The Fed is not as Independent as Designers Planned It to Be

The Federal Reserve System was designed to be independent of political influence. The seven members of the Board of Governors serve 14-year terms. Thus, appointees can be in office longer than the U.S. President who appoints them. And the terms are staggered so that one term expires every two years, minimizing the influence of one President on the makeup of the Board. However, resignations and retirements can give a President opportunities to appoint a majority of the Board. As the article below explains, Barack Obama will soon make his fifth appointment and thus will have reshaped the composition of the U.S. central bank that guides monetary policy, controls the money supply, and oversees the banking system.

In the April 29, 2010 article "Obama to name Yellen as Fed's No. 2," Associated Press writer Darlene Superville reports:

WASHINGTON – Putting a bigger stamp on the Federal Reserve, President Barack Obama is set to name Janet Yellen as vice chairwoman of the central bank and fill two other vacancies on the board, which has enormous power over Americans' pocketbooks.

The nominations are subject to Senate approval. If the Senate confirms all three nominees, Obama will have appointed five of the seven members of the Federal Reserve Board.

Obama's moves come as the Fed, whose decisions influence economic activity, employment and inflation, is facing political and economic challenges.

The Fed is steering the economy out of the worst recession since the 1930s, and legislation to overhaul the financial system would eliminate some of the Fed's authority while giving it new responsibilities. Some lawmakers think the Fed overstepped its authority by bailing out some big financial firms during the 2008 financial crisis.

Fed interest rate decisions affect the rates consumers pay on home mortgages and other consumer and business loans. On Wednesday, the Fed ended a two-day meeting by sticking to its pledge to hold rates at historic lows for an "extended period" to help energize the recovery.

Yellen is president of the Federal Reserve Bank of San Francisco. As vice chair, the second-highest ranking Fed official, her duties would include helping build support for policy positions staked out by Fed Chairman Ben Bernanke, who has begun a second term.

Obama also is expected to nominate Sarah Raskin and Peter Diamond to the Fed board. Raskin is the Maryland commissioner of financial regulation. Diamond is an economist at the Massachusetts Institute of Technology.

An official with advance knowledge of the moves spoke to The Associated Press on condition of anonymity because the announcement was pending.

Yellen was a top adviser to President Bill Clinton and is considered a dove on monetary policy. That means she would be expected to be more concerned about high unemployment, currently holding at 9.7 percent nationally, than about rising inflation.

She would succeed Donald Kohn, who plans to depart at the end of June. Kohn has been a member of the Fed board since 2002.

Yellen and Diamond, who is an authority on Social Security, pensions and taxation, are Ph.D. economists. With Kohn's departure, the Fed would have just one professional economist, Bernanke. Of its other current members, Daniel Tarullo was a Georgetown University law professor, Kevin Warsh brought Wall Street experience and Elizabeth Duke was a banker. Warsh and Duke were nominated by President George W. Bush.

Raskin, who served as counsel to the Senate Banking Committee, would expand the Fed's expertise over financial regulation. That would include consumer issues, which are important to Obama and Congress as they seek to impose tighter oversight on the financial industry.
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On the Net:
Federal Reserve: http://www.federalreserve.gov

Bill Clinton Sees 'More Immigrants' As A Way To Reduce Deficit

Bill Clinton Sees 'More Immigrants' As A Way To Reduce Deficit

Dan Froomkin Dan Froomkin
Wed Apr 28, 2:26 pm ET

Former President Bill Clinton enthusiastically weighed into the blistering national debate on immigration today with a resounding assertion that America needs more immigrants -- not fewer -- to ensure its long-term fiscal future.

At a symposium on deficit reduction today (see my earlier story), Clinton said that one key to avoiding massive debt is to maintain a good ratio between people paying into the system, and those receiving payouts (through such programs as Social Security.)

That means more jobs and more people working, he said. "Which to me means more immigrants."

Clinton said he supports immigration reform as proposed by President Obama or as supported by Sen. John McCain before he changed his mind.

Clinton spoke glowingly of the immigrant experience in the United States. "We've got somebody from everywhere here, and they do well," he said.

And looking at the overall budget numbers, comparing money in to money out, "I don't think there's any alternative for us but increasing immigration," he said. "I just don't see any palatable way out of this unless that's part of the strategy."

Clinton didn't mention it, but it's not just legal immigrants who contribute to the plus side of the Treasury's balance sheet. In fact, undocumented immigrants are even more lucrative for the government, particularly Social Security. Many undocumented workers have payroll taxes automatically withheld from their wages, but because they use fake numbers, never collect the benefits.

