James Pethokoukis

Politics and policy from inside Washington

What the Obama economy will look like in 2012

Jul 31, 2009 20:20 UTC

You know, i don’t agree with all it, but I do agree with a lot of this analysis from Joel Kotkin:

So no matter how much the conservatives complain, Obamanomics most likely will end up with results remarkably like those of Bushonomics: more consumption, less production, expanding public debt, asset inflation on Wall Street and a slowly declining middle-class standard of living. The only real difference will lie in who gets to rob the public — instead of pharmaceutical and oil companies, we get Gorite “renewable” energy traders and well-connected “green” venture capitalists.

Americans need to place a pox on both these flawed models. We need a totally new approach that focuses on key productivity-enhancing investments such as improved transportation infrastructure — new roads, bridges, ports and waterways to meet the demands of an expanded economy for a growing population. We should be looking at modern equivalents of the New Deal electrification program, the GI Bill, the Eisenhower highway and the space program.

Clearly, an infrastructure that is inadequate today will be utterly useless in 2050, when there are projected to be at least 100 million more Americans. Already, our energy-generating capacity in some parts sputters like that of a Third World country. Commodity exports, such as grains, unable to reach foreign markets because of a lack of rail cars and adequate waterways, are left to rot and feed rats.

This is not the way to prepare ourselves for ever greater competition from countries such as China, India and Brazil. Americans must demand a program that, while perhaps financially painful now, will make it possible for our progeny to enjoy a prosperous future rather than a declining one.


Dear James,
You have analysed Obamaeconomics in a detailed ways.
i have agreed your views by partial ways.
Entire world wants to know ,where America stands in Global economic map.
Now the time has come for America to discourage outsiders for small,unskilled jobs from third world countries.
simple logic holds good for any country,for anybody.
First, we should earn,save,spend for essential things to our family,our parents,our blood relatives and to our own country.
America!s infra structures like,new bridges,new roads,new school,college set up,small essential items to be produced locally with American citizens talents,construction of public health care sectors,encouragement to small media networks,cultivation of non-violence,away from day today,film personalities publicity gimmicks etc, will create a new awakening to Americans.
As a journalist with very wide knowledge on local and world economics ,will bring much positive outcome to economic slow down to recovery in future years.
I hope that,American planners will read your articles again and again for her country interests.
best work done by you.
Hope to get more economic lights from this network and from you,and from other editors.

Obama’s problematic surtax on the rich

Jul 31, 2009 20:10 UTC

Bruce Bartlett makes several good points about slapping a surtax on wealthier Americans to pay for expanding healthcare coverage: 1) breaks the linkage between the taxes people pay and the benefits they receive; 2) won’t actually generate enough dough to pay for reform; 3) ignores the vast tax subsidy for high-end health plans. Other than that, it is a super idea.


Exactly, this surtax that Obama is doing on people, will be his downfall.

To punish sucess is just stupid wont last.

Posted by Ian | Report as abusive

The declining odds of a public plan

Jul 31, 2009 18:52 UTC

A handy way of summing up what a rough patch the Obamacrats have been going through, (via Intrade and Baseline Scenario):


Or maybe it is time to shutter the Fed …

Jul 31, 2009 18:01 UTC

It took my pal John “The Professor” Tamny of RealClearMarkets about a nanosecond to respond to my blog column about Ron Paul’s plan to audit the Fed. He let loose with both barrels:

The Constitution empowers Congress to “Coin Money, and Regulate the Value Thereof”.  For Congress not to audit/control the Fed would be unconstitutional.  And while I don’t think we need physical gold backing every dollar as Paul wishes, this notion that the Fed needs to conduct “monetary policy” is absurd.

All we need is price rule whereby the dollar has a fixed, redeemable value.  Why we allow a bunch of academics with terrible track records do much of anything is beyond me.  We don’t need policy, we just need a dollar-price rule and that wouldn’t require the Federal Reserve. The Fed’s ability to create money at will has zero to do with economic growth.

Come on Jim, don’t go all statist on me.

Me: I am concerned that we wouldn’t get a dollar price rule but a Congress actively influencing monetary policy. I don’t want to trade Bernanke for Pelosi & Company. I would like a price rule, though.


