Fed Continues Move Towards Explicit Targets

November 14, 2012
Categories: Economy, Financial Markets

Federal Reserve Vice Chair Janet Yellen gave a speech yesterday on the Fed’s continued movement towards clearer communication via explicit inflation and unemployment targeting.

Tim Duy: “The Fed is moving in this direction, promising to further lock-in a program of aggressive large scale asset purchases.  But is this the end of the road for policy?…  If the economy stumbles, will the Fed pull a new trick out of its policy bag, or is that bag finally empty?  And if that bag is empty, then we will need to turn to fiscal policy if the economy stumbles.  This is worrisome given the expected path of fiscal policy – tighter, just degrees of tighter. Which means for the moment we just cross our fingers and hope the economy gains traction on the back of housing and accelerates as 2013 progresses.”

Matthew Yglesias is more optimistic: “This is potentially a huge deal. Yellen is an important policymaker in her own right, and the Federal Reserve Board of Governors usually acts as a team so it’s unlikely she’d be out there with this speech unless Ben Bernanke wanted to shift the Overton Window a bit… That’s excellent news for the American labor market.”

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Why Temporary Tax Cuts Are a Bad Idea

November 14, 2012
Categories: Budget & Taxes, Economy

Bruce Bartlett says that the “fiscal cliff” shows why temporary tax cuts like the Bush tax cuts are usually a bad idea.

“Supply-side theory has always held that permanent tax changes are vastly more powerful than temporary changes… People and businesses don’t make the sorts of changes in their behavior that would give the economy a supply-side boost unless they have confidence that today’s tax regime will be in place when the payoff from increased work, saving or investment is realized.”

“A key reason that the tax-rate reductions of the Bush administration failed to have any stimulative effect is because they came with expiration dates from Day 1. Republicans insisted on cutting them on a partisan basis, without negotiating with Democrats. Consequently, they lacked the votes in the Senate to overcome the so-called Byrd Rule, which limits legislation that raises the deficit to a maximum of 10 years when budget reconciliation procedures are used.”

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Entitlements Are Part of the “Fiscal Cliff” Debate

November 14, 2012
Categories: Budget & Taxes, Health

While Medicare, Medicaid, and Social Security were excluded from the across-the-board spending cuts in the “fiscal cliff” — known as sequestration — Kaiser Health News reports that those three programs will likely make their way into a “grand bargain” and looks at some of the ways lawmakers may adjust Medicare.

“Among the options sometimes mentioned are limiting the amount of ‘bad debt’ that hospitals and other providers can write off their taxes,  reducing federal funding for medical education and requiring more prior authorization for some medical services, such as imaging, to help reduce unnecessary care… The age for full Social Security benefits will reach 67 in 2027 and some analysts argue that it makes sense to slowly raise the Medicare eligibility age from 65 to 67… Members of both political parties and some health care analysts have long thought that spending could be slowed if patients, including Medicare beneficiaries, put up more of their own money for health services.”

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Chart of the Day

November 14, 2012
Categories: Budget & Taxes, Chart of the Day, Economy

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– The Washington Post has a comprehensive graphic showing the effect of going over the “fiscal cliff,” both for the economy and Americans across the income spectrum. Click through for the full-size image.

Meanwhile, Lori Montgomery and Zachary Goldfarb look at President Obama’s tough opening offer in the negotiations: “Obama plans to open talks using his most recent budget proposal, which sought to raise taxes on corporations and the wealthy by $1.6 trillion over the next decade… Meanwhile, Treasury Secretary Timothy F. Geithner and other senior Democrats on Tuesday said Obama would not be willing to maintain the Bush tax rates in exchange for a cap on deductions for households earning more than $250,000 a year, a leading Republican alternative.”

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Addressing the Fiscal Cliff and Climate Change Simultaneously

November 14, 2012
Categories: Budget & Taxes, Energy & Environment

The Washington Post looks at the possibility of using a tax on fossil fuel use — a carbon tax — to make a deal on the “fiscal cliff” and the deficit more likely.

