France and Germany veto increase in EU rescue fund – Jose Barroso, head of the European Commission, called on EU leaders to boost the firepower of the EU’s €440bn (£366bn) bail-out fund and beef up its role, allowing it to intervene with pre-emptive bond purchases to help states under threat. "It is important for the markets to know that Eurozone leaders are committed to do whatever is necessary," he said, hoping for action as soon as early February. He also proposed a "new phase of European integration" with far-reaching oversight of the budgets, pensions, labour markets, and trade flows of EU states to prevent a recurrence of the imbalances that led to the EMU debt crisis. The response in Paris and Berlin was chilly. "We think the fund is big enough," said Francois Baroin, France’s budget minister. German Chancellor Angela Merkel said the bail-out mechanism was "nowhere near exhaustion", adding curtly that she did not wish to debate the matter "any further".
Eurozone promises comprehensive medium-term anti-crisis plan
– It always takes a little bit of market panic to bounce Europe’s complacent leaders into action; EU’s finance minister promise to work out a strategy within two months that will almost include an EFSF with a wider remit and a higher ceiling; Barroso says decision possible at next EU summit on Feb. 4; Merkel said fund size sufficient, but Germany was ready to do whatever is necessary; Portuguese bond auction success, with 10-year bond at 6.71%; euro recovers after Portguese bond auction, and peripheral bond spreads narrow; FT Deutschland says support for a higher EFSF ceiling comes at a wrong time; Brussels plans one-off bank levy; Andrea Enria, an Italian central bank, is to head the new European Banking Authority; the head of the Italian Treasury says Italy is not Spain; Sarkozy is contemplating the scrapping of the wealth tax; Ireland seeks private insurance against banking losses [more]
“Bring Us Sugar!” U.S. Inflation And the Rest of the World
– Yesterday I set up a Google alert for “inflation,” expecting to turn up the occasional article on monetary policy and such. Instead I got deluged with stories from around the world about how rising prices are causing everything from “political pressure” to food riots. Things that seem pretty minor to Americans — like $3 gas and an extra quarter for a loaf of bread — are major problems for countries where food and fuel are dominant daily expenses. Based on these reports, today’s inflation is mostly limited to food and energy, with food price spikes being due more to crazy weather than surging demand. So it’s not yet a systemic, generalized, global inflation, and bumper crops in the coming year would ease some of the pressure. Still, the US is clearly exporting inflation. Because we import much of what we consume, newly created-dollars flow overseas where they pump up prices.
Food Riots Commence As The Fed’s Loose Money Policy Leads To First Violence Of 2011 We were only partially serious when we predicted that following the just released FAO data confirming food prices have just hit an all time high, we were expecting food riots to ensue imminently. Alas, as all too often happens these days, we were right. 2011 first and certainly not last rioting comes out of Algeria, where Bernanke’s genocidal policies are first to take root. From the Associated Press: “Riots over rising food prices and chronic unemployment spiraled out from Algeria’s capital on Thursday, with youths torching government buildings and shouting “Bring us Sugar!” Police helicopters circled over Algiers, and stores closed early. Security officers blocked off streets in the tense working-class neighborhood of Bab el-Oued, near the capital’s ancient Casbah, and areas outside the city were swept up in the rampages. The U.S. Embassy issued a warning to Americans in Algeria to “remain vigilant” and avoid crowds. .
Import Prices in U.S. Rose 1.1% Last Month, Led by Higher Fuel, Food Costs
– The cost of goods imported into the U.S. rose in December, led by higher prices for commodities such as fuels and food. The 1.1 percent increase in the import-price index followed a revised 1.5 percent gain in November, Labor Department figures showed today in Washington
. Economists projected a 1.2 percent gain for December, according to the median estimate in a Bloomberg News survey. Import prices climbed 0.3 percent excluding fuel, with little change in the costs of automobiles and consumer goods. Rising demand from emerging markets like China
, along with a weaker dollar, is driving up the cost of commodities. With unemployment stuck above 9 percent, companies are finding limited scope to raise finished goods prices, allowing the Federal Reserve
to complete a second round of monetary easing to stimulate the economy.
The Antibiotics Crisis –
"Crisis" is not too strong a word for describing what has happened to antibiotics. As our use of the drugs rises every year in the United States, bacterial resistance has risen right alongside it: there isn’t a single known antibiotic to which bacteria have not become resistant. As just one example: staphylococcus aureus, or a staph infection, has become ever harder to treat. Staph bacteria can spread like mildew in a damp basement in hospitals when equipment, clothing, or even hands aren’t washed and sterilized properly. (Hospitals are loath to admit it, but this happens in every hospital in the United States — even in the very best ones.) There was a time, a long time, when staph could be knocked out almost immediately by antibiotics. These days, there’s no guarantee that any antibiotic can save you. Every year, more than ninety thousand Americans die from similar infections that have become resistant to antibiotics. That stunning figure is higher than the death toll from AIDS, car accidents and prostate cancer combined.
