James Pethokoukis

Politics and policy from inside Washington

Maybe this is why the stimulus isn’t creating tons of jobs yet

Jul 8, 2009 16:53 UTC

Here is what the Government Accounting Office is saying about the progress of stimulus spending:

Across the United States, as of June 19, 2009, Treasury had outlayed about $29 billion of the estimated $49 billion in Recovery Act funds projected for use in states and localities in fiscal year 2009.

And how is that $29 billion being spent? Like this (hint, not on infrastructure projects):


Obama, Congress made the stimulus ineffective as stimulus

Jul 8, 2009 14:17 UTC

Dan Clifton of Strategas Research makes some great points on the choices the Obamacrats made when constructing the stimulus plan:

We believe it’s not a question of the simulus being too small. The real issue is that it was designed very inefficiently, focused on longer term projects with long lags in distribution, and not focused on remedying US economic problems.

At the end of the legislative process, three major provisions were scaled back to ensure the stimulus had very little impact in the near term: 1) Income tax cuts were reduced in size and scope, 2) The housing tax credit conditions made the provision meaningless and 3) The Net Operating Loss impacted very few companies. If these provisions survived in their original form, it would not matter much that the spending won’t really start having an impact by 2010.

But now that spending is the focus of the package, by its very nature it will take time to be spent and then actually impact jobs. Which begs the question, if another stimulus is put forth, is it just additional spending on top of what is approved?

My spin: When people say, “It’s Obama’s economy now,” this is what they mean.


What a waste. Is the government only capable of spending money inefficiently? How can Obama and Co. claim that they are committed to reducing the deficit & debt, when they are so eager to add additional spending that is not guaranteed to accomplish anything? It won’t be a stimulus, it will just be another feeding trough.

This brings up another point, regarding taxes. Obviously, the tax rebate and housing credit were ineffective, and the net-operating loss provision too narrow. So why don’t we take a different tax approach? We need an actively modulated corporate tax policy, that is specifically tailored to an economic climate, and takes into consideration sector strength.

Instead of credits, the IRS should vary corporate tax rates quarterly, based on macroeconomic conditions & net profits. This would then reduce the tax burden on struggling companies, but maintain or increase the rate on successful companies. When times are good the rate goes up, but when times are bad, the rate goes down. Currently, companies have a higher tax burden during recessions versus booms. This makes recovery even more difficult.

Posted by Greg | Report as abusive

Healthcare surtax another burden on US economy

Jul 8, 2009 13:51 UTC

As you are contemplating the idea of a (perhaps ) $300 billion surtax on wealthier Americans to help pay for healthcare reform, consider that ALREADY the potential growth rate of the US economy has been lowered by all the government intervention in the economy. In a recent research note, economist David Rosenberg said he was worried about the price-earnings ratio of the stock markets:

As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.

Recall that already the top income rate is being raised to 40 percent … and higher investment taxes … and a possible cap-and-trade energy tax … and a possible Social Security tax hike. In addition, more of tax burden is being placed on a smaller segment of the population — nearly half of Americans pay no taxes. This is exactly one of the big problems California faces. In the end, Democrats are pusing for a costly healthcare reform measure at a time of huge deficits and tax increases during a terrible recession. Wrong formula, wrong model.


>In the end, Democrats are pusing for a costly healthcare reform measure at a time of huge deficits and tax increases during a terrible recession.

What are you talking about? The stimulus included $288 bln of tax cuts. It is simply not true that the Democrats have raised taxes during this recession. You’re not on Fox News or CNBC now — when you write in print these facts can easily be checked.

Posted by Kramer | Report as abusive

California’s warning for Obama

Jul 7, 2009 15:34 UTC

A great, great piece by Joel Kotkin on what went wrong with the Golden State (via Instapundit):

The media and political pundits refuse to see this gap between the state’s budget and its ability to pay as an essential issue. It is. (This is not to say structural reform is not needed. I would support, for example, reforming some of the unintended ill-effects of Proposition 13 that weakened local government and left control of the budget to Sacramento.)

But the fundamental problem remains. California’s economy–once wondrously diverse with aerospace, high-tech, agriculture and international trade–has run aground. Burdened by taxes and ever-growing regulation, the state is routinely rated by executives as having among the worst business climates in the nation. No surprise, then, that California’s jobs engine has sputtered, and it may be heading toward 15% unemployment.


What has Obama actually done to help the country out. He spilled millions of dollars into circulation only for top management to get their bonuses. I understand that Obama needs to repay the favor for the money he received during the campaign, but his actions are seriously discouraging. Everyone was looking for a hero not a fraud.. He promised to take the troops out of Iraq only to send them to Afghanistan.. Is this what we can come to expect from the new President? And internally he is doing very little.. Again, establishing a dominant role in resource rich Africa has been top priority while homeland agendas come second if not last..