Fed monetary policy is obviously becoming less and less important in a globalized world market where foreign investment can increase the domestic money supply. Eventually, as we have already somewhat seen, other countries will dictate our monetary policy, not us. See China.

Posted by Greg | Report as abusive

Ron Paul’s Dumb Plan to Audit the Federal Reserve

Jul 31, 2009 16:58 UTC

The Federal Reserve is at least partially to blame for the economic crisis. It left interest rates too low for too long, and laxly regulated the megabanks. Given this reality, or at least this public perception, it’s not surprising that there are plenty of economists and politicos with oodles of ideas for re-imagining the central bank’s role and function. (Linking its policymaking operations more directly to the performance of market metrics such as the greenback, bond rates, and commodities would be a good start.)

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

Then there is Representative Ron Paul, a Texas Republican and libertarian who would rather imagine a fantasy world without a Fed. Throughout his political career, Paul has repeatedly called for the Fed’s abolition, preferring Congress to take full control of monetary policy and eliminate fiat money in favor of a gold-backed national currency.

Since Paul can’t eliminate the Fed outright, he’s trying to emasculate it. Impinging on, and eventually ending, the central bank’s independence is the purpose of the Federal Reserve Transparency Act, Paul’s bill which would “eliminate restrictions on audits of the Federal Reserve and open Fed operations to enhanced scrutiny.”

[See if Obama's big economic gamble is paying off]

And what’s wrong with a little more sunshine on the Fed? Nothing, many Americans apparently think. A Rasmussen poll finds that 75 percent “favor auditing the Federal Reserve and making the results available to the public.”

Now those results aren’t a big surprise given the public’s unease with the unprecedented measures the Fed has taken to bolster the economy, including the unpopular bailout of AIG. Another recent poll found that the Fed is the most unpopular government institution, ranking behind even the Internal Revenue Service.

This unease is also reflected in the nearly 300 House members who are supporting the Paul bill. It’s a worrisome level of congressional support that may be pushing Ben Bernanke to educate the public on what the Fed really does, for example through his appearance at a recent town hall meeting at the Kansas City Fed.

[Find out how healthcare taxes would affect you]

Of course, most Americans surely don’t realize that the non-policy aspects of the Fed are already audited by the GAO, nor have they watched the Fed chairman’s twice-a-year testimony, once known as the Humphrey-Hawkins testimony, in front of House and Senate committees.

But Paul’s bill would go further. An audit would create an explicit and clear congressional assessment of the Fed’s performance. “Indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to,” argues Michael Woodford, an economics professor at Columbia University.

How might more influence be exerted? Economist Anil Kashyap of the University of Chicago thinks an audit suggests the GAO and Congress could force the Fed to supply all the background information that goes into an interest-rate decision and compel all members of the FOMC to share their individual thinking on any issue in real time. “The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy. That would be a disaster.”

The effect on the economy might not be so beneficial, either. Even if the result of the Fed bill is onlymore aggressive congressional questioning and criticism, financial markets might well fear the bank would start taking congressional wishes into account when making policy.

“If the markets and foreign investors perceive it that way,” says economist Michael Feroli of JPMorgan, “it could immediately push up borrowing costs even if the audits are only a symbolic increasing of congressional oversight of monetary policy.”

More congressional authority would more likely be biased toward pushing for looser monetary policy to bring down unemployment.  If Congress were full of hard–money guys like Paul, that would be one thing. But who really wants Nancy Pelosi and Barney Frank deciding when to tighten and ease? And right now do Americans really want global investors to start questioning the Fed’s commitment to low inflation and a stable currency, right as Uncle Sam is running up record budget deficits?

The economy is only now pulling itself out of recession. Paul’s bill, if successful, could send it back the other way.



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5 quick takes on the 2Q GDP report

Jul 31, 2009 16:13 UTC

Here is a smattering of quick opinion on today’s second quarter GDP report from around the Street:

1) Nariman Behravesh,  IHS Global Insight:

Today’s GDP release is very much in line with IHS Global Insight’s view that the U.S. economy is at—or very near—the bottom of the deepest recession of the postwar period. We expect real GDP growth in Q3 to be a small positive.However, the early phases of the recovery are likely to be quite weak.We expect growth of only 1% to 1.5% in Q4 and Q1.After that, we expect growth to pick up gradually, and exceed 3% by the end of 2010.

2) Michael Darda, MKM Partners:

Full-year 2008 growth was revised lower, which means the recession is deeper than previously estimated. To wit: GDP has fallen 3.9% from one year ago, the largest annual decline in post-war history. … The  silver lining here is that the largest declines in GDP, including those in the 1930s, all produced robust recoveries, even if they didn’t last long enough to produce full-employment. This is why we continue to believe consensus forecasts for 2010 are far too pessimistic (assuming full-year real growth of just 1.8%). Our credit-based indicators, which captured the depth of this recession nearly perfectly, continue to point to 4% real GDP in 2010. A recession of this magnitude would be expected to produce at least a 6-8% GDP recovery, so our 4% growth outlook could still be considered conservative.

3) Bruce Kasman, JPMorgan:

Today’s GDP report provides considerable new information on the economy’s recent path.  … It is important to express the central point that the report bolsters confidence in both our strong growth and low inflation forecast for the coming quarters. On growth, the composition of demand looks increasing favorable with final sales stronger and inventory drawdowns larger than we had expected in 1H09. As a consequence, we are revising up our forecast for current quarter GDP growth to 3% (from 2.5%). We continue to anticipate GDP growth close to 4% over the course of 2010.

4) Robert Brusca, Fact and Opinion Economics:

The clearest point is that force of the down turn has been muted. The second clearest point is that and true upswing has not yet started. Only government spending among the main domestic components of GDP turned positive and that is on artificial stimulus although that impact should grow as the stimulus package takes hold.

More important than the government sector is that the consumer retrenchment is diminishing. Population growth continues and normal forces should restore positive growth to consumer spending, especially as job losses ease and as the fear of job is eradicated by better economic performance. It could happen in Q3.

5) Andrew Busch, BMO Capital Markets:

It will take very little snap back in either inventories or CAPEX to see a decent rebound in Q3 and Q4 GDP.  I guess where I’ve been incorrect is understanding that the economy fell so far that it has no where to go but up for a bit.  There will be questions of where earnings will come from besides cost cuts going forward, but growth should return with minimal effort.  This shift in expectations has occurred with all the subtlety of a sledge hammer the last two weeks and does draw concerns over additional strength.

Another bad poll on the Obama agenda

Jul 30, 2009 15:17 UTC

This one is just out from Pew:



The more people understand his policies the lower that approval rating will continue to go. Folks are not satisfied with general comments anymore and it is hurting his popularity because he has to give details. Worked on the campaign trail but won’t work on the job.

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The case against Ben Bernanke

Jul 30, 2009 15:01 UTC

Over at ClusterStock, former Merrill Lynch strategist Richard Bernstein tells us why it should be “one and done” for Ben Bernanke. (He compares BB to Burns and Miller from the 1970s. Ouch!)

1) He is a status quo chairman when big change is needed.

His policies both before and after the banking and credit crises have attempted to maintain financial market status quo. … Mr. Bernanke’s comments regarding his inability to proactively control financial bubbles, and the ease with which the Fed could manage a bubble’s deflation, were astonishing for their naïveté. The fact that the credit bubble’s deflation caused the worst recession of the post-war period seems to demonstrate that Mr. Bernanke has failed even according to his previously expressed expectations.
2) He is too close to Wall Street.
Wall Street thrives on financial asset inflation’s cheaper and more abundant credit. Mr. Greenspan and Mr. Bernanke made sure that the Street was not disappointed regardless of the longer-term detrimental effect on the US economy. The next Fed Chairman should be more concerned with the stability of the financial sector, rather than with the growth of the financial sector.
3) He doesn’t understand the dangers of financial asset inflation.

