James Pethokoukis

Politics and policy from inside Washington

More U.S. stimulus? Really?

Jul 10, 2009 12:51 UTC

Morgan Stanley economists Richard Berner and David Greenlaw on whether the U.S. stimulus package should have been bigger:

Clients are asking whether the American Recovery and Reinvestment Act of 2009 was too small.  We don’t think size is the issue; rather, the problem is one of timeliness and bang for the buck.  It is heavily back-loaded and full of spending that is unlikely to be stimulative.  Moreover, some of the spending programs will be difficult to unwind, leaving structurally larger deficits and debt.  What happened to ‘timely, targeted and temporary’? The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now.


The problem is that Obama cynically allocated this pork spending bill toward later years in order to prepare for the 2010 and 2012 elections. If he wanted a stimulus, Obama should have started to work towards repealing the 16th Amendment.

Posted by Austrian School | Report as abusive

Study: Cash for clunkers won’t spur any net new car sales

Jul 9, 2009 16:49 UTC

The  $1 billion federal “Cash for Clunkers” program that will pay consumers up to  $4,500 for trading in aging gas-guzzlers for new, more fuel efficient models could be a big bust. Macroeconomic Advisers just completed a study on the program and found that it will bring forward future sales that would have happened anyway (though that could be good for cash-strapped companies). This is very similar to what economists have found with natalist policies that try to incentivize women to have more kids:

We expect the program to be successful in that all of the roughly $1 billion of incentives will be exhausted in the purchase of some 250 thousand new vehicles.  However, we expect CARS to affect the timing of sales, not total sales.  In particular, we expect that roughly half of the 250 thousand in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway.  Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.  It does, however, accelerate the return to more comfortable inventory levels and provides needed near-term cash flow to an industry that is struggling with the current low pace of sales.


Too many rules….if you read about it your car must be worth less then the 4500 bucks. There’s not a lot of people driving a car that used up that can afford to buy a new one. There’s also rules about the milage etc.You have to do it by Semptember. In the end, it will be a boondogle and will be rampant with fraud, but what do you expect being written by congress.

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Roubini: ‘Around 11 percent’ unemployment in 2010

Jul 9, 2009 13:38 UTC

Nouriel Roubini speaks (or, rather, writes in Forbes):

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11% next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11% in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans and commercial loans–much bigger numbers than what the stress tests projected.

Fed Watch: Obama’s shortlist for next Fed chair

Jul 9, 2009 12:11 UTC

From the WSJ:

Treasury Secretary Timothy Geithner is expected to play a key role in advising President Barack Obama on whether to reappoint Mr. Bernanke. Mr. Geithner has worked closely both with Mr. Bernanke and with the leading alternative for the powerful post — Lawrence Summers, the former Treasury secretary, who is currently the president’s top economic adviser.

Before making a decision later this year, the White House also is expected to look at other economists, including Roger Ferguson and Alan Blinder, former Fed vice chairmen; Janet Yellen, president of the San Francisco Federal Reserve Bank; and Christina Romer, chairman of Mr. Obama’s Council of Economic Advisers.

My spin:  What is the political landscape here? You would think that GOPers would prefer Bernanke since he was a Bush appointee, while the rest are no-doubt Dems. And it’s not like Obama would dump BB for John Taylor or Glenn Hubbard.  Yet Big Ben has come to personify Bailout Nation to many on the right. And at least one high-profile conservative, CNBC host Larry Kudlow, seems to have a soft spot for Summers:

So given the choice between those two, who do I like? Well, meaning no disrespect to Mr. Bernanke, I think I’ll go out on a limb and choose Summers. Why? Because during the Clinton years, when Summers held several Treasury posts (including Treasury secretary), a strong-dollar policy was in place. Back then I called it King Dollar. And I frequently praised Robert Rubin and Larry Summers for backing King Dollar.

And since I believe in a price-rule approach to Fed policy, where the dollar should be stable and the Fed head should watch open-market prices such as the dollar, gold, and commodities in order to promote price stability and economic growth, Larry Summers’s résumé as a Clinton-Rubin alumnus is closer to my liking.