Germany recovering without stimulus

Jul 7, 2009 14:48 UTC

From economist Robert Brusca:

Note as VP Joe Biden is pondering the success of the Obama stimulus plan and Laura D’Andrea Tyson is recommending a course of ‘seconds’ before we finish ‘firsts’ Germany is posting strong orders growth. The WORLD economy is reviving. Germany may not be shot out of a cannon but its message is clear.   … Adding another stimulus program on top of the already in train program would not be a good fit because the attempt to do it would result all the same delays and pork as the last one. … The plan is working as it was supposed to. It’s just the wrong plan and it’s huge.


These people suggesting economic stimulus are thieves plain and simple. It is debasement of the currency and to continue to do it and try to maintain this EMPIRE is futile. Massive inflation is inevitable. And so now they will try and regulate the way people trade commodities. Hey… has anyone ever heard of property rights? Far as I knew my money is mine to use at my own discretion. If government try’s to regulate me I will just find another way to get around their regulation. Here are some links everyone should visit that give a clue as to what is really happening. Throw anyone suggesting stimulus out of office! They are thieves! The world economy is not reviving because governments will continue to intervene in the market and the FED will continue to artificially muck with interest rates. Germany remembers what inflation is like. Remember Weimar?
http://www.kitco.com/ind/fekete/jul06200 9.html
http://www.kitco.com/ind/katz/jul062009. html
Got gold?

Posted by Josh | Report as abusive

Will Obama push for a weaker dollar?

Jul 7, 2009 14:21 UTC

Great catch by my guy Andy Busch, superstrategist at BMO Capital markets in Chicago. While Laura Tyson’s remarks about a secoond stimulus package are getting all the play, she also had a lot to say about the dollar:

If that comment by Tyson wasn’t disturbing enough, she went on to say that the US dollar ought to decline in the longer-term on a trade weighted basis.  Tyson believes the US should focus on generating exports and that a lower US dollar would aid in this venture.  While the FX markets ignored her commentary, I would wager that China and Russia did not.  Given that she was speaking in Singapore and in their backyard, I would say they must feel their worst fears are getting confirmed.
First, she’s advocating expanding the fiscal deficit beyond it’s current distended fiscal bloat.  Second, she saying the US should devalue its currency and therefore the value of the government bonds as well.  For a foreign holder of US dollars and US government securities, could you have possibly said anything worse?  Maybe, she could have said that the health care bill will put a 4% surcharge tax on wage earners over $200k.  Oops, that’s what’s being floated by Congressional Democrats now.
As the summer wears on and discontent grows, I expect calls will be louder and louder for additional stimulus from Congressional Democrats to put more Americans to work.  I also expect the bond market to become more volatile as the Congressional Budget Office calculates the effects of health care, energy, and the current spending on the deficit.  If more Obama officials talk down the US dollar, we’ll create the risk of a fall exit that will neither create jobs nor boost the economy.

The likelihood of hyperinflation looks much more real.

Inflation vs. Hyperinflation, Nathan Lewis http://www.realclearmarkets.com/articles  /2009/07/06/inflation_versus_hyperinfla tion_97294.html


“I used to think that hyperinflation and inflation differed only in magnitude. However, a friend pointed out that they could be considered as arising from different processes. “Inflation” is often something done primarily for economic reasons, as a sort of “stimulus.” “Hyperinflation” has, as its root, the policy of printing money to pay bills and debts………”

“……….Where are we today? I have a funny feeling that we have already crossed the Niemen, as far as hyperinflation goes. Although the various money-printing schemes that have arisen since autumn of last year have been justified on “stimulus” grounds, they are looking more and more like a funding mechanism (including funding for bank bailouts). They have a can’t-go-back quality about them. Banks can’t take any more garbage on their balance sheet, so the bank swaps are likely to stay for now. The purchases of Treasury and GSE debt could be reversed, but that isn’t likely to happen as Ben Bernanke is not the kind of guy to dump a trillion dollars of paper on the market while the Treasury itself is trying to dump another trillion-or-two on unsuspecting bagholders. A bear market in bonds would be confirmed, which is not such a big deal itself but not considered acceptable right now. The double-whammy of higher Treasury rates and higher GSE/Treasury spreads (likely if there is selling of GSE debt) would mean another 100-200bps on mortgage rates, which would blow up whatever housing-related “Green Shoots” we have been fantasizing about recently. Instead, I think the Fed is going to continue to purchase Treasury bonds at the regular auctions, and probably in size larger than the $300B they talk about publicly. The more they do this, the less that regular purchasers (notably foreign governments) are interested in buying this debt………”

“……………..People tend to fixate on the clownish final stages of hyperinflation, when they’re buying bread with bundles of billion-dollar banknotes. Actually, the damage is done much earlier. The first 10:1 decline in currency value is the worst, especially if it happens in a brief period like two years or so. (It would take about a 10:1 decline to produce a CPI of 26%+.) The second 10:1 decline, over another couple years, pretty much obliterates whatever remains of a financial system. That adds up to a 100:1 decline, or a 99% fall in the value of the currency. After that, it’s all just comic book madness.”

Posted by Siobhan Sack | Report as abusive

Will Obama go for a second stimulus? No …

Jul 7, 2009 14:05 UTC

OK, so Laura Tyson thinks a second stimulus might be a good idea. Will the White House go for it The economic logic of such a package might seem compelling. The original $787 billion spending measure was deemed appropriate by the White House for an economy where the unemployment rate was predicted to approach 9 percent in early 2010 if no new fiscal actions were taken.

Of course, the U.S. jobless rate is already at 9.5 percent and President Obama himself predicts a 10 percent rate by year end. Admitting the obvious, Vice President Joe Biden told ABC News that the administration “misread how bad the economy was.”

No shame there, really. Most of Wall Street and the Federal Reserve also underestimated the depth of the recession. But if the disease is worse than first thought, then shouldn’t the treatment be more aggressive?

Maybe not. Anyone want to predict how those killjoy bond vigilantes would react to a second U.S. stimulus plan — say, $500 billion or so in new federal aid to cash-strapped states and cities? Recall that some analysts interpreted the sharp backup in bond yields from mid-March to mid-June as a sign fixed-income investors were getting spooked about the potential inflationary implications of rising U.S. debt.

Now explaining market movements over a short period of time is a tricky proposition at best. But it’s certainly not a stretch to assume that at some point rising debt will cause bond investors to demand higher yields. Indeed, a 2003 Federal Reserve study found that interest rates “rise by about 25 basis points in response to a percentage point increase in the projected deficit-to-GDP ratio, and by about 4 basis points in response to a percentage point increase in the projected debt-to-GDP ratio.”

Don’t bet much that White House economic adviser Larry Summers and budget chief Peter Orszag aren’t aware of that study or the risk that higher yields could suffocate an embryonic economic recovery. No wonder the administration says it is taking a wait-and-see approach as stimulus spending from the existing package “ramps up” this summer and fall.

And the politics of a second stimulus plan are just as dicey for Team Obama as the economics.

Obama was elected to fix the economy. So calling for a “do-over” on his signature economic initiative might call into question the administration’s economic competence. (Republicans are already touting Biden’s admission as proof of that.) Although the administration’s forecast was similar to the prevailing consensus, there were certainly gloomier voices out there, such as Paul Krugman and Nouriel Roubini.

Some might question why the administration didn’t push for an even bigger stimulus package just in case the bears were right. Sure the politics would have been difficult, maybe even impossible. But the White House almost surely could have passed a similarly sized stimulus package that was more front-loaded to boost growth in 2009. (Probably not a bad idea given the adverse relationship between rising unemployment and mortgage defaults.)

What’s more, pushing a second stimulus package would drain energy away from the healthcare and climate change. An administration defeat on one or more of these key issues would certainly leave Democrats weakened heading into the 2010 election. And passing a second stimulus in late 2009 or early 2010 might not provide much of an economic boost before the midterms anyway.

So forget a second stimulus. Boxed in both economically and politically, the administration can do little more than pray those delicate green shoots quickly turn into green stalks.

5 stimulus plans better than Obama’s first one

Jul 7, 2009 09:33 UTC

Vice President Joe Biden now admits the Obama administration “misread” just how bad the economy really was back in January. No apologies necessary. The Federal Reserve and most of Wall Street also blew it. But what Team Obama might want to apologize for is pushing an $800 billion stimulus/recovery/reinvestment/spending package that will do little to either boost the economy in the short run (quite obvious now) or improve America’s long-term global competitiveness (obvious later). Now with unemployment soaring toward double digits (even though the White House said the stimulus plan would keep it under 8 percent), there is talk of a second stimulus plan. More union-friendly infrastructure spending that will take months to implement? A massive aid package that would reward fiscally irresponsible states and cities? Ugh. Here are five intriguing ideas Obama passed on that he might want to reconsider for a second stimulus:

[See why Obama’s big economic gamble Is failing.]

1) An investment stimulus plