Tuesday, August 24, 2010

Economic Events of the Week

Tuesday – Existing Home Sales
Wednesday – Durable Goods Orders, New Home Sales
Thursday – Jobless Claims
Friday – Q2 GDP

Featured Story
Responding to Dr. Krugman's Column on Tax Cuts for the Rich (KeithHennessey.com)Why Not An Energy Stimulus? (Raghu Rajan's Blog)

Washington Update
Court Orders Fed to Disclose Lending Information (Congressional Quarterly)

Financial Markets News
Government Clouds Value of Investments (Wall Street Journal)

Editorials and Commentaries
Road to Safer Banks Runs Through Basel (Sheila Bair in Financial Times)
Why Not An Energy Stimulus? (Raghu Rajan's Blog)
Social Security Is "Beyond Comprehension" (Andrew Biggs in AEI)
Taming Trading (Financial Times Editorial)

Featured Story

Responding to Dr. Krugman's Column on Tax Cuts for the Rich (KeithHennessey.com)

In his column yesterday, Dr. Paul Krugman argues for raising the top marginal income tax rates on January 1. His polemic is useful because it encapsulates most of the Left’s arguments. Yes, the super-rich make a lot more than the rich.  This is a feature of pre-tax income, not of tax policy. Thanks to our progressive income tax structure, the post-tax distribution of income is more compressed than the pre-tax distribution. Compare the super-rich to the sort-of-rich: multiplication tells us that if you raise their marginal tax rate by the same number of percentage points, you’ll collect a lot more money from a super-rich person than from a sort-of-rich person. Dr. Krugman flips this on its head by saying policymakers are “giving” these people money, rather than “not taking it.”  Marginal tax rates levels are not the same thing as tax expenditures. In Krugman’s view of the world, all tax revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them. But, money doesn’t just magically appear in the government coffers. A private citizen or firm earns income and the government takes a portion of that income. The money initially belongs to the he or she who earned it. Using “we” to refer to the government, as Dr. Krugman does, suggests the funds being spent by the government belong to the government. This matters because if the money belongs to the government, then elected officials should apply their moral principles to figure out who needs or deserves it most. If the money belongs first to he or she who earned it, then elected officials should apply their moral principles to figure out whether they should take it from the earner and spend it on something else or give it to someone else. Those are fundamentally different decisions. The first philosophy ignores the costs (moral and economic) of government taking something from someone who earned it.

Washington Update

Court Orders Fed to Disclose Lending Information (Congressional Quarterly)

Efforts to pry open the workings of the Federal Reserve are gaining ground more than a month after President Obama signed a financial overhaul bill into law that left the central bank’s response to the financial crisis largely secret from the public. The U.S. Court of Appeals ruled in March that the Fed must hand over wide swaths of information about its lending activities during the depths of the financial crisis. In a decision filed Aug. 20 and publicized Monday, the court refused to reconsider the ruling, making it likely the Fed would appeal the ruling to the Supreme Court.

Financial Markets News

Government Clouds Value of Investments (Wall Street Journal)

What is anything worth? That might sound like an utterance from the book of Ecclesiastes or the title of a freshman philosophy paper. But it is a valid question for any investor right now. Gauging the true worth of stocks, bonds and real estate is extremely difficult at a time when their prices are so heavily influenced by the actions, or perceived inaction, of governments and central banks.

Editorials and Commentaries

Road to Safer Banks Runs Through Basel (Sheila Bair in Financial Times)

Of all the lessons learnt in the recent financial crisis, the most fundamental is this: excessive leverage was a pervasive problem that had disastrous consequences for our economy. Thankfully, the Basel Committee on Banking Supervision is now moving to correct the problem. Proposed reforms centre on three areas: weeding out hybrid instruments, which confuse debt and equity and weaken the capital structure; adding new capital buffers so deleveraging need not crush lending in a crisis; and placing higher capital charges on riskier derivatives and trading activities.

Why Not An Energy Stimulus? (Raghu Rajan's Blog)

I usually don’t comment when an economist responds to what I am supposed to have said in press quotes because it leads to more confusion than clarity. However, Professor Paul Krugman has a large following, and he has criticized me repeatedly for my stance on Fed policy, especially my exhortation for the Fed to exit its policy of ultra-low interest rates sooner rather than later. I will try and address his latest concerns, but before I start, let me declare that I am as much for getting out of this recession as anyone else. However, I would like to get out of this recession in a way that is sustainable, that does not merely pump up growth in the short term only to see it collapse later. This is where Krugman and I differ the most.

Social Security Is "Beyond Comprehension" (Andrew Biggs in AEI)

There is work that has been done in the past where we looked at what people thought their benefit was going to be, relative to what it turned out to be. It showed that even people who were right on the verge of retirement are all over the place in terms of being able to predict the benefit. I think simplifying the benefit formula really makes sense. All the fine-tuning that has been done hasn't really helped that much. It just makes the system more complicated. Also, Social Security should be reoriented, to a degree at least, to focus more closely on its safety net and poverty protection elements. That may mean reducing benefits for high earners and probably increasing the retirement age as well, to keep people in the labor force a little bit longer.

Taming Trading (Financial Times Editorial)

High-frequency traders are capable of executing transactions in milliseconds. It has taken regulators rather longer to cast an eye on their activities. But the May 6 “flash crash”, when the US stock market plummeted almost 1,000 points in minutes, has focused regulatory attention on the systemic impact of automated trading. These systems are usually based on complex computer algorithms. This complexity hinders regulators’ insight into markets. The flash crash is an arresting example of the volatility high-frequency trading is capable of inflicting. So far, regulators have failed to keep up with developments in trading technologies. 

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