Domestic Policy

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  Rate Cut to 2%April 30, 2008 16:26 The Federal Reserve lowered the benchmark U.S. interest rate by a quarter point to 2 percent and indicated it's ready to pause after seven cuts since September.

``The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time,'' the Federal Open Market Committee said in a statement after meeting today in Washington. The central bank also warned that ``some indicators of inflation expectations have risen in recent months.''

Chairman Ben S. Bernanke and his colleagues dropped a reference to ``downside risks'' to the economy, while acknowledging the damage that the housing slump has wrought on the six-year expansion. Stocks surrendered gains on speculation the most aggressive monetary-policy easing in two decades is approaching an end.

``We do not expect to see a rate cut at the next few meetings without a substantial contraction of the economy,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``We are not yet to Memorial Day weekend, but the Fed effectively told us today to take the summer off.''

 
  The Fed Must Strengthen The DollarApril 28, 2008 22:11 When Federal Reserve governors meet today, they should consider that solutions to their twin challenges – a flagging economy and systemic moral hazard in financial markets – have common roots in a stable dollar. One of the primordial lessons of economic history is that sound money is a necessary condition to promote long-run prosperity and maximal growth. Moreover, a stable currency and low inflation lessen the need for complex hedging vehicles which can be leveraged to harmful effect in volatile markets.

Unfortunately, with total first quarter job losses up to 232,000 and the University of Michigan Consumer Sentiment Survey at its lowest level since 1982, fed funds futures indicate a strong likelihood of a cut of 25 basis points in the fed funds rate. But will yet more interest rate cuts help the economy or lower the problem of moral hazard?


To understand why it may not, and why a different path should be taken, it must be recognized that Fed policy has long been guided by – or perhaps more accurately, yoked to – the alleged trade-off between unemployment and inflation: the so-called Phillips Curve.

A.W. Phillips's original 1958 paper dealt with wage rate changes and unemployment. But eventually it would become conventional policy wisdom to apply his insight more broadly to price level movements against the unemployment rate.

Over time, the Phillips Curve became conventional macroeconomic wisdom and an extension of Keynesian fine-tuning, i.e., a menu of choices along with a rationale for discretionary monetary policy to effect changes in employment levels.

Phillips's work is important and has been validated over short time frames when inflation and unemployment are low. But Milton Friedman and Edmund Phelps showed that the relationship broke down in the long run, due to expectations and changing institutions and technologies. Over a long horizon, employment and growth are a function of real factors; inflation and unemployment often move in tandem, not as a trade-off.

Since 1948, according to Bureau of Labor Statistics figures, inflation has averaged 3.7% per year, unemployment 5.6%, and real GDP growth 3.4%. But the 10 lowest inflation years (between 1949-62, and 1986) averaged 0.5% inflation and 5.2% unemployment, along with 3.5% GDP growth. And the 10 high inflation years (between 1973-81, 1969, and 1990) averaged 9.1% in consumer price increases, along with 6.2% unemployment and 2.6% in growth. In other words, low inflation was often associated with lower unemployment and stronger GDP growth than high-inflation years.

More strikingly, the years following the 10 lowest inflation years were even better in terms of performance (averaging 5.1% unemployment and 4.4% growth), and the years following the high inflation years were even worse (7% unemployment and 1.4% GDP growth). This record shows the importance of sound money, fostering an environment allowing the key growth drivers of entrepreneurship and capital investment to flourish under stable long-run expectations.

Why would the Fed base policy on a trade-off which does not hold beyond the short run, and is the underlying premise of the stop-go monetary strategies that have caused boom-and-bust instability? Partly because the Phillips Curve framework is so universally and deeply ingrained. Partly because until recently the Fed has held that inflation is not a threat, and that the economy now demands low short-term rates and unlimited liquidity.

In spite of Fed indifference, however, inflation warnings are ubiquitous. Commodity and consumer prices are soaring, and the dollar continues to weaken against the euro and other currencies. Broad measures of the money supply are expanding rapidly. One such measure, MZM ("Money of Zero Maturity"), has grown 16.3% in the last year, accelerating to a 30.3% annualized rate since the middle of January. MZM – equivalent to M2 minus time deposits, plus all money market funds – measures money or assets that can be quickly turned into money at par. Thus it captures the real level of liquidity and spending power in the financial system. Rapid growth in liquidity guarantees inflationary pressures.

Also, the U.S. dollar is the de facto international reserve currency; as the demand for dollar-denominated assets such as U.S. Treasurys bids up their price, the interest rate the Treasury has to pay to borrow declines. Without that demand, interest rates would rise and, with domestic savings diverted to service the debt, output would be lower and prices higher.