The future of monetary policy, in my opinion, will focus on the delicate balance between real and financial asset inflation. The US economy does not function well when there is excessive real asset inflation. The 1970s have proven that. However, the US economy also does not function well when there is excessive financial asset inflation. … Yet most central bankers, like Mr. Bernanke, do not yet appreciate this delicate balance. They continue to operate under the assumption that real asset inflation is bad and financial asset inflation is good.  In this respect, Mr. Bernanke’s term as Fed Chairman seems to mimic those of Arthur Burns and William Miller during the 1970s.

Bernstein’s bottom line:
The next Fed Chairman should probably come from one of the Federal Reserve’s district banks. The person should not primarily focus on Wall Street, but rather should fully understand how the optimal cost of capital in the financial markets drives efficient real investment and maintains a stable banking system. The next Fed Chairman should have a thorough understanding of small businesses lending (imagine if TARP money had gone to the Small Business Administration instead of to bank trading desks?) and how the future of the US economy depends on efficient real investment and not on financial engineering. That person undoubtedly exists somewhere within the Federal Reserve Board but, unfortunately, it is not Mr. Bernanke.

I was curious to see how Bernstein concluded his opinion on Bernanke. The beginning parts of his case were the general & dated talking points from the Obama campaign.

1) I don’t know how anyone could call Bernanke “status quo” especially in light of the extreme & heroic measures the Fed has undertaken over the last 10 months (which has had the not so small benefit of saving Obama’s bacon these few months later & more importantly the Country & the world economy– but never miss a chance to bite the hand that feeds you). I thought it was universally accepted that the heavy lifting by the Fed was a key component of averting complete disaster(?) and creating current stability. Today the President inexplicably stated it was his Stimulus bill that is goosing the “recovery.” What was in that Bud Lite?

2) Next the nonsense about being “too close to Wall St.” — another deeply held article of faith for Obamacrats. This has proven to be one big obstacle to first class government appointments. Accordingly, it’s best to apponit someone who is removed from the source, academics are best or even someone who has an arcane or tangential connection to the subject at hand(!!!?) They lost out on appointing Rodgin Cohen. This extends to foreign policy where even Sec. of State Clinton has groused about the appointment procedures. Is the Treasury Dept. even close to half staffed yet?

To his 3rd point, who the heck puts any kind of “asset inflation” on the top of the list right now –really -? The bigger risk is hyper-inflation, which would be a result of the Fed not having an exit strategy for quantative easing. It’s going to be tough to turn off the spigot & we’d all prefer someone who won’t be leveraged by the politicos.

Last, Bernstein’s concluding argument was rife with nonsense. TARP, Small Biz, etc. Does he forget how TARP came to be, what it’s purpose was? It was meant to avert collapse.

Is his concluding argument an opening salvo for gov. involvement & investment in small biz? Does he forget that all this commenced with “real investment” – homes? He wants to expand the recklessness further when the first mess isn’t cleaned up?

Kinda dumb.

Posted by Siobhan Sack | Report as abusive

America’s top 1 percent pay 40 percent of all taxes

Jul 30, 2009 14:17 UTC

The Tax Foundation review of new IRS data (through 2007) finds some remarkable things about America’s progressive tax system:

1) The top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government — the highest percentage in modern history — while the top 1 percent paid 24.8 percent of the income tax burden.

2) The share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

3) To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

4) Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.



The last post is 45% off. The top 1% owns half the wealth in this country but that is a mute point. Income taxes are bases on INCOME for a specific year. The Estate Tax taxes accumulated wealth after it has been taxed many times in a lifetime. In 2005 the top one percent EARNED 18% of total income and PAID 38% of federal income taxes.

Also, why do we not analyze work habits when we talk about income disparity. Those in higher income brackets have more education, put in more hours at work and watch less television than those in the bottom income brackets. My husband works at least 70 hours a week in a very stressful job and has to travel and be away from his family. He has been doing this for 25 YEARS. He is a first generation college graduate not a trust fund baby. Only 2% of the top 1% are trust fund babies. The rest started out as the average American. You want to be in the top 1%, go for it but you will have to work for it.

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Getting a recovery in the worst way possible

Jul 30, 2009 14:03 UTC

It is like opening a present and finding a bomb inside. Gluskin Sheff economist David Rosenberg on the “recovery”:

The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.