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Wonkbook: Fed takes mild action; Obama signs state aid bill; Senate considers border security bill

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The Fed will hold rather than gradually reduce the amount of assets it owns in order to kickstart what it views as a faltering recovery. This, in Fed lingo, is "mild easing," and the markets were cheered by it because it means the Fed is probably willing to intervene if things get worse. But so far as it's actual economic impact goes, it's not going to mean much: The Fed will do more by not doing less. It's like watching Yoda intervene in the economy.

Meanwhile, the House passed and Obama signed into law a $26 billion package providing aid to state governments. It is, for Democrats, a big, frustrating victory. Republicans managed to halve the total size of the aid package, and states are facing a $140 billion shortfall. So though this aid will give states a boost, we can still expect the public sector to contract quite sharply even as the private sector slowly expands. If you want to see what that looks like, think back to the July job numbers, when the 71,000 jobs the private sector added were overwhelmed by the 200,000 public sector job losses.

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Top Stories

The Fed is introducing mild easing, reports Neil Irwin: "The Fed pledged to keep the amount of assets it holds unchanged at $2 trillion rather than allow the level to taper off over time. The decision should help keep long-term interest rates, such as those for home mortgages and corporate loans, a bit lower than they otherwise might have been, though the direct economic impact is likely to be modest. ...'The signaling effect is much greater than the actual effect,' said Anthony Chan, chief economist at J.P. Morgan Private Wealth Management. 'It says that they have a lot more firepower to deploy if it becomes necessary.'"

Phil Izzo collects economists' reactions to the Fed news: http://bit.ly/aQnUZ2

Obama signed $26 billion in state aid into law, report Lori Montgomery and Nick Anderson: "The sum is about half what Obama requested. Democratic leaders were forced to scale back the package by rank-and-file Democrats concerned about how more spending would play with angry voters. They also had to cover the cost of the measure so that it would not increase future deficits. The bill includes nearly $10 billion in new taxes on U.S. multinational corporations that do business abroad, and it rescinds after 2014 an increase in food stamp payments enacted in last year's $862 billion stimulus package."

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Harry Reid will reopen the Senate to consider a $600 million border security bill, report Scott Wong and Carrie Budoff Brown: "Democrats will try to pass the bill by unanimous consent, which means only a handful of senators will need to be present for the unusual session less than a week into the Senate’s month-long summer recess. 'It’s up to Republicans to decide if they agree with this strategy,' Reid spokesman Jim Manley said. 'Do they want an issue or do they want us to get it done quickly?'"

David Leonhardt writes that the unemployed are bearing almost the whole burden of the recession, while the employed are occasionally even benefiting: "This time around, nominal wages -- the numbers people see in their paychecks -- have risen throughout the slump, as companies have passed along some of the impressive productivity to their (remaining) workers. Meanwhile, inflation has been almost non-existent, except for parts of last year, when real wages did briefly fall... the contrast is pretty stark. The typical jobless person has been out of work six months. The typical worker has received a raise."

'90s cover interlude: The Swell Season play "Two-Headed Boy".

Still to come: FinReg implementation is already running into problem; a judge in New Orleans is set to hear over 300 oil spill lawsuits; the House GOP is still hammering at health care reform; and a cat who really hates watermelon.

Economy/FinReg

Regulators suggest new legislation may be needed to implement FinReg properly, reports Michael Crittenden: "Regulators meeting at the Federal Deposit Insurance Corp. expressed concern about a requirement restricting the use of private credit ratings by federal agencies that was included in the Dodd-Frank legislation. The requirement has forced regulators to put on hold a proposal setting capital standards for thousands of banks, particularly smaller institutions. Regulators complained that they were now left with few attractive alternatives and that the changes they could be forced to make might cause more harm than good."

FDIC is creating two new divisions to handle FinReg implementation: http://bit.ly/d0AD1Q

Economists fear deflation more than inflation by a two to one margin, reports Phil Izzo: "Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year."

Equipment purchases are growing fast: http://bit.ly/cGR6Ez

The minimum income for working families to be subject to income taxes is still below 1950s levels, write Gene Steuerle and Stephanie Rennane "In 1947, a family of four owed income tax once their earnings hit 89 percent of median family income. Over the following three decades, this tax threshold fell steadily, reaching a low point of 33 percent by 1974, just before Congress enacted the Earned Income Tax Credit (EITC). It rose steadily from 1985 to 2003, when it reached 70 percent, where it remained through 2008. While that’s higher than most of the past thirty years, it is still below the levels of the late 1940s and early 1950s."