But exploding fiscal deficits, the housing correction, protectionist threats and $200 billion in tax hikes scheduled for 2011 are fueling loss of confidence in the U.S. dollar. If foreign holders of dollars or dollar-denominated assets sell them, all the good effects of being the de facto international reserve currency start operating in reverse. Until fiscal and monetary policies change, all this implies future inflation and higher interest rates.
  Ahead Of May 6 Primary, Us Supreme Court Upholds Indiana Voter Id LawApril 28, 2008 12:14 The US supreme court today upheld a law requiring voters to produce photo identification, rejecting the arguments of civil rights groups that believe the rule disenfranchises minorities and the poor. The decision comes one week before Indiana's presidential primary.

The high court ruled 6-3 to validate the state of Indiana's strict photo ID law, which was crafted by conservative Republicans and billed as a protection against voter fraud.

The ruling ended the most important voting rights case since the court sided with George Bush over Al Gore in the disputed 2000 election. While the court affirmed Bush's right to equal protection under the law in that case, the equal protection claim made on behalf of Indiana voters was denied.

The law "is amply justified by the valid interest in protecting 'the integrity and reliability of the electoral process,'" supreme court justice John Paul Stevens wrote in an opinion upholding the Indiana rule.

"We cannot conclude that the statute imposes 'excessively burdensome requirements' on any class of voters," Stevens said.

Stevens dissented in the Bush v Gore case. He was joined by chief justice John Roberts and justice Anthony Kennedy in supporting the Indiana law.

Justices Samuel Alito, Antonin Scalia and Clarence Thomas also agreed with the outcome, but wrote separately.

Justices Stephen Breyer, Ruth Bader Ginsburg and David Souter disagreed with the Indiana law. All three also disputed the 2000 ruling in favour of Bush.

Indiana passed its voter ID law in 2005, over the objections of Democratic politicians and civil rights advocates who feared the rule would dissuade poor, older and minority voters - who most often lack proper identification - from going to the polls.
  Truckers Rally In Washington, Seeking Lower Gas PricesApril 28, 2008 12:02 Horns blaring in a deafening fanfare, a convoy of truck drivers arrived in Washington on Monday to protest high fuel prices.

Members of Truckers and Citizens United circled the National Mall before parking their rigs at RFK Stadium. Organizers said about 350 vehicles were expected.

The truckers planned an afternoon rally at the Capitol as they call on Congress to stop subsidizing big oil companies, release oil from the Strategic Petroleum Reserves, and end exports of oil from Alaska, among other things.

Many of the truckers arrived from Harrisburg, Pa., and other cities to the north. A passenger in one truck held a sign that read "Enough is Enough," and one trucker used a bullhorn to yell at Congress as he drove past.

The demonstration drew the attention of tourists. Nathan and Tara Horn of Normal, Ill., had been visiting museums and other sites but came to the Capitol to see the trucks driving past in rainy weather.

"Just knowing the influence that our citizens have to talk to our congressmen and senators ... This is awesome," Nathan Horn said. "We really need to bring the fuel prices down for the common person."

Traffic was not significantly affected by the convoy although a few horn-honking truckers drove through red lights.
  How Air Pollution Hurts Your Kids' LungsApril 21, 2008 11:24 Twice a day, 7-year-old Hannah Austin exhales all the air from her lungs. She then takes a puff of a low-dose steroid from a purple inhaler, holds her breath for a few seconds and exhales.

Like nearly 7 million other children in the United States, Hannah, a second-grader from Smyrna, Georgia, has asthma. This simple exercise with the inhaler allows her to breathe easier.

But on a day when the air quality is poor, she often struggles to catch her breath.

"We know that environmental pollutants have a very significant impact on children with asthma," said Dr. Avril Beckford, a pediatrician in Austell, Georgia. See how the air harms little lungs »

Children are more vulnerable to the effects of air pollution because their lungs don't fully form until they are adolescents, the American Academy of Pediatrics noted.

The leading pediatricians group added that "because children spend more time outdoors than do adults, they have increased exposure to outdoor air pollution."

"If you live near a polluted area of a city, it's like the child is smoking," said best-selling author and pediatrician Bill Sears. "We all know what smoking does for the lungs."

 
  Dangerous Animal Virus On Us Mainland?April 11, 2008 10:14 The Bush administration is likely to move its research on one of the most contagious animal diseases from an isolated island laboratory to the U.S. mainland near herds of livestock, raising concerns about a catastrophic outbreak.

