I just attended a healthcare symposium at the American Enterprise Institute where Prof. Stephen Parente of the University of Minnesota revealed the results of a complex healthcare cost simulation model. What did the number crunching show? The Democratic healthcare plan under consideration by the Senate Finance Committee would cost $300 billion a year if it wanted to reduce the number of uninsured Americans by three quarters. (Hello VAT!) And just to show how hard it is to do healthcare reform within current parameters of public policy, a conservative Republican alternative plan would cost $150 billion a year, though it would achieve the same results. Or America could try this approach.
Politics and policy from inside Washington
Robert Gibbs, the White House press secretary, was asked by CNS News where the U.S. government’s authority to take a 60 percent stake in General Motors came from. His answer: “Well, I think the money is based on the Troubled Asset Relief [Program], and is related to money that was approved in the prior administration through that program to deal with, as they had in the past administration, they were dealing with loans to cover–basically to bridge the operating costs.”
Gibbs was then asked if he thought Congress ever contemplated such a use of the TARP dough. His answer: “I can’t speak to what people in Congress believed in terms of their motivations back in September or October when this was being debated.”
In the WSJ today, Karl Rove notices that the unemployment rate may still be really, really high on Election Day 2010: “The difficulty for Mr. Obama will be when the public sees where his decisions lead — higher inflation, higher interest rates, higher taxes, sluggish growth, and a jobless recovery.”
Me: I have been saying for awhile that voters in the congressional midterm elections are more likely than not to think the U.S. economy still stinks — even if GDP is expanding at a steady clip. Unemployment could be around 10 percent with both inflation and interest rates on the rise.
Certainly the recent history of U.S. elections is that the party in power gets blamed. The classic example is 1992. The unemployment rate was 7.4 percent, still close to the cyclical high of 7.8 percent, even though the economy had been expanding steadily since the second quarter of 1991. President George Bush lost to Gov. Bill Clinton handily. Even by 1994, voters thought the economy still dodgy and voted the GOP back into power in Congress. Two things the Dems have going for them is that 1) the GOP has to protect more Senate seats and 2) high-tech redistricting methods have made huge swings on the House less likely.
OK, so it looks like Rising Asia is trying to get on the same currency page. Now lots of people think rumblings of the region dumping the dollar are empty threats. Where are they going to go, right? The euro? Please. David Goldman of the fantastic Inner Workings blog thinks he has it figured out bold is mine):
The Asian exit from the dollar will be turtle-slow and gradual. China and Japan between them have nearly $2 trillion worth of US Treasury securities and will do nothing to jeapordize their existing investment. But the collapse of governance in the United States and the Obama administration’s response have turned the US into a zombie economy, and the dollar into a zombie currency. The Euro offers no alternative. Demographically Europe is dying, and Europe’s economic misery is worse than America’s. … Apart from the problem of protecting a massive existing investment in the dollar, Asia has another problem in existing from the dollar: there exists no natural alternative. An alternative would have to be constructed. … Asia may have passed a milestone in monetary cooperation, but China, India and Japan never will establish the sort of political rapport that allows for currency union along European lines. To link their currencies would require an agreement to employ an objective benchmark for monetary policy, and the obvious choice would be some basket of commodities. … This is a five, perhaps a ten-year project, to be executed very gradually and very carefully as the Treasury’s largest foreign investors gradually reduce exposure to the US market and create their own financial markets.
Since we must scale back fiscal borrowing as we move into the future, there are only two alternatives: to accept far higher levels of taxation, or to accept a U.S. economy that is significantly smaller and slower-growing than it would otherwise have been. (The consequences of the latter, of course,are high unemployment and less material well-being for individuals.)
What would be a logical way to navigate between those alternatives? Adopt a high-tax policy that does as little as possible to burden highly-productive individuals, businesses and capital, thus lessening the impact on the size and dynamism of the economy.
But we already know that the President wants to do exactly the opposite. Faced with an evil choice between much higher taxes and a smaller economy, Obama is on track to give us both.
I had the pleasure this morning of attending a small breakfast gathering with South Carolina Gov. Mark Sanford, a potential contender for the 2012 Republican presidential nomination. Sanford talked a lot about his legal fight to reject stimulus money from the federal government. Well, not so much about the legal details, but more the philosophy behind his stand. He says he is extremely concerned that the government’s debt problems are approaching a “tipping point” that will lead to higher inflation and a weaker dollar — all characteristics of “banana republic economies.” Sanford also said that Obama’s stiff-arming of GM creditors is an assault against private property rights and the rule of law, creating uncertainty in America’s business community about ” what the rules are” and potentially freezing business invesment here. ( He added that a meeting with folks on Wall Street confirmed his suspicions on this matter.)
I asked the governor about Democrats using concerns about the budget deficit as an excuse to raise taxes. He said he didn’t see much appetite out in America for higher taxes, given the success of the “tea party” movement and the rejection of tax-hikes measures in California.
A few observations:
1) He called himself a “low-key” kind of guy. I think that is a pretty accurate self assessment, though it was pretty early in the morning and he got into town late last night.
2) If Mitt Romney is a CEO, then Sanford came across as a CFO. It kind of reminded me of company conference call where the CEO gives that analsysts the sales job and then calls in the CFO to run through the numbers. I am not sure what kind of salesman Sanford would be as a presidential candidate, but he does comes acrosss as whip smart, even wonky guy. Also a very “suburban” vibe.
3) Just a hunch, but I think he would market himself as a guy who could restructure government and make it leaner and more efficient, sort of governor for the nation. It wouldn’t be a “cult of personality” sort of campaign.
Sorry, Larry Summers. It’s looking more and more likely that you’re going to be stuck in the West Wing for the duration.
See, if your boss fails to reappoint Ben Bernanke as Federal Reserve chairman come January, it would be a public betrayal worthy of the television reality show “Survivor.” For President Obama has no greater ally: Bernanke is truly the gift that keeps on giving.
The latest evidence came on Wednesday during Bernanke’s testimony before the House Budget Committee. The Fed chairman offered a stern warning about America’s huge budget deficits.
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Bernanke said.
Tough, but hardly atypical Fedspeak.
Then Bernanke went a step further. He gave significant credence to the view that the recent rise in long-term Treasury yields and mortgage rates was caused by deficit jitters:
“These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.”
Bingo! We have Fed confirmation: those inflation-hating “bond vigilantes” have time warped to 2009 from 1994 and are hot on the hunt for countries that can’t manage their finances.
Now when talk about the return of the bond vigilantes got louder last week, some were quick to declare it bad news for Obamanomics.
Rising rates, the theory goes, could force the White House to trim its future spending plans and return more quickly to a sustainable fiscal path. So long, universal healthcare. Bye-bye, green investments. And Bernanke playing deficit hawk only adds to that momentum, right?
Not really. Chatter about budget deficits and fiscal responsibility is exactly what Team Obama needs right now.
Here’s why: If you buy the theory of bond vigilantism — that credit markets will force interest rates higher in reaction to unsustainable national budget deficits — then you also have believe the White House needs to raise taxes sharply to pay for all its spending programs or risk a bond revolt.
Indeed, plenty of White House staffers, particularly if they worked for Bill Clinton, probably do believe in the theory. It was Clinton, after all, who chucked his investment agenda in favor of a “bond market strategy” to boost growth by persuading credit markets that the administration would balance the books.
As Clinton nicely boiled it down, “You mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of [expletive] bond traders?”
Now Obama has no intention of following a Clintonesque bond market strategy. Rates are already low. He just needs them to stay there until the economy recovers. And he also needs more tax revenue to pay for healthcare reform, alternative energy investments and his other investment priorities.
Maybe even a carbon tax to keep gas prices high enough so consumers will want to buy General Motors’ pricey electric vehicle, Volt.
Unfortunately for the White House, there are few signs that Americans want to pay higher taxes, especially during a recession that has eviscerated their net worth even if they have stayed employed. California voters, for instance, just voted down their state’s efforts to raise taxes to close a yawning budget deficit.
Yet the recent experience on the national level is that gigantic budget deficits often lead to higher taxes. That was true in 1982, 1990 and 1993. So if Team Obama wants a value-added tax, higher payroll taxes to fix Social Security or higher incomes taxes on wealthier American, it needs Americans to start fretting more about America’s fiscal condition.
Bernanke’s sharp warning contributed to that effort. So not only has Bernanke’s unprecedented monetary stimulus allowed Obama to focus on pushing forward his policy agenda rather than a pure stimulus effort (such as a temporary suspension of payroll taxes), but the weight of his authority is now being used to help persuade Americans that the budget deficit is the Next Scary Problem.
In short, Bernanke is effectively preparing the battlefield for Obama tax initiatives to pay for Obamacare and who knows what else. What more could a Fed chairman do for a president?
Ben Bernanke seemed to buy into the “bond vigilante” theory today in his House testimony as an explanation for the recent backup in long yields:
Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. … These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.
Me: Some folks are interpreting this as bad news of Obamanomics, that deficit fears mean he’ll have to trim back his spending agenda. (I’ve seen plenty of posts about how Bernanke’s warning means he won’t get reappointed in 2010.) But recent history shows that deficit fears often lead to tax hikes (1982, 1990, 1993) and higher taxes are just what Obama needs to pay for “investments” in healthcare, energy and eduction. Here is a bit from a column that should go up later today:
Chatter about budget deficits and fiscal responsibility is exactly what Team Obama needs right now. Here’s why: If you buy the theory of bond vigilantism — that credit markets will force interest rates higher in reaction to unsustainable national budget deficits — then you also have believe the White House will need to raise taxes sharply to pay for all its spending programs or risk a revolt. Indeed, plenty of White House folks, particularly if they worked for Bill Clinton, likely do believe in the theory. Recall that it was Clinton who chucked his investment agenda in favor of a “bond market strategy” to boost growth by persuading credit markets that the administration would balance the books. As Clinton nicely boiled it down, “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of [expletive] bond traders?”
… And today, Bernanke’s sharp warning contributed to that effort. So not only has Bernanke’s unprecedented monetary stimulus allowed Obama to focus on pushing forward his policy agenda rather than a pure stimulus effort (such as a suspension of payroll taxes), but the weight of his authority is now being used to help persuade Americans that the budget deficit is the Next Scary Problem. In short, Bernanke is “preparing the battlespace” for Obama tax initiatives to pay for Obamacare and who knows what else. What more could one Fed chairman do for a Democratic president?
Daniel Ikenson of the Cato Institute makes a great point on the Hummer deal:
The willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.
Whatever the politics, fixing Social Security is easy conceptually. And if Team Obama is starting to get a bit anxious about an adverse reaction from the bond market to its fiscal policies, why not offer a fix as evidence of its seriousness about America’s entitlement woes? Here is Ed Yardeni on this very topic:
The Obama Team needs to negotiate a peace treaty with the Bond Vigilantes. The Administration will agree to slash the structural federal deficit. The Vigilantes will stop pushing bond yields and mortgage rates up to levels that will abort the recovery. This would be a win-win solution in the spirit of doing what is best for the country. The President could do what Nixon did. It took an anti-communist hawk to recognize Red China. It may take a liberal community organizer to address the looming financial crisis in the social welfare state, particularly Social Security and Medicare. Now is a good time to push for means testing of these two programs. Actually, there is already some means testing in both programs, but the testing should be expanded. The programs shouldn’t be entitlements. They should be insurance programs that provide a safety net for those who are truly in need of public assistance. If the Obama Administration seriously addresses this issue, the outlook for the structural deficit will improve dramatically. In this scenario, both Treasury bonds and the US dollar could rally as the Administration actually delivers on its promise to reduce the structural federal deficit.
Me: I wonder if bond investors are more worried about inflation, default or inflating to avoid default? I would also be concerned that any Obama solution would include higher payroll taxes. Some economists blame FDR’s institution of a payroll tax in the 1930s for extending the Great Depression. Raising the retirement age and linking benefits to inflation rather than wages would actually create huge budget surpluses, by the way.