Productivity fell in the second quarter: http://bit.ly/aint7z

Raghuram Rajan argues the world economy is still out of balance: "In the United States, for example, credit-fueled consumption may have been exacerbated by the government’s push to expand home ownership, especially among low-income households...the political pressure on the Fed to revive the economy forces it to try to discourage household savings in downturns by keeping policy rates at ultra-low levels for sustained periods of time...As other countries come to see that the United States is willing to be the world’s consumer of first and last resort, they are happy to rely on it to provide the extra demand to lift the world out of recessions, even while Americans get their finances in order."

Great moments in film criticism interlude: Scott Tobias tears apart Cats & Dogs: The Revenge of Kitty Galore.

Energy

Oil spill lawsuits will go before a judge in New Orleans, reports Dionne Searcey: "U.S District Court Judge Carl J. Barbier of the Eastern District of Louisiana will hear the civil suits filed against BP PLC and other defendants by shrimpers, resort owners and others. All say they have lost revenues because of the Gulf's oil-tainted waters. The lawsuits also include environmental claims as well as personal injury and wrongful death actions filed on behalf of workers hurt or killed when the Deepwater Horizon oil rig exploded April 20. Also, Judge Barbier will oversee rig owner Transocean Ltd.'s efforts to limit its liability."

"Biochar" fuel could reduce global carbon emissions by 12%: http://bit.ly/aiw4qf

BP gas stations still haven't recovered, reports John Collins Rudolf: "While the worst may be over for the BP brand, anxiety and dissatisfaction remain high among station owners and distributors. Some complain of a lack of public relations support from BP. The company introduced a lavish campaign describing its efforts to clean up the gulf, but spent little on ads explaining to the public that its station owners were independently owned businesses with only an inadvertent connection to the disaster."

"Feed-in tariff" policies are responsible for 75% of the world's solar and 45% of its wind power development: http://bit.ly/aSMunv

Julia Whitty writes that the spill's worst effects may be ahead of us: "Untreated oil quickly rises to the surface, where it can be skimmed with relative ease. But treated with dispersant, it becomes a submerged plume, unlikely to ever float to the surface, and destined to migrate through underwater currents to the entire Gulf basin and eventually the North Atlantic. 'Oil is toxic to most life,' says Steiner. 'And Corexit is toxic to most life. But the most toxic of all is oil that's been treated with Corexit. Plus, dispersants may well kill the ocean's first line of defense against oil: the natural microbes that break oil down for other microbes to eat.'"

Firms building oil containment equipment are seeing purchases canceled by BP: http://bit.ly/9KHAtf

David Roberts argues "environmentalism" cannot solve climate change: "For 50 years, American environmental politics has been about restraining the amount of damage industries can do. Environmental campaigners have developed a set of strategies for that purpose, designed to overcome the resistance of industries and politicians to such restraints. And they've been successful in a number of areas. So when climate change entered American politics via environmentalism, that is the model into which it was slotted."

Adorable animals who are picky eaters interlude: The only cat in the world who doesn't like watermelon.

Domestic Policy

The House GOP has launched a new anti-health care reform discharge petition, reports Simmi Aujla: "Herger’s petition would repeal all of health care reform, including the reconciliation, and replace it with a plan that would go after frivolous medical lawsuits and fund state-run programs for people with pre-existing medical conditions. A small group of conservative Republicans first supported King’s discharge petition, but House Minority Leader John Boehner (R-Ohio) and House Republican Whip Eric Cantor of Virginia later signed on. They issued statements Tuesday backing the Herger petition as well, which Ways and Means ranking Republican Dave Camp of Michigan also supports"

Food insecurity is on the rise in the US: http://bit.ly/cCB3Py

DHS is expanding its deportation program, reports Elise Foley: "Secure Communities requires local law enforcement to give fingerprints they collect to immigration officials, who can then begin removal proceedings...The records also showed troubling inconsistencies county to county, said Bridget Kessler, a clinical teaching fellow at the Benjamin N. Cardozo School of Law’s Immigration Justice Clinic. Some counties had far higher rates of deportation of non-criminals than the national average, such as Travis County, Texas, where 80 percent of those deported were non-criminals, or Maricopa County, Ariz., where 54 percent were non-criminals."

Regulators have found Toyota not at fault in sudden acceleration episodes: http://bit.ly/94XjrK

Linda Chavez defends birthright citizenship: "Our history has been largely one of continuously expanding the community of people regarded as Americans, from native-born whites to freed slaves to Indians to naturalized citizens of all races and ethnicities. Since the abolition of slavery, we have never denied citizenship to any group of children born in the U.S.--even when we denied citizenship to their parents, as we did Asian immigrants from 1882 to 1943. This expansive view of who is an American has been critical to our successful assimilation of millions of newcomers. Conservatives should not betray these values based on a misreading of American history and legal precedent."

John Sides and Andrew Gelman debate term limits for Supreme Court justices here: http://bit.ly/aJ1aG5 and here: http://bit.ly/9MAZN6

Steven Pearlstein defends for-profit education: "The real potential of for-profit schools is their focus on teaching and learning. Unlike traditional universities, they have been aggressive in finding ways to use technology to cut costs and achieve economies of scale. They make extensive use of videotaped lectures and online interactive tests. Classes often 'meet' online, as well as in classrooms, and there are teaching assistants available 24/7 to help students with homework. All of this works particularly well for introductory courses, as well as for those that are part of professional training and certification."

Closing credits: Wonkbook compiled with the help of Dylan Matthews and Mike Shepard. Photo credit: Fuzzcat/Flickr/CC.

By Ezra Klein  |  August 11, 2010; 6:39 AM ET
Categories:  Wonkbook  
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Next: Why Supreme Court justices serve longer

Comments

"It's like watching Yoda intervene in the economy."

I dunno. Yoda said, "Do, or do not. There is no try."

Although, I think he'd look at all of us and just say. "No. I cannot teach them." Then Obi Wan would say something like: "But, they can learn." Then Yoda would say: "No. They are reckless and impatient. Like their father." And Ben would say: "So was I at his age, if you recall." And Yoda would say: "Talking about dating Gungans I am not!" And then they'd start arguing about our massive consumer debt, and Darth Cheney takes over. The end.

Posted by: Kevin_Willis | August 11, 2010 8:02 AM | Report abuse

"Regulators have found Toyota not at fault in sudden acceleration episodes"

Why am I not surprised? For a few weeks there, the news media was painting a picture of a crazy company engineering cars that went nuts and tried to kill people. Then it turns out some of the reports were trumped up or untrue, then it turns out for even when it was the case, Toyota was not at fault.

Not the outcome Government Motors was hoping for, obviously. ;)

Linda Chavez on birthright citizenship: "Conservatives should not betray these values based on a misreading of American history and legal precedent."

I'm pretty sure conservatives are not. My favorite conservative pundits (Rob Long, James Lileks, Peter Robinson, even Tucker Carlson) have said that talk about taking away birthright citizenship is crazy talk. The folks talking about it are ideologically politicians, or at least politicians first, and are demagoguing the issue.

"Great moments in film criticism interlude: Scott Tobias tears apart Cats & Dogs: The Revenge of Kitty Galore."

I expected everybody to tear it apart. I was amazed that Variety actually gave it a very positive review. To the point it made me actually kind of want to see it.

Posted by: Kevin_Willis | August 11, 2010 8:12 AM | Report abuse

wonder what would've happened if the greens spent their tens of millions promoting feed-in tariffs as their centerpiece in place of cap and tax. losing cap and tax was winning

Posted by: jackjudge4000yahoocom | August 11, 2010 9:52 AM | Report abuse

The nuts and bolts of the border security bill is that we're going to sacrifice high income visa's (b1 and h1) in order to make one more futile attempt to secure the border from illegal immigrants. What we're giving up? High income visas who could help with consumer demand.

Hooray for Democratic stupidity!!!

Posted by: visionbrkr | August 11, 2010 10:07 AM | Report abuse

"The minimum income for working families to be subject to income taxes is still below 1950s levels, write Gene Steuerle and Stephanie Rennane "In 1947, a family of four owed income tax once their earnings hit 89 percent of median family income. Over the following three decades, this tax threshold fell steadily, reaching a low point of 33 percent by 1974, just before Congress enacted the Earned Income Tax Credit (EITC). It rose steadily from 1985 to 2003, when it reached 70 percent, where it remained through 2008. While that’s higher than most of the past thirty years, it is still below the levels of the late 1940s and early 1950s."

Using median income is misleading. The data I link to is old, but it includes 1947. Median income was $21,771 in 1947 and $54,061 in 2004. 89% of $21,771 is $19,376 and 70% of $54,061 is $37,843. So in 1947 families started paying taxes at roughly half of the actual income as they do now.

Yes, FICA is higher, but then so are the benefits linked to FICA payments.

http://www.epi.org/page/-/old/datazone/06/median_income.pdf

Note that a 28% flat tax and a $12,000/yr basic income per adult citizen exempts a married couple from paying net income tax up to $85,714...

Posted by: justin84 | August 11, 2010 10:13 AM | Report abuse

visionbrkr, the anti-immigrant hysteria is coming from the Right. If the Dems are stupid on this issue, it's because they're giving up the argument and running to their Right so nobody can say they want amnesty. Of course, their political opponents will *still* say they want amnesty or some other such nonsesne, but that won't stop the Dems from playing a defensive game.

Posted by: MosBen | August 11, 2010 10:42 AM | Report abuse

MosBen,

but the point I have the most problem with is that Dems are whining about aggregate demand with the economy (as they should) but then stifling it with policies like this. Where's srw3's financial transaction tax or any of a number of other taxes on the rich to pay for it. Why, in this economy, would you harm aggregate demand like that?

Posted by: visionbrkr | August 11, 2010 12:21 PM | Report abuse

visionbrkr,

From the article:

"Similar to the Senate proposal, the House bill would mostly be paid for by hiking fees on foreign companies that use U.S. visa programs to import lower-cost labor from countries like India. Firms with more than 50 employees and more than 50 percent of their employees on H-1B work visas would be affected."

Visas are not being restricted, the fees on employers who use these visas for importation of LOW COST labor for the MAJORITY of their work force WITHIN the United States are being increased in order to provide FUNDING for additional border security.

Your concern about the effect of such changes on "aggregate demand" is touching, but it seems misplaced. If you'd like to provide solid data about the amount of actual payroll reduction (and subsequent reduction in consumer spending) that will result from mildly penalizing employers that use non-citizens as the majority of their workforce for low income labor within our borders, please do share.

Personally I would expect that if such changes have any effect whatsoever, it would be to remove incentives to hire foreign nationals rather than unemployed American citizens, and that there will be no resulting impact on aggregate demand, and that if there is any impact at all on the economy, it will be entirely positive.

Posted by: Patrick_M | August 11, 2010 1:06 PM | Report abuse

Patrick,

what do you think the end result of this will be? Those countries will just keep that labor offshore as opposed to bringing it to the US. Those employees make in the US between $85k and $100k on average and stimulate this economy. Now they can stay in India.

I have clients that specifically do this and they've already told me (as i could have guessed) that this will be the result of this.

Will it end up increasing American employment who can do those jobs? Ya maybe a little. But its still cheaper to keep them offshore and that's what these large corporations will do.

Posted by: visionbrkr | August 11, 2010 1:18 PM | Report abuse

so the net effect will be more offshore employees. For the benefit of the US economy I'd rather have them here making $85-100K a year spending money in the US as compared to making a million rupees a year in India and spending it there.

Posted by: visionbrkr | August 11, 2010 1:24 PM | Report abuse

Your concern about the effect of such changes on "aggregate demand" is touching, but it seems misplaced. If you'd like to provide solid data about the amount of actual payroll reduction (and subsequent reduction in consumer spending) that will result from mildly penalizing employers that use non-citizens as the majority of their workforce for low income labor within our borders, please do share.

Posted by: Patrick_M | August 11, 2010 1:06 PM | Report abuse


As I said they're not low income. Computer programmers making $85-$100k per year or more is what I'm talking about. What we're doing is sending the high income computer programmers out in a futile attempt to keep out the actual low income day laborers.

Posted by: visionbrkr | August 11, 2010 1:28 PM | Report abuse

visionbrkr,

I don't share your enthusiam for the supposed necessity of American companies employing foreigners, either onshore or offshore, and I'd like to see some substantiation for the argument that it will be cheaper for American employers to create an offshore work environment than it would be for them to pay a moderately increased fee for foreign visas, or to simply employ American citizens like the vast majority of American businesses do.

We should be doing more (not less) to discourage the exportation of American jobs, whether it occurs on or off shore.

You rely on personal anecdotes, so I will do so as well. Friends of our family have a son who just graduated from a good university with a degree in computer sciences, and the young man has just accepted a programming job offer at $60k per year, with an additional bump in six months. The USA has many highly qualified citizens that are eager to work at the sort of compensation levels you describe.

If you want to seriously argue that it is good for our economy in a time where unemployment is THE major issue to maintain incentives to import labor from other nations, that is certainly a novel approach to solving the jobs crisis.

Posted by: Patrick_M | August 11, 2010 1:43 PM | Report abuse

Patrick,

I'm not talking about solely American companies. They certainly won't set up operations outside of the US if they're not already there. I'm talking about multi-national corporations that can draw worldwide and already have operations in India and other developing nations. If its going to start costing them more to bring their people to the US then they'll just keep them in India.