Skeptical Democrats in Congress are demanding to see internal documents they believe highlight the risks and consequences of the decision. An epidemic of the disease, foot and mouth, which only affects animals, could devastate the livestock industry.

One such government report, produced last year and already turned over to lawmakers by the Homeland Security Department, combined commercial satellite images and federal farm data to show the proximity to livestock herds of locations that have been considered for the new lab. "Would an accidental laboratory release at these locations have the potential to affect nearby livestock?" asked the nine-page document. It did not directly answer the question.

A simulated outbreak of the disease — part of an earlier U.S. government exercise called "Crimson Sky" — ended with fictional riots in the streets after the simulation's National Guardsmen were ordered to kill tens of millions of farm animals, so many that troops ran out of bullets. In the exercise, the government said it would have been forced to dig a ditch in Kansas 25 miles long to bury carcasses. In the simulation, protests broke out in some cities amid food shortages.

"It was a mess," said Sen. Pat Roberts, R-Kan., who portrayed the president in the 2002 exercise. Now, like other lawmakers from the states under consideration, Roberts supports moving the government's new lab to his state. Manhattan, Kan., is one of five mainland locations under consideration. "It will mean jobs" and spur research and development, he says.

The other possible locations for the new National Bio-and Agro-Defense Facility are Athens, Ga.; Butner, N.C.; San Antonio; and Flora, Miss. The new site could be selected later this year, and the lab would open by 2014. The numbers of livestock in the counties and surrounding areas of the finalists range from 542,507 in Kansas to 132,900 in Georgia, according to the Homeland Security study.

Foot-and-mouth virus can be carried on a worker's breath or clothes, or vehicles leaving a lab, and is so contagious it has been confined to Plum Island, N.Y., for more than a half-century — far from commercial livestock. The existing lab is 100 miles northeast of New York City in the Long Island Sound, accessible only by ferry or helicopter. Researchers there who work with the live virus are not permitted to own animals at home that would be susceptible, and they must wait at least a week before attending outside events where such animals might perform, such as a circus.

The White House says modern safety rules at labs are sufficient to avoid any outbreak. But incidents in Britain have demonstrated that the foot-and-mouth virus can cause remarkable economic havoc — and that the virus can escape from a facility.

An epidemic in 2001 devastated Britain's livestock industry, as the government slaughtered 6 million sheep, cows and pigs. Last year, in a less serious outbreak, Britain's health and safety agency concluded the virus probably escaped from a site shared by a government research center and a vaccine maker. Other outbreaks have occurred in Taiwan in 1997 and China last year and in 2006.

If even a single cow signals an outbreak in the U.S., emergency plans permit the government to shut down all exports and movement of livestock. Herds would be quarantined, and a controlled slaughter could be started to stop the disease from spreading.

Infected animals weaken and lose weight. Milk cows don't produce milk. They remain highly infectious, even if they survive the virus.

The Homeland Security Department is convinced it can safely operate the lab on the mainland, saying containment procedures at high-security labs have improved. The livestock industry is divided. Some experts, including the former director at the aging Plum Island Animal Disease Center, say research ought to be kept away from cattle populations — and, ideally, placed where the public already has accepted dangerous research.

The former director, Dr. Roger Breeze, suggested the facility could be safely located at the Atlanta campus of the Centers for Disease Control and Prevention, or at Fort Detrick in Frederick, Md., home of The United States Army Medical Research Institute for infectious diseases.

Another possibility, Breeze said, is on Long Island, where there is no commercial livestock industry. That would allow retention of most of the current Plum Island employees.

Asked about the administration's finalist sites located near livestock, Breeze said: "It seems a little odd. It goes against the ... safety program of the last 50 years."

 
  Is There A Will To Make The Hard Choices On The Environment?April 11, 2008 08:59 A recent National Public Radio program featured carbon traders excitedly discussing their work, traveling the world drumming up business for carbon-offsets trading. Fresh out of graduate school, they were making $60,000-$100,000 doing whatever it is they do (it was as clear to me as subprime mortgage deals).

About the same time, I read an article called "Benefits of Carbon Offsets are a Myth" by local Web developer Neil Rowland. He was angry about a Statehouse bill that would put a carbon-offsets trading program in place in New Hampshire. He may well be right, but his article provided few facts and a lot of hyperbole, especially about Al Gore, lobbyists from Massachusetts and the undermining of New Hampshire "social virtues."

