James Pethokoukis

Politics and policy from inside Washington

A global green war on the wealthy?

Jul 7, 2009 01:56 UTC

This report from my Reuters colleagues is a stunner:

WASHINGTON, July 6 (Reuters) – To fairly divide the climate change fight between rich and poor, a new study suggests basing targets for emission cuts on the number of wealthy people, who are also the biggest greenhouse gas emitters, in a country. Since about half the planet’s climate-warming emissions come from less than a billion of its people, it makes sense to follow these rich folks when setting national targets to cut carbon dioxide emissions, the authors wrote on Monday in Proceedings of the National Academy of Sciences. … The study suggests setting a uniform international cap on how much carbon dioxide each person could emit in order to limit global emissions; since rich people emit more, they are the ones likely to reach or exceed this cap, whether they live in a rich country or a poor one. …  Is this a limousine-and-yacht tax on the rich? Not necessarily, [author] Chakravarty said, but he did not rule it out: “We are not by any means proposing that. If some country finds a way of doing that, it’s great.”

My spin: Scary stuff. A green version of (high) tax harmonization. Tax something, you get less of it.  Where do the greenies think all the innovative, high-tech solutions are going to come from, nonprofits?


Oh smack! You just got beat down Pethokouis. Way to be a shoot from the hip libertarian. I suppose LESS oversignt aand regulation (or big government as you might call it) would have prevented the credit crisis too. Put down the Ayn Rand and find your way to reality.

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Face it, America is spending way too much

Jul 6, 2009 18:36 UTC

Sure, raise taxes. But you’ll never be able to raise them enough to deal with America’s huge future liabilities. Some excerpts from a new report by Morgan Stanley economist Richard Berner:

America’s long-awaited fiscal train wreck is now underway.  Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then – a doubling over the next decade.  Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP.  Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth.  And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service.  Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability. …

Some of the deterioration is obviously cyclical: Courtesy of the financial crisis and recession, aggressive fiscal stimulus, and ongoing military outlays, the federal deficit has ballooned to US$1.8 trillion or 13% of GDP in fiscal 2009.  But the bulk of the threat is structural: The fiscal stimulus package included spending increases with minimal bang for the buck, leaving more debt than growth.  In its FY2010 budget, the administration proposes to extend several tax cuts enacted in 2001 and 2003, provide relief from the alternative minimum tax, and increase both mandatory and discretionary spending compared with current law.  Most important, by 2019 the full force of rising entitlement outlays and debt service will begin to hit the budget.  No rosy growth scenario will provide sufficient resources to meet all the claims on future federal revenue.  And while tax hikes or a broader tax base will likely be part of the solution, the real cure is to curb the growth of entitlement spending. …

Some are concerned that our reckless fiscal policy will trigger a downgrade of the US sovereign debt rating, making the financing of our burgeoning deficits more difficult.  While worries that the US will default on its debt are illogical, global investors and officials are concerned about the credibility and the sustainability of our fiscal policies.  So am I.  They fear that we will adopt policies that will undermine the dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation.  I worry about that too, although such policies probably would be accidental rather than deliberate.  As a result, interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds, for such dangers.  While the dollar will for now retain its reserve-currency status, such concerns put it at risk.


America’s debt-financed stimulus can be attributed to a set of neoclassical economic theories held by current Fed and Treasury policy makers. Will it work to end the deflationary spiral? How can it, if the stimulus does nothing to get rid of all the personal debt zapping the buying power of consumers and businesses. See: http://www.debtdeflation.com/blogs/

Looks like the Fed is taking its foot off the gas pedal

Jul 6, 2009 18:23 UTC

From Gluskin Sheff economist David Rosenberg:

At the same time, it looks as though the Fed is now in the process of snugging monetary policy. We don’t hear from the inflation-ists that the central bank has actually been allowing its bloated balance sheet to lose some weight in recent weeks and that the growth rate in the once-red-hot monetary aggregates is shrinking and the monetary base is also shrinking. Over the last 13-weeks, the monetary base has contracted at a 23% annual rate (!), M2 growth has softened to a 1.4% annual rate and MZM has slowed to a mere 4.6% annual rate.

Unemployment a leading indicator?

