This, from the president of France: “I will not increase taxes,” he said, “because an increase in taxes would delay the end of the crisis and because by increasing taxes, when we are at our level of taxation, we would not reduce deficits — we would increase them.”
Politics and policy from inside Washington
1) Megan McArdle points out that if there is little economic cost to cap-and-trade, then how will it change behavior and limit emissions? Good question.
2) Scott Grannis (the Calafia Beach Pundit) looks for a return to economic normalcy in, oh, about 3-5 years.
3) Kurt Brouwer of Fundmastery take a funny look at “shovel ready” projects.
4) Donald Marron wonder about paying for healthcare reform.
5) My boss Jeffrey Cane writes a quite funny piece about the Jack Welch MBA!
Some doom and gloom from David Wyss of S&P via the NYPost:
David Wyss, S&P’s chief economist said banks should brace for a plastic meltdown as credit-card losses track the unemployment figures almost exactly. “Credit-card losses, on average, are equal to the unemployment rate plus about 5 percent,” he said, noting his estimates that the nationwide jobless rate could rise as high as 12.5 percent by 2011.
“If one more thing goes wrong, say oil goes over $100 a barrel, or the banks have to deal with another big hit like the commercial real-estate market dropping substantially, unemployment could continue to rise through 2011,” Wyss said.
I think Mike Darda of MKM Partners nicely encapsualtes the Fed’s thinking:
With the unemployment rate 3-4 percentage points above what is widely deemed to be neutral, the Fed probably believes the economy is running more than $1 trillionbelow potential. In other words, don’t expect the Fed to start laying the groundwork for tighter monetary policy until a sustained turn in both output and employment is underway. Of course, this will risk an eventual inflation problem, but as long as inflation doesn’t escape the mid-single-digit range, it’s a risk the Fed is probably willing to take (as opposed to a relapse in the credit markets, and a third leg down in the economy, if they tighten too soon).
My pal Larry Kudlow makes a point that shouldn’t need making during a terrible recession. But I guess it does:
On a related note, Washington is spending far too much time focusing on regulations right now. They’re not devoting nearly enough time to figuring out ways to truly grow our economy. It is a statist governmental approach. This great country of ours is thirsting for free-enterprise incentives and solutions. And as the latest polls show, Americans are becoming fed up with the out-of-control spending, borrowing, debt-creation, and tax increases.
What we need is serious economic growth. That is priority number one. What we need is risk-taking and entrepreneurship. Of course, we need transparent markets. But it is the growth message that is being overlooked.
My spin: Weak growth makes every economic problem look worse. Are bond price rising because of inflation fears or perhaps also default fears because of the combo of high debt and forecasts of wimpy U.S. growth going forward?
“I need a crash cart, stat!” The political prospects for major U.S. healthcare reform have taken a decided turn for the worse in recent days (at least from the point of view of many Democrats). And you don’t need to be some totally plugged-in Washington insider to understand that.
Just take a look-see at the stock market performance of industry players such as Aetna, Cigna, UnitedHealth Group, and WellPoint. Shares have been trending higher of late. What’s been slowly dawning on Wall Street is that the legislative process in Washington is unlikely to produce a national public health insurance option that could eventually squeeze out the private sector. Indeed, the betting markets give just a 43 percent chance of that happening, despite a Democrat president and Democrat control of Congress.
[See why Obama's big economic gamble is failing.]
Fact is, the prospects for any sort of bill that would produce major changes are in as much doubt as at any time since President Obama took office. Worried that the plan was growing too expensive, the critical Senate Finance Committee appears to have jettisoned any idea of a public plan option and is also cutting back on subsidies to help fully insure the nearly 50 million Americans who don’t have health insurance for one reason or another. On Sunday, Sen. Diane Feinstein, a California Democrat, said she doesn’t think Obama “has the votes right now,” to pass a bill, while Sen. Lindsey Graham, a South Carolina Republican, said spiraling cost estimates were “a death blow” to a public insurance option being included in the final legislation.
So what just happened? How is it possible that Democrats cruised to a huge victory on Election Day in November 2008 and are yet again unable to make good on their top legislative priority? Why are the ghosts of Bill Clinton’s 1994 healthcare reform debacle suddenly flitting about Capitol Hill? What happened was the Great Recession, the political impact of which the Obamacrats completely misunderstood. Oh, they knew the financial and economic crisis helped sweep them to office. That part they got just fine.
But they also assumed that the downturn would create such a sense of economic insecurity that time would be ripe for the sort of expansive, government-led healthcare changes that the party has been dreaming of for two generations. Instead, the Great Recession made healthcare less of a priority for voters than economic recovery — as fast as possible, please — and job creation. A recent spate of polls shows concern about healthcare (and climate change and pretty much everything else) lagging concern about unemployment. Healthcare lags concern about the shocking enlargement of the federal budget deficit, which has grown partly due to government actions — such as the $800 billion Obama stimulus package — to deal with the recession, as well as by the decline in tax revenue caused by the downturn itself.
And then last week, the Congressional Budget Office, the respected arbiter of what new government programs might cost, calculated that the Senate Finance Committee’s health reform bill would cost more than $1.6 trillion over 10 years. That was determined to be a political no-go by Senate Democrats– a smart conclusion given the recent polling — and the committee moved on to a still evolving plan B.
It is also ironic that the Obama administration, so aware of the latest research in behavioral economics, would forget about a phenomenon called “loss aversion”, which suggests people feel the pain of financial losses more acutely than comparable gains. Seems the whole healthcare plan was built up on the theory of losing something now — such as tax-free, employer-provided health benefits — for something later, like lower costs and a more sustainable government fiscal situation. (Polls show Americans reject that and don’t even want $500 in new taxes to pay for universal healthcare.) To recession-shocked voters, that probably doesn’t seem like a more economically secure situation at all.
