Secondary Sources: Toxic Asset, Cigarette Taxes, Consumer Satisfaction
A roundup of economic news from around the Web.
- Toxic Asset: NPR’s Planet Money purchased a toxic asset, and now we can all watch it die. “Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure. At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely. Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. If it goes to Thanksgiving, we could double our money. By the way, we bought the asset with our own money. Any proceeds will go to charity. If we lose money, we take the loss.”
- Cigarette Taxes: Writing for voxeu Deliana Kostova looks at the correlation between higher cigarette taxes and demand. “Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%.”
- Consumer Satisfaction: Bryan Caplan on EconLog looks at how to measure consumer satisfaction. ” For the past few years, social scientists have been arguing over the One True Measure of consumer welfare. Most economists still cling to the Demonstrated Preference Standard: If A buys X, then X makes A better off by definition. Psychologists and psychologically-minded economists have been pushing the Happiness Standard: If A buy X and feels happier as a result, then and only then is A better off. I think both standards have some merit. But I’d like to suggest a middle way. I call it the Consumer Satisfaction Standard. According to this standard, if A buys X, and would do so if he had the chance to make the decision over again, then X makes A better off. The Consumer Satisfaction Standard is less tautologous than the Demonstrated Preference Standard; it allows for the possibility - which we often observe in real life - that a person will not be a satisfied customer. At the same time, if someone complains about X but keeps buying it, the Consumer Satisfaction Standard treats his grousing as empty verbiage.”
Compiled by Phil Izzo
Continued here:
Secondary Sources: Toxic Asset, Cigarette Taxes, Consumer Satisfaction
Who is Janet Yellen?
Janet Yellen, president of the Federal Reserve Bank of San Francisco, is expected to be nominated by President Barack Obama as vice chair of the Federal Reserve Board. Ms. Yellen, 63 years old, has served as a Fed policy maker for almost a decade between her stints in Washington and San Francisco.
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| Dan Francisco Fed President Janet Yellen (Reuters) |
Policy stance:
Ms. Yellen has been a reliable supporter of Fed Chairman Ben Bernanke’s policies. She is frequently cited by economists as one of the central bank’s most dovish policymakers, generally backing policies that would boost growth and reduce high unemployment. She has long been a counterweight to the Fed’s more hawkish regional bank presidents who tend to be more concerned about rising inflation. (The Fed’s dual mandate from Congress is to promote maximum sustainable employment and price stability.)
Voting record:
In her time as a Fed policy maker, Ms. Yellen has never cast a dissenting vote on policy — in either raising interest rates or lowering them. She has voted 36 times as a member of the Federal Open Market Committee, always with the majority, according to a tally by Wrightson-ICAP. Of the 12 current regional bank presidents, five have dissented at least once. Of current FOMC officials, only three have cast more votes on interest-rate policy in their careers: Vice Chairman Donald Kohn (63 votes), Kansas City Fed President Thomas Hoenig (60 votes) and Chairman Bernanke (56 votes), according to the Wrightson tally.
Policy experience:
Ms. Yellen has been president and chief executive officer of the San Francisco Fed since June 2004. She served as a Fed governor from August 1994 through February 1997. She left the Fed to become chair of the Council of Economic Advisers under President Bill Clinton through August 1999. In 1977 and 1978 she served as a staff economist on the Fed’s Board of Governors in the Division of International Finance (Trade and Financial Studies Section).
Academic background:
Ms. Yellen graduated from Brown University in 1967 with a degree in economics and received her doctorate in economics from Yale University four years later. She taught at Harvard from 1971 to 1976, then the London School of Economics from 1978 to 1980. She has been on the faculty at the University of California at Berkeley since 1980, most recently as a professor of business and professor of economics.
Research:
Ms. Yellen’s key research interests are unemployment and labor markets; monetary and fiscal policies; and international trade and investment policy. A respected scholar, she has written widely on income inequality and published numerous papers with her husband, George Akerlof, the Nobel prize-winning economist. (Among them: “An Analysis of Out-of-Wedlock Childbearing in the United States” in 1996 and “East Germany In From the Cold: The Economic Aftermath of Currency Union” in 1991.) In 2001, she published “The Fabulous Decade: Macroeconomic Lessons from the 1990s” with former Fed vice chair Alan Blinder.
In her own words:
Ms. Yellen, in her most recent speech, defended the Fed’s near-zero interest rate target. “Such accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low. I believe this is not the time to be removing monetary stimulus.”
See the rest here:
Who is Janet Yellen?
Fed’s Dudley: Governments Need Fiscal Stimulus Exit Plan
Calling government budget deficits unsustainable, a top Federal Reserve official on Thursday called on national leaders to start laying out plans that would allow a move back to more manageable spending levels.