And in terms of Mr. Summers’s so-called prickly personality, that might be an excellent credential for a truly independent Fed chairman. Paul Volcker had a prickly personality, but he was the inflation slayer (with Ronald Reagan’s help).

Ben Bernanke, on the other hand, seems to be targeting the unemployment rate, and he has never given much emphasis to a stable dollar as a key Fed-policy variable. Right now the bond markets are pricing in five or six Fed tightening moves as the economy shifts toward recovery. And at least until recently, the dollar was soft and gold was strong. But if Mr. Bernanke targets the unemployment rate, the Fed will overstay its easy-money welcome and inflation will shoot up in the years ahead.


Our fiat monetary system has failed. Abolish the Fed and institute a free-market medium of exchange.

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Independents souring on Obamanomics (Virginia version)

Jul 9, 2009 11:28 UTC

Very interesting (via Politico):

A Public Policy Polling survey in Virginia found Obama’s approval and disapproval numbers effectively tied, with independents disapproving of the president’s job performance, 52 percent to 38 percent. “That is fairly consistent with all our polling around the country — Obama tends to be really well-liked personally, but he’s starting to lose a majority of the independents,” said Public Policy’s Dean Debnam. Democrats have “had long enough in some voters’ minds that they’re getting blame for nothing happening, and Republicans are scaring them around health care and tax increases.”

And Obama, of course, isn’t up for reelection anytime soon, and even nervous Democratic congressmen can keep their fingers crossed for economic recovery over the next year.

“It’s been more or less inevitable that we’re going to see some decline in numbers for Democrats,” said Mark Mellman, another Democratic pollster. “For most folks, there’s not an election until 2010, and most economists suggest that by the time we get to 2010, we’re going to see the beginnings of an uptick in the economy.”

My spin: Is Mellman taking into account a possible jobless recovery? Upticks in GDP ain’t going to cut, I don’t believe.


I remember when Charles Krauthammer said back in January that Obama would start to own the recession 6 months into his term. Alot of people laughed at that prediction and said it wouldn’t be until 1-2 years into his term that he would own it. But now, based on all the polling, he was right on.

Posted by Tony Franjie | Report as abusive

The econ chart that should worry David Axelrod and the Dems

Jul 9, 2009 11:11 UTC

Brad DeLong worries that the downturn in bond yields is hinting at an anemic economic recovery.

A recovery in which unemployment is higher two years later than when
the recovery began is not much of a recovery. And I don’t see what is
going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people
trading in the bond market willing to bet their money that the future
holds that kind of non-recovery recovery. And so I worry.

Me:  Think a second stimulus would change that trajectory? Remember that the 2001 Bush tax cuts were considered to be almost perfectly timed stimulus.



Recall the first Stimulus Plan. The “design” is the problem.

The first Stimulus is not based on Political-Economy. Rather its based on Political-Political.

Fed study: Bailouts and stimulus plans can recessions into depressions

Jul 9, 2009 11:03 UTC

Some interesting conclusions from a Minneapolis Federal Reserve Bank study of how country’s deal with financial crises. The White House might want to take a peak at the whole thing. Here is a bit of it (bold is mine):

1) Governments are now spending huge sums of public money to bail out financial institutions that had not been previously regulated. … Labor and capital will stay employed in unproductive uses. Incentives for future investment will be distorted by moral hazard problems.  …  Indiscriminate bailouts in the financial sector will reward many of those who made bad decisions and make it even more difficult to assess risks in the future. Understanding the moral hazard problems created by bailouts, many citizens and politicians will call for massive regulation of all financial institutions. Directly and indirectly, massive and indiscriminate bailouts of the financial system will create inefficiency and low productivity.

2) What do we need to do now? The central banks in the countries that are in crisis should lend to banks to maintain liquidity.  … The bailout should not be used to maintain high returns either to the equity holders or to the bond holders in these institutions. Investors who made risky investments should not be rewarded when these investments have  gone bad. Any public spending on investment in infrastructure should be justified on its own merits, especially in terms of its potential for increasing productivity. Otherwise, we should let the market work in letting unproductive firms go bankrupt and reallocating what remains of their resources to more productive firms. Reforming bankruptcy laws in some countries could make this process more efficient.

3) Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression. Those who try to justify the sorts of Keynesian policies implemented by the Mexican government in the 1980s and the Japanese government in the 1990s often quote Keynes’s dictum from A Tract on Monetary Reform: “The long run is a misleading guide to current affairs. In the long run we are all dead.” Studying past great depressions turns this dictum on its head: “If we do not consider the consequences of policy for productivity, in the long run we could all be in a great depression.”

An economic inflection point for Obama?

Jul 8, 2009 21:27 UTC

The current state of Obamanomics, according to former White House economist Keith Hennessey:

For the time being, the Administration and its allies are implicitly wagering that the new jobs report is not an early warning sign of a new downward trend.  They are sticking to their existing policy and message.

I see at least five challenges on the path they have chosen:

  1. It might be wrong.  If the July employment report (to be released August 7th) is worse than the June report, the Obama team will look like they have missed a turning point.  In their preemptive defense, it’s often quite difficult to identify turning points.
  2. The Vice President’s comment that “we misread the economy,” followed by the President’s comment that “we had incomplete information,” undermines confidence in the Administration’s ability to diagnose and address major macroeconomic trends.  Sticking with the current path under potentially changed circumstances risks reinforcing this feeling.
  3. They have to rally nervous allies to echo their message that “the stimulus is working,” while the evidence to prove this is in question.  Just as it’s impossible for opponents to prove that the stimulus did not “save or create” jobs, it’s impossible for the Administration to demonstrate that 467,000 lost jobs is better than it would have been without the stimulus.  On a raw political level, how do you convince people that the stimulus is working when the economy is still in visible decline?
  4. They have to publish the Mid-Session Review of the President’s Budget this month, with a new updated economic forecast.  That forecast was almost certainly locked down weeks ago.  Do they revise it downward based on last week’s bad jobs data?  Either choice has significant downsides.
  5. They have to combat a press trend for a “weakening U.S. economy” storyline to overwhelm their desire to move health care legislation through the Congress in July.  This storyline has exploded today in the Washington-centric press.

The healthcare surtax and US competitiveness

Jul 8, 2009 19:14 UTC

The Cato Institute put together a nice chart looking at global tax rates:



i wonder just how long before living here in the US is just not worth it any more and time to head over seas. I am not interested in working for the gov and having my wife and daughter working for the gov. And yes i believe that the IRS, Congress and President Obama wants everyone to work and die with nothing. Just kick back and see what happens when more and more Rich people head out of the country to escape taxes.

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A lose-lose proposition for Obama

Jul 8, 2009 17:13 UTC

My sometimes CNBC debating partner Noam Scheiber wonders at what point people totally start freaking out over the unemployment rate,  so much so that they don’t care about the deficit:

If you’re Obama, I guess the problem is that you want to prevent us from getting to that point. But, if you’re successful, then those pesky deficit concerns stick around. It’s not very comforting to know that you suddenly won’t have to worry about the deficit (politically) when unemployment is persistently in double-digits.

My spin: Actually, it’s much worse for that.  High unemployment will heighten the feeling that the all that red ink was completely wasted by the Obamacrats.


Agree with your spin. Plus Noam Scheiber is generalizing that deficit spending by the gov. creates jobs, so you have to suffer one to improve the other. Completely false premise.

Deficit spending by the Fed’s for job creation is an exercise in ineffiency. It’s like going to a well to fill a bucket with water to take across a field to the seeds & thirsty, little green shoots. The hitch is that the “bucket” is Congress & it’s riddled with holes, & so the bulk of the water slips away to things that don’t count or help. Hey – it’s only water, could go back and fill the bucket again or just start borrowing from your neighbor.

Noam narrows ithe political problem to either/or — unemployment/deficits. Of more serious concern would be a coupling of food price inflation (it’s an El Nino year — droughts, anticipation of grain price increases) and unemployment. Or unemployment and a geopolitical event or some hacker messing with the electrical grid. Those would definately move those pesky deficit worries further down the list.

State Dept. Website Still Under Attack
http://www.bloomberg.com/apps/news?pid=2 0601087&sid=a.IwUiOEywSo

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