The Pete Davis Archives
This afternoon, the American Enterprise Institute held two high quality panel discussions that were quite critical of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. While many of their criticisms seemed valid to me, I couldn't accept their conclusions that we can't anticipate future financial crises and that most could be avoided if we just kept a tighter rein on monetary policy when the economy is strong. I found the contention that system risk wouldn't exist if we just let failing institutions fail to be very 19th century, when we had a financial crisis every ten years or so. Nor could I accept their dismissal of predatory lending as something mostly concentrated in the Federal Housing Administration. You don't have to spend much time on the poor side of town before you become quite convinced of the need to better protect against financial predators.
Today, Urban-Brookings Tax Policy Center Director Donald Marron told the National Economists Club that additional revenues are bound to be needed to avoid a federal debt explosion over the next decade. Plenty of spending cuts could be made too, but they're unlikely to be enough. Starting with that premise, he outlined four options for raising revenue:
1. Increase economic growth. Each percentage point of addition growth would add approximately $2.5 trillion to federal revenues over the next decade. That's real growth. A point of additional inflation raises revenues by a similar amount, but federal spending would rise about $3.0 trillion, so that doesn't work. Americans may work longer. We could allow more immigration, particularly of better educated immigrants, because they tend to pay more taxes than they consume benefits.
Today's Conference on America's Fiscal Choices at the Newseum in Washington kicked off with a panel of Nobel Prize Winner Paul Krugman, Marty Feldstein, and Goldman Sachs' Chief U.S. Economist Jan Hatzius agreeing that unemployment will rise over the next few months, that $787 billion of stimulus wasn't enough, and that we've got a 2 out of 3 chance of 1% to 2% real GDP growth and a 1 out of 3 chance of sliding back into recession. I kidded a budget buddy later that being an economist allowed my friends to overlook my chronic depression.
It's rare to find a book on economic policy that is so well written for the general public without sacrificing first rate analysis. I would recommend it for undergraduates and for anyone who wants to get quickly to the heart of some very tough issues: fiscal stimulus; monetary policy; tax reform; trade imbalances; oil dependence; runaway entitlement spending; health reform; and preventing the next financial crisis. When a book is this quick a read, you often don't come away which much, but Seeds of Destruction pays big dividends and left me looking for more. You come away understanding the key drivers of economic growth without having to juggle equations or IS/LM graphs. They cut through a lot of extraneous issues and focus on the keys to good economic policymaking.
Uncertainty impedes economic activity, but it's notoriously difficult to quantify those effects. They're just too complicated. In general, individuals and businesses cope with uncertainty by withholding investment, postponing hiring, and by holding more cash. If uncertainty gets really bad, like in a war, destruction of lives and assets is gambled on the chance of victory and a better future as refugees and wealth flee for safety. After the fact, it's impossible to accurately measure how the economy would have behaved without the uncertainty. This year, Congress has heightened economic uncertainty in many ways, some necessary and some unnecessary. Here are the major ones.
Yesterday, Senior Economist David Shulman cited two reasons for a weak forecast with a 9.5% unemployment rate at the end of 2011; 1) the "balance sheet hypothesis" of slow recovery from financial crises; and 2) "an extraordinary increase in policy uncertainty." “At present, business firms can only make the wildest guesses as to what corporate and individual taxes will be next year, and for that matter three years from now, what the cost of healthcare will be, whether or not there will be a revived cap and trade policy with respect to carbon emissions or whether the Environmental Protection Agency will step in with regulations of their own absent a statue and whether it will be easier or more difficult to hedge risks with financial derivatives.” He amplified his findings on his blog. Way to go David.
Today's Census report also documented a worsening income distribution and that 50.7 m. Americans are without health insurance. These data underscore why Americans are so down on the economy and on Washington's policy responses. Explaining that those policies operate with a lag and that they're much less effective in the face of a mountain of public and private debt is no consolation.
Somehow the headline writers went further than House Minority Leader John Boehner (R-OH) did on CBS's Face the Nation yesterday. After demanding tax cut extensions for everyone, he said, "If the only option I have is to vote for those at two hundred and fifty and below, of course, I’m going to do that. But I’m going to do everything I can to fight to make sure that we extend the current tax rates for all Americans."
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.