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| New York Fed President William Dudley (Reuters) |
“Just as there needs to be a credible exit strategy for monetary policy to anchor inflation expectations, there also needs to be a credible exit strategy from fiscal policy stimulus to anchor expectations about the risks of sovereign debt default,” Federal Reserve Bank of New York President William Dudley said Thursday.
Much like the very stimulative state of monetary policy, the “accommodative” levels of government spending have been “appropriate” and in many cases unavoidable, given the shifts in demand seen in national economies, the policy maker said. As for the U.S., “without substantial fiscal stimulus, the economy would have been even weaker and the unemployment rate considerably higher.”
But even as that’s the case, governments need to start thinking about and making public plans to get their respective fiscal houses back in order, the official said. Dudley, who is also vice-chairman of the interest rate setting Federal Open Market Committee, offered his comments in the text of a speech prepared for delivery before the Council of Society Business Economists Annual Dinner, in London.
Dudley made no comment about the outlook for the U.S. economy, or for monetary policy. But his call for forming plans to making government spending more sustainable came at a time where central bankers are also mulling how to unwind a set of policies designed to support a badly wounded economy, one that needed zero% interest rates and intensive interventions into markets.
Dudley’s case for government fiscal sustainability essentially argued national leaders need to make decisions now, so that markets don’t make the call later.
When it comes to things like U.S. government debt, “market participants appear to be quite tolerant of the current large fiscal imbalance.” But thinking this will continue is “a risky strategy because it fully exposes the economy to the vagaries of market sentiment and because shifts in such sentiment can have important consequences for both the deficit path and the economy,” Dudley warned.
To be sure, the central banker said he was not calling for some imminent shift in government spending patterns. “The economic recovery is still very fragile” and “premature fiscal retrenchment could jeopardize the recovery and push a convalescent economy into a double-dip recession,” he said. The official added any plan should be phased in slowly.
Much of the rest of the official’s speech centered on issues of financial regulatory overhaul and the need to rebalance world economies.
Dudley noted “the international consensus to harmonize standards globally appears fragile.” He added, “If each country acts to strengthen its financial system in an uncoordinated way, we will be left with a balkanized system, riddled with gaps that encourage regulatory arbitrage.”
As many Fed officials have done, Dudley also argued against efforts to strip the central bank of its bank oversight powers. “The Federal Reserve is particularly well suited to this role,” one with the added benefits of aiding the central bank in its lender-of-last-resort role, and in its job of making monetary policy, Dudley said.
The official also said the longer-run growth outlook would be better if consumption patterns were higher in emerging economies, and lower in the U.S. over a long run period. He warned that current patterns, which see a massive outflow of dollars to nations like China, are problematic, saying “a number of countries have surely reached a point at which further reserve accumulation comes with more costs than benefits.”
Dudley also argued for more transparency across the financial system, particularly in things like the trading of derivative securities.
“If regulators had ready access to current OTC derivatives transaction information in trade repositories, I suspect that this would serve as a brake on the use of OTC derivatives that are used for more questionable purposes,” Dudley said.
Go here to read the rest:
Fed’s Dudley: Governments Need Fiscal Stimulus Exit Plan
Perfect Babies and C-Section Complaints
Tom aka Rusty Rustbelt
Perfect Babies and C-Section Complaints
Some issues are like spring flowers, always returning.
The “too many C-Sections” debate is recurring again, raising issues of cost and clinical judgment (some women want sections for cosmetic reasons).
Problem is, Americans expect perfect babies, and if babies are not perfect it is time to call the lawyers.
(John “lover boy” Edwards became very rich filing junk science Cerebral Palsy cases against Ob-gyns.)
The last time I did a cost study on an Ob-gyn practice, all of the contribution margin from Ob was going to malpractice premiums, most of the expenses and all of the physician incomes were derived from gyn services (as I remember the premiums were about $140,000 per physician). So why deliver babies?
Certainly there is malpractice, and it is (in my opinion) malpractice not to do a quick section on a distressed baby (as one of my doc friends said, “we were all trained in the 2 minutes C-section drill). Proper compensation for legitimate cases is important.
Ob-gyns are becoming employees are a means of shifting risk and cost to hospitals and integrated networks. Difficult cases are referred up the specialist chain, often to academic centers (often many miles from home). Medical students are avoiding OB as a specialty.
This is no way to run a health care system, and the plans moving through Congress do not address these issues.
Tom aka Rusty Rustbelt
Read the original here:
Perfect Babies and C-Section Complaints
Geithner and EU regulation of derivatives
“Mr Geithner warns that US hedge funds, private equity groups and banks could be discriminated against if proposals to restrict the access of EU investors to funds based outside the 27-country bloc are included in the final law.” Geithner Warns of Rift Over Regulation
as declared over this:
“Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading.” Call For Ban ON CDS Speculation
Once again Geithner has shown whose interests are more important. It certainly isn’t Main Street when it comes to exports/imports. God forbid, some other country begin to regulate Wall Street though!
