Opinion

The Great Debate

Washington’s next challenge

By James Pethokoukis
The opinions expressed are his own.

Reuters invited leading economists to reply to Larry Summers’ ope-d on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Reuters Breakingviews columnist James Pethokoukis’ reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as well.

Like Larry Summers, I have a “multifaceted reaction” to Washington’s debt ceiling and budget deal. In fact, I have the exact same multifaceted reaction, except driven by completely different rationales.

1. Like Summers, I feel relief — but not because the agreement averted default and avoided harsh austerity. While the package doesn’t fundamentally change America’s fatal fiscal trajectory, it keeps the legislative momentum headed in the right direction with a focus on reducing debt via spending cuts rather than tax increases.

Nor do I think the process was some sort of “shabby spectacle.” The democratic process is always messy, and frequently driven by a sense of crisis. But it was designed to prevent tyranny; not to promote efficiency. And the recent House ban on earmarks ensured much of the haggling revolved around policy rather than political favors.

2. Likewise, I am cynical — but not about the nature of the debt deal. Future editions of Congress and the economic cycle will have great say about how much America taxes and spends in coming years. Fiscal norms are being set and attitudes changed now, such as when Congress rejected President Barack Obama’s recent budget 97-0. The new budget deal is part of that ongoing evolution.

Who lost the dollar?

James Pethokoukis – James Pethokoukis is a Reuters columnist. The views expressed are his own –

The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. (The William Jennings Bryan “cross of gold” speech and all that.)

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

from James Pethokoukis:

The myth of Lehman, part two

John Taylor has maintained that it was the government's reaction to Lehman that freaked out financial markets. Now Luigi Zingales and John Cochrane make a similar pitch in the WSJ:

On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman's collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)

Why? In effect, these speeches amounted to "The financial system is about to collapse. We can't tell you why. We need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.

from James Pethokoukis:

3 reasons why cap-and-trade is in trouble

The man who will almost certainly become Japan's next prime minister, Yukio Hatoyama, is promising to cut the nation's greenhouse gas emissions by 25 percent from 1990 levels by 2020.

That is a far more ambitious target that can be found in the legislation currently making its way through Congress. The cap-and-trade bill passed by the House of Representatives would trim U.S. emissions by 17 percent from 2005 levels. That translates to around a 6 percent cut from 1990 levels.

But even that lesser reduction seems unlikely to happen anytime soon. Climate change legislation faces a tough road in the Senate, and it may get pushed back to 2010 or beyond.

from James Pethokoukis:

Are Obama’s healthcare troubles actually a good thing?

Mickey Kaus gives his theory:

It’s easy to forget that, even if Obama’s health care effort is bogging down, the effort itself still serves his presidency as a crucial time-waster, tying up Congress and giving him a reason to postpone (or the public a reason to ignore) those other divisive, presidency-killers. Obama needs some excuse for putting off unpopular Democratic demands; health care’s a good one. If he keeps failing to pass health care until spring, that might not be such a bad outcome. In fact, even quick passage was maybe never in his interest. There are things more unpopular than struggling. ... Cap and trade, immigration legalization, “card check”—these are not what you’d call confidence building appetizers leading up to the main course of Obama’s presidency.

Me: None of it works when Americans have less and less confidence in Obama. And that number will continue to work against him as long as unemployment stays high.

from James Pethokoukis:

Why healthcare co-ops are a political solution, not an economic one

Here is a devastating critique of the idea of healthcare co-ops in place of a true public option (via Tim Foley at Change.org):

We’re guessing at the details, since they haven’t been divulged. How it would work? Does the government give seed money in the form of grants to set these up? Does it give loans? Who, pray tell, does it give this seed money to? How long would it take to get one of these co-ops up and running? How long would it take them to get a network of doctors? Since the co-op would start with no customers and presumably no bargaining power, how long would it take for insurance companies to be quaking in their boots?

That said, we do know a lot about them:

    We know that we used to have health care co-ops in this country. What happened to most of them? As Professor Timothy Stoltzfus Jost explains, “The Farm Security Administration withdrew support in 1947, and they collapsed. They had a hard time getting going anyway.” We know the ones that have been relatively successful have had their own network of providers, like Kaiser or the VA. However, the best of them took decades to develop – up to 60 years. The GAO looked at health insurance co-ops in 2000. These weren’t the same idea – they would allow small businesses to pool their employees in a co-op to shop for insurance. The GAO’s conclusion? They don’t work very well and did nothing to lower costs. The fact that a health co-op is a non-profit won’t in and of itself yield competition. As I pointed out earlier, “Conrad’s home state of North Dakota has 475,000 people enrolled in the not-for-profit North Dakota Blue Cross Blue Shield. That’s not just competition – it’s a monopoly, 60% of the market. Guess what? It hasn’t helped. Premiums jumped 74% in the past seven years.” Most co-ops won’t be as successful as already-existing Blue Cross plans, which means they won’t have market clout to lower costs or change the game for private insurance. Which is, you know, the whole point. Conrad introduced the co-op in June to solve a political problem – find common ground to allow the Senate Finance Committee to release their bill. So far, the Finance Committee remains at impasse, we’ve seen no bill, and every other committee has been done for weeks now. Great job. By the way, Republicans aren’t biting. They say the co-op is a public option in sheep’s clothing. So they’re against it. And, of course, progressives are furious at even the hint that there won’t be a public option, so they’re against it, too.

I guess Conrad succeeded in uniting the left and the right. Unfortunately, they seem to be united against his idea – the same idea whose sole existence is not to make American health care better but to win votes.

from James Pethokoukis:

A healthcare plan to save Obama’s presidency

President Barack Obama has told Americans to be skeptical of reports of an end to the recession, saying the downturn has "many more months" to run. Given the recent retail sales data, Americans seem to be listening to their economist-in-chief.

Obama may well be right in his dour forecast. Whatever the next quarter or two of GDP numbers say, continuing high unemployment and depleted personal wealth should keep the vibe more recessionary than expansionary. It's tough to be cheerleader-in-chief, after all, when people's pocketbooks are telling them a starkly different story.

But another issue is exacerbating Americans' sour attitudes and raising doubts about the president's competence: healthcare reform. Indeed, a recent Gallup poll shows identical pluralities of 49 percent disapproving of both Obama's handling of the overall economy and his handling of healthcare policy.

from James Pethokoukis:

Oh, about that U.S. economic recovery …

What might stand in the way of a robust economic turnaround. Gary Becker outlines the following factors:

The federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government's likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking.

Me: It is not about aggregate demand, gang, it's about confidence.

from James Pethokoukis:

5 reasons why Obama will hike middle-class taxes

JamesPethokoukiscrop.jpgC’mon, how about some Walter Mondalesque candor from the Obama White House on taxes? Yes, yes, it was 25 years ago this summer that the Democratic presidential candidate self-immolated on the issue at his party’s convention in San Francisco. But surely Americans have become more urbane and sophisticated since then as to what makes for sound economic policy, oui?

[Find out five ways to boost the economy and create jobs]

Nope. If you had any doubt that higher taxes are still poisonous policy in center-right America, all you had to do was listen to White House Press Secretary Robert Gibbs yesterday. He briskly and precisely walked back the White House from the ambiguous statements made by Tim Geithner and Larry Summers on the Sunday chat shows. “I am reiterating the president's clear commitment in the clearest terms possible that he's not raising taxes on those who make less than $250,000 a year," Gibbs said.

But what’s so clear, Mr. Gibbs? “Commitment” in this context is a schemer’s word, the much-weaker-yet-more-conniving sibling of “guarantee.” Did Broadway Joe express a mushy “clear commitment” to winning the 1969 Super Bowl? Clearly not. In any event, feel free to ignore Gibbs or any other White Housespinmeister who gives the impression that President Obama raising middle-class taxes would be the equivalent of playing himself in a Hollywood biopic -- so unlikely as to be fanciful. It’s not and here’s why it will happen eventually:

Healthcare: Going back to Massachussets?

James Pethokoukis – James Pethokoukis is a Reuters columnist. The views expressed are his own —

Time for a political reality check. Government-run public health insurance that competes with private plans — a Democratic dream since President Truman suggested it in 1945 — may not be dead for now on Capitol Hill, but its vital signs are awfully faint.

Of course, many proponents are hoping to use the congressional August recess to rally the grassroots and the netroots for one final push come September. And maybe that will work.

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