Pete Davis's blog
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.