His assertion that "every scientist who disagrees (with global warming) is denounced as a heretic, and even worse, denied grant money. Thus is an artificial consensus manufactured by politicizing science. "Mao would have applauded" is absolute nonsense. By throwing in a communist red flag (Mao), inventing stories about scientists denounced as "heretics" and focusing on Gore as a hypocritical politician, Rowland seriously undercut what could have been a good expose on carbon-offsets trading. True, Gore lives and works in a large mansion, claiming that carbon-offset trading makes up for his energy consumption. I wish Rowland had provided some facts about that rather than saying it "justifies his huge mansion."

Remember when Vice President Cheney told us with a sneer that "conservation is a personal issue?" Many of us were appalled by that kind of thinking, but we were ridiculed. The Bush-Cheney administration has been very supportive of our petroleum-based consumer society, telling us to "go shopping" (instead of saving). This administration worked diligently to undercut needed regulation of the fuel and automobile industries. Three decades ago, President Carter started down a path of energy conservation, which many experts now say could have been of great benefit today.

The Reagan administration dismantled Carter's programs and the present Bush-Cheney administration, with its strong ties to the oil companies and the Saudis as well as its anti-regulation/anti-conservation policies, seem far worse to me than Gore's perceived rift between his environmental beliefs and his personal energy consumption.

According to Rowland, a New Hampshire carbon-offsets trading program "will greatly increase our energy costs" although he offers no proof of this. He told us the reason the state wants this program is that it would "somehow enhance the reliability of our electric power." Again, he offers no proof or sources. He asserted that if we could have more hydroelectric, wind and nuclear plants then we could heat our homes cheaply with electric instead of oil. Is that true? No facts/figures are offered; nor is there apparent concern about storage of highly dangerous nuclear waste. It would be great if our government — state/local/federal could be helping us get off our dependence on fossil fuel and I hope that enthusiastic people like Rowland work hard to see that this happens.

Rowland and many others point out that China is producing an alarming rate of greenhouse gases, but they often neglect to say this is partly a result of our trade with their unregulated businesses (to maximize profits and satisfy our desire for cheap goods). The Bush-Cheney government has borrowed trillions from China (mostly for the Iraq war); we certainly are not going to do anything to harm growth in China no matter what it does to the climate.

Had Bush-Cheney returned to the policies of Carter regarding energy independence, maybe we would be in a far better place today. War, however, was more important — to protect "our" oil in the Middle East. Is there the will now to make the hard choices and sacrifices required?
  Oil Reserve Site Raises Ire, Bush Policy TestedApril 04, 2008 15:02 The Bush administration says it favors "environmentally friendly" energy development, but that policy is under attack in a Mississippi town where residents worry a planned emergency oil reserve may drain a river, destroy wetlands and harm Gulf of Mexico fishing areas.

There is fear the Energy Department's plan to carve out underground salt caverns in Richton, Mississippi, to hold some 160 million barrels of crude oil could be the worst environmental disaster to hit the state since Hurricane Katrina.

The government's decision to pick Richton as the fifth storage site in expanding the country's Strategic Petroleum Reserve was touted as a $4 billion economic boost for a state still suffering from being sideswiped by Katrina.

The Energy Department said the oil site will be constructed in an "environmentally friendly" manner, but many residents and environmental groups feel that is just government-speak.

"That's an absolute joke, there is nothing environmentally friendly about this project," said Steve Shepard, Gulf Coast director for the Sierra Club's Mississippi chapter. "They want to ram it down our throats."

The strategic reserve, created by Congress after the 1973-74 Arab oil embargo, is the largest stockpile of government-owned crude in the world. It now holds a record 701 million barrels of oil at four locations in Texas and Louisiana.

 
  Job Losses, Unemployment Both Worse Than ForecastApril 04, 2008 09:38 U.S. employers slashed jobs for the third straight month in March and unemployment rose to a nearly three-year high, offering the latest signs that the economy has fallen into a recession.

The Labor Department's much anticipated report showed a net loss of 80,000 jobs last month. That marks the third straight month that jobs have fallen - the longest period of decline since early 2003.

Economists surveyed by Briefing.com had forecast that payrolls would fall by 50,000 in the latest reading.

The new report also pegged job losses in January and February at 76,000 each month.

Those revisions added an additional 67,000 job losses to previous readings. The Labor Department now estimates that the economy has shed 232,000 jobs in the first three months of this year.

"The revisions are the real surprise in the report," said John Silvia, chief economist for Wachovia. "If we had known it was anything like that, there would not have been any debate going on about whether we were in a recession. It's pretty stark."

The job losses were widespread, with the battered construction sector losing 51,000 jobs and manufacturing employment falling by 48,000. But there were also losses in key service sector industries. Retail employment dropped by 12,000 jobs, and business and professional service employers cut staff by 35,000.