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Archive for February, 2011

If you’ve got a free hour, here’s video of HBS’s Michael Porter, McKinsey’s Byron Auguste, and me talking about competitiveness. Hosted by Matt McDonald of Hamilton Place Strategies.

It would be fair to say that Michael, Byron, and I agree a great deal.

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On Friday I will be speaking at an event sponsored by Hamilton Place Strategies. It came together on short notice, so let me give it a plug:

Developing the Competitiveness Agenda

This week’s first meeting of the President’s Council on Jobs and Competitiveness kicked off a national debate on the economic policies encouraging greater job creation and economic growth in the United States. The Council’s mission is to focus on finding new ways to promote growth by investing in American business to encourage hiring, to educate and train our workers to compete globally, and to attract the best jobs and businesses to the United States.

To contribute to the ongoing debate, we are bringing together noted policy experts and economists to discuss the key policies that will be most effective in achieving America’s economic goals.

Featuring

Byron Auguste, Director, McKinsey & Company
Donald Marron, Director of the Urban-Brookings Tax Policy Center
Michael E. Porter, Professor, Harvard Business School

Moderated by Matt McDonald, Partner, Hamilton Place Strategies

WHEN: 10:00 am – 11:00 am, Friday, February 25th, 2011

WHERE:
The National Press Club: Holeman Lounge
529 14th Street, NW
Washington, DC 20045

RSVP here

My basic approach will be to emphasize the three key drivers of economic activity: a skilled workforce, capital, and ideas. I generally align myself with Paul Krugman on the idea of “competitiveness“, so if you hear me use the term, I probably mean it as shorthand for productivity. (Well, not shorthand exactly — “competitiveness” has more letters than “productivity” – but you know what I mean.)

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Why are WTI and Brent Oil Prices Out of Whack?

As regular readers may recall, I am intrigued when prices deviate from normal relationships (see, e.g., previous posts on oil vs. natural gas prices and the pricing of Citigroup securities).

Over the past couple of months, a new anomaly has emerged: crude oil quoted at Brent has become much more expensive than WTI, the usual price benchmark quoted in the United States.

Over at the Oil Drum, Gail the Actuary illustrates the price disparity:

And explains it:

We have all heard at least a partial explanation as to why West Texas Intermediate (WTI) and Brent prices are so far apart. We have been told that the Midwest is oversupplied because of all of the Canadian imports, and the crude oil cannot get down as far as the Gulf Coast, because while there is pipeline capacity to the Midwest, there isn’t adequate pipeline capacity to the Gulf Coast. I have done a little research and tried to add some more context and details. For example, the opening of two pipelines from Canada (one on April 1, 2010 and one on February 8, 2011) seems to be contributing to the problem, as is rising North Dakota oil production.

There are two pipelines (Seaway – 430,000 barrels a day capacity and Capline – 1.2 million barrels a day capacity) bringing oil up from the Gulf to the Midwest. It is really the conflict between the oil coming up from the Gulf and the oil from the North that is leading to excessive crude oil supply for Midwest refineries and the resulting lower price for WTI crude oil at Cushing. Demand for output from the refineries remains high though, so prices for refined products remains high, even as prices for crude oil are low. This mismatch provides an opportunity for refiners to make high profits.

Her whole post is well worth reading if you are into such things.

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A few months ago, I argued that housing was messing up inflation measures, in particular the core CPI. With last week’s release of fresh CPI data, I decided to check in to see if that’s still true.

Answer: Yes, but less so. The cost of housing is still rising slower than for other core goods and services, but the gap has narrowed.

In my earlier post, I found that year-over-year core inflation through October was a remarkably low 0.6% and that housing costs (as measured by the CPI for shelter) had fallen 0.4%. As a result, core inflation less shelter was 1.3% — low, but not remarkably so.

We now have data through January: core inflation has picked up a bit to 0.9% over the past 12 months. Shelter costs rose 0.6% over the same period, and core inflation less shelter is 1.2%.

As you can see, the big change is that shelter costs over the past year are now rising, not falling:

Bottom line: Housing costs have dragged the core CPI down over the past year, but not as much as was true a few months ago.

P.S. My earlier post provides details about the BLS measure of shelter prices.

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My first column for the Christian Science Monitor (first appeared here):

America’s tax system is broken. It’s needlessly complex, economically harmful, and often unfair. It fails at its most basic task, raising enough money to pay government’s bills.

Because of Washington’s love affair with temporary tax cuts, it’s also increasingly unpredictable. Americans deserve a simpler, fairer, more pro-growth tax system.

It won’t be easy. Any reform creates losers as well as winners – and losers always let their representatives know how they feel. But Washington is giving hopeful signs that the journey toward tax reform – the first in a quarter century – may finally be under way.

In his State of the Union message, President Obama called on Congress to reform individual and corporate taxes. He reiterated the offer at a press conference Feb.15. Democrats and Republicans have been holding hearings and drafting legislation. The president’s fiscal commission and the Domenici-Rivlin debt-reduction task force (on which I served) have proposed serious reforms, taking hatchets to the trillion-dollar thicket of tax preferences that complicate the code and distort economic activity.