More:
Geithner and EU regulation of derivatives
Companies’ Net Worth Falls Again
The Federal Reserve’s latest flow of funds report offers a clue for those trying to understand why banks often don’t want to lend to businesses: By some measures, businesses’ finances are still deteriorating.
In the fourth quarter of 2009, nonfinancial corporate businesses’ net worth — what they have minus what they owe — declined 1.9%, notching its ninth straight quarter of contraction. The main driver of the drop is companies’ real-estate holdings, which tend to include things like land, warehouses and offices that have kept falling in value even as residential real estate has rebounded a bit.
One problem with the fall in net worth is that it can drive a wedge between the interests of a company’s owners and its creditors. With less to lose, the owners might be willing to take on more risk in the hopes of making big gains. The creditors, by contrast, are more likely to take a bigger loss if the owners’ bets go wrong. Consider, for example, a guy who bets $11 on a horse that pays double if it wins, $1 of his own money and $10 borrowed at 10% interest. In the best case, he makes $10; in the worst, he loses $1, with the creditors taking the rest of the hit.
Those odds can make bankers wary of lending to anyone, a problem noted long ago by economists Ben Bernanke and Mark Gertler, who developed a concept known as the “financial accelerator” to describe how such lending problems can aggravate economic downturns. If the latest data on bank lending are any indication, the accelerator could still be engaged: As of the end of 2009, total bank lending to businesses — known as commercial and industrial lending — was down 18% from a year earlier.
Read more here:
Companies’ Net Worth Falls Again
Sen. Corker Offers Details of Deal That Almost Was…
Sen. Bob Corker (R., Tenn.) on Thursday talked openly of the bipartisan compromise he nearly reached with Senate Banking Committee Chairman Christopher Dodd (D., Conn.) over new financial regulations.
On consumer protection:
“I think the consumer title that Chairman Dodd puts forth will be very much shaped by our discussions. My guess is he’ll probably veer it to a hair left to be candid … but hopefully not. But where it was left, it was housed at the Fed, appointed by the president, confirmed by the Senate.”
“One of the things about the Fed, and since I can come real clean now…the thing about the Fed if you remember the President said that he wanted an independent source of funding. The way the Fed works, the Fed gives whatever surplus is left to the Treasury each year, and that was a way of solving that problem because in essence the consumer protection agency would have an independent source of funding.”
Mr. Corker said the consumer division within the Fed wouldn’t “report to the chairman. It was a lot different than people thought. Here’s where it’s been: Republicans, conservative Republicans I might add, have agreed to broad-scope rulemaking, and that’s never happened. And were talking about rulemaking where the shadow industry has to live by the same rules that the regulated market has. If I’m a consumer person, I’m saying that’s breaking ground. Where Republicans have drawn a line in the sand, and that line has been honored, we do not want (the consumer division) involved in enforcement. … In other words, if consumer issues exist, we want the OCC to implement, or the Fed to implement, or the FTC to implement. We don’t want rulemaking and enforcement combined.”
“There was a veto process. We made the first real offer on consumer a week ago Saturday. It was actually a real offer to try to get a deal done. There was a process through which rules would be made. It’s consultative. There is a veto process if the safety and soundness of the financial system or systemic risk is created, there’s a veto process by the regulators. … We were down to issues that I promise you none of you ever dreamed of in your life. … If there’s a conflict and there’s a judgment, then how does that all work out. It got down to judicial issues if you will. So that’s the sort of fine-tuning that we had gotten to on consumer. But again, the major concepts, actually agreed to.”
On rating agencies:
“We have at present a pretty painful clause for rating agencies, if you are one of the large ones in there. I know the House basically wrote them out of the code, and I’m not saying I’m opposed to that I might add. But on the credit rating side, we had a pretty big liability burden that was going to be placed on credit rating agencies, and I think (would have) caused them to pay a lot more attention to what they are doing.”
On derivatives:
“The issue that has kept (Sens. Jack Reed and Judd Gregg) from coming to closure, although they are this close, has been how much of an end-user exclusion should exist. I have not seen their language, nor has Chairman Dodd seen their language, I might add, because it’s not ready yet. … I give Chairman Dodd some additional slack because I think he knows that it’s going to take probably a couple weeks to be honest for them to resolve their differences. … I probably felt a better way to do that is to leave that section out and add it as an amendment when it comes.”
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Sen. Corker Offers Details of Deal That Almost Was…
Health-Care Status Quo Is Bad Medicine for Jobs
As health care goes, so goes job growth?
