Tuesday, July 10, 2012

Economic Events of the Week

Tuesday – Job Openings and Labor Turnover Survey
Wednesday – International Trade, FOMC Minutes
Thursday – Jobless Claims
Friday – Producer Price Index

Story of the Day
What's Wrong With the Federal Reserve? (Allan Meltzer in The Washington Post)

Washington Update
Obama Calls for Middle Class Tax Cut Extension (Politico)
Obama’s Record on Outsourcing Draws Criticism from the Left (The Washington Post)
GOP Prepares Efforts to Challenge IRS Rule on Health Insurance Subsidies (CQ)

Market Talk
An "Economic Quality" Scorecard Of The Obama Administration (ZeroHedge Blog)
Fed’s Lacker Sees ‘Tepid’ U.S. Growth, Not Recession Risk (Bloomberg)
US Consumer Credit Growth Beats Forecasts (Financial Times)

Editorials & Opinions
The Square Off Over Jobs (The New York Times Editorial)
Off the Tax Cliff He Goes (The Wall Street Journal Editorial)

Story of the Day

What's Wrong With the Federal Reserve? (Allan Meltzer in The Washington Post)

By allowing its monetary policy to be influenced by elected politicians and market speculators, the Federal Reserve is putting its independence at risk. It is also neglecting basic economics, which was a great strength of its current chairman, Ben Bernanke. Consider the response to last week's employment report for June—a meager 80,000 net new jobs created, and an unemployment rate stuck at 8.2%. Day traders and speculators immediately clamored for additional monetary easing. Even the president of the Federal Reserve Bank of Chicago joined in. To his credit, Mr. Bernanke did not immediately agree. But he failed utterly to state the obvious: The country's sluggish growth and stubbornly high unemployment rate was not caused by, nor could it be cured by, monetary policy. Market interest rates on all maturities of government bonds are the lowest since the founding of the republic. Banks have $1.5 trillion in cash on their balance sheet in excess of their legally required reserves—far more than enough to meet any unsatisfied demand for loans that bankers regard as prudent.

Washington Update

Obama Calls for Middle Class Tax Cut Extension (Politico)

President Barack Obama called Monday for Congress to pass an extension of Bush-era tax cuts for household incomes less than $250,000 in the coming weeks, and to leave a debate on whether to extend the cuts to the rich until after the presidential election in November. “The Republicans say they don’t want to raise taxes on the middle class, and I don’t want to raise taxes on the middle class, so we should all agree to extend the tax cut for the middle class. Let’s agree to do what we agree on,” he said in the East Room of the White House, flanked by people who would benefit from the extension. “Let’s not hold the vast majority of the Americans and the entire economy hostage while we debate the merits of another tax cut for the wealthy.” Though Monday’s announcement was an official statement of White House policy, it dovetailed with the Obama campaign’s push to paint Romney as out of touch and supportive of policies that favor the rich.

Obama’s Record on Outsourcing Draws Criticism from the Left (The Washington Post)

Barack Obama promised voters four years ago that he would work to slow the outflow of American jobs to other countries, proposing to revamp a federal tax code that encourages companies to maintain overseas operations. Obama as president has continued to call for rewriting the rules that allow U.S. corporations to avoid paying taxes for a time on income generated overseas. But the tax changes have not happened. While White House officials say they have been waiting on Congress to act, Obama’s critics, primarily on the political left, say he has repeatedly failed in other ways to protect American jobs from being moved overseas. They point to a range of actions they say he should have taken: confronting China, reining in unfettered trade and reworking a U.S. visa program that critics say ends up sending high-tech jobs abroad. The issue of overseas outsourcing has returned to the center of the presidential campaign, with Obama hammering the record of Mitt Romney’s financial company. The debate intensified in recent weeks with Obama’s campaign attacking his Republican rival after a Washington Post article reported that Romney’s private-equity firm, Bain Capital, had invested in companies that specialized in helping other firms relocate work overseas.

GOP Prepares Efforts to Challenge IRS Rule on Health Insurance Subsidies (CQ)

An Internal Revenue Service rule could spark a new legal battle over the 2010 health care law, which the Supreme Court largely upheld last month. The rule, finalized May 18, allows the federal government to issue subsidies to low- and middle-income Americans to help them purchase health insurance through state and federal exchanges created by the health care law overhaul. Conservative lawmakers, however, argue that the law itself authorizes the subsidies only for those buying insurance through state, not federal, exchanges. Republican Reps. Scott DesJarlais and Phil Roe, both physicians from Tennessee, contend that the IRS is using the rule-making process to circumvent Congress and expand the subsidies to a potentially huge new pool of Americans. The Health and Human Services Department, they note, has estimated that the federal government may need to run insurance exchanges in dozens of states that decline to do so themselves.

