Friday, August 13, 2010

Economic Events of the Week

Friday – Consumer Price Index, Retail Sales

Featured Story
Making Medicare Solvent (Paul Ryan in Washington Post)

Washington Update
Spending Posts Now a Liability for Lawmakers (New York Times)
The Bush Tax Cuts and Fiscal Responsibility (Economix)

Financial Markets News
Weekly Initial Unemployment Claims Increase, Highest Since February (Calculated Risk)
Economists Want Policy Makers to Back Off Now (New York Times)

Editorials and Commentaries
Paralysis at the Fed (Paul Krugman in New York Times)
Where Are We Now, Three Years After the Onset of the Crisis? (John Taylor)
Can the Nation Stimulate Its Way to Prosperity? (Federal Reserve Bank of Dallas)

Featured Story

Making Medicare Solvent (Paul Ryan in Washington Post)

The annual analysis of Medicare's financial health released by the program's trustees on Aug. 5 led some Democrats to claim that Medicare's imminent bankruptcy has been delayed, thanks to the creation of their health entitlement program. Only in Washington could the government raid one entitlement program to finance a brand-new one and still claim that deficits have been reduced and entitlements have been reformed. While I am proud to have 13 House Republicans co-sponsor my roadmap, and have been overwhelmed by the support outside the Beltway, my plan is not the Republican Party's platform and was never intended to be. This proposal is my sincere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met -- mathematically and politically -- and to challenge those who disagree with my proposal to offer their own.

Washington Update

Spending Posts Now a Liability for Lawmakers (New York Times)

Membership on the Appropriations Committee used to be a first-class ticket to Congressional success, guaranteeing lucky lawmakers the ability to campaign on the federal money they had lavished on the folks back home. But the era of the appropriator appears to be on the wane. In a treacherous political environment where cutting spending is the more potent message and earmarks can count as a black mark, serving on the House or Senate committee that doles out federal dollars can bring more punishment than prestige. Indeed, the power of the purse has already weighed down some lawmakers. Of six Congressional incumbents defeated in preliminary contests so far this year, four were veteran members of the appropriations panel who found themselves on the defensive.

The Bush Tax Cuts and Fiscal Responsibility (Economix)

The coming battle over the Bush tax cuts is of real importance. According to the Congressional Budget Office, extending the Bush tax cuts would add $2.3 trillion to the total 2018 debt. And a credible commitment to long-term fiscal sustainability should reduce interest rates today, helping to stimulate the economy. Critics say that this amounts to increasing taxes at a time of high unemployment, and that instead the tax cuts should be extended as a stimulus measure. This overlooks the fact that tax cuts are an inefficient form of stimulus, because many people choose to save their additional income instead of spending it.

Financial Markets News

Weekly Initial Unemployment Claims Increase, Highest Since February (Calculated Risk)

In the week ending Aug. 7, the advance figure for seasonally adjusted initial claims was 484,000, an increase of 2,000 from the previous week's revised figure of 482,000. The 4-week moving average was 473,500, an increase of 14,250 from the previous week's revised average of 459,250. The 4-week average of initial weekly claims is at the highest level since February, and suggests further weakness in the labor market.

Economists Want Policy Makers to Back Off Now (New York Times)

Economists are getting more pessimistic about the strength of the U.S. recovery, but they don't think policy makers should do anything more to support it, according to the latest Wall Street Journal forecasting survey. The 53 surveyed economists offered a bleak picture of tepid growth and high unemployment. On average, they still don't see the unemployment rate dropping below 9% through at least June 2011. They expect the economy to add just 136,000 jobs a month over the next 12 months, down from a forecast of 157,000 in the July survey.

Editorials and Commentaries

Paralysis at the Fed (Paul Krugman in New York Times)

Ten years ago, one of America’s leading economists delivered a stinging critique of the Bank of Japan, Japan’s equivalent of the Federal Reserve, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” With only a few changes in wording, the critique applies to the Fed today. The fact is that the Fed — which is required by statute to promote “maximum employment” — isn’t doing its job. Instead, like the rest of Washington, it’s inventing reasons to dither in the face of mass unemployment. And while the Fed sits there in its self-inflicted paralysis, millions of Americans are losing their jobs, their homes and their hopes for the future.

Where Are We Now, Three Years After the Onset of the Crisis? (John Taylor)

This week marks the third anniversary of the flare up of the financial crisis in August 2007. We are now going into the fourth year of “crisis-recession-fizzled recovery” and for several reasons the outlook is bleak unless policy is changed. I have argued that the problem was misdiagnosed, and thereby mistreated, by policy makers, and that is why the patient eventually went into “cardiac arrest” a year or so later, though some still say that the treatment was correct and things would have been even worse without the treatment. 

Can the Nation Stimulate Its Way to Prosperity? (Federal Reserve Bank of Dallas)

Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point. At first glance, it doesn’t appear the stimulus achieved these objectives. In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage.

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