The Pete Davis Archives
Fed Chair Ben Bernanke just addressed the annual Kansas City Fed economic symposium in Jackson Hole, WY. After a detailed review of recent subpar U.S. economic performance, he discussed the pros and cons of more quantitative easing. Rarely have other Fed chairs offered such insight into their thinking, but, based upon his extensive study of the Depression, Mr. Bernanke strongly believes that Fed transparency is essential to reviving markets. So the Federal Open Market Committee stands ready to provide more quantitative easing at its September 21 meeting, if not before, if the economy continues to falter. We are fortunate to have Mr. Bernanke's leadership in this crisis.
This morning, in Cleveland, OH, House Republican Leader John Boehner (R-OH) slammed President Obama's economic policies and called for the resignation of Tim Geithner and Larry Summers. Here's the video, and here are his prepared remarks. He railed against "job-killing tax hikes," stimulus spending that "has gotten us nowhere," and "government run amok." Boehner is right on about ending economic uncertainty, particularly about future tax rates and unsupportable levels of future public debt. However, he sounded as if all of our problems began when President Obama was sworn in as president on January 20, 2009. Our current suffering mostly arose from the Iraq War, Medicare Part D, and the very lax regulatory environment that allowed the financial crisis and the Gulf oil spill to occur, all courtesy of President George W. Bush and the Republicans.
This morning, the Congressional Budget Office released its August Update estimating the FY11 deficit would rise $71 billion to $1.066 trillion as compared to its March estimate. The increase comprised $92 billion of legislated deficit increases, $45 billion of deficit reduction from better than expected economic performance, and $23 billion of increased deficit from worse technical estimating assumptions. The FY10 deficit estimate improved $27 billion. See Appendix Table A-1 for the details.
Tuesday, House Ways and Means Democrats presented Jackie Calmes of The New York Times with tables from the Joint Committee on Taxation showing the average income tax cuts of extending the Bush tax cuts for those under $250,000. Taxpayers in all income groups would receive large tax cuts, even those with incomes over $1 m. Here's her article from yesterday. Where's the tax increase on those over $250,000? That's the magic of averages. Extending all of the Bush tax cuts would cost approximately $3.8 tr. over the next 10 years, and about $700 b. of that would be lopped off from those over $250,000 under President Obama's proposal. However, the remaining $3.2 tr.
At 2:15 PM yesterday, the Federal Open Market Committee made a big symbolic move, announcing it would buy Treasury debt in the 2-year to 10-year range to keep its $2 trillion of securities holdings constant. Otherwise, the portfolio of agency and mortgage-backed debt would have run off at $10 billion to $20 billion a month as homeowners prepay mortgages. Although that would have been a miniscule tightening of monetary policy, the Fed acted to support economic recovery. It is also the first step toward future inflation. The Fed is already bumping into its self-imposed limit on purchasing no more than 35% of any Treasury issue. With no signs of major deficit reduction from Congress yet, the Fed may have to buy a lot more Treasury debt in 2011 and beyond.
A few minutes ago, I watched two top economists, Mark Zandi and John Taylor, debate whether the government's massive fiscal and monetary stimulus was effective on the PBS Newshour. The video will be posted here tomorrow. Wednesday, Zandi and Alan Blinder published a Moody's macro simulation that estimated 8.4 million more jobs and 6.6% of real GDP would have been lost 2010 without either stimulus. Taylor argued that much of the stimulus was ineffective, that the economy revived because of business investment, and that now we are saddled with massive debts which will burden future growth. It's hard for an experienced economist to come to an informed choice between these two positions, so most viewers tonight came away with one conclusion: Economists can't agree on anything, just like our political leaders.
We now know some of the decisions reached at last Thursday's closed-door Senate Finance Committee meeting. According to this morning's Washington Post, committee mark-up won't occur until September, and Chair Max Baucus (D-MT) won't rule out extending the tax cuts for those with incomes over $250,000 ($200,000 for singles). From this morning's New York Times, we find that Baucus refused to give Republicans any assurances about an open amendment process. So last week's rumblings were about having the debate over extending the Bush tax cuts before the election and were not about enacting an extension before the election.
Because of the bad news about the FY11 deficit, OMB withheld the Mid-Session Review 8 days beyond its statutory deadline until 3 p.m. this afternoon. Technical reestimates of individual income tax and Social Security taxes were the primary reason for the deterioration along with somewhat weaker wage growth. Usually that means taxpayers fell into lower tax brackets and claimed more deductions and credits than estimated. The FY10 deficit was reestimated $79 billion lower than in February because of lower outlays for unemployment compensation, FDIC deposit insurance, and a broad range of discretionary spending. The real GDP forecast was raised to 3.2% for CY10 from 2.7% in February and was lowered to 3.6% for CY11 from 3.8%. This is confirmation of my long held expectation that we're going to see deficits of at least $1 trillion for years to come.
Fed Chair Ben Bernanke kept monetary stimulus options open this afternoon in his semiannual monetary policy testimony and report before the Senate Banking Committee. Ranking Republican Richard Shelby (R-AL) put the question this way:
SHELBY: Thank you.
Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I'll quote, "The committee would need to consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably," end quote.
Stan's onto something here. Senate Democrats have suddenly shifted into high gear to pass the Bush tax cuts for those under $250,000 before they go out for their August recess. Democratic staff will meet at 12:30 p.m. tomorrow, and Democratic senators will caucus at 4:30 p.m. There's still a lot of work to do to bridge the big gaps within the caucus on the estate tax and on the top rates for capital gains and dividends. Senate Democratic leaders want to put Republican senators on the spot defending tax cuts for the rich before the election. The Statutory PAYGO Act of last February exempts most of these tax cuts, except for keeping the dividends rate below 39.6%, but that too may be set at 20% or even 15% I'm told. It's none to soon for the stock market, which has had this as one of its concerns lately.
Pardon my incredulity! Alan Greenspan just taped an interview with Judy Woodruff for broadcast tomorrow and over the weekend. This Bloomberg News story quotes him saying, "They should follow the law and let them [the Bush tax cuts] lapse." He believes it is more important at this point to cut burgeoning deficits than to funnel more money to taxpayers. In a telephone interview after the taping, Greenspan acknowledged that this "probably will" slow growth.
At 10 a.m. this morning, the Senate Finance Committee held a hearing on extending the 2001 and 2003 Bush tax cuts. Former CBO Director Doug Holtz-Eakin and former Deputy Assistant Treasury Secretary Len Burman squared off in a very informative debate. They didn't agree on much, except that we desperately need income tax reform to lower marginal rates and broaden the tax base. Holtz-Eakin would focus on pro-growth policies led by making all of the Bush tax cuts permanent and cutting federal spending, and Burman would only extend the Bush tax cuts temporarily for low and middle-income Americans until Congress produces income tax reform and a carbon tax or a VAT to bring the public debt back to 60% -- a threshold we will cross in a few months time.
At 5 p.m. today, Treasury released its Report to Congress on International Economic and Exchange Rate Policies. Regarding China, it said: "On June 19, 2010, China announced that it was returning to an exchange rate regime that would be more flexible and more market based, with the renminbi allowed to trade within a band of plus/minus 0.5 percent against the dollar on a daily basis. On June 21, the first trading day following China’s announcement, the renminbi appreciated 0.43 percent, the largest single day appreciation against the dollar since China’s initial 2.1 percent revaluation on July 21, 2005. Between the June 19 announcement and July 2, the renminbi appreciated a total of 0.81 percent versus the dollar, while average intraday volatility has been much higher than that seen during the 2007-08 period of steady renminbi appreciation against the dollar. China’s policy shift is a significant development and a welcome step forward in fostering stronger, more sustainable, and more balanced global growth.
That's up from 9.9% in May and 7.1% in April from the monthly Cleveland Fed analysis of yield curve spreads. It also projects 1.0% real GDP growth over the next year, much less than the consensus forecasts of just under 3%. An inverted yield curve has preceded each of the last seven recessions by about a year, but there have been two false positives, in 1995 and in 1998. How much predictive power yield curve analysis has is in dispute among economists, as the Cleveland Fed notes here.
I have been asked a lot recently by Wall Street economists about where Washington fiscal policy is headed. In short, I don't expect much change. We'll stay stuck at around $1 trillion of annual deficits in FY10, FY11, and probably FY12.
This morning, House Majority Leader Steny Hoyer (D-MD) spoke out for a long-term deficit reduction effort combining spending cuts and tax increases. He chided those who would rule out any tax increases saying:
By allowing $31 billion of tax breaks to expire every year, Congress gives the appearance of lower future deficits. When the deficit was $161 billion four years ago, that would make a difference. Now that it's $1.4 trillion, it's a trifle, but Congress still goes through the exercise, just like a drug addict who requires ever increasing doses to get the same high.
Wall Street analyst Ken Posner has written a must-read about analyzing data and decisionmaking -- Stalking the Black Swan. The Black Swans are "the seemingly improbably but highly consequential surprises that turn our familiar ways of thinking upside down." It's rare to find a book that combines this much real world investment experience with hard earned lessons on the limits of computer modeling, information overload, cognitive dissonance, information asymmetry, Monte Carlo methods, and good judgment. I worked for Ken and his colleagues for years and developed great respect for his analytical abilities, particularly his willingness to weigh new data and alternative theories. Keeping an open mind in this field is no mean feat. If you're an investor or a decision-maker of any kind, you will be rewarded by your investment in this book.
Airlines are a classic case of free market versus regulation, competition versus monopoly, and consumers versus business. Thursday's Senate Judiciary hearing on the pending United-Continental merger laid out the issues. Airline executives touted lower costs, better travel options under "an unparalleled global network," and more stable employment for its workers. The Consumers Union charged consumers would face less choice and fewer flights, loss of service to smaller cities, higher fares, reduced quality of service, and the creation of another "too big to fail" corporation. My recent travel experiences -- fewer available and more costly seats plus annoying extra charges for my first bag, for poor food, and for an Internet connection -- support charges of growing monopoly power for the four major U.S. carriers that would remain if this merger goes through. We're awaiting a Justice Department decision.
