8/11/10 Post

BUZZ: Second-Quarter Growth Looking Even Worse

News
U.S. Trade Deficit Widens
The U.S. trade deficit widened unexpectedly to a record 21-month high in June, as imports from its largest trading partners ballooned.
Beware the VAT: Why the consumption tax is coming
The report states that if the crisis strikes in 2011, and rates on Treasury bonds rise by around 4 points, interest on the federal debt will double from $460 billion to around $900 billion by 2015... interest payments alone will account for around one in every six dollars of government spending... equivalent of 40% of all income taxes.
Fed Move on Debt Signals Concern About Economy
With short-term interest rates already close to zero, the Fed’s policy makers have relatively few tools available to encourage consumer and corporate spending. So they now plan to use the proceeds from the Fed’s huge mortgage-bond portfolio to buy long-term government debt.
US regulators tighten control over Wall St
US regulators have increased their scrutiny of the country’s largest banks in recent months, digging deeper into riskier activities and pushing institutions to conduct more rigorous “stress tests” of their financial health.
House Passes $26 Billion in State Aid
The House interrupted its summer recess on Tuesday to approve $26 billion in aid to school districts and states to prevent large-scale layoffs of teachers and public employees and to engage in another partisan fight over policy priorities.
Yen Hits 15-Year High vs. Dollar
The yen hit a 15-year high Wednesday against the U.S. dollar, following the U.S. Federal Reserve's downgraded assessment of the U.S. economy Tuesday and its decision to reinvest some bond holdings.
Wholesale Inventories Up in June but Sales Drop
Inventories at the wholesale level edged up slightly in June but sales fell by the largest amount in 15 months.
Fed keeps key interest rate low; Hoenig is lone dissenter again
Tom Hoenig, president of the Federal Reserve Bank of Kansas City, remained the sole dissenting voice on the Federal Open Market Committee as it once again voted to keep short-term interest rates low.
Californians’ income falls for first time since WWII
The federal Bureau of Economic Analysis said personal incomes of Golden State workers fell by that amount in 2009 compared with the previous year – the state's first year-to-year decline since World War II.
States not facing teacher layoffs get federal money from education jobs bill anyway
With the passage of a $26 billion aid package Tuesday to help states pay for Medicaid and teacher salaries, most state budgets will get some help in paying for education programs, but states not facing massive teacher layoffs and cutbacks are also set to receive millions in federal money.
The stakes in the health care war
In recent months, as voters express anger across-the-board with Washington, there may well be no single initiative as unpopular as the administration’s health care reform bill.
Senate May Clear Immigration Bill This Week
Senate Majority Leader Harry Reid is expected to bring the chamber back into session as soon as this week to clear border security legislation.
China needs 'U-turn' to avoid crash landing
China's economic growth continued to ease in July, signaling that the world's third-largest economy may need to loosen its policies to avoid a hard landing.

Blogs
Secondary Sources: Debt and Growth, Job Troubles, World Trade
A roundup of economic news from around the Web.
The Health Insurance Hurdle
Health care now approaches 20 percent of the economy. With health insurance included in compensation, that means that 20 percent of compensation is determined not by your skill level, but by the median cost of health insurance. ...if the value of your skills has been rising more slowly than the median, then your skill level is no longer enough to overcome the health insurance hurdle.
Spontaneous order on the road
"Not only had congestion decreased in the intersection—buses spent less time waiting to get through, for example—but there were half as many accidents, even though total car traffic was up by a third."
Economists React: Fed Takes the ‘Middle Road’
Economists and others weigh in on the Fed’s policy statement and its decision to reinvest proceeds from its mortgage holdings.
What's the actual problem in the labor market?
David Leonhardt has a very good piece which presents some relevant facts about unemployment.
Moody's: Money Market Accounts Were in Worse Trouble Than We Thought
Moreover, it seems to have been happening long before the crisis hit; presumably firms figured they'd lose less money by making good the losses than they would by alienating customers who lost money on a "sure thing".
“Buy and Bail”:
Apparently this strategy works best for those with excellent credit scores and high income who can qualify for two mortgages.
What's Wrong with Paul Ryan's Plan?
Not because it's dishonest, but because it's hard. Really hard. As in, I-don't-see-how-it-could-possibly-survive-the-legislative-process hard.
Comparing CBO and White House Budget Forecasts
...the OMB has once again estimated just how much in the red the Obama administration's spending will put the U.S. in 2010: 1.471 trillion U.S. dollars.
Paul Krugman is Still Wrong on Paul Ryan and the CBO
Many policy proposals that have been marinating considerably longer than Ryan's roadmap have to go through grueling marathons of tweaking and resubmission until they get a good score. Indeed, that's why we have the CBO and the JCT as an independent check on our politicians.
The States and Too Big to Fail
Today’s action is not a full state bailout (as far as I know, none of the states are threatening bankruptcy just yet), but the federal assertion that the states are too big to fail does mean that they will face a significantly softer budget constraint tomorrow than they did yesterday.
FOMC: What Does It Mean?
Interest rates were left unchanged, but there's much more to this story.
Next Round of Losses for the GSEs
The numbers are in for Fannie Mae and Freddie Mac on the second quarter of 2010, and from all accounts, they are stabilizing—if stability includes being essentially owned by the government without a chance to survive alone in a private market.
Home Depot Does What FEMA Dreams About
The fifth anniversary of Hurricane Katrina, and all its attendant devastation, is a good reminder that the federalization of natural disasters by the Federal Emergency Management Agency continues uninterrupted.
Economic Effects of 2011 Tax Hikes: Killing One Bird with Two Stones
The right answer is to extend the tax cuts for all Americans—including top earners.
Anti-Deflationists Win the Day at the Fed
While the short-term effect of the Fed's decision will be modest, longer-term implications should unfold.
Summer of Bailouts
When the House recessed last week, taxpayers had the chance to believe that their long national bailout nightmare was over. No such luck. Just when you thought your tax dollars were safe, the Obama administration sucks them back in.
The Assault on For-Profit Universities
For-profit higher education is serving the needs of students, as evidenced by the significant increase in enrollment over the past two decades.
President’s Commission Recommends President Reconsider Drilling Ban
The President’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling has called on the Obama Administration to consider lifting the ban on drilling for certain rigs.
The FOMC Meeting Aftermath
A few observations in the wake of statements by the FOMC and New York Fed.