Amid the worst labor market in more than a generation, it is surprising that discussions — pro and con — about overhauling health insurance tend to ignore one key issue: The current insurance system that relies on employer-provided policies and little portability threatens future job growth.
If left alone, the current system will curtail job creation in many ways, from raising the total cost of U.S. labor to hurting global competitiveness, besides dimming the entrepreneurial spirit. While it’s hard to pin down numbers, it’s safe to say that no change on health care will make it even tougher to bring down the unemployment rate, currently at 9.7%.
A study by Hewitt Associates forecasts that absent change, U.S. companies providing health insurance will face an annual bill of $28,530 per employee by 2019 — almost three times more than the $10,700 cost in 2009.
That leaves U.S. multinationals and exporters at a huge disadvantage because their foreign competitors in developed economies don’t provide health insurance to their workers. Instead, medical care is funded by the government.
As a report by the Business Roundtable said, “America’s businesses cannot win in the marketplace when bidding against global companies [that are] shouldering significantly lower health-care cost burdens.”
In other words, U.S. companies will lose sales, lessening the need for more U.S.-based labor.
Domestic demand will take a hit as well. Higher health-care bills means less money to give out in the form of cash wages. Slower income growth will hurt consumer spending. Small businesses, from restaurants to hair salons, depend on households as customers. Without increased sales, they have no need to take on extra staff.
At the same time, workers will have fewer career paths because of the possible loss of health insurance if they leave their current jobs. That will reduce earnings growth and the number of start-up companies that could create new jobs.
Workers with health problems (or with an ill dependent) often stay in a job because of the fear that a new insurance plan will not cover an existing condition. Economists have estimated this job-lock reduces voluntary turnover from 16% yearly to 12%. That means about 2 million workers stay in a job because of health insurance concerns.
Switching jobs expands income potential (since people most often take new jobs that pay more). Research shows that reducing job-lock by making health insurance portable could raise personal income by $30 billion a year. But if workers are stuck in jobs, the loss of potential income will hurt consumer spending growth.
Similarly, workers decide against becoming entrepreneurs because of the unavailability or high cost of individual insurance policies. Past research on male workers indicates that their worries about insurance stop about a quarter of possible entrepreneurs from going out on their own. Start-up businesses that survive and become small firms are the primary generators of jobs.
So whether you are for the Senate bill, the House proposals or prefer an entirely new approach, keep this in mind: Maintaining the status quo isn’t a viable option. The current insurance system will lead to many fewer jobs in the U.S. in the coming decades.
Here is the original:
Health-Care Status Quo Is Bad Medicine for Jobs
Extending temporary tax breaks passed
$238 billion to maintain very low capital gains and divdiends rates (mostly of value to wealthy who receive most of the capital income);
$359 billion for extension of the child tax credit, refundability and AMT rules
$359 billion for so-called “marriage penalty relief”
$18.4 billion for education incentives
The tax measures in the purported “temporary recovery measures” cost just less than $100 billion and include many provisions that are not going to do anything to stimulate the economy, in all likelihood, such as more expensing provisions for small businesses, more bonus depreciation for certain properties, and more tax credits for certain types of investments.
Additional “tax cuts” touted in the budget are similarly hard to justify since they increase the “consumption tax” features in the income tax–expanding the “saver’s credit” is a too costly $27 billion over ten years; and expanding the “american opportunity tax credit” is another $58 billion.
The “tax cuts for businesses” include two items that should hit the trash heap–hopefully Sandy Levin is going to toss these out:
almost $8 billion for eliminating capital gains taxation on investment in small business stock (this will be just another tax break to equity funds and all those hugely wealthy investors, not a break for little businesses or little guys)
$70.5 billion for making the research & experimentation credit permanent- (this is another item that doesn’t belong in an income tax–letting companies get a credit for R&D means that something that is just a normal cost of business is treated as reducing the tax owed on a dollar for dollar basis. That’s a nutty policy to put in place, but it is something that the corporations have lobbied for year after year after year, and Congress keeps giving it to them)
The biggest revenue raiser is capping itemized deductions, which would garner almost $300 billion over 10 years, but the Dems in Congress have practically rolled over on that one already.
[hat tip to taxprof]
Rdan here: Final vote passed the bill.
Original post:
Extending temporary tax breaks passed
Corker Disappointed Talks on Financial Regulation Broke Off
Sen. Bob Corker (R., Tenn.) said he was very disappointed talks have broken off with Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and blamed health care and White House politics for the problem.
“I think Republicans want to see a good financial reform bill. I think Democrats want to see a financial reform bill. If we cannot do this in a bipartisan way, and I still have hope that we will, we can’t do anything anymore in the United States Senate.”
See the rest here:
Corker Disappointed Talks on Financial Regulation Broke Off