Wednesday, August 25, 2010

Economic Events of the Week

Wednesday – Durable Goods Orders, New Home Sales, Biden Hosts A Middle Class Task Force Event
Thursday – Jobless Claims, Federal Reserve Retreat in Jackson Hole, WY
Friday – Q2 GDP

Story of the Day
Putting the Brakes on ObamaCare (Grace-Marie Turner in Wall Street Journal)

Washington Update
Estimated Impact of the Stimulus Package on Employment and Economic Output (CBO)

Market Talk
US Home Sales Plunge to 15-Year Low (Financial Times)
Is There a Government Bond Bubble? (Laurence Kotlikoff in The Economist)

Editorials and Opinion
Guessing the Trigger Point for a U.S. Debt Crisis (Arnold Kling in Mercatus Center)
It Is Time for Bernanke to Stake Out a Public Position (Mark Thoma in Roubini Global Economics)
Will Social Security Reform Cut Benefits? (Gene Steurele in Tax Policy Center)
Bush Tax Cuts for the Rich Must Go (John Podesta in Financial Times)

Story of the Day

Putting the Brakes on ObamaCare (Grace-Marie Turner in Wall Street Journal)

If Republicans take control of one or both houses of Congress this fall, many will have been elected with a promise to "repeal and replace" ObamaCare. But what are their options, really? Click through for six key strategies that a Republican Congress could employ to put on the brakes. The real wallop of ObamaCare will come in 2014, when most of the spending begins and businesses and individuals are hit with intrusive and expensive mandates. The main job of Republicans, should they capture Congress, will be to slow down implementation of the law and explain to the American people the damage it will do—and already is doing—to our economy. If the White House changes hands in 2012, they can be ready to start with a clean slate and begin a step-by-step approach to sensible reform.

Washington Update

Estimated Impact of the Stimulus Package on Employment and Economic Output (CBO)

CBO estimates that in the second quarter of calendar year 2010, ARRA’s policies: (1) raised the level of real gross domestic product by between 1.7 percent and 4.5 percent, (2) lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points, (3) increased the number of people employed by between 1.4 million and 3.3 million, and (4) increased the number of full-time-equivalent jobs by 2.0 million to 4.8 million.

Market Talk

US Home Sales Plunge to 15-Year Low (Financial Times)

Purchases of previously owned homes plunged to their lowest level in 15 years last month as a weak jobs market and strict financing requirements stalled buying activity, heightening fears that the housing market will drag down the US economy. Home resales declined by 27.2 per cent in July to an adjusted annual rate of 3.83m, according to the National Association of Realtors. That was far worse than the 13.4 per cent drop that economists were expecting and left sales down by 25.5 per cent from a year ago.

Is There a Government Bond Bubble? (Laurence Kotlikoff in The Economist)

Yes, there is a government bond bubble. And it's huge. Uncle Sam and his counterparts in the EU and Japan are broke and are, almost surely, going to print vast quantities of money to cover their enormous spending obligations. The Fed, for example, has increased the monetary base by 140% in the last three years. But what we've seen is the beginning, not the end, of the money creation process, and any increases in the current price level will give rise to expectations of future increases in prices. This will raise long-term interest rates and lower nominal bond prices.

Editorials and Opinions

Guessing the Trigger Point for a U.S. Debt Crisis (Arnold Kling in Mercatus Center)

Leading authorities in the United States, including the Congressional Budget Office, use the term unsustainable to describe the long-term fiscal outlook. By the year 2080, spending on entitlements alone could exceed total federal tax revenues. In the very long run (meaning from the year 2035 through 2080), the problem is primarily one of excess costs in health care, meaning the tendency for health spending to grow faster than the rest of GDP. However, in the medium run, meaning from 2010 through 2035, the aging of the U.S. population is the dominant factor. This paper explores the possibility of the U.S. experiencing a debt crisis in the medium run, meaning somewhere between 2015 and 2035. It is impossible to state precisely the trigger point for a crisis. At best, we can make guesses about some of the key parameters.

It Is Time for Bernanke to Stake Out a Public Position (Mark Thoma in Roubini Global Economics)

Unlike the Fed under Greenspan where the Fed chair used his influence to determine policy pretty much on his own, Bernanke has attempted to make the Fed a "a collection of argumentative academics" where everyone is allowed to have a say in the outcome. Should we worry about that? When there is considerable uncertainty due to disagreement on the FOMC, the Fed chair needs to set a firm course for policy, and resolve the uncertainly. At some point the Fed chair needs to step up and lead. Right now is one of those times.

Will Social Security Reform Cut Benefits? (Gene Steurele in Tax Policy Center)

Will Social Security reform cut benefits? That’s highly unlikely. It’s more likely that reform will simply cut the rate of growth in benefits. Social Security reformers have often thought about reform in terms of the annual benefits they want to give people. The complication with this approach is that it ignores the enormous increase in the number of years that benefits have been paid as people retire much earlier and live longer than they did when Social Security was first created. That’s why it helps to focus on lifetime benefits—how much will be paid over a normal lifespan—rather than just looking at the annual benefit.

Bush Tax Cuts for the Rich Must Go (John Podesta in Financial Times)

Congress can kill two birds with one stone when President George W. Bush’s tax cuts expire in December. It can – and should – extend cuts for strapped middle-class families while America digs its way out of recession. It should also let the tax cuts for the wealthiest 2 per cent of households expire, as a wide range of economists recommend, to make a sizeable dent in the nation’s unsustainable longer-term budget deficits.

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