Wednesday, September 1, 2010

Economic Events of the Week

Wednesday – Manufacturing Index, FCIC Hearing on "Too Big To Fail," Christina Romer National Press Club Speech
Thursday – Pending Home Sales
Friday – Employment Situation

e21 Reaction & Commentary
e21 Commentary: The Misguided Arguments Against Social Security Reform
e21 Reaction: Responding to Klein: Don't Cross the Revenue Streams

Washington Update
Reid Revives Hope for Renewable Energy Standard (Congressional Quarterly)

Market Talk
Currency Trading Soars (Wall Street Journal)
JPMorgan to Close "Prop" Trading Division (Financial Times)
No Chance of a V-Shaped Recovery (Roubini Global Economics)

Editorials & Opinions
Beware Those Who Think the Worst is Past (Vincent Reinhart in AEI)
Obama Was Too Cautious in Fearful Times (Martin Wolf in Financial Times)
Bring Back the Estate Tax Now (Robert Rubin in Wall Street Journal)

e21 Reaction & Commentary

e21 Commentary: The Misguided Arguments Against Social Security Reform

For the past few months, it has been rumored that President Obama’s fiscal responsibility commission will tackle Social Security as part of their broader budget recommendations. Once again, a cacophony of voices has arisen to argue that nothing about Social Security warrants changing any time soon. The stubborn facts are that the Social Security shortfall isn’t going away, despite the persistence of folklore alleging the contrary. If we act today, we can protect all of today’s retirees, we can protect low-income beneficiaries today and in the future, and we can allow for a smooth growth in future benefit levels. But the longer that we postpone action, the more sudden and disruptive will be the inevitable changes that hit the workers and beneficiaries of the future.

e21 Reaction: Responding to Klein: Don't Cross the Revenue Streams

The Center on Budget Policy and Priorities has released a chart that is causing a stir among those who want to raise taxes on the top 2%. In fact, so many have seized on this chart that we have to take exception and respond. The chart appears to show that the Social Security shortfall over the next 75 years could be solved by increasing tax rates on the top 2% of income earners (the proposed expiration of the Bush tax cuts). The chart in uninformed hands is at best misleading and at worst dangerous.

Washington Update

Reid Revives Hope for Renewable Energy Standard (Congressional Quarterly)

Senate Majority Leader Harry Reid said Tuesday he may include a renewable electricity mandate in legislation that would impose new safety regulations on offshore drilling, reviving a requirement jettisoned from a broader energy bill earlier this summer. Reid said adding a renewable electricity provision to a narrow energy measure that would overhaul federal oversight of the outer continental shelf and boost production of natural gas and electric-powered vehicles could attract the support of two Republicans.

Market Talk

Currency Trading Soars (Wall Street Journal)

Currency trading volume around the world has hit $4 trillion a day, fueled by investors in the wealthiest nations looking to diversify beyond their home markets in a time of economic turmoil. The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements. The debt crisis likely boosted trading volumes in the euro in the latest survey. But the continued rise in trading reflects the increased globalization of investing.

JPMorgan to Close "Prop" Trading Division (Financial Times)

JPMorgan Chase is to close the commodity unit that trades with the bank’s own money as Wall Street moves to comply with new US financial services rules banning proprietary trading. A person familiar with the matter said that the traders in the unit were told on Friday their jobs were on the line because of the bank’s decision to stop trading commodities on its own account.

No Chance of a V-Shaped Recovery (Roubini Global Economics)

All the tailwinds of H1 will become headwinds in H2. As state and local governments keep retrenching and even the federal stimulus diminishes, the fiscal stimulus will turn into a fiscal drag that will be much more pronounced in 2011 and after some of the 2001-03 tax cuts expire. The base effects from the lousy economic activity figures of 2009 are gone, temporary census hiring is finished and tax incentives—cash for clunkers, the investment tax credit, the first-time homebuyer tax credit and cash for green appliances—have all expired after “stealing” demand and growth from the future.

Editorials & Opinions

Beware Those Who Think the Worst is Past (Vincent Reinhart in AEI)

Our research found real per capita gross domestic product growth tends to be much lower during the decade following crises. Unemployment rates are higher, with the most extreme increases in the most advanced economies that experienced a crisis. It gets worse. Where house price data are available, 90 per cent of the observations over the decade after a crisis are below their level the year before the crisis. Median prices are 15 to 20 per cent lower too, with cumulative declines as large as 55 per cent. Credit is also a problem. It expands rapidly before crises, but post-crash the ratio of credit to GDP declines by an amount comparable to the pre-crisis surge. However, this deleveraging is often delayed and protracted.

Obama Was Too Cautious in Fearful Times (Martin Wolf in Financial Times)

Debate is emerging on how much of the surge in unemployment is structural. My answer, from European experience, is that one way to ensure it becomes structural is to let it linger. In the short run, the simplest way to prevent that from happening is to expand demand and so output. Since there is huge slack in the labour market, not the slightest threat of inflation – far more a risk of deflation – and no constraint from bond or foreign exchange markets on further monetary and fiscal stimulus, these are the policies that have to be pursued. Yet, alas, the Fed seems to have decided to fall asleep and the administration has lost the initiative.

Bring Back the Estate Tax Now (Robert Rubin in Wall Street Journal)

The question of how to address the income and other tax cuts that expire this year is already eliciting many conflicting views. But action on the estate tax should not wait. Our country is losing revenue that, with its stressed fiscal conditions, it can ill afford to forego. The question of how to address the income and other tax cuts that expire this year is already eliciting many conflicting views. But action on the estate tax should not wait. Our country is losing revenue that, with its stressed fiscal conditions, it can ill afford to forego.

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.

2010, e21: Economic Policies for the 21st Centurys