Jul 6, 2009 18:02 UTC

No, says economist Mike Darda of MKM Partners:

At no time in history — from the deflationary wipeout of the 1930s to the inflationary recessions of the 1970s and early 1980s, to the balance sheet downturn of 1990-1991, to the bursting equity bubble and the 2001 recession — was the labor market or the unemployment rate a leading indicator of either the business cycle or stock market trends.

My spin: Unless, of course, the jobless rate is a leading indicator of a double-dip recession.


Mohammad El Erian takes the opposite side of Darda’s argument in a recent FT commentary. “America’s Jobs Data is Worse Than We Think”

“….The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market. ”

Here’s another way of looking at the situation. From RealClear Markets. “Get Ready For 14% Unemployment” — Louis Woodhull. He makes the case for the link between Government deficits and unemployment. The key factor is the negative effect of deficits on Private Business Investment (PBI).

http://www.realclearmarkets.com/articles  /2009/07/06/get_ready_for_14_percent_un employment_97295.html

“…Here’s why. Because a lot of PBI goes toward offsetting depreciation and increasing productivity, it takes a 5% year-over-year increase in PBI to produce a 1% increase in the number of jobs. Correspondingly, a 5% decrease in PBI will yield a 1% reduction in total employment.

The unemployment rate a year ago was 5.5%. Because the potential labor force is growing, we need employment to increase by 1% annually to keep the unemployment rate from going up. The 37.9% investment decline reported by the BEA can be expected to eventually produce a reduction in total employment of about 8.5%. Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of PBI is reversed………………………………….

While doing nothing to boost demand, Obama’s “stimulus” will depress PBI, and therefore employment. This is because the “stimulus” plan requires selling an additional $787 billion in government bonds. The money to buy these bonds will have to come from somewhere, and much of it will come from people who would otherwise invest in starting or expanding businesses. Indeed, the bonds will have to be priced so that this risk-free investment is more attractive to investors than their other alternatives.

In the fourth quarter of 2008, the Federal government ran a deficit of $303 billion (and therefore had to sell $303 billion of new bonds) and business investment fell by 21.7%. In the first quarter of 2009, the Federal deficit was $650 billion and business investment fell by 37.3%. The economy is being forced to invest in Barack’s Bailout Bonds rather than in businesses that create jobs.

Virtually everything the Obama administration wants to do will have the effect of increasing unemployment. As bad as joblessness is now, be prepared for it to get much, much worse.”

Posted by Siobhan Sack | Report as abusive

The politics and economics of a second stimulus plan

Jul 6, 2009 17:47 UTC

I would doubt whether the WH thinks a second stimulus works for them politically or economically:

1) It’s clear they are closely watching interest rates to see if the”bond vigilantes” are getting spooked by all the debt. The surge in yields from mid-March to mid-June forced Team Obama to start talking about deficit reduction. Would they want to risk a further backup in rates by announcing a $500 billion package to aid cash-strapped  cities and states? Higher rates would be recovery killer.

2) It’s one thing to admit that you, like pretty much everyone else, underestimated the depth of the recession. But why didn’t the WH push for a package that was more front-loaded or had more tax cuts or, as liberals wanted, just much bigger in case the bears were right? Those questions go to the heart of the administration’s economic competence.

3) What if the WH pushed for a second stimulus package and lost? Or what if the effort drained energy away from getting healthcare and climate change passed? Those are big risks for a plan that might not help much before the 2010 midterms anyway.

4) With 90 percent of the dough yet to be spent, the whole thing makes the WH look panicky.


Leadership counts — it’s key in a crisis and we are certainly not thru this yet. The realities of California having to issue warrants and the dysfunction in the NYS legislature hampering normal debt issue amongst other very important & critical tasks will further highlight the divide between feckless political manuveurs & sound governmental stewardship.

The floodgates opened with Federal interference/take-over in private industry. No one can be surprised that some willing States ( and lobbies & industries – etc.) would be far behind in lining up at the Fed trough.

Nifty opinion – http://www.bloomberg.com/apps/news?pid=n ewsarchive&sid=abPswcmJHZVA

I really believe that the administration does not understand their policy consequences, and so many of their positions are having/will generate an inverse out come. So like the Bloomberg opinion piece says, they wanted to limit and decrease Lobbyist influence — instead they create a hot bed of Lobbyist activity in the place you would want it least., Their JOBS, JOBS, JOBS is a JOB KILLER.

Both Carter & Wilson were better men than they were Presidents. Let’s hope this isn’t some kind of redux.

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