Fixing the corporate tax code looks to be the easier task. Federal and state levies average more than 39 percent, the second highest in the world; we’ll take the top spot in April when Japan slashes its rate. Add in rising concern about America’s international competitiveness and slow economic recovery, and you have a recipe for a bipartisan push to cut corporate tax rates.

Given America’s budget woes, however, we can’t afford to reduce future revenues. Unless Washington demonstrates remarkable spending discipline, we will need all our existing revenues, and more, to cover the costs of an aging population and rising health-care costs.

That’s where real reform comes in. Along with high corporate tax rates, we also have very generous tax breaks, leaving much corporate income untaxed or facing only low effective rates. Far better would be a system with fewer tax breaks and lower rates across the board.

Such reform would reduce distortions and allow economic fundamentals, not taxes, to guide business decisions. As Mr. Obama put it: “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate … without adding to our deficit.”

Congress should pursue the same strategy with an even bigger challenge, the personal income tax. Dozens of exemptions, exclusions, deductions, and credits complicate the code and make Swiss cheese of our tax base. These preferences mean that trillions of dollars of income go untaxed. As a result, Congress must impose higher rates on the income that does get taxed, weakening economic growth and treating unfairly tax-payers who don’t milk every preference.

Policymakers should cut those tax preferences, use some of the resulting revenue to cut tax rates, and use the remainder for deficit reduction. A good starting point would be the fiscal commission’s proposal to eliminate many tax preferences and use the savings to deep-six the hated alternative minimum tax, cut tax rates across the board, and boost revenues by $80 billion a year. That plan would also make taxes more progressive while retaining slimmed-down deductions for mortgage interest, retirement savings, and charitable giving.

Tax reform will be a journey. The landmark reform in 1986 capped several years of effort. The same is likely to be true this time. If our leaders want to enact the landmark tax reform of 2013, they need to start sharpening their hatchets now.

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Tim Kane at the Kauffman Foundation is out with his latest survey of economics bloggers (full disclosure: I am both an adviser to the survey and a participant in it).

My favorite feature is a word cloud of adjective that respondents offered to an open-ended question about the U.S. economy:

Uncertainty still reigns (as it should), but “recovering”, “improving”, and “growing” now hold some prime real estate. As do “fragile” and “precarious.”

In last quarter’s survey, “uncertain” was even larger, with “weak” and “sluggish” close behind:

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Here’s a quick multiple choice quiz about President Obama’s new budget.

Over the next ten years, would the budget:

     a. Increase taxes by $819 billion

     b. Cut taxes by $2 trillion

     c. Increase taxes by $1.6 trillion

     d. All of the above.

If you answered (d), you have a fine future as a budget watcher.

As noted expert Johnny Depp demonstrated some months ago, it all depends on how you measure things.

For starters, you might compare ten-year tax revenues under the President’s proposal ($38.747 trillion) to what they would be if there were no new policy actions ($37.928 trillion under the President’s notion of “baseline” policy). That gives you answer (a), a tax increase of $819 billion.

But wait. The President’s baseline assumes that many expiring tax provisions get extended. They include the “middle-income” tax cuts originally passed in 2001 and 2003 and now scheduled to expire after 2012, the “patch” of the alternative minimum tax through 2011, and 2009-style estate tax law through 2012. If you treat extending those provisions as a policy choice—a defensible view since it will take new legislation for them to happen— you should score them not as freebies, but as a $2.845 trillion tax cut. Offset that by the President’s $819 billion in tax increases and you get answer (b): the budget calls for roughly a $2 trillion tax cut.

But wait again. Congress and the President recently had a chance to let the “high-income” tax cuts expire. And they didn’t. And they enacted a new estate tax law for 2011 and 2012 that’s lower than 2009 levels.  Those are now (temporarily) the law of the land. So you might view them as being current policy. And relative to that policy, the President’s baseline represents an $807 billion tax increase. Add in the other $819 billion and you get answer (c), a tax increase of about $1.6 trillion.

The President’s budget would thus cut taxes by $2 trillion relative to current law, but raise taxes by $1.6 trillion relative to current policy. Or something in between if, like the President, you prefer to use a baseline that’s a mix of current law and current policy.

Does your head hurt yet?

If not, please move on to our extra credit short essay question. How can we square any of these figures with the Administration’s talking point that the budget reduces future deficits by $1.1 trillion with about two-thirds of that coming from spending cuts?

Think about that for a moment. On its face, that would seem to imply that one-third of the deficit reduction comes from revenue increases. And that would put the revenue increase somewhere in the neighborhood of $350-400 billion.

Which bears no resemblance to any of our earlier figures.

I am not sure of the exact calculation behind the talking point (anyone?), but it appears that the main issue is that the administration identifies only some tax increases as being related to deficit reduction. For example, the budget includes an additional $328 billion in revenue to finance new transportation projects. Those revenues are not counted as reducing the deficit. And the budget includes another $56 billion in higher revenues from “program integrity” efforts – i.e., administrative actions to improve enforcement of the tax code. As best I can tell, that revenue, too, is not counted as part of deficit reduction (perhaps because budget experts are hesitant about giving credit for purely administrative changes).