“Because it would tax fossil fuel use, the carbon tax pleases economists who want to encourage investment and discourage consumption. Climate activists hope it would reduce greenhouse-gas emissions by penalizing the use of coal, oil and natural gas. And for lawmakers opposed to any change in tax rates or deep cuts in spending, the carbon tax could be a lifeline.”

Dylan Matthews looks at a few studies showing that a carbon tax wouldn’t make a big difference: “In 2015, a 100 percent swap would only allow income tax rates to fall 0.59 percentage points, relative to all the Bush tax cuts expiring. So the top rate would be 39 percent rather than 39.6 percent. That’s hardly a game-changer. The possible income tax cuts are barely perceptible when only half of revenue funds rate reductions.”

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Quote of the Day

November 14, 2012
Categories: Financial Markets

“For the first time, it’s clear that size and complexity come with a higher cost.”

– Goldman Sachs CEO Lloyd Blankfein, quoted by the New York Times, noting that stricter regulations on banks are pushing banks to become leaner.

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Could Solving the Fiscal Cliff Boost the Economy?

November 14, 2012
Categories: Budget & Taxes, Economy

Ryan Avent notes that stalling inflation expectations may be an early indicator that the economic recovery is “losing momentum.”

“Other proxies for demand—equity prices, bond yields, and the level of the dollar—have also moved, albeit modestly, in worrying ways. The S&P 500 is down a bit over 5% from its September high, the 10-year Treasury yield has fallen more than 20 basis points since October.”

A touch of optimism: “My hope is that dimming market expectations are mostly due to American fiscal uncertainty and mostly amount to pricing in of a low but real risk of fiscal disaster. In that case, signs should quickly swing positive when (if?) Washington takes steps to lessen the fiscal blow as of January. But despite the Fed’s reassuring action in September, the global economy remains fraught with pretty substantial risks. And politicians still haven’t learned not to monkey around with all-too-fragile recoveries. America may have glimpsed the sunlight beyond the edge of the woods in September and October, but it isn’t out yet.”

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Will Republicans Block Obama’s Cabinet Nominees?

November 14, 2012
Categories: Personnel

David Weigel thinks that recent Republican noise about filibustering President Obama’s second-term Cabinet nominees is more bark than bite.

“When the next Senate meets to confirm nominees, it will have only 45 Republicans. Only five of them will be needed for cloture on nominees, and filibusters of high-level nominees are exceedingly rare. Graham can say what he wants, but a steady schedule of Sunday show appearances does not, in fact, give him extra votes in the Senate.”

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2 Million People Set to Lose Unemployment Benefits

November 14, 2012
Categories: Economy

Adding to the challenges Congress faces in the lame-duck session, “More than 2 million Americans stand to lose their jobless benefits unless Congress reauthorizes federal emergency unemployment help before the end of the year,” according to the Washington Post.

“The people in danger of having their unemployment checks cut off are among those who have benefited least from the slowly improving job market: Americans who have been out of work longer than six months… Conservative lawmakers have raised concerns that continually extending jobless benefits is both an unmanageable burden on the federal budget and a disincentive for people to find work… As the unemployment crisis has persisted, the program has been extended on 10 occasions.”

“Beyond the pain that a cutoff would cause recipients, advocates say that ending the federal jobless benefits would harm the economy because those who get such checks tend to quickly spend the money on basic needs.”

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Romney Adviser Calls for Raising (Some) Taxes

November 14, 2012
Categories: Budget & Taxes

Former Romney economic adviser Glenn Hubbard explains how he would solve the “fiscal cliff” and, in a sign of potential room for compromise, includes increased revenue front and center.

“The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should first come from these individuals. This means closing loopholes. For instance, the Bowles-Simpson commission, which Mr Obama established, has proposed limiting tax preference benefits for upper-income households. Also, Martin Feldstein of Harvard University and Maya MacGuineas of the Committee for a Responsible Federal Budget have suggested caps on the amount of deductions relative to a taxpayer’s income. These ideas are good places to begin.”

Additional ideas: “The second step would be to agree to a package of expenditure reductions to occur over the next 10 years… The third step is both fundamental and difficult: it is to realise that a strategy of ‘taxing the rich’ cannot pay for the entitlement state. If we wanted a larger government as a share of GDP, we would have to raise taxes substantially on everyone.”

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