Sure I'd rather it go to your family friend in the US but the fact of the matter is that it won't. I believe the net result will be negative.

As mentioned before if the concern is illegal immigration and paying for border control why not tax or find a way to get monies from those that are hiring illegals? Heck enact a "landscapers tax" in the same context.


As I mentioned before my issue is about aggregate demand and not unemployment. Sure unemployment is a problem but there's better ways to resolve this than to force jobs overseas at an even greater pace. For every one of your friend's son there are 100 in India willing and able to do the job for one-tenth of the cost to the employer. Which would you do if you were Infosys, HP, IBM or another hi-tech company?

Posted by: visionbrkr | August 11, 2010 1:58 PM | Report abuse

FYI, the increase is $2,000 per visa.

As an employer, it seems to me that it would cost my business far more to relocate my operations offshore, than to bear that modest increase (or else hire American citizens), if we are really talking about "$85-100K a year" employees.

I understand that Indian IT firms don't like paying an additional $2,000 to take away an American job. But I think I can contain my sorrow on their behalf, and I don't expect that there will be any hit in the "aggregate demand" in our economy as a result of making it slightly more expensive to import tech labor.

Posted by: Patrick_M | August 11, 2010 2:01 PM | Report abuse

"As mentioned before if the concern is illegal immigration and paying for border control why not tax or find a way to get monies from those that are hiring illegals? Heck enact a "landscapers tax" in the same context."

Umm...maybe because companies that hire illegals are breaking the law, and we don't allow crimes to continue in order to raise revenues? Deportations and audits of employers to force the firing of undocumented workers is way up under Obama, although that fact is rarely discussed by those on the right that are obsessed with the evils of immigrant labor. Your suggestion of taxing employers of illegal labor rather than enforcing the law is similar to imposing a tax on bank robbery.

An extra $2k for the visa of a six figure a year imported worker paid by foreign (and domestic) companies that use foreign workers for over 50% of their workforce at a time of 9.5% unemployment is a very reasonable source of revenue to tighten the border and to encourage the hiring of more Americans.

Again, please substantiate and quantify the impact on "aggregate demand." How many of these visas are granted? How many go to workers in companies that employ more than 50% of their workforce from other countries? How much payroll would actually go away, even if we accept your theories that all of this foreign labor will suddenly migrate offshore because of the $2k increase per visa? And how much of that payroll actually becomes demand for American products (rather than being saved, or sent to families in the home country)? I'm sorry, but for me your demand argument is simply a red herring.

Posted by: Patrick_M | August 11, 2010 2:22 PM | Report abuse

Patrick,

I had originally read the cost at $4500 per visa. Don't know if it had changed or not. Sure that's less of an issue assuming that number is what it ends up at.

And again I'm not concerned about those that would relocation operations offshore. I'm speaking of those that already have offshore operations and would look to reduce staffing in the US and increase overseas because of this.

Maybe I'm making a mountain out of a molehill. We'll see. But again people said the same thing about NAFTA and now look at it all. What's the harm with targeting those people that do hire the actual illegals instead of targeting people here legally.

Posted by: visionbrkr | August 11, 2010 2:26 PM | Report abuse

"I had originally read the cost at $4500 per visa."

The increase is $2,000. $2,300 presently; $4,300 is the bill is signed into law.

"I'm speaking of those that already have offshore operations and would look to reduce staffing in the US and increase overseas because of this."

If a one-time hike of $2k per employee would cause this shift, it is probably inevitable anyway. But my expectation is that the Indian corporation will grumble and then either cough up the money, or hire an American tech worker instead, if there is any compelling reason to operate inside our borders in the first place.

"Maybe I'm making a mountain out of a molehill. We'll see. But again people said the same thing about NAFTA and now look at it all. What's the harm with targeting those people that do hire the actual illegals instead of targeting people here legally."

NAFTA is apples and oranges, and to the extent that there are complaints about NAFTA it is quite the opposite---that the agreement costs jobs for American workers.

We do already "target" illegal workers, and that enforcement is what the visa money will pay for. Most comprehensive immigration reform proposals include an increase in the number of legal work visas that would be allowed, at the same time that the flow of illegal workers is reduced. There is no reason (that I am aware of) why foreign and domestic companies who profit from importing mostly foreign labor legally imported into the USA should not share in the cost of preventing illegal foreign labor from coming into the country.

Posted by: Patrick_M | August 11, 2010 2:44 PM | Report abuse

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