The Pete Davis Archives
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.
For over a year House Blue Dog Democrats took a back seat to President Obama's top priorities, a $787 billion stimulus bill and a health reform bill that CBO scored as paid for, but about which many have their doubts. This week the Blue Dogs bit off almost $80 billion from the extenders bill, H.R.4213, most of which passed the House this afternoon on two separate votes. The good news is that those fighting larger deficits in the House are gaining power. The bad news is that the Senate will undoubtedly add back some of that spending when it takes up the bill during the week of June 7. Taking away $8 billion of COBRA health benefits for the unemployed, $24 billion of Medicaid aid for the states, and $40 billion from the Medicare physician reimbursement hits the vulnerable, which I'm not comfortable with, but I've learned the hard way that there are no easy deficit cuts.
As the Senate lurches toward the goal line on financial reform, senators and staff are doing their best curtail the future financial excesses of bad guys without harming good guys. It's not easy to do.
- We're not sure what happened. Automatic systems failed in the Gulf, and automatic computer equity trading systems spun out of control, but, so far, the exact causes are not known.
Yale Professor Robert J. Shiller spoke to the National Economists Club at lunch today in Washington, D.C. He expressed concern of slow growth until the next recession, his definition of a double-dip. His 20-city Case-Shiller real home price index declined 35% from its 2006 peak until early 2009, when Fed mortgage backed securities purchases and the homebuyer tax credit pushed it back up just over half as much, but he expects further housing price declines with the expiration of those government interventions on March 31 and April 30 respectively.
Last night, Washington deficit hawks gathered on Capitol Hill to hear OMB Director Peter Orszag and former OMB Director and current CIA Director Leon Panetta at the Committee for a Responsible Federal Budget dinner. Orszag emphasized the future deficit reduction embodied in the recently enacted health reforms, particularly the new Independent Medicare Advisory Board, and expressed confidence that the President's National Commission on Fiscal Responsibility and Reform will set the course for future deficit reduction when it reports on December 1, 2010. He acknowledged that the strength of the recovery needs to be closely monitored as stimulus spending declines, and he noted that a year ago it was hard to find anyone who expected as much GDP growth and renewed job creation as we have had since. Orszag expressed great appreciation for the support he received from Leon Panetta while working as an economist on the Council of Economic Advisers and since.
BP will pay billions to clean up the Gulf oil spill, but it will also face civil and possibly criminal prosecution for allegedly failing to comply with federal law requiring engineer-approved drawings and documentation of subsea components. Monday afternoon's National Journal Congress Daily reports that a whistle blower made the charges to House Natural Resources Subcommittee Chair Raul Grijalva (D-AZ) and other members regarding BP's Atlantis Gulf platform months ago. Grijalva and 18 other members wrote the Minerals Management Service on March 2 demanding an investigation. MMS Director S. Elizabeth Birnbaum has promised a full investigation and a report by the end of this month. Senator Bill Nelson (D-FL) is pushing the Interior Department for a separate investigation of whether oil companies exercised undo influence during regulatory proceedings that failed to require audio activation of blowout preventers. Senate Energy will hold a hearing at 9:30 AM Thursday morning on the BP Deepwater Horizon Gulf oil spill.
Yesterday, an unnamed Treasury official told the Bureau of National Affairs that April's average primary dealer forecast for FY10 was $1.38 tr., up slightly from $1.36 tr. in January. OMB's estimate in President Obama's February budget was $1.556 tr., and CBO's in March was $1.500 tr. Stronger economic growth than projected by OMB and CBO is the main cause for the improved estimates.
The Congressional Budget Office has a well deserved reputation for excellent analysis and for "calling them as they see them." On April 30, CBO analyzed tax arbitrage by U.S. colleges and universities. The Internal Revenue Code bars recipients of tax-exempt bond proceeds from directly reinvesting at higher rates, but the Congressional Budget Office found that most colleges and universities will do so indirectly with the $5.5 billion of muni's to be issued for them in 2010. Tax arbitrage is a pipeline directly into the pockets of U.S. taxpayers. That $5.5 billion will be spent on qualified purposes for university buildings etc., but until they are built they're invested in taxable assets at much higher rates of return. These institutions also benefit from tax-free charitable contributions for those who are well off enough to itemize their deductions, about 25% of the taxpayers. That tax expenditure has been estimated by the Joint Committee on Taxation as costing taxpayers $32.1 billion over five years FY09-FY13.
Congress is beginning to realize how expensive it will be to cap the dividends tax rate at 20% for those earning over $250,000 beyond the end of this year. Yesterday, House Ways and Means Chair Sander Levin (D-MI) told the Bureau of National Affairs that it would be "very expensive" and that there was no provision for exempting it under the Budget Act or for "paying for" it at a cost of $138 b. FY11-FY20. Congressional taxwriters have spent the last few months struggling to find ways to "pay for" $31 b. of extensions of expired tax provisions and would have a much more difficult time finding $138 b.
That was the title of today's luncheon talk to the National Economists Club by Urban Institute Fellow and former Deputy Assistant Treasury Secretary Gene Steuerle. A video and slides will be posted here. These are the main points he made.
