Friday, August 16, 2010

Economic Events of the Week

Monday – International Capital, Obama Delivers Remarks on Energy and the Economy
Tuesday – Housing Starts, Producer Price Index
Wednesday – Petroleum Report
Thursday – Jobless Claims
Friday – Regional and State Unemployment

Featured Story
Lessons From Germany's Economic Recovery (e21 Staff Editorial)

Washington Update
Corker Wants to Prevent a Tax Increase (Politico)

Financial Markets News
Slow Growth, But Growth Nonetheless (Wells Fargo)
Why Do I Expect the Unemployment Rate to Increase? (Calculated Risk)

Editorials and Commentaries
The Tax Cut We Can Afford (Mark Zandi in New York Times)
Our Limping Economic Recovery (Richard Posner in Becker-Posner Blog)
Some Big Ideas from Small Countries (Jeff Frankel's Blog)
Are Macro-Prudential Policies Prudent? (Gianluca Benigno in voxEU)

Featured Story

Lessons From Germany's Economic Recovery (e21 Staff Editorial)

The German economy grew nearly four-times faster than the 2.4% annualized growth rate recorded by the U.S. economy in the second quarter. More significantly, German growth has accelerated at the same time as growth in the U.S. has slowed markedly. It has been distressing to watch analysts blame the lackluster recovery in the U.S. on an insufficiently large stimulus. Both historical and contemporaneous data suggest that problem may be the debt-financed stimulus itself. The German GDP growth rate is an important reminder to U.S. policymakers that a dynamic system as complex as the U.S. economy cannot be reduced to simple algebraic equations that suggest the road to economic growth is paved through increasing amounts of public expenditure.

Washington Update

Corker Wants to Prevent a Tax Increase (Politico)

Sen. Bob Corker advocated Sunday for preventing a tax increase, pushing a message Republicans hope will benefit them in the coming midterm elections. The Senate Banking Committee member said the government has “created an air of unpredictability” with all the laws it's passed over the last year." President Obama has said he wants to extend the elements of the 2001 tax cuts that benefit those who make $250,000 or less per year. The administration says extending these breaks will result in about $2,000 per year in savings for middle-class families.

Financial Markets News

Slow Growth, But Growth Nonetheless (Wells Fargo)

Economic data released this week came in slightly below expectations, but remain consistent with our forecast of slow economic growth with a low probability of a double-dip recession. Second-quarter real GDP figures, however, may be revised lower based on international trade and wholesale inventory data. Consumer prices in July showed inflation remains benign. Contained inflation is good news for two key reasons: It increases consumers’ purchasing power and gives the Fed flexibility to keep short-term interest rates low.

Why Do I Expect the Unemployment Rate to Increase? (Calculated Risk)

The main reason is the general slowing economy. There is a general relationship between GDP and the unemployment rate , and I expect a 2nd half slowdown. Second, with the end of the housing tax credit, I expect residential construction employment to decline further over the next few months. Third, the 4-week average for initial weekly unemployment claims has increased recently. This is the highest level since February. And fourth, the Labor Force Participation Rate decreased from 65.0% in May to 64.6% in July. This was a key reason the unemployment rate decline to 9.5% in June from 9.7% in May.

Editorials and Commentaries

The Tax Cut We Can Afford (Mark Zandi in New York Times)

Whatever policymakers decide regarding the tax code, they should take action, or agree not to, quickly. Not knowing what tax rates will be just a few months from now is adding to the collective nervousness, already high after the epic policy debates on health care, financial regulation, energy and immigration. All this anxiety is most likely affecting whether businesses hire. None of this means the tax code should be off the table when President Obama’s fiscal commission addresses how to fix our long-term problems. Past experience with fiscal austerity at home and overseas strongly suggests that it is best for the economy’s long-run performance to restrain government spending rather than raise taxes, but taxes must also be part of our national debate.

Our Limping Economic Recovery (Richard Posner in Becker-Posner Blog)

Why is the economy so sluggish at present? The basic reasons are, I think, first, the reduction in household wealth, due to the fall in housing and common stock values; second, the high rate of unemployment, underemployment, and reductions in wages and benefits; and third the continued weakness of the banks. The uncertainties and long-term debt created by the Obama Administration excessively ambitious domestic programs on top of the deficit spending of the Bush years, the plunge in federal tax revenues resulting from the depression-induced decline in taxable income, and uncertainty about which Bush tax cuts will be allowed to expire in the coming year, have impeded private investment.

Some Big Ideas from Small Countries (Jeff Frankel's Blog)

Two decades ago, many thought the lesson of the 1980s had been that Japan’s variant of capitalism was the best model, that other countries around the world should and would follow it. The Japanese model quickly lost its luster in the 1990s. One decade ago, many thought that the lesson of the 1990s had been that the US variant of capitalism was the best model, that other countries should and would follow. The American model in turn lost its attractiveness in the decade of the 2000s. Where should countries look for a model, now, in 2010? Many small countries on the periphery have experimented with policies and institutions that could usefully be adopted by others. 

Are Macro-Prudential Policies Prudent? (Gianluca Benigno in voxEU)

The fallout from global crisis has left many calling for economy-wide, macro-prudential policies, such as taxes on capital flows and capital controls. This column argues that the case for such measures is ambiguous at best – the excessive borrowing on which they are predicated is not a general and robust feature of financially developed and integrated economies. It is also important to keep in mind that prudential regulations and capital controls can hamper efficiency and lower long-term growth. Sometimes these distortions can be justified and are indeed beneficial, but in order to advocate such distortions economists must be fairly certain of their costs and benefits.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

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