Market Talk

An "Economic Quality" Scorecard Of The Obama Administration (ZeroHedge Blog)

With the US presidential election just 4 months away, focus on tier 1 economic data will become acute, as will headlines blasting top-line data without much, if any, underlying "between the lines" analysis. Which is why we have decided to put together a template of key data series that in our opinion best capture the dramatic shift in the labor composition of the US welfare state under the Obama administration, starting with January 2009. Here are the facts: “Total Nonfarm Payrolls have decreased by -1.3 million from December 2008 (134,379K) to June 2012 (133,088); Source: St. Louis Fed; Full-time jobs based on the Household Survey, have decreased by 2.5 million from 117,039K to 114,573K; Source: Table A.9, BLS; Parti-time jobs based on the Household Survey, have increased by 1.6 million from 26,3187 to 27,894K; Source: Table A.9, BLS; Foodstamps recipients have increased by 14.6 million from 31.567 million to 46,187 (as of April 2012); Source: USDA; Disability recipients have increased by 1.3 million from 7.427 million to 8.733 million; Source: Social Security Administration” And that, in a nutshell, is how the economy has performed over the past 42 months.

Fed’s Lacker Sees ‘Tepid’ U.S. Growth, Not Recession Risk (Bloomberg)

Federal Reserve Bank of Richmond President Jeffrey Lacker said that “some of the slowdown is real” for the U.S. economy though the reduction in growth isn’t severe enough to tip the economy back into a recession. “The numbers have been pretty tepid, we’re definitely experiencing a slowdown,” Lacker said today in a Bloomberg radio interview on “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “I don’t think this is fatal. I don’t think this is pushing us back into a recession right now.” Lacker, who has dissented from all four Federal Open Market Committee decisions this year, is at odds with colleagues on what the Fed should do to boost the economy. He said in a June 22 statement that he opposed the FOMC’s $267 billion extension of its Operation Twist program because it may spur inflation and won’t give the economy a significant boost.

US Consumer Credit Growth Beats Forecasts (Financial Times)

US citizens boosted their credit card spending in May, driving the biggest increase in US revolving debt in four and a half years. Overall consumer credit rose $17.1bn to $2.57tn outstanding, the Federal Reserve said on Monday, about twice the $8.5bn rise economists had forecast. April’s increase was revised higher to $9.95bn. Revolving debt, which includes credit cards, jumped $8bn, the most since November 2007, before the financial crisis and recession. This was a surprise, said Cooper Howes, an analyst at Barclays, who had predicted revolving credit to fall $3bn. “We think that the strong rise in revolving credit will be more the exception than the rule, given that it has been the more volatile component in recent months, but we see revolving credit as being on a longer-term upward trend as the labour market improves,” Mr Howes said.

Editorials & Opinions

The Square Off Over Jobs (The New York Times Editorial)

There’s no solace in the employment report for June, released Friday. The economy added a paltry 80,000 jobs last month, leaving no doubt that the economy is slowing. In the past three months, the economy averaged 75,000 new jobs a month, compared with 226,000 in the prior three months. The jobless rate in June held steady at 8.2 percent, which is down from the recession peak of 10 percent in October 2009 but still very high. Who is to blame? How can it be fixed? On the campaign trail, President Obama has explained correctly that recoveries from financial crashes are tortured affairs and that it was an achievement to get the economy growing again a mere six months after he took office. For that, he credits the 2009 stimulus he pushed through Congress, a point well supported by public- and private-sector economic analyses. It’s also worth noting that job growth in the current recovery has actually outpaced the job growth following the Bush-era recession in 2001. The recovery is not unusually weak; what is atypical is the length and severity of the recession that Mr. Obama inherited.

Off the Tax Cliff He Goes (The Wall Street Journal Editorial)

So the 2013 tax cliff is a big enough economic problem that President Obama now wants to postpone it for some taxpayers. But it isn't so big that he's willing to curb his desire to raise taxes on tens of thousands of job-creating businesses. That's the essence of Mr. Obama's announcement Monday that he wants Congress to extend current tax rates for a year, but only for those making less than $200,000 a year. This is a political gambit designed to protect Democrats who are starting to feel queasy about opposing GOP plans to extend all of the Bush rates as the economy weakens again. The ploy could help Democrats if Republicans fall for it, but it won't reduce the economic damage to the country. By Mr. Obama's economic logic, tax increases matter on middle-income earners but are irrelevant to everyone else. "By the way, these tax cuts for the wealthiest Americans are also the tax cuts that are least likely to promote growth," as he put it Monday.

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