With those two adjustments, it appears that the deficit-reducing revenue increases, as the Administration measures them, total about $425 billion over the next ten years. Which is still more than a third of the $1.1 trillion in deficit reduction. But maybe we are close enough for partial credit.

Update 2/17: Turns out the administration’s figure for deficit-reducing tax provisions is $375 billion. How do you get there? Three steps: The President’s budget would raise revenues by $819 billion. However, it would also increase outlays (due to refundable tax credits) by $115 billion. So the net budget impact of provisions that affect revenue is $703 billion. Subtract the $328 billion in unspecified funding for surface transportation, and you have $375 billion (which does include the program integrity efforts). As this shows, a recurring nu(is)ance in budget accounting is that tax provisions often have spending impacts. (Not to mention all the tax preferences that are hidden spending.)

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In early January, Esther and I discovered a mother cat and two kittens living under our deck. We’d been petless for several years, but after months of discussion had still not settled on what our next pet should be.  (There is a moral here about the burden of choice, procrastination, and other ideas in behavioral economics, but let’s leave that to the side. This post is about the cats.)

Taking a hint from fate, we decided to befriend the little cat family. And after much patience, many hours playing chase the ribbon, some smelly tuna, and one unintended meal of sushi-grade salmon, we have three beloved house cats: Momma Cat, Cinnamon, and Caramel.

Here are MC and Cinnamon:

We’ve learned much in our efforts to woo our furry friends. For example, I made it to my mid-40s not knowing that cats have whiskers above their eyes, not just by their noses. Four decades of cat doodles have been anatomically incorrect.

We also learned that wooing cats is a lot like growing up.

At first, we were timid teenagers.

“Would you like to come eat with us? We’ll buy you a nice dinner.”

Then progressively more confident.

“Would you like to come into our house?”

“Can we pet you? Would you like to sit on our laps?”

“Would you like to spend the night in our house?”

At this point, we thought we had everything under control. Three lovely kitties who trusted us enough to eat our food, watch TV in the family room, and play chase the ribbon.

But then we were thrust into the role of stressed parents.

“Hey, who is that big Tom cat outside?”

“Looks like she’s interested in boys again. She better not get pregnant. Let’s schedule a doctor’s appointment for her and the kittens.”

“Young lady, you are grounded. You are not to see that Tom cat.”

“Please stop that yowling. You are grounded, that’s it.”

“What do you mean she snuck outside?”

“Kitty, get inside. You are not leaving this house again. And we are moving up that doctor’s appointment.”

So there you go. In just six weeks, we’ve been transformed from timid teenagers into overbearing parents.

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Nice NYT Chart of Debt Limit Votes

Over at the New York Times, Jackie Calmes surveys the brinkmanship of debt limit politics.

Accompanying her piece is a lovely reworking by Amanda Cox of my charts showing how Democrats and Republicans have voted in past debt limit showdowns:

I particularly like the horizontal spacing (no missing years). One benefit it that it aligns the Senate votes, House votes, and political control from top to bottom. With just a little effort, readers can see the basic insight: Blue below, Blue above. Red below, Red above. Mixed Blue and Red below, Mixed Blue and Red above. Bottom line: Debt limit votes are a tax on the majority.

Nice job.

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Today was a big one for housing finance. Treasury kicked things off with its much awaited report to Congress on “Reforming America’s Housing Finance Market.” And then the Brookings Institution hosted a full day conference on “Reforming the U.S. Mortgage Market.

Both Treasury’s report and the conference showed that there’s still important debate about the potential merits and demerits of a continued government backstop in the prime mortgage market. Treasury’s three options, for example, run the gamut from no guarantee to a backstop guarantee that kicks in during bad times to a permanent, broad-based guarantee. I’ll have more to say on these options in the future.

For now, I’d like to highlight several other aspects of the Treasury report and the discussion at Brookings that I found encouraging. Based on what I heard (and what I read between the lines of the Treasury report), there appears to be near-consensus on five important issues:

  1. The multi-trillion dollar investment portfolios of Fannie Mae and Freddie Mac were a mistake. As the Treasury report puts it: “Fannie Mae and Freddie Mac were allowed to behave like government-backed hedge funds, managing large investment portfolios for the profit of their shareholders with the risk ultimately falling largely on taxpayers.” Such government-backed portfolios have no place in our future mortgage finance system.
  2. Any future government assistance must be better targeted. For example, the conforming loan limit (and its FHA counterpart) need to come down.
  3. If there are any future government guarantees for prime mortgages, they must be protected by greater private capital.
  4. If there are any future government guarantees for prime mortgages, they must be explicit, and financial firms must pay at least actuarially fair rates to purchase them.
  5. Affordable housing programs should be transparent and on budget, rather than embedded in regulatory requirements on Fannie Mae, Freddie Mac, or any successors.

Each of these would be a substantial improvement from the old GSE system.

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