The Bush Tax Cuts Didn’t Work

Bruce Bartlett rounds up economic research showing that the tax cuts passed by President George W. Bush from 2001 to 2003 failed to meet even the administration’s promised results.

“This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress… Mr. Hubbard had also spearheaded enactment of big tax cuts in 2001 and 2002 that he said would jump-start the American economy… There is no evidence that the tax cut had any such effect… Hence the need for yet another big tax cut.”

“The idea of the 2003 legislation was to raise dividend payouts, thereby bolstering personal income, and raise the prices of common stock, which would improve household balance sheets… Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation.”

“It is hard to find even a reputable conservative economist willing to say anything good these days about President Bush’s tax and economic policies.”

Planning for Year Two of the Sequester

Most of the across-the-board spending cuts imposed by the “fiscal cliff” sequester remain in place, and with no budget deal in sight, lawmakers are starting to plan for the second of ten years of cuts. The Washington Post has details of House Republicans’ effort to restore “cuts to the military while making cuts to domestic programs favored by Democrats even deeper.”

“Veterans Affairs, Homeland Security and the Pentagon would be spared under the plan approved by the House Appropriations Committee on a party-line vote, but legislation responsible for federal firefighting efforts and Indian health care would absorb a cut of 18 percent below legislation adopted in March.”

“The panel’s move came as Democrats and Republicans remain sharply apart on broader budget issues like taxes… Neither House not Senate are likely to have much luck in advancing the measures very far unless a broader deal is made.”

Not Every Bull Market is a Bubble

Felix Salmon explains the difference between a bull market and a speculative bubble, arguing that the current recovery is no bubble.

“The word ‘bubble’, at least for me, is a loaded term, with a specific meaning. For one thing, it implies speculation: people buying an asset which is going up in price, just because they think they’re going to be able to sell it… The reason to be worried about bubbles has nothing to do with fear of what happens when everybody is happily making money. Rather, the problem with bubbles is that they burst… if asset prices simply decline without causing substantial collateral damage, then you weren’t in a bubble to begin with; you were simply in a bull market which then became a bear market.”

“Looking at the markets today, they show every indication of being bull markets rather than bubbles. For one thing, there’s not much speculation going on: no one’s day-trading junk bonds…  the One Percent are getting wealthier just because they own stocks and those stocks are going up… That’s real investment, it’s not speculation… when asset prices start to fall, the main people to be hurt will be the ones owning the assets in question.”

Obama Quietly Promotes Energy Efficiency

USA Today looks at one of President Obama’s least-known strategies to promote energy efficiency without any government spending: the Better Building Challenge.

“More than 110 partners — including schools, universities and cities, such as Atlanta, Chicago, Los Angeles and Seattle — have signed on to the voluntary Better Building Challenge, launched by President Obama in December 2011… which provides technical but no financial help to its partners.”

“Unlike some aspects of Obama’s ‘all-of-the-above’ energy strategy, efficiency has garnered broad support… the DOE program aims to provide strategies, already proven by leaders in energy efficiency, that other organizations can follow… the trick was getting companies to share data and tips — a sort of playbook — for what works.”

Congress is Wrong About Economic Policy

Federal Reserve Chairman Ben Bernanke testified yesterday before Congress’s Joint Economic Committee and brought a simple message: You’re wrong.

Neil Irwin looks at Bernanke’s criticism of the recent fiscal consolidation: “It might be one thing if the fiscal retrenchment was also solving the country’s longer-term deficits. But, Bernanke says, it has not… Focus on reducing the long-term sustainability of the U.S. government’s finances while moving cautiously, if at all, on short-run fiscal austerity. And the chairman repeats that plea in today’s testimony.”

Meanwhile, FT Alphaville highlights a key portion of Bernanke’s testimony in which he defends the central bank’s monetary policy decisions.

Said Bernanke, “Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets.”

Housing Data Continues to Impress

The National Association of Realtors reported that existing home sales “increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million in April from an upwardly revised 4.94 million in March,” just below the consensus forecast of 5 million sales.

Bill McBride takes a deeper look: “NAR reported that inventory increased 11.9% in April from March, and is only down 13.6% from April 2012… The key points are: 1) inventory is very low, but 2) the inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.”

How One Amendment Says Immigration Reform Will Pass

Matthew Yglesias sees rays of hope for immigration reform after a successful markup process where “senators disagreed about the merits of an issue, and  they struck a compromise whose goal was to advance their substantive objectives rather than to provide rationalizations for opposing a bill.”

“The basic issue is that the Gang of 8 immigration framework both expanded the H1-B skilled guest worker program and added some new hoops that companies have to jump through if they want to hire H1-B workers. Sen. Orrin Hatch, R-Utah…had a couple of amendments that would basically pair those hoops back. Dick Durbin…did not like those amendments.”