Involuntary Commitment and the Prison Population – William Galston writes at The New Republic The Tucson Shooter and the Case for Involuntary Commitment: Jared Lee Loughner was mentally ill when he pulled the trigger, there were multiple signs of his descent into delusion over the past year, and no one did very much about it….We need legal reform to shift the balance in favor of protecting the community, especially against those who are armed and deranged. This means two changes in particular. First, those who acquire credible evidence of an individual’s mental disturbance should be required to report it to both law enforcement authorities and the courts…Second, the law should no longer require, as a condition of involuntary incarceration, that seriously disturbed individuals constitute a danger to themselves or others This sounds like a dangerous path. I’ve seen Titicut Follies (which is now available on dvd) and it doesn’t surprise me there was a mass movement to find alternatives to involuntary commitment during the 1960s. Besides poor facilities and terrible treatment, new historical research is documenting the race and clinical assumptions from earlier in the 20th century that were used to make it harder for African-Americans to be declared ‘mentally-fit and socially-productive’ and thus leave confinement:
Illinois’ deficit reduction scheme
– States have generally suffered during this economic crisis much the way most people have–there’s been less money coming in as sales receipts slowed during the recession, more services needed as many become homeless, insuranceless and generally more vulnerable during the recession, and bills have continued to pile up. States have a number of options for dealing with the demands. They can layoff employees and freeze salary increases, taking the brunt of the recession out of the hide of state services and state employees and at the same time likely making the recession worse. Some states have dealt with the problem with the perennial accounting gimmickry. All that does is paper over the problem and pass it along to the next budget year. Some states seem to be dealing with the fiscal crises by cutting workers pay and cutting workers. That is likely merely to make the crisis worse over the long run. So that leaves thinking about tax increases. All in all, it seems that reasonable tax increases should be a win-win proposition, even during difficult economic times. At any rate, that is the decision that Illinois Democrats reached today
Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate
– We’ve released a report today taking an updated look at how just-enacted tax increases in Illinois would have affected their ranking in our 2011 State Business Tax Climate Index.
Authored by Tax Foundation Staff Economist Kail Padgitt and myself, the report is Fiscal Fact No. 256, "Illinois Approves Sharp Income Tax Increase, Third-Highest Corporate Tax Rate."
As enacted, the Illinois plan raises the individual income tax from 3% to 5%, a two-thirds increase, and raises the corporate income tax from 7.3% to 9.5%, a 30 percent increase. Illinois will thus have the third highest state corporate income tax in the United States and the third highest combined national-local corporate income tax in the industrialized world. The formerly low, one-rate individual income tax compensated for many negative aspects of the state’s tax system.
State Tax Changes During 2010
– We’ve released a new Special Report
outlining the significant state tax changes during 2010. Due to a combination of improving revenues and growing political opposition to increased state-level taxes and additional federal aid to states, 2010 was a lighter year on state-level tax changes than anticipated. Most of the states that raised taxes in 2010 have aimed the increases at specific groups, such as high-income earners, smokers, or out-of-state business transactions. These revenue sources may provide short-term relief but can cause harm to the state economy in the short and long term. The 8-page report covers income tax increases (Oregon), decreases (California-for now at least, Maryland, New Jersey, North Carolina, Ohio, and Rhode Island), sales tax changes (Arizona & Kansas), and trends in click-through nexus/"Amazon" taxes, sales tax holidays, corporate income taxes, cigarette taxes (7 states), soda taxes, gasoline taxes, film tax credits, lotteries, energy taxes, and estate taxes.
The Problem With Opposing a Debt Limit Increase Without Opposing the Policies That Breach the Debt Limit
– Hmmm….. According to a Reuters/Ipsos poll
released this week: The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs… Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase.
Yet from the same poll: Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement. Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support
, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program. Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.
NAHB Forecast: Single Family Starts to increase 21% in 2011
– To put the following forecasts into prespective, there were around 474,000 single-family housing starts in 2010, and about 588,000 total housing starts From MarketWatch: Home-building rebound in 2011 a small matter Home building is set for a rebound in 2011, with single-family housing starts projected to climb 21% to 575,000 units, the [National Association of Home Builders chief economist David Crowe] said Wednesday.
