Today's News

In surveying American opinion just before and a week after President Barack Obama’s healthcare summit, we found a third of respondents more supportive of his plan, a third less so and a third unchanged. This would seem to confirm that the summit achieved nothing. But looking deeper into our March 3 data reveals some surprises. These may give second thoughts to those Republicans who want some type of health reform but are under orders to vote no on Obamacare. When we asked who was putting the nation’s interest ahead of political gain, we got a surprise: most independents – and almost half of Republicans – chose the Democrats.

Economists have long known that the overall performance of the economy as measured by GDP has a direct bearing on unemployment. But the relationship between changes in output and changes in the unemployment rate deviated from expectations in 2009. Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate. Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1½ percentage points. Instead it rose by 3 percentage points, more than twice the predicted increase. We examine what might have disrupted the usually reliable empirical relationship described by Okun. Our results indicate that the main factor driving the unusual rise in unemployment relative to output was very rapid productivity growth, which allowed businesses to cut back sharply on labor while maintaining output levels.

Now that they have raised federal spending as a share of GDP to 25% and don't want to return to the 20.7% 40-year average, Democrats are looking for political cover to pay for it. They want the commission to declare that there's no way you can cut future spending enough to balance the budget, and then to propose ways to raise huge new chunks of revenue beyond the current tax code. Mr. Obama's nominees will endorse both propositions, and if GOP appointees go along the headline will be: Bipartisan Commission Says Taxes Only Way to Balance Fisc. One way to increase the odds of dodging this trap would be for Senate Minority Leader Mitch McConnell to name the likes of former Texas Senator Phil Gramm as one of his three appointees.

When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets.