James Pethokoukis

Jed Graham of IBD highlights the coming fiscal drag in a pretty picture:

Me: What would that mean for GDP growth? A pre-financial crisis analysis by Goldman Sachs predicts, for instance, found that getting rid of all the Bush tax cuts at the end of 2010 would cause a 3 percentage point drop in the economy in 1Q 2011.  In any event, anti-growth fiscal policy is one more reason to believe in the dreary New Normal

David Rosenberg of Gluskin Sheff doesn’t think so:

These attempts to stimulate consumption at a time when household spending relative to GDP is already at an all-time high are not going to carry much of a multiplier impact. There is a youth unemployment crisis, a skills crisis, a crisis among the ability of small businesses, who have been responsible for 65% of the new hiring in the U.S.A. over the past 15 years — to secure financing for working capital purposes, there is a crisis in terms of a declining manufacturing capital stock, and the programs we get are these old and tired Keynesian attempts at temporary boosts to consumer demand. It truly boggles the mind, and as we show below, American taxpayers are still a long, long way from paying for all these transitory fiscal policies out of Washington.

Me: When I hear folks start talking about new WPA and CCC programs, I know they’re out of ideas.

Kim Strassel is right, cap-and-trade looks terminal for 2010 and beyond. Sure, the EPA could try to push its own draconian carbon regulation. But I think that would cause a firestorm on Capitol Hill. Strassel:

Polls show a public already losing belief in the theory of man-made global warming, and skeptics are now on the offense. The Competitive Enterprise Institute’s Myron Ebell argues this scandal gives added cover to Blue Dogs and other Democrats who were already reluctant to buck the public’s will and vote for climate legislation. And with Republicans set to pick up seats, Mr. Ebell adds, “By 2011 there will hopefully be even fewer members who support this. We may be close to having it permanently stymied.” Continued U.S. failure to act makes an international agreement to replace Kyoto (which expires in 2012) a harder sell.

Karl Rove makes a good point:

The administration says it is now instructing agencies to either freeze spending or propose 5% cuts in their budgets for next year. This won’t add up to much unless agencies use the budgets they had before the stimulus inflated their spending as their baseline in calculating their cuts.

For example, if the Education Department uses its current stimulus-inflated budget of $141 billion instead of the $60 billion budget it had before Mr. Obama moved into the White House, freezing its budget will do nothing to fix the fiscal mess the president has created.

Me: Indeed, one thing to watch out for is how these elevated, stimulus-related spending levels become incorporated into budget baselines.

My pal Felix Salmon makes a good point about the dollar and Dubai. The greenback initially slid on the news. But isn’t the greenback supposed to be a safe haven. Felix opines as follows:

Needless to say, this isn’t exactly a classic risk-aversion reaction: when the markets are really scared, they tend to flee to the safety of the dollar, rather than to the Japanese yen. So my feeling is that this — along with the relatively modest stock-market reaction in New York this morning — counts as a sign that Dubai really isn’t all that bad: it shows that markets are trading the news, rather than panicking.

On the other hand, it’s clearly not good news that a severe-if-not-life-threatening shock such as this one sends the dollar down rather than up. The immense fiscal cost of the financial crisis has hurt the dollar’s standing as the global reserve currency, and if I were at Treasury right now I’d be very concerned about this reaction. Not that there’s much Treasury can do about it.

If former CNN anchorman Lou Dobbs decides to make an independent bid for president in 2012, he will probably find the political climate as hospitable for an insurgent run — if not more so — as it was in 1992, when Ross Perot captured a fifth of the popular vote. (It was the best showing by a third-party candidate since Bull Moose Teddy Roosevelt finished second with 27.4 percent of the vote in 1912.)

The dreary economic New Normal that is the aftermath of the Great Recession has created a huge political opening for Dobbs or Michael Bloomberg or Sarah Palin, or some other American with high visibility or deep pockets or both.

It was a slow-recovering economy and concern about big deficits that drove the Perot phenomenon. There’s a high probability both factors will be at play three years from now. The Center on Budget and Policy Priorities forecasts annual budget deficits to average $1.2 trillion over the next three years. And the Federal Reserve is forecasting a so-so economic expansion that will leave unemployment over 7 percent in 2012. Overall, the nation’s economic mood might be a lot worse than it was in 1992.

Then you have a populist, anti-Wall Street sentiment that neither Democrats nor Republicans have been able to capture successfully. The result is that party loyalties are frayed, with the tea party movement one manifestation. According to the Pew Research Center, 36 percent of Americans identify themselves as independents, the highest number since 1992. And they seem to be up for grabs. Barack Obama won 52 percent of the independent vote in 2008. But a recent poll by Rasmussen Reports shows Obama with a 61 percent disapproval rating among the group.

None of this means an independent would actually win. Rasmussen has Dobbs at 14 percent in a race with President Obama (42 percent) and Mitt Romney (34 percent.) With the more populist Palin replacing Romney, Dobbs gets 12 percent versus 44 percent for Obama and 37 percent for Palin.  Yet without Dobbs in the race, Romney is tied with Obama and Palin trails by just three. So an independent could, at the very least, radically alter the political landscape.

And not just for the GOP. Unhappiness about an escalation in the Afghanistan war and muddled healthcare reform could create a more liberal independent challenger. Take Howard Dean, for instance. The former Vermont governor and chairman of the Democratic National Committee has been ripping ObamaCare lately and says he would vote with Sen. Bernie Sanders of Vermont, an independent socialist, against it if he were a senator. And Dean sure knows how to use the Internet to raise money, as he showed in his 2004 run for the Democratic nomination.

But here is the bottom line: If the New Normal turns out to be worse than expected, with the GOP blamed for the original collapse and Democrats for a bungled remedy, an independent might accomplish much more than just being a spoiler.

Why is passing healthcare reform so difficult? One big reason is that Democrats are trying to pay for a broad-based new entitlement without enacting a broad-based new tax.

As the joke goes, the only real difference between Republicans and Democrats is that the Rs don’t want to raise taxes on anybody and the Ds want to clip only the top 2 percent.

But some Democrats have finally found a cause worth taxing the middle class for: the war in Afghanistan. A group of powerful House committee chairmen are pushing a graduated income surtax. (A Senate effort would tax only the wealthy.)

The twin goals, backers say, are fiscal probity and transparency, especially now that it looks like President Barack Obama will be sending up to $34 billion worth of new troops to Afghanistan.

As Barney Frank, House Financial Services chairman, puts it: ‘It’s important for people to understand how these wars are adding to our deficits.’

Nonsense. The same lawmakers supporting the war surtax also support a healthcare reform plan that is structured to hide long-term costs. No accounting trick is spared. Taxes are front loaded. Some spending is back loaded, while other spending is shunted to a separate bill.

No, the goal of the surtax is to drain public support for a war many Democrats think should be downgraded. And no doubt if this legislative effort proves successful, it would be tempting to eventually make the temporary surtax permanent.

Indeed, the whole effort could be laying the groundwork for a broad value-added tax that many centrist and liberal economists think necessary to shrink America’s long-term budget gap.

But why not take this opportunity to help pay for the war through spending cuts?

It’s inside-the-Beltway wisdom that Congress won’t cut spending. But eventually spending will need trimming to deal with the long-term budget deficit without resorting to currency devaluation or inflation or huge tax increases.

So let’s start now. The war in Afghanistan currently costs some $43 billion a year. As the Heritage Foundation rightly notes, “that sum is dwarfed by the $72 billion in improper payments (i.e. over-payments, payments made for services and goods never received, benefits and tax credits paid to people who didn’t qualify) that the Government Accounting Office said the federal government made last year.” Then there’s $92 billion in corporate welfare and $123 billion in programs that simply aren’t really showing any positive impact, according to government auditors.

Time for Congress to prove the common wisdom wrong and do the unexpected: Cut spending.

One residual from Timothy Geithner’s rough confirmation back in January — “Turbo Tax Tim” and all that — is that his political position is probably a bit more precarious than that of the typical newbie treasury secretary.

Not only has Geithner been a frequent target of late-night comedy shows, he’s the public face of the unpopular bank and automaker bailouts. High unemployment rate isn’t helping either.

No surprisingly, a new Rasmussen poll finds that 42 percent of Americans think Geithner has done a “poor” job handling the economy versus 20 percent who rate him “good or excellent.” And the furor over his handling of the AIG bailout has yanked the competence issue back to the forefront.

So there is little political risk from calling for his resignation, as Representative Peter DeFazio, an Oregon Democrat, and several Republicans have done. But, my sources say, there seems to be little White House appetite at this moment for ousting Geithner, who certainly has no plans of his own for a fast exit.  Expect him to stick around until at least November 2010.

And why would Obama cut him loose when doing so would be tantamount to a vote of disapproval in his own economic policies?

No one has charged Geithner with going rogue, after all. So blame the model, not the man, if you must. Not to mention a quick hook would stink of panic. Top cabinet secretaries of first-term presidents rarely leave before the midterm elections.

Nor does Geithner have much to fear from a whisper campaign to put JPMorgan CEO Jamie Dimon in the job, according to insiders. Despite the rumors, Dimon doesn’t want the gig. What banker would, given the current populist political climate?

It seems unlikely that radioactive Wall Street will be supplying Geithner’s eventual successor. More likely candidates: Rahm Emanuel (he of the frequent phone calls to Geithner), White House chief of staff; Janet Yellen, president of the San Francisco Federal Reserve; Lawrence Summers, director of the National Economic Council; and Roger Ferguson, CEO of TIAA-CREF and former Fed vice chairman.

But the calls for Geithner’s resignation, as well as stunts like the Congressional Black Caucus blocking a key House committee vote on financial reform, indicate a degree of desperation among congressional Democrats. They see high unemployment and dissatisfaction with Obama’s scattered focus on the issue as driving the anti-incumbent mood.

Unlike in sports, in government it’s the players, not the coach, who gets fired. And that’s why some Dems think one way to save their jobs in 2010 is by suggesting that Geithner lose his today.

Ed Yardeni calls it on PAYGO:

Too bad that there are so many devils in the details. Obama’s proposal for fiscal discipline totally exempts “discretionary spending” for defense, education, environmental protection and many other programs. Normal increases in entitlement spending (more beneficiaries, higher health costs, etc.) also aren’t covered. In other words, the increase in Social Security and Medicare spending resulting from the impending retirement of baby boomers doesn’t count. Congress did operate under self-imposed PAYGO rules during FY1991-FY2002, and frequently skirted them. The statute was then allowed to expire. So here we are with Mr. Obama paying lip service to fiscal disciple with yet another campaign speech.

Is it any wonder that the price of gold is at a record $1165 this morning?

I have to admit, this scenario does make a lot of sense:

In a word, yes. Back in August 1993, President Clinton passed the largest tax increase in history – the Omnibus Budget Reconciliation Act of 1993 (OBRA) – and made it retroactive to January of that year.

It was challenged in court, and the court held that retroactive tax increases were legal. This was not the first time this sort of chicanery had been pulled. (You can read more on the topic of retroactive taxes by clicking here.)

Why am I so confident this trap is being set? Nancy Pelosi herself tipped her hand on the retroactive tax plan when she said last January she wanted Congress to repeal Bush’s tax cuts well before their scheduled expiration date. An early repeal of the Bush tax cuts was also one of President Obama’s campaign promises.

The administration and its allies have since gone quiet on its intentions. But that’s only because they want to avoid triggering a stock selloff before the end of 2009. That all changes once the ball drops in Times Square this coming New Year’s Eve. At that point, it will be too late to escape.

Me: Perhaps this is how Team Obama means to help pay for the second stimulus, assuming they don’t intend just to borrow it all.