“If this were the health care bill, the way it would have played out would have been that Hatch would be unable to get 100 percent of what he wanted and then that would have become a key talking point of his over why he can’t support the law. What happened instead is that Hatch and Durbin struck a compromise that advances the key interests of tech companies while retaining some of the protections that H1-B skeptics wanted. Hatch then voted for the bill, not promising to support final passage but saying that he wants the legislative process to move forward.”

Chart of the Day

– FT Alphaville has this chart from Credit Suisse showing that according to just about any standard measure of inflation, the year-over-year rate of inflation is slowing down.

“Inflation is low and, according to every recent measure, it’s been falling. That’s pretty much all there is to it. As to the question of how much (or even whether) this disinflationary trend will influence policy, it’s hard to say.”

“Bernanke suggested…that he wasn’t so worried about it because inflation expectations have remained stable.”

Shift to Part-Time Workers Predates Obamacare

As the federal government prepares to implement major components of President Obama’s health care reform law, some have worried that employers are beginning to utilize more part-time workers, but a new report from the Employee Benefits Research Institute blames the recent shifts on the Great Recession.

“The percentage of workers employed part-time has been rising since 2007, increasing from 16.7 percent to 22.2 percent in 2011… At the same time, while both full-time and part-time workers have experienced drops in coverage, part-time workers have been affected disproportionately. Recent trends provide an important base line against which to measure the impact of PPACA once its 2014 health-coverage mandate takes effect.

Will Congress Finally Update Chemical Safety Rules?

“The current U.S. law on chemical safety is 37 years old, riddled with exceptions, and widely seen as ineffective,” says Brad Plumer, but “that law could soon get a face-lift” after Sens. Frank Lautenberg (D-NJ) and David Vitter (R-LA) announced a deal to overhaul the Toxic Substances Control Act.

“Under the Toxic Substances Control Act, the Environmental Protection Agency (EPA) can only call for testing of a chemical if evidence somehow surfaces that the substance is dangerous. What’s more, tens of thousands of existing chemicals were exempt from review when the law was enacted in 1976.”

Under the proposed changes, the EPA “would review all actively used chemicals and label them as either ‘high’ or ‘low’ priority based on their potential risk to human health and the environment… The EPA will also have greater flexibility to take action on chemicals deemed unsafe, ranging from labeling requirements to outright bans on things like asbestos.”

Why Housing Growth Hasn’t Brought Recovery

Nick Timiraos highlights a new note from PIMCO explaining why expectations of “a quick return to the ‘virtuous cycle’ by which rising prices, home sales, and housing construction feeds further consumer spending” have not yet been fulfilled.

“First, construction is coming back, but the industry’s muscles have atrophied a bit… construction still needs to double to keep up with population and household growth. How quickly it gets there matters, and the speed with which construction grows could depend on its ability to overcome a series of capacity constraints.”

“Second, banks have to be willing to expand credit beyond today’s conservative standards. New regulations will keep lenders cautious… Third, consumers also have to feel confident enough to borrow… Fourth, mortgage-equity withdrawal—the process by which homeowners take cash out of their homes—isn’t likely to play the same role that it did during the past decade in fueling consumer spending.”

Why the Bubble Debates Aren’t Interesting

Tyler Cowen explains why he generally stays away from debates about whether or not the Federal Reserve’s monetary policies are creating a “bubble recovery.”

“ I don’t find most predictive discussions of bubbles interesting, while admitting that such claims often will prove in a manner correct ex post.  ’OK, the price fell, but was it a bubble?  I mean was there froth, like on your Frappucino?’… Good news and improving conditions may well bring more bubbles or greater likelihood of bubbles, but that is hardly reason to dislike good news and improving conditions.”

“I expect the real economy over the next twenty years to be more volatile than it was say in the 1990s.  In that sense, many current asset market prices may be revised and quite dramatically.  Still, I don’t find the bubble category to be so useful in this regard.  We really don’t know what is going to happen and that is why the current prices are wrong, not because of a ‘bubble.’”

Economic Issues Fall to the Wayside

The Washington Post looks at troubling signs that the stock market boom and the focus on issues that were largely ignored during the financial crisis — including immigration — are pushing economic issues to the back-burner.

“There are no serious negotiations underway between the White House and congressional leaders on legislation to spur growth, and no bipartisan ‘gangs’ of senators are huddling to craft a compromise job-creation package.”

“But lawmakers appear to feel little electoral pressure to address those concerns. They disagree vehemently over what actions would make a difference, and lately they’ve been distracted by other issues and scandals. There also is mounting evidence that the political donor class — wealthier Americans — is feeling a stock-market-fueled surge of optimism about the economy. It all adds up to inaction.”

Will Rail Revolutionize the Oil Industry?

Open Markets looks at how railroads are making “a 21st-century impact on the U.S. crude oil industry.”

“What was first seen as a stop-gap measure to deal with extra output is now being considered a viable complement to pipelines and a permanent part of the energy infrastructure in the U.S…. In 2012, the Association of American Railroads said it moved a record amount of crude oil: 233,811 Class 1 carloads, up 256 percent from the 65,671 carloads moved in 2011.”

“Nothing beats the efficiency and convenience of pipelines, but the use of unit rail car trains, where 100 cars or more are dedicated to one product, helped to significantly lower the cost of using rail… producers who use rail can respond to market forces and send crude oil where prices are higher, rather than being stuck with where the pipeline ends, opening new domestic markets… The third benefit of rail is that rail companies offer shorter-dated contracts of one to four years, versus pipelines, which were 10 to 15 year contracts.”

Watering Down Regulations is a Two-Way Street

Many commentators have lamented the influence of lobbyists as the Dodd-Frank financial reform law works its way through the regulation-writing phase, but David Dayen argues that “this gets things backward. Concessions aren’t made without a regulator willing to sit across the table from Mr. Wall Street Lobbyist and agree to his suggestions.”

“Witness the most recent rollback of Dodd-Frank, a compromise on derivatives regulations by the Commodity Futures Trading Commission… one Democratic commissioner on the CFTC, Mark Wetjen, basically forced through the weaker rules by himself… Wetjen is in line to replace Chair Gary Gensler and run the CFTC.”

“Yet the major reform organizations continue to cite Wall Street lobbyists… Top industry lobbyists have met with Mark Wetjen repeatedly, but if he ignored their concerns, we wouldn’t be talking about how Wall Street killed financial reform.”

US, EU Seek to End Solar Panel War With China

“The Obama administration is engaged in preliminary talks with the European Union and China to settle a dispute over trade in solar-energy equipment and avoid a conflict among the world’s largest economies,” according to Bloomberg.

“Government support for renewable-energy products including solar panels has led to disputes as the price of polysilicon, the main ingredient in solar cells, has dropped 64 percent since December 2010.”

The New York Times has details of a potential deal.

“The plan that is starting to take shape would essentially carve up the global solar panel market into a series of regional markets. It would sharply raise the price of solar panels exported from China, the world’s dominant producer, by requiring Chinese companies to charge more while limiting the total number of solar panels they could ship.”

“In exchange, Chinese companies would no longer be charged steep taxes on their exports of solar panels. The United States is already collecting tariffs totaling about 30 percent while the European Union is expected to impose similar tariffs of about 50 percent on June 5, and may backdate them to March 5.”

The Lawyers That Regulate Wall Street

The Financial Times takes a deep look at the US Attorney’s Office for the Southern District of New York, “the New York legal world’s equivalent of the playing fields of Eton, a proving ground for the attorneys who count on Wall Street.”

“Former assistant US attorneys – or A-USAs, as they are known – from the southern district include everyone from Mary Jo White, the new chairman of the Securities and Exchange Commission, and Rudolph Giuliani, the former mayor of New York City, to 21 of the 46 judges in the federal district court in Manhattan.”

“Southern district prosecutors are thorns in the side of Wall Street but that experience makes them attractive to banks and New York’s elite law firms once they have left government. It is typical for southern district prosecutors to ‘graduate’ to the private sector – and then sometimes return to public service at more senior levels. It is a legal circle that keeps turning.”

Another Court Blocks Another Abortion Law

The Hill reports that the Ninth Circuit Court of Appeals “struck down an Arizona law banning most abortions after the 20th week of pregnancy,” following less than a week after a different court temporarily blocked an even more restrictive Arkansas law.

“Arizona’s law banned abortion after 20 weeks except in the case of a ‘medical emergency.’ The government has no right to ban abortion before a fetus is viable, the 9th Circuit said, and 20 weeks falls before that point.”

With so many court battles over abortion restrictions, the only question appears to be which case will make it to the Supreme Court first.

Fed Signals Confusion As Exit Strategy Nears

With various Federal Reserve bank presidents and board governors offering conflicting statements about the eventual tapering off of the quantitative easing program, Tim Duy looks at the key areas of confusion.

“I think there is strong interest in tapering QE now that we have a string of job reports pointing to substantial and sustainable improvement in labor markets, but, given the fiscal contraction, little willingness to pull the trigger on tapering until we see another two or three similar reports.”

“Still, at the same time, the Fed wants to keep its options open, as they are very much cognizant that past efforts to pull back on easing have been premature.  Hence the talk that future moves could be up or down, which is really just plain confusing… It is even more confusing given that some officials seem to care about inflation, but others labor markets.”

“Hence, we are all looking toward…Federal Reserve Chairman Ben Bernanke to provide the clarity that appears very much needed. “

Immigration Reform Passes Senate Committee

“The Senate Judiciary Committee on Tuesday approved a broad overhaul of the nation’s immigration laws on a bipartisan vote,” the New York Times reports, “sending the most significant immigration policy changes in decades to the full Senate, where the debate is expected to begin next month.”

“The most emotional part of the committee process, which stretched over five days and 301 amendments, came late Tuesday, when Senator Patrick J. Leahy, the Vermont Democrat who leads the committee, said that he would not offer an amendment allowing United States citizens to apply for permanent resident status, known as a green card, on behalf of their same-sex partners.”

The Associated Press provides the key details of the amended legislation as it heads to the Senate.

Senate Hits Apple Over Corporate Tax Avoidance

The Senate Permanent Subcommittee on Investigations held a hearing in which it grilled Apple CEO Tim Cook after releasing a report (PDF) on Apple’s tax avoidance strategies. Matthew Yglesias says that the “most striking fact is that this isn’t just a matter of shifting profits to lower-tax jurisdictions, but that some of Apple’s profits aren’t taxed by anyone anywhere due to jurisdictional gaps.”

“The issue here is with the tax code not with Apple. Portraying it as a showdown between the Senate and a CEO makes for better television, but the actual issue here is one of legislators versus legislators… It’s a question of public policy how much revenue we want to raise via corporate income tax and what sectors do we want to coddle with loopholes.”

Felix Salmon: “What we’re seeing here is a corporate class which is vastly more effective at evading taxes than individuals are; I don’t see that trend going away any time soon. Instead, I have a modest proposal of my own: why not at least require all public US companies to file their federal tax returns with the SEC… at least we’d be able to see which ones are evading taxes most effectively.”

FT Tech Blog has a detailed look at the back-and-forth in the hearing.

What You Need to Know About the Oklahoma Tornado

A massive tornado swept through Moore, Oklahoma on Monday, causing severe damage and over 50 deaths. Alexis Madrigal answers a number of frequently asked questions about tornados generally and this tornado in particular.

“Moore has a deep and tragic tornado legacy. The town could probably lay claim to being the very center of Tornado Alley… On May 3, 1999, Moore was hit by one of the worst tornadoes on record.”

“The National Weather Service’s Norman, Oklahoma office says that a tornado warning went into effect 16 minutes before the storm hit. That’s three minutes faster than the current average lead time for a warning.”

“Because there was a large tornado in 1999, we have detailed information on some of the problems with the construction methods in the area… much of the construction in the area does not follow best practices for resisting a tornado’s winds.”

Jeff Masters looks at the damage and expected costs of this tornado, noting that “after the damage tally from the May 20 tornado is added up, Moore will hold two of the top five spots on the list of most damaging tornadoes in history.”

Bonus Chart of the Day

– Joe Weisenthal notes an interesting similarity between the decline in the labor force participation rate (in blue) and the fall in per capita vehicle miles driven (in red).

“As you can see, per capita miles driven peaked just before the recession, and hasn’t recovered at all… It reminds us of the chart of the Labor-Force Participation Rate (the share of workers working or looking or work), which also started sliding before the recession, and hasn’t stopped sliding at all during the recovery.”

“There’s a logical connection between the two. Not in the workforce? You’re less inclined to drive.”

Why the Shrinking Deficit Won’t Allay Conservatives’ Fears

Cullen Roche explains why recent reports that the budget deficit is shrinking will not be enough to assuage conservatives’ deficit concerns.

“The conservatives who understand the monetary system are more concerned that the growing influence of the US government will reduce the productive base of the country therefore making us less competitive and at greater risk of becoming a high inflation country in the future.  I don’t think those fears are necessarily all that valid in the present environment, but I know what the concern is and can appreciate the worry over a longer time horizon.”

“It’s the absolute size of government spending relative to the economy that worries conservatives.  To the informed conservative who is worried about the long-term impact of growing government the continued growth in the deficit is nothing to celebrate at all.”

Employers Continue Search for Low-Cost Health Care Options

“Employers are increasingly recognizing they may be able to avoid certain penalties under the federal health law by offering very limited plans that can lack key benefits such as hospital coverage,” according to the Wall Street Journal.

“Many employers and benefits experts have understood the rules to require robust insurance, covering a list of ‘essential’ benefits such as mental-health services and a high percentage of workers’ overall costs… But a close reading of the rules makes it clear that those mandates affect only plans sponsored by insurers that are sold to small businesses and individuals.”

“Larger employers, generally with more than 50 workers, need cover only preventive services, without a lifetime or annual dollar-value limit, in order to avoid the across-the-workforce penalty… Limited plans may not appeal to all workers, and while employers would avoid the broader $2,000-per-worker penalty for all employees not offered coverage, they could still face a $3,000 individual fee for any employee who opts out and gets a subsidized policy on the exchanges.”