Research, Reports & Studies
Hudson Institute Economic Report
The recovery is progressing, but it is not V-shaped. The July jobs report showed that the economy lost 131,000 jobs and the unemployment rate remained at 9.5%.
RCM: Wells Fargo Economics Group: Productivity Fell in the Second Quarter
Nonfarm productivity decreased at a 0.9 percent annual rate during the second quarter after a revised 3.9 percent pace of growth during the first quarter. Output and hours both increased.
Calling Recessions in Real Time
Although the hypothesis that recessions may be caused by an exogenous decline in productivity has been popular with real business cycle theorists, this paper does not find that account compelling.
A Prescription for Export Growth—and Economic Recovery
President Barack Obama recently pledged to double U.S. exports over the next five years through a program of subsidies and aggressive diplomatic intervention in favor of selected U.S. firms. Following are four better options for boosting U.S. exports.
Medicare Trustees Issue Report Disavowed by Chief Actuary
Over the past six years, Congress has twice passed and two Presidents have signed into law major legislation affecting Medicare.

Economists’ Comments & Opinions
The Conspiracy Against Economic Growth
America does not need higher taxes, it needs more economic growth. Prosperity is possible, but the Republicans must make a decisive, public break from the conspiracy against economic growth.
Stimulus Pushers
The latest bailout for public unions and spendthrift states.
OMAN: The hidden cost of auto bailouts
Government takeovers make private investment too risky now.
For Those With Jobs, a Recession With Benefits
...in today’s high-tech, global economy, educated workers remain very much in demand. They make their companies more productive and the American economy more competitive. They expand the size of the economic pie.
Our Exhausted Monetary Policy Arsenal
So in the end, what's left? Only real stimulus of the "supply-side" variety - the kind that creates not debt and phony money, but increased output through serious spending cuts, genuine entitlement reform, freer trade, less-onerous regulations and - yes - either further tax cuts or at least the extension of the Bush tax cuts due to expire at year-end.
Higher Taxes On The Wealthy Mean 3.4 Million Spenders May Cut Back
If the Bush tax cuts are allowed to expire, Uncle Sam will get more money but he is likely to be the only one who does. Higher taxes will be needed on everyone, not just the rich, at some point in the near future to pay for the record spending by Washington, but with an economic recovery as fragile as this one now is not the time.
Life before industry
...daily life in the 18th century bore little resemblance to the "life" we see at Colonial Williamsburg. Being preindustrial, everyone but royalty and the upper-crust nobility of that era was oppressively poor by our standards.
Obama's State Capitalism: A Failure of Modesty
In this summer of unrecovery it's still important to understand how so many smart people got so much so wrong…
Memo to Republicans: It's Big Government, Stupid!
Given this record of Democratic ineptitude and the voters' reaction to it, one would think that Republicans would be talking about these issues every day.
A Captive of the Industry
The solution is not to double-down on the failed regulatory model.

Graph of the Day
2009: Percent change in per Capita Income by Metro Area
See: Californians' income falls for first time since WWII
See: Weekly Initial Jobless Claims
See also: Federal Government Is a Lucrative ‘Industry’

Book Excerpts
"Permanent budget deficits, inflation, and an expanding and disproportionately large public sector are all part of a package. They are all attributable, at least in part, to the interventionist bias created by Keynesian economics. Deficits and inflation are related to the growth of government in a reciprocal fashion. Deficits and inflation contribute to the growth of government, while the growth of government itself generates inflationary pressures." –James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (1977)

Did You Know
Since the Constitution took effect in 1789, there have been more than 11,000 attempts to amend it. Just 27 have been ratified in those 221 years, and that includes the Bill of Rights, the first 10. The last one, the 27th Amendment, dealing with congressional pay raises, was finally ratified in 1992, was first proposed in 1789.