A Vote for Lower Taxes May Be a Vote for Higher Taxes

When Florida voters approved Amendment 1 to the state constitution with the perceived promise that everyone would pay less in property taxes, most of them failed to consider the economic concept of tradeoffs and the reality that government services must be adequately funded. Amendment 1 essentially allows more of the assessed value of all property to be excluded from taxation. For example, a home valued at $150,000 previously would be liable for taxes on $125,000. With the new provision, only $100,000 is subject to the property tax. Yet, another provision of the amendment allowed the wealthy to exclude as much as $400,000 from taxation when they sold a house and moved. So the benefits of the amendment went overwhelmingly to the rich.

But with more property excluded from taxation, revenues to fund local government services have declined significantly. Marginal tax rates may increase over time in an effort to recoup the lost revenues. In the meantime, however, other taxes and fees are being raised to generate funding for the government services citizens expect. An early response to the amendment from the city council in Jacksonville was the implementation of a new household tax to fund garbage collection. As the article below explains, city leaders want to increase that tax. Property tax savings for people of moderate means have been more than offset by increases in other taxes and fees. The overall tax burden for residents of Florida is being increasingly shifted from the wealthy to everyone else.

So some of the people who voted for amendment 1 in the expectation of paying less in overall taxes are now paying more. Their vote for lower property taxes has increased their overall tax burden.

In the April 24, 2010 Florida Times-Union article "Proposal to double Jacksonville's garbage fee up for vote Tuesday," Matt Galnor reports on the higher garbage fees:

When the City Council first passed a new garbage fee three years ago, it outlined gradual increases to try to cover the actual costs by 2014.

On Tuesday the council is expected to vote on a bill that would blow through that schedule and more than double the fee come Oct. 1.

The fee proposal is part of Mayor John Peyton's plan to bring city fees closer in line with how much the city spends providing the service.

If all of the new fees are approved Tuesday, it will bring in about $25 million to city coffers - and more than $20 million of the new dollars come from raising the garbage fee.

The annual garbage fee would go from $72 to more than $150 - contrary to the 2007 bill that would bring the fees up no more than $12 each year.

"We're catching hell paying this, how we going to pay more?" Southside resident Robert Blackshear said, sitting with friends in a lot off Old St. Augustine Road. "But they don't see it that way downtown."

Council Vice President Jack Webb helped lead the charge for a closer look at all city fees - some of which hadn't been changed in 25 years.

The analysis looked at everything from building permits and facility rentals to zoning change applications and the cost to rename a street.

The increases are tough, especially the garbage fee, Webb said, but added to the reality is the city has to try to capture its costs.

"It's bitter medicine, but we've got to do something to get our financial house in order," Webb said.

Councilman John Crescimbeni said Friday he's preparing an amendment that would change some of the fees.

For example, the fee to apply for a Planned Unit Development is now $1,500, but it costs the city more than $3,500 to process. The proposed fee is $2,000.

"The premise that this thing is being sold on - recovering costs - should be for everybody or nobody," Crescimbeni said.

The garbage fee would cover the cost of collecting residential waste, but there's another $28 a year per household in disposal costs that won't be covered by the new fees, Peyton spokeswoman Misty Skipper said.

The proposal passed two council committees last week - including a narrow 5-4 vote in the Finance Committee.

Crescimbeni was among those voting against it, as were Don Redman and Bill Bishop. Both Redman and Bishop said they were against it because of the original 2007 plan to increase the monthly fee by $1 every year.

"It's going back on our word," Redman said.

Peyton is proposing a $58 million shortfall for the budget that will begin Oct. 1. The mayor says the primary cause is rising employee costs and the city has so far been unsuccessful in getting unions to agree to a 3 percent pay cut and a less lucrative pension for new hires.

matt.galnor@jacksonville.com, (904) 359-4550

Links:
[1] http://jacksonville.com/sites/default/files/JacksonvilleNews1_9.jpg

AP survey: Recovery to remain sluggish into 2011

In the April 12, 2010 article "AP survey: Recovery to remain sluggish into 2011," Associated Press economics writer Jeannine Aversa says a survey of economists suggests U.S. economic growth will remain quite modest until at least 2011.

"Among the first survey's key findings:
• The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3 percent by the end of this year and to 8.4 percent by the end of 2011. The rate has been 9.7 percent since January. When the recession started in December 2007, unemployment was 5 percent.
• Home prices will remain almost flat for the next two years, even after plunging an average 30 percent nationally since their peak in 2006. The economists forecast no rise this year and a 2.3 percent gain next year.
• The economy will grow 3 percent this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. It takes growth of 5 percent for a year to lower the jobless rate by 1 percentage point, economists say."

Tea Party Supporters of Smaller Government Advocate Volunteer State Militias

One way to reduce the size of the U.S. federal government is to decrease military expenditures. Some people advocate a return to state militias as a response to increased federalism. According to the April 12, 2010 article "Okla. tea parties and lawmakers envision militia," members of the Oklahoma tea party movement are considering it.

Interest Rates Have Nowhere to Go but Up

Interest Rates Have Nowhere to Go but Up

Murdoch rips competitors for bias even as more Fox critics emerge on the right

Murdoch rips competitors for bias even as more Fox critics emerge on the right

Nearly half of US households escape fed income tax

In the April 7, 2010 article "Nearly half of US households escape fed income tax," Associated Press writer Stephen Ohlemacher reports that almost half of all U.S. households pay no income tax. Does this infer that the Tea Party movement is people of modest means advocating for more financial gains for the wealthy?

According to Ohlemacher:

WASHINGTON (AP) -- Tax Day is a dreaded deadline for millions, but for nearly half of U.S. households it's simply somebody else's problem.

About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.

Most people still are required to file returns by the April 15 deadline. The penalty for skipping it is limited to the amount of taxes owed, but it's still almost always better to file: That's the only way to get a refund of all the income taxes withheld by employers.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government.

The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

"We have 50 percent of people who are getting something for nothing," said Curtis Dubay, senior tax policy analyst at the Heritage Foundation.

The vast majority of people who escape federal income taxes still pay other taxes, including federal payroll taxes that fund Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local taxes on sales, income and property.

That helps explain the country's aversion to taxes, said Clint Stretch, a tax policy expert Deloitte Tax. He said many people simply look at the difference between their gross pay and their take-home pay and blame the government for the disparity.

"It's not uncommon for people to think that their Social Security taxes, their 401(k) contributions, their share of employer health premiums, all of that stuff in their mind gets lumped into income taxes," Stretch said.

The federal income tax is the government's largest source of revenue, raising more than $900 billion -- or a little less than half of all government receipts -- in the budget year that ended last Sept. 30. But with deductions and credits, especially for families with children, there have long been people who don't pay it, mainly lower-income families.

The number of households that don't pay federal income taxes increased substantially in 2008, when the poor economy reduced incomes and Congress cut taxes in an attempt to help recovery.

In 2007, about 38 percent of households paid no federal income tax, a figure that jumped to 49 percent in 2008, according to estimates by the Tax Policy Center.

In 2008, President George W. Bush signed a law providing most families with rebate checks of $300 to $1,200. Last year, Obama signed the economic recovery law that expanded some tax credits and created others. Most targeted low- and middle-income families.

Obama's Making Work Pay credit provides as much as $800 to couples and $400 to individuals. The expanded child tax credit provides $1,000 for each child under 17. The Earned Income Tax Credit provides up to $5,657 to low-income families with at least three children.

There are also tax credits for college expenses, buying a new home and upgrading an existing home with energy-efficient doors, windows, furnaces and other appliances. Many of the credits are refundable, meaning if the credits exceed the amount of income taxes owed, the taxpayer gets a payment from the government for the difference.

"All these things are ways the government says, if you do this, we'll reduce your tax bill by some amount," said Roberton Williams, a senior fellow at the Tax Policy Center.

The government could provide the same benefits through spending programs, with the same effect on the federal budget, Williams said. But it sounds better for politicians to say they cut taxes rather than they started a new spending program, he added.

Obama has pushed tax cuts for low- and middle-income families and tax increases for the wealthy, arguing that wealthier taxpayers fared well in the past decade, so it's time to pay up. The nation's wealthiest taxpayers did get big tax breaks under Bush, with the top marginal tax rate reduced from 39.6 percent to 35 percent, and the second-highest rate reduced from 36 percent to 33 percent.

But income tax rates were lowered at every income level. The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here's how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Internal Revenue Service: http://www.irs.gov

Tax Policy Center: http://www.taxpolicycenter.org

Signs the economy is really getting better

In the April 6, 2010 U.S. News & World Report article How To Tell When The Recession Is Really Over, Rick Newman says "the recession is officially over, but many Americans won't feel the recovery until these things happen."

There are two kinds of recessions: the one that economists measure, and the one that ordinary people feel.

The official recession is over. That's because the economy is growing again after a sharp decline, with GDP back to the levels of mid-2008. For people who have kept their jobs, suffered no loss of income and enjoyed a rebound in their investments thanks to the year-long stock market rally, things are pretty good.

Then there's the unofficial recession, which clearly persists. More than 8 million people have lost their jobs over the past two years, and the economy has barely started to add those back. Many others have had their pay or hours cut. The housing bust, in its fourth year, still isn't over. Foreclosures continue to mount, businesses and consumers remain gloomy, and many families are struggling to get by on reduced income. "It's a recovery, but it sure doesn't feel like it," says Nariman Behravesh, chief economist for forecasting firm IHS Global Insight. Here are five things that still must happen for a robust recovery to kick in.

Banks need to lend more. The government's emergency measures helped stabilize the financial system, but banks haven't taken the next step and increased lending. With trillions in bad loans still on their books, many banks continue to hoard cash and turn down loan applications. That depresses the market for homes, cars, appliances and other costly items that many consumers can't pay for in cash. It also squeezes small businesses, which often rely on credit to meet payroll, order supplies, invest and grow. Behravesh predicts that lending could bottom out and start to pick up by late this year or early next year--although that would probably be the point at which the Federal Reserve starts to raise interest rates to subdue inflation. A few things that will signal improvements in the credit market: a drop in the required down payment for well-qualified home buyers, which is typically 30 percent or more now; increased availability of car loans for subprime borrowers with a credit score below 680; and banks' willingness to increase their customers' credit-card limits, if asked.

Incomes need to rise. Median income was stagnant for about a decade leading up to the recession, and it probably fell 5 percent or more over the past couple of years. Some economists worry that reduced incomes could indefinitely curtail consumer spending, which has long fueled the U.S. economy. A glut of unemployed workers will keep wages low in many industries for years. And since many families have lost wealth because of falling home values or declining investment portfolios, or both, they need to save more to prepare for retirement. That leaves less money to buy stuff. The good news is that inflation is low and energy prices are stable, which helps stretch a dollar.

Housing needs to stabilize. Most of the pain is probably in the past, but home values continue to erode in many regions. Moody's Economy.com predicts that house prices, which have fallen more than 30 percent from their 2006 peaks, could still fall another 5 to 10 percent through the end of this year. Since many families still have the majority of their wealth invested in their homes, the economy can't really get healthy again as long as such a huge asset is falling in value. The end of the federal home-buyer tax credit and other government programs throughout the year will test whether the housing market can stand on its own. If it can't, the government could step back in, but that would only signal further weakness in a sector that accounts for more than 15 percent of the economy. The silver lining is that falling prices make it a great time to buy, for those with enough cash or the ability to get a mortgage.

Confidence needs to rebound. Americans remain gloomy, with most consumer-confidence surveys showing only modest improvements from the low points hit during the recession. The most obvious reasons are the weak job market and a sense that the recovery will be weak at best. Businesses are downbeat too, with CEOs worried that strapped consumers will put their wallets away. That makes them reluctant to hire, which perpetuates the malaise. Confidence is a perplexing psychological phenomenon, and economists aren't sure what it will take to make consumers upbeat enough to propel a robust recovery. But once home prices stop falling, jobs seem more secure, and people feel like the bloodletting is over, that will certainly help.

Jobs need to return. The availability--or lack--of jobs is the single biggest factor in the economy, and unfortunately, a pickup in hiring is likely to be painfully slow. Many of the 8 million lost jobs are probably gone forever, as manufacturers downsize their operations and many companies substitute technology or cheaper foreign labor for American workers. The unemployment rate, which is 9.7 percent now, might even rise throughout the year, as workers who gave up looking for jobs try again and the labor force swells.

Still, economists recognize some familiar patterns in the job market that suggest things are finally getting better instead of worse. Corporate profits are strong, thanks to aggressive cost-cutting over the past two years. That means companies can afford to hire workers, if they decide to. And productivity gains have hit record levels recently, which means companies are extremely efficient; if demand picks up, they may only be able to meet it through increased staffing. A good indicator of real improvement would be several consecutive months of six-figure job gains, due to permanent hiring and not temporary factors like the census or weather-related events. "The recent resumption of employment growth will be sustained and gather strength over time," insists T. Rowe Price chief economist Alan Levenson. That's not the kind of roaring endorsement most Americans want to hear, but it suggests that sooner or later, the recovery in your neighborhood will catch up with the one that economists see in the data.