President Obama walked a financial tightrope in his State of the Union address on Wednesday.
Faced with an unexpectedly high unemployment rate, he talked at length about the need to spur job growth and help ease the financial strains on the middle class through tax credits, targeted spending and other measures.
But he made one thing very clear: He also wants to address the unsustainable growth rate in U.S. debt.
"[I]f we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery - all of which could have an even worse effect on our job growth and family incomes," the president said.
Indeed, the Congressional Budget Office reminded policymakers this week that the U.S. government’s fiscal outlook is "daunting."
Here’s why: The interest on the debt and unfunded promises to future retirees in Medicare and Social Security are on track to consume an ever-increasing share of the federal budget. And that depletes resources for many of the basic functions Americans expect their government to provide.
To begin to tackle the problem, the president said he would create a bipartisan fiscal commission by executive order.
The commission would make recommendations to Congress for how to address the looming fiscal shortfalls. Deficit hawks have said such a commission should be allowed to put all spending and tax breaks on the table for consideration.
"This can’t be one of those Washington gimmicks that lets us pretend we solved a problem," the president said. "The commission will have to provide a specific set of solutions by a certain deadline."
Nevertheless, Obama’s panel is a weaker version of a commission that was voted down by the Senate on Tuesday because Congress won’t be required by law to consider the presidential commission’s recommendations or to vote on them.
And beyond the fiscal commission, many of the president’s deficit-reduction proposals were baby budget steps.
It’s not that they’ll be easy to accomplish given how deeply partisan lawmakers have become. But the actual savings achieved from the proposals relative to the accrued debt is very small.
Spending freeze: The president proposed a three-year freeze on non-defense discretionary spending, which accounts for $447 billion, or roughly 13%, of the 2010 federal budget. The freeze would start next year, he said, when the economy is stronger.
The estimated total savings from the freeze: $250 billion over 10 years. But that’s a fraction of the $9 trillion in debt the CBO projects the country could incur over the same time period.
"I think it is a small step," CBO chief Douglas Elmendorf told lawmakers on Wednesday. He added that there is no single step that can adequately balance the budget.
Pay for new policies: Obama has also thrown his support behind the push for statutory pay-go rules. Those rules would legally require lawmakers to pay for proposed tax cuts or spending increases by raising taxes or reducing spending elsewhere in the budget.
Pay-go rules don’t actually reduce the debt load already accrued, but they put the brake on future increases in the debt load, which is helpful first step, budget experts say.
The effectiveness of pay-go rules, however, depends on their parameters. The strongest form would not allow any policy to be exempt.
But the president has backed a proposal that would only apply to "any new non-emergency tax cut or mandatory spending expansion," according to a White House statement.
The problem: That would exempt Obama proposals that are not deemed "new" — for instance, the permanent extension of the 2001 and 2003 tax cuts for most Americans — which is estimated to cost federal coffers more than $2 trillion over 10 years.
Curbing some tax cuts: The president also reiterated some pledges he has made before but that have yet to be passed by Congress. He favors, for instance, taxing the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. Such a provision is estimated to raise roughly $24 billion over 10 years.
What’s really needed
Any credible long-term solution to the country’s fast-growing debt puts Obama in a tight political spot.
That’s because it would have to involve a combination of tax increases (sure to rankle Republicans) and spending cuts (certain to disturb Democrats).
To use just one would be economically prohibitive.
Just how prohibitive?
Suppose Obama and Congress wanted to rely solely on individual income tax increases to get annual deficits down to 3% of GDP by 2015. If they just raised taxes on high-income households — something Obama has promised — they’d have to more than double the top two tax rates.
And that would push the top rate above 75%, according to research by the Tax Policy Center.
If they relied only on spending cuts, they would have to slash the federal budget to the bone. That means they would have to cut much of the discretionary spending pot, including defense.
Elmendorf noted that lawmakers often object in general to "wasteful" discretionary spending.
But when it comes to the specifics, individual programs have fierce defenders, he said. It is after all the pot that pays for everything from public schools, safe roads, health research, national parks, veteran benefits and the court system. To name a few.
Arizona State University is partnering with Teach For America to transform ASU’s teacher education program.
With a five-year, $18.9 million investment from entrepreneur and philanthropist T. Denny Sanford, ASU will partner with Teach for America to bring changes to the way ASU recruits, selects and prepares K-12 teachers.
The Sanford Education Project will use Teach For America’s tools to recruit teachers to work in low-income communities. Since 1990, Teach for America has recruited, trained and placed more than 24,000 teachers in low-income communities guaranteed payday loans. It has developed strategies to attract people into teaching who otherwise may not have chosen the profession. It also has developed support systems to help those teachers in the classroom and built a pipeline of leaders in the community focused on quality education.
As part of Sanford’s investment, ASU’s College of Teacher Education and Leadership will create a summer institute based on Teach For America’s model.
About 1.5 million Graco strollers have been recalled because they could pose a risk of fingertip amputations and lacerations to children, federal safety officials announced Wednesday.
The recall includes certain models of strollers and travel systems made by Graco Children’s Products, including the Graco Passage, Alano and Spree Strollers and travel systems, the Consumer Product Safety Commission said.
The hinges on the product’s canopy pose a fingertip amputation and laceration hazard to the child when the consumer is opening or closing the canopy, the CPSC said.
Graco has received seven reports of children injured when they placed their fingers in the stroller’s canopy hinge mechanism, including five fingertip amputations and two lacerations, according to the commission online cash advance.
The CPSC said consumers should immediately stop using the recalled strollers and contact Graco to receive a free protective cover repair kit.
The recalled strollers were sold at Babies "R" Us, Toys "R" Us, Kmart, Sears, Target, Walmart and other retailers nationwide from October 2004 and December 2009.
The strollers had a suggested retail price of between between $80 and $90. The travel systems, which include a detachable car seat, sold for between $150 and $200.
Nike Inc. built its $648 million golf business on the back of Tiger Woods.
Now it appears the Washington County athletic footwear and apparel giant (NYSE: NKE) will try to sell some golf clubs without him.
The Wall Street Journal on Monday reported that Nike will launch the Victory Red STR8-FIT Tour fairway woods on Jan. 28 that were designed with the help of 13 U.S. golf stars that promote the Nike Golf brand. The new line’s promotional materials, however, make no mention of Woods, the newspaper reported.
The new clubs were tested during a tournament by Lucas Glover, who won the U.S. Open championship last year, according to the report.
General Motors, AT&T Corp., Accenture, Gillette and Swiss watch maker Tag Heuer have all ended their relationships with Woods since a Thanksgiving weekend car crash and later admission to marital infidelity.
Nike, however, has stood by his side.
In an interview last month with the Sports Business Journal, Chairman Phil Knight referred to the Woods scandal as a “minor blip.”
It’s unclear whether the latest product release is an indication that the company’s support for Woods — who has since taken a leave of absence from golf — is wavering.
A Nike spokeswoman couldn’t immediately be reached for comment.
Luxembourg’s Jean-Claude Juncker said the group of euro-area finance ministers, which he heads, may not reach a decision next week on a successor for European Central Bank Vice President Lucas Papademos.
“Whether we do this on Monday evening or in February, I cannot yet say,” Juncker said at a press conference in Luxembourg today. The so-called eurogroup of finance chiefs is scheduled to discuss the three candidates to succeed Papademos at a regular monthly meeting on Jan. 18 in Brussels.
The candidates to take over the central bank’s vice- president post on June 1 are ECB Governing Council members Yves Mersch and Vitor Constancio and Peter Praet, a director at the Belgian central bank who also is chairman of the Frankfurt-based ECB’s Banking Supervision Committee low interest rate personal loans.
Juncker said he lobbied French President Nicolas Sarkozy on behalf of Mersch, who is head of Luxembourg’s central bank, at a meeting yesterday in Paris.
“I’m in touch with all the euro-zone countries. I outlined the merits of Mersch’s candidature to President Sarkozy,” Juncker said. “It’s not my intention to reveal publicly the various reactions I’ve had.”
Renters who are caught up in foreclosures or short sales may get more time to get out before the sheriff shows up to evict them, if a proposed bill gets traction in the Florida Legislature.
HB 125, sponsored by state Rep. Hazelle Rogers, D-Lauderhill, and co-sponsored by state Rep. Darren Soto, D-Orlando, is scheduled to be taken up Tuesday by the Civil Justice & Courts Policy Committee. Its companion bill is SB 854.
Soto, an attorney who is handling more than 250 foreclosure defense cases, said tenants often get served the same paperwork from the bank as the owner, which causes stress and confusion.
“They basically receive a complaint, but it doesn’t tell them their rights, other than that they have to respond,” he said. “They don’t know to not pay the rent or to pay the rent, and their landlord is usually pretty mum.”
However, some worry that the bill could limit owner rights by requiring the owner or lender to give the tenant first right of refusal to buy the property.
“A lease with a tenant has a beginning and an end date,” said Stephen Weiss, VP of business development for Fort Lauderdale-based Foreclosure Response Team, a private company specializing in short sales. “It doesn’t give tenants a right or obligation to own my property. This is hindering and impairing on the value of real estate.”
The bill:
Scott Coloney, president of the Foreclosure Response Team, added that if the tenant is awarded the first right of refusal, it could prolong short sales, which are already long, creating problems for buyers.
However, he did like the provision that requires the lender to give notice.
“It’s one less thing that the landlord has to do,” he said.
When General American Life Insurance Co. commissioned acclaimed architect Philip Johnson to design its downtown St. Louis headquarters in the mid-1970s, the firm sought to create something striking to bolster what was then a barren area along the south side of Market Street.
Many architectural aficionados say Johnson delivered.
In essence, he designed a three-story dark-glass box that was just under 130,000 square feet. But here’s the twist: As if slicing a sandwich, Johnson divided the building diagonally, then perched half of it on columns.
"What he did, very creatively, was take a building, cut it on the diagonal and lift one part of the triangle," said H. Edwin Trusheim, General American’s chairman who retired 18 years ago. "You’ve now created a six-story building out of a three-story building."
General American moved to a location in south St. Louis County in 2004. Since then, the building has sat vacant, but a revival of sorts is in the works.
Centaur Properties of New York, which bought the building in 2005 for $6.1 million, says it will spend as much as $10 million in 2010 to spruce up the building to lure potential tenants and restore its historic appeal.
The building’s exterior glass remains in good shape, but the heating and cooling systems will be replaced. The rest of the rehab budget will go toward specific tenants’ needs, said Mike Donovan, a principal at Balke Brown Associates of St. Louis, which is marketing the building for sale or lease. Its $21 per-square-foot rent is at the upper end of the downtown office market.
By itself, a multimillion-dollar refurbishment won’t eliminate the General American building’s competition for tenants downtown, where the overall vacancy rate remains at about 20 percent. Finding the right fit among potential tenants hasn’t been easy, said Kevin Farrell, director of economic and housing development with the Partnership for Downtown St. Louis.
He pointed out that two law firms considered moving into the building since General American moved out.
While the building’s architect is noteworthy, Farrell said prospective tenants will be enticed by the building’s views of Citygarden, the Old Courthouse, Busch Stadium and the Arch.
"It’s a building with a lot of interesting attributes," Farrell said. "You need to find somebody who falls in love with it."
Johnson helped launch the Modernist movement of glass skyscrapers in the 1950s easy online payday loans. In New York, he had a hand in Mies van der Rohe’s Seagram building, the epitome of the sleek corporate headquarters. The Pritzker prize, architecture’s version of the Oscar, was established in 1979. Johnson was the first recipient.
His Modernist towers in the 1980s included the Pittsburgh Plate Glass Co. building in Pittsburgh and the Transco Tower in Houston. He also helped start a Post-Modernist phase of architecture with his AT&T building in New York.
Above the AT&T’s Modernist facade is an enormous pediment resembling the top of a Chippendale desk. Johnson was 98 when he died in 2005.
Even compared to such high-profile projects, the General American building ranks high in the Johnson portfolio, said John Berendzen, a partner at Fox Architects in St. Louis. "It’s a very clean Modernist building," said Berendzen, who years ago designed some interior remodeling there.
"It’s a very simple, yet very complex structure."
It was General American’s vice president, Stanley Richman, who should be credited for bringing Johnson to St. Louis, Trusheim said. Richman, who died in 1985, was a "Renaissance man" of many interests, including architecture.
"Stan searched out architects and, at that time, Philip Johnson was one of the leading architects in the United States," Trusheim said during a recent phone interview from his home in Minneapolis.
For now, however, the building remains empty.
Though intended for a single tenant, the "tremendous amount of public-type space" could allow for retrofitting the structure for several occupants, Berendzen said.
Law firm Blackwell Sanders nearly relocated to the General American building from the Laclede Gas building in 2006. The deal fell through at the last minute. Blackwell merged last year with Husch & Eppenberger and consolidated this year in Clayton. Bob Tomaso, a Husch Blackwell partner involved in the General American negotiation for Blackwell Sanders, wouldn’t explain why the firm passed. Still, he said he admires the building.
"It’s a shame it has sat empty for so long."
The number of Americans filing first-time claims for unemployment insurance fell sharply last week to the lowest level in 17 months, the government said Thursday. Analysts had expected an increase.
There were 432,000 initial jobless claims filed in the week ended Dec. 26, down 22,000 from the previous week’s revised 454,000, the Labor Department said. The figure is the lowest since July 19, 2008, when there were 413,000 claims filed.
A consensus estimate of economists surveyed by Briefing.com expected claims to jump to 460,000.
The 4-week moving average of initial claims totaled 460,250, down 5,500 from the previous week’s revised average of 465,750.
"It’s encouraging to see that we’re continuing to move in the right direction toward 400,000 claims," said Tim Quinlan, economic analyst at Wells Fargo. "We’re certainly off the highs we saw earlier this year.
Jobless claims have been trending downward since the end of March, when they peaked at 674,000, the highest figure since 1982.
Continuing claims: The government said 4,981,000 people filed continuing claims in the week ended Dec. 19, the most recent data available. That’s 57,000 down from the preceding week’s revised 5,038,000 claims.
The 4-week moving average for ongoing claims fell by 122,250 to 5,101,250 from the previous week’s revised 5,223,250.
But the slide may signal that more filers are dropping off those rolls into extended benefits.
Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks business card design. The figures do not include those who have moved to state or federal extensions, or people whose benefits have expired.
Congress passed legislation last month to extend federally paid benefits up to 99 weeks, depending on the state, but the law only helps those who exhaust their federal unemployment lifelines by the year’s end.
Lawmakers in the House and the Senate recently passed measures to extend the filing deadline through the end of February. The President is expected to sign the legislation soon.
Both chambers initially introduced bills to push the deadline to apply for benefits through 2010 or beyond, but Democratic leaders in the House scaled back the effort in hopes of getting the bill through the Senate more quickly.
State-by-state: Jobless claims in 10 states declined by more than 1,000 for the week ended Dec. 19, the most recent data available. Claims in Tennessee dropped the most, by 2,972.
A total of 12 states said claims increased by more than 1,000. Claims in New York jumped the most by 1,155. A state-supplied comment attributed the increase to layoffs in the construction, service and real estate industries.
Outlook: The employment picture will continue to improve as jobless claims continue to fall, but Quinlan said they will need to drop near 350,000 for positive job growth.
He expects nonfram payrolls to return to positive territory by the second quarter of 2010, and for the unemployment rate to fall by the end of the year.
The government’s Christmas Eve pledge of unlimited financial aid to mortgage giants Fannie Mae and Freddie Mac is aimed at making sure the housing market doesn’t take another turn for the worse and cause the economic recovery to unravel.
This insurance policy taken out by the Treasury Department will help keep mortgage rates low, and may wind up being a gift of sorts to struggling homeowners and banks. But there’s a catch: the housing crisis is now likely to cost taxpayers much more.
The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion. It also eases restrictions on the size of the companies’ investment portfolios. That’s a reversal of the Bush administration’s September 2008 plan to shrink the size of the companies’ holdings of mortgage-backed securities.
The action, which didn’t need the approval of Congress, could position Fannie and Freddie to get more aggressive in dealing with the housing crisis, perhaps taking troubled mortgage investments off banks’ books.
"They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want," says Edward Pinto, a housing consultant who served as Fannie’s chief credit officer in the late 1980s.
The Treasury could also lean harder on Fannie and Freddie to help troubled homeowners avoid foreclosures — and by extension the banks and other investors who own their mortgages.
Many economists and housing experts say an existing $75 billion government program to prevent foreclosures isn’t working fast enough, threatening the emerging signs of home price stability in many cities across the nation.
Boosting the firepower of Fannie and Freddie, which finance three-quarters of all new mortgages, also should help keep rates on home loans low just as the Federal Reserve starts dialing back its separate $1.25 trillion program aimed at doing just that.
That’s good news for the banking industry, which benefited in 2009 from homeowners refinancing their mortgages, says Jason O’Donnell, senior research analyst at Boenning & Scattergood Inc. "This is an initiative that spreads far beyond just Fannie Mae and Freddie Mac," he says.
But the trade-off is that the Treasury will have to cover much more than the $111 billion in losses at Fannie and Freddie it already has funded. Barclays Capital predicts the losses will range from $230 billion to $300 billion.
Both companies provide vital funding for home loans, buying mortgages from lenders, pooling them into bonds and selling them to investors with a guarantee against default.
While they traditionally backed loans to relatively safe buyers, they dramatically lowered their standards during the housing boom, and those loans are now defaulting in higher numbers.
If the administration leans on Fannie and Freddie to expand its foreclosure-prevention program, it would be pricey. If Fannie and Freddie were, hypothetically, to start forgiving a quarter of borrowers’ mortgage debt, that would cost another $125 billion to help 2.5 million to 3 million borrowers, estimates Barclays analyst Ajay Rajadhyaksha.
The Treasury Department says its only motivation is to make sure investors remain confident that Fannie and Freddie can keep doing their jobs of buying the bulk of mortgages made in the U.S. and turning them into investments.
Heightened airport security after a botched terrorist attack on Christmas Day means one more cost for an airline industry that’s already experiencing considerable turbulence.
Consumers will likely be the ones to bear the brunt of the additional expenses, said John McKenna, president and chief executive officer of the Air Transport Association of Canada.
"Any time there are new security measures of any type, the travelling public pays for it," McKenna said.
After Friday’s attempted attack aboard a Detroit-bound Northwest Airlines flight, travellers now face a pat-down by security agents as well as tougher restrictions on what they are allowed to take on the plane.
Bags with wheels are no longer being allowed as a carry-on, and only one bag per traveller can be taken on the plane.
The secondary checks can take up to five minutes per person. That could add up to a delay of several hours for each flight if more employees aren’t brought in.
"If you add the people, you add costs. And these costs will have to be paid for by somebody," said McKenna.
"If they are permanent measures, this clearly costs the airlines and the travelling consumer a lot more money."
In Canada, Transport Minister John Baird requested help from the RCMP on Sunday night, and the Mounties helped provide additional screening security at Canada’s largest airports on Monday.
Transport Canada employees were also been called in on overtime for what was supposed to be a federal holiday to deal with the extra security needs.
For WestJet Airlines Ltd. (TSX: WJA), a Calgary-based carrier, tallying the added costs is not a "primary focus" at the moment, said spokesman Robert Palmer.
"We are focused on our guests and their experience," Palmer said.
He recalled that airlines struggled a year ago with an onslaught of snowstorms that snarled air traffic at the height of the holiday rush.
"In some ways, this is not dissimilar to last Christmas, when we went above and beyond to help our guests get home for the holidays," Palmer said.
McGill University professor Karl Moore said he doesn’t believe air travel will be affected significantly during this holiday period because most consumers will already be committed to their travel plans and will adapt.
"It will get back to normal, or the new normal, with a few more restrictions," said Moore, who noted that passengers are already used to taking off their shoes and belts and having liquid bottles checked.
"Travel is not fun in the way it used to be 15 years ago," Moore said.
"What we will see is a little bit of a slowdown but I think the restrictions will ease over time," said Moore, who teaches globalization and management in McGill’s Desautels Faculty of Management.
Moore said Air Canada in particular may actually see a bit of an increase in traffic as a result with travellers being able to choose international routes and connecting flights that avoid the United States.
"The more difficult it is to fly through the U.S., Canada gains a little bit from that."
A number of travellers at Toronto’s Pearson International Airport said over the holiday weekend that they were impressed with the way Air Canada handled the new security measures.
Stock in WestJet, Jazz Air Income Fund (TSX: JAZ.UN) and Montreal-based travel company Transat AT Inc. (TRZ.B0 felt a downdraft Tuesday in the first trading since Friday’s attempted bombing.
WestJet dropped 17 cents or 1.4 per cent to $12.29 while Jazz, a former Air Canada subsidiary that’s now a separate airline company, dropped 13 cents or 2.9 per cent to $4.30 and Transat (TSX: TRZ.B) slipped 20cents to $21.
Air Canada (TSX: AC.B) was unchanged at $1.25.
In the wake of the 2001 terrorist attacks in the United States, airline travel fell dramatically around the world and led to billions of dollars in losses for the global airline sector.
Earlier this month, The International Air Transport Association revised its financial outlook for 2010 to an expected US$5.6 billion global net loss, larger than the previously forecast loss of $3.8 billion. However, passenger traffic is expected grow by 4.5 per cent in 2010.
For this year, the airline research group maintained its forecast of a $11 billion net loss.
Umar Farouk Abdulmutallab, 23, of Nigeria was charged Saturday with trying to blow up a Northwest Airlines flight as the plane approached Detroit on Christmas Day. He’s accused of igniting an explosive substance hidden in his pants. An al-Qaida group claimed responsibility for the attempt on Monday.
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