I expect a rebound for housing starts, but that forecast seems overly optimistic. Economist Tom Lawler is forecasting
single-family starts at 520,000 in 2011. Here is a long term graph of housing starts through November … Even if single-family housing starts increased to 575,000 (the NAHB forecast) that would still leave starts below the bottom of the ’90/’91 recession.
Labour markets: Sticky, sticky wages | The Economist: what we see is a two-track labour market. Workers who never lost their jobs… have potentially enjoyed pay increases. But… jobless workers… have struggled to find work and who can generally only do so at a significant wage cut relative to their previous pay…. I mentioned a few explanations ventured by Rob Shimer….One big issue is the problem that nominal wages aren’t very flexible in a downward direction. Another issue could be that since existing firms aren’t motivated to hire new and cheap workers, new firms are needed to absorb jobless workers, but new firm creation is hampered by tight credit conditions. Mr Shimer also speculated that unemployed workers could somehow be different—uniquely unskilled or improperly skilled—or they could be pinned in place by housing conditions in particularly bad job markets…. Why wouldn’t firms swap out older, more expensive workers for the cheaper unemployed ones available to them? One possibility is that firms are worried about the disruptive impact of such workforce turnover and have decided that it’s better to keep employing existing labour at existing wages…
US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months. All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks. This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed. Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans
Goldman Sachs: “We Consider Our Size An Asset That We Try Hard To Preserve”
– To great fanfare, this week Goldman Sachs unveiled the report of its Business Standards Committee
, which makes recommendations regarding changes for the internal structure of what is currently the 5th largest bank holding company in the United States
. Some of the recommended changes are long overdue – particularly as they address perceived conflicts of interest between Goldman and its clients. What is most notable about the report, however, is what it does not say. There is, in fact, no mention of any issues that are of first order importance regarding how Goldman (and other banks of its size and with its leverage) can have big negative effects on the overall economy. The entire 67 page report reads like an exercise in misdirection.Goldman Sachs is ignoring the main point of the debate made by – among others – Mervyn King, governor of the Bank of England, on p.10 of his Bagehot Lecture in October 2010
, regarding why big banks need to be much more financed by equity (and therefore have much less leverage, meaning lower debt relative to equity).
We owe it to bankers to feel their pain – At last someone has dared to defend the oppressed people of the banking community. Bob Diamond, chief executive of Barclays, who himself has to suffer the trauma of an £8m bonus, said yesterday that the bankers’ "period of remorse and apology should be over". And you feel his pain, because the first words to cross your mind when you see a banker are "remorseful and apologetic". Then you’re left worrying, "Oh, how I wish the poor souls were slightly less burdened with remorse about their bonus, and didn’t apologise with such agonising sincerity about putting it into their wife’s name in a series of untraceable accounts based in uninhabitable islands off Ecuador."But at last they’ve learnt to stand up for themselves, and Bob Diamond has emerged as their Martin Luther King. Soon the whole banking community will declare: "Say it out loud, I’m 27 million quid in the black and I’m proud."
Fisher: Fed Has Done Enough, Now Congress’s Turn
– Believing the Federal Reserve
has done enough to aid the economy, a top Federal Reserve official is calling on Congress to help improve the economy’s outlook by reducing uncertainty and get its financial house in order. “The Fed has done much… to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home,” Federal Reserve Bank of Dallas
President Richard Fisher
said Wednesday. The official said none of his business contacts “are complaining about the cost of borrowing, the lack of liquidity or the availability of capital.” Instead, “all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.”
The Road to Economic Crisis Is Paved With Euros – Krugman – Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. Ireland, hailed as the Celtic Tiger not so long ago, is now struggling to avoid bankruptcy. Spain, a booming economy until recent years, now has 20 percent unemployment and faces the prospect of years of painful, grinding deflation. The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable.
Lessons from the Top 1%: Fixing Tax Revenues
– How much money will the U.S. federal government expect to collect from the Top 1% of American taxpayers if it changes their income tax rates? Well, instead of leaving the question to professionals, we’re going to make it possible for you to get in on the action too with our latest tool! Now you too can ignore the dynamic effects of how the highest income earners in the U.S. might react to such a change and pretend that you’ll collect as much or as little as what an expert-produced static tax analysis would predict! How? Easy! We’ve taken the IRS’ own data
from 1986 through 2008, along with the maximum tax rates
that applied through that time, and used it to create a model that can determine approximately how much the U.S. government would have collected from the Top 1% of U.S. taxpayers!