Thursday, November 18, 2010

Today's Links

1--It's Time to Tax the Rich, LA Times

Excerpt: The final two years of the George H.W. Bush presidency brought a creeping recession, with an unemployment rate that increased from 5.6% in 1990 to 7.5% in 1992. In June 1992, just five months before the elections, the rate reached 7.8%, and Bush lost his reelection bid ("It's the economy, stupid").

What did the new president do about the economy? President Clinton in 1993 proposed to raise the highest marginal tax rate immediately from 31% to 39.6%. In a Wall Street Journal article, Martin Feldstein, the former chief economic advisor to President Reagan and then as well as now a professor of economics at Harvard, opined that "Mr. Clinton's proposal to raise the marginal tax rates of high-income individuals would hurt incentives, weaken the economy and waste investment dollars."

This was, of course, a reincarnation of the GOP's trickle-down theory — tax cuts for the rich would eventually benefit the middle and lower classes. But Republicans did not let the fact that the Reagan tax cuts had decimated government services and created huge deficits stand in their way. Claiming that it was wrong to raise taxes on the rich in the middle of a recession, every one of them, in both houses, voted against it. Forty-one Democratic representatives and six Democratic senators joined them. The tax increase passed by only the narrowest of margins. In the House the vote was 218 to 216, while in the Senate the increase passed with a tie-breaking vote by Vice President Al Gore.

2--Mark-to-Make-Believe Perfumes Rotten Loans: Jonathan Weil, Bloomberg

Excerpt: Just when it looked like U.S. banks were starting to reveal the true values of their loans, it turns out there’s an accounting loophole they can exploit to keep bad news buried.

Ever since new rules took effect last year, lenders have been required to disclose the “fair value” of their loans each quarter. The results have been something of a mystery, though. Some banks show large disparities between these numbers and the loan values on their balance sheets. Others don’t.

One big reason: Thanks to the loophole, they don’t all have to follow the same definition of fair value. My guess is most investors don’t know this. Often lenders’ disclosures don’t clearly explain which approach they’re using, or that companies have a choice. Unsuspecting readers of their financial statements easily be misled.

3--Breakfast with Rosie, David Rosenberg, zero hedge

Excerpt: The fiscal mess at the state and local level will very likely be the front page story in 2011 and the retrenchment in this sector poses the greatest headwind regarding the economic outlook. Chicago, where I am today giving speeches and meeting prospects, has a $20 billion unfunded pension liability. Yesterday’s front page of the WSJ ran with States Offer Washington Lesson in Belt Tightening. The state of Illinois is just behind California in terms of fiscal recklessness — the state just borrowed $4 billion in order to meet a payment to its pension fund (the fund in recent months has been selling assets and the state legislature is now contemplating income tax hikes). Read the article, it’s not just Christie in New Jersey that has taken a knife to sacred cows but so has Mitch Daniels in Indiana who also issued an executive order that terminated collective bargaining rights for civil servants. Spending was sliced and taxes were raised to close the fiscal gaps, and guess what? Governor Daniels has a huge 68% approval rating right now. Tim Pawlenty in Minnesota has also found creative ways to cut costs — though in part offloading the restraint to the cities.

It seems hardly likely that the federal government would guarantee banking sector liabilities and then not backstop the state and local governments because a default in this space is unfathomable — especially from a political standpoint.

4--Why Congress Must Extend Jobless Benefits For Hard-hit Families But Not Tax Cuts For the Rich, by Robert Reich:

Excerpt: America’s long-term unemployed — an estimated 4 million or more — constitute the single newest and biggest social problem facing America. Now their unemployment benefits are about to run out, and the lame-duck Congress may not have the votes to extend them. (You can forget about the next Congress.)

The long-term unemployed can’t get work because there are still five people needing work for every job opening. ...

Republicans and many blue-dog Dems say we can’t afford another extension. But these are many of the same people who say we should extend the Bush tax cuts for the wealthy for at least another two years.

Extending the Bush tax cuts for the top 1 percent would cost an estimated $120 billion over the next two years. That’s more than another unemployment benefit extension would cost. The unemployed need the money. The rich don’t...

5--(Deficit Commission's new report) Yep, It’s Regressive, Paul Krugman, New York Times

Jon Chait takes another look at Bowles-Simpson, this time with numbers from the Tax Policy Center, and is disillusioned. As I surmised, it redistributes income upward: the bottom 80 percent of families would pay higher taxes than they did in the Clinton years, while the top 20 percent — and especially the top 5 percent — would pay less; not what you’d call shared sacrifice.

The only twist here is that the ultra-rich, the top 0.1 percent, who get a lot of their income from dividends and capital gains, would be hit by having these gains taxed as ordinary income. Even so, they would face a smaller tax increase than the bottom 60 percent.

This wasn’t the plan we’ve been looking for; on taxes, what on earth were they thinking?

6--Ireland: A Textbook Example of the Dangers of Balanced Budgets and Fiscal Responsibility, Dean Baker, CEPR

Excerpt: Ireland is in the headlines these days as its government struggles with insolvency. Remarkably, none of the news stories remember to point out that Ireland was a model of fiscal responsibility in the years leading up to its current disaster. Not only did it balance its budget, Ireland ran large budget surpluses in the 5 years preceding its collapse in 2008. Its peak surplus in 2006 was 2.9 percent of GDP, the equivalent of a surplus of roughly $420 billion in the United States.

Like the deficit hawks in the United States, Ireland's political leaders ignored the country's massive housing bubble, the collapse of which sank its economy. It is interesting to note that, while Ireland's background to the deficit crisis is generally ignored, news reports on Greece's financial difficulties routinely referred to its large budget deficits in the years leading up to the crisis.

7--G20 summit should have focused on stimulating growth, Mark Weisbrot, Guardian

Excerpt: he most immediate problem facing the world economy is that the high-income economies – including the United States, Europe and Japan – are barely recovering from their recessions. The IMF pointed this out in their semi-annual World Economic Outlook last month, noting that the recoveries of the high-income economies "will remain fragile for as long as improving business investment does not translate into higher employment growth". Unfortunately, this is everybody's concern because these countries make up the majority of the world's economy.

Now, this is something that the G20 governments could actually do something about, not least because some of them are actively making things worse. The European authorities – which include the European Commission, the European Central Bank and the IMF (which is subordinate to these authorities in Europe) – are choking off recovery in Spain, Ireland, Greece, Portugal, and other countries. Ireland's borrowing costs just jumped 3 percentage points in the last three weeks – from 6% to a potentially explosive 9% – because its austerity policies are having the predictable effect of tanking the economy. Spain just racked up zero growth for the third quarter and hardly any for the whole year, with unemployment at 20%. In just the last six months, the IMF has had to lower the forecast for GDP growth in Greece from negative 2% to negative 4%, for the same reasons; and if all goes well according to their austerity plan, Greece will have a debt of 144% of GDP in 2013, up from 115% in 2009.

It is a great irony that any of these governments or authorities now complain when the US Federal Reserve actually does something right...The most immediate threat to the world economy at present comes not from "currency wars" or protectionism, but from overly conservative, dogma-driven macroeconomic policies. It's a shame that this wasn't a major item on the G20 agenda.

8--€1,650bn of pain for Europe’s peripherals, Credit Suisse says, FT Alphaville

Excerpt: Credit Suisse’s Andrew Garthwaite & Co. are here to serve.

They reckon that total bank losses in Spain, Greece, Ireland and Portugal have so far been about €140bn — or 8 per cent of GDP. If you compare those with the same figures for historical banking crises, Credit Suisse estimates peripherals still have about €350bn of additional costs to go through, or 22 per cent of their GDP.

Assuming then, that private sector leverage falls back to the level suggested by income in Spain, Portugal and Ireland (not Greece) — then these three countries would have to reduce their borrowings by €1,300bn, or 80 per cent of GDP.

Could core Europe walk away from peripheral Europe? We think the chance of this is zero. The issue is that already core Europe has, on the BIS data, about $700bn of assets in peripheral European debt. Moreover, the ECB holds $71bn of peripheral European government debt directly – and most of the ECB repo financing to European peripheral banks (€322bn, equal to 20% of their GDP) is secured against domestic government bonds. (A third of the cost of recapitalisation the ECB would have to be met by the Bundesbank). This means that – apart from other economic and political issues – there is a huge direct cost for core Europe if there were significant defaults in the periphery. The indirect costs of a failure of the monetary union would be even greater, namely the loss of a single market, with the newly established Deutsche Mark appreciating 20% hitting German exports, the probable erection of trade barriers etc.

9--State Budget Cuts: The Undeclared War on the Middle Class, June Carbone and Naomi Cahn, New deal 2.0

Excerpt: A double dip is coming, and it will be aimed at women and families.

The next round of the Great Recession — the feared “double dip” in employment — is coming. The Federal Reserve Board is so worried about it that it is encouraging inflation. What policy makers are not saying is that the next round will be the direct result of government policy and that this round will disproportionately target women, families and the most vulnerable.

The explanation is simple. In a recession, tax revenues fall, increasing deficits. State governments are required by law to balance their budgets, so they must either raise taxes or cut spending. Doing either in the middle of a recession makes it worse by increasing unemployment and reducing the money people have to spend, setting off another round of economic decline. Since the Great Depression, economists have emphasized the importance of efforts to counter this vicious cycle. Republicans, starting with Nixon, have argued that revenue sharing that sends federal money to the states is the most effective way to save jobs and avoid waste.

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