A new Rasmussen Reports national telephone survey finds that 39% of voters now say the country’s economic problems are caused more by the policies Obama has put in place. That’s a 12-point jump from a month ago.
Fifty-four percent (54%) still say the country’s economic woes are due to the recession Obama inherited from President Bush. That figure is down eight points from 62% from early June.
By a two-to-one margin, voters also have more confidence in themselves than in the president when it comes to the economy. This marks a significant shift from just after Obama took office.
Sixty percent (60%) of voters now trust their own economic judgment more than the president’s. In early February, 49% had more trust in themselves while 39% trusted the president more.
I think this bit from First Read echoes what I have been saying:
So let’s get this straight: Barack Obama won last year’s presidential election by seven percentage points (53%-46%) campaigning, in part, for some form of universal health care; his party is about to have 60 votes in the Senate; polls show the country is receptive to overhauling health care; and the president’s approval rating is between 56-60%. But Senate Democrats, like Dianne Feinstein, now say that Obama might not have the votes to pass health care? “I think there’s a lot of concern in the Democratic caucus,” she said on Sunday, per the AP.
My spin: What is going wrong: big deficits, too much all at once, voters who don’t see how reform wil benefit them but understand how higher taxes will hurt them.
Moody’s is threatening California with a “multi-notch” downgrade of its credit rating. The state is in a deep fix, but necessity is the mother of policy invention. It will be interesting to see what Arnold and legislature do, assuming no rescue from Uncle Sam. The governor’s call for a flat tax might just be the beginning.
A string of new polls seems to show that America’s belief in the wonder-working power of Obamanomics has begun to fade. A Pew poll found President Obama’s economic approval rating has fallen to 52 percent from 60 percent in April. A Wall Street Journal poll found 53 percent disapprove of his handling of GM and Chrysler vs. 39 who approve. And the New York Times found that 60 percent don’t think Obama has a “clear plan” to deal with the monstrous budget deficit.
Okay, here’s the thing: Obama took a tremendous economic and political gamble last January. The new president had the option of putting forward a stimulus plan that would attempt to reverse or significantly dampen America’s terrible economic downturn ASAP. The quickest and most effective approach would have been a big cut in payroll taxes. For $800 billion, combined Social Security and Medicare taxes could have been slashed by 6 percentage points, or 40 percent. That would have put $1,500 in worker paychecks and, according to one credible study, increased employment by 4 million jobs in 2009.
Instead, Obama chose to listen to Rahm “Never let a crisis go to waste” Emanuel and put forward an $800 billion plan that advanced his healthcare, energy and education policy goals — but pretty much neglected the economy in 2009. Team Obama had to fully understand this. Indeed, a study from the Congressional Budget Office study — when led by current Obama budget chief Peter Orszag — concluded that an Obama-like economic stimulus package would be “totally impractical” because it would take so long to implement. (True enough, only seven percent of the American Recovery and Reinvestment Act has been doled out so far.)
Presidential gamble. In short, Obama wagered that the deluge of money coming from the Federal Reserve would do the heavy lifting as far as stabilizing the financial sector and keeping the already apparent recession from turning into a real disaster. Voters would, thus, continue to support his policies to assert more government control over healthcare, heavily regulate energy through a costly cap-and-trade program and further intervene into the financial industry.
The gamble appears to have failed miserably, both economically and politically. The terrible tale of the tape: a) the current downturn is arguably the worse since the Great Depression; b) household wealth has fallen by $14 trillion during the past two years, including the first quarter of 2009; c) while the economy may not shrink as much this quarter as it did in the previous three months (-5.7 percent) or the final quarter of 2008 (-6.3 percent), unemployment is soaring; d) Obama himself said the jobless rate will hit 10 percent this year; d) even worse, the Federal Reserve sees it approaching 11 percent next year. (Recall, that the original White House economic analysis of the Obama economic plan never saw unemployment exceeding 8 percent if Obamanomics was passed by Congress.)
Falling public support. So now many Americans are rightfully wondering just what they are getting for that $800 billion, as well as massive budget deficits as far as the eye can see. And it goes beyond the mercurial world of polling. Pricey plans to deal with perceived climate change and healthcare are also appear on the ropes or are being scaled back as voters view them as lower priorities than job creation and taming out-of-control spending.
Green shoots? Oh there are some to be sure. Just yesterday, the Conference Board said its index of leading economic indicators rose by its biggest monthly amount in five years And the stock market is up nearly 40 percent from its lows as depression fears ebb. Gluskin Sheff economist David Rosenberg, by contrast, declares that the “era of the green shoots is over.” He points out that 1) bellwether FedEx described the economy as “extremely difficult” when it reported disappointing earnings , 2) United Airlines said second quarter traffic fell as much at 10.5 percent, 3) commercial real estate loan concerns led S&P to cut ratings on 22 non-”too big too fail” regional banks; 4) incomes are being pinched by rising gas prices, and 5) surging interest rates are refreezing the housing market.
Too little, too late. Then, of course, there is rising unemployment, which is either a lagging indicator of an economy slowly on the mend or a forward indicator of a possible double-dip recession. Either way, it takes a long time for economic perceptions to change after a nasty downturn. Just ask all those congressional Democrats who lost their jobs in 1994. Even though the economy had then been growing for 14 straight quarters since the 1990-91 recession and the unemployment rate was down to 5.8 percent from a high of 7.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction. What do you think the national mood will be like on Election Day 2010 if unemployment is over 10 percent, gas prices near $4.00 a gallon and homes prices moribund? Certainly by then, the effectiveness of the “Blame Bush” mantra will have hit its expiration date for Obama and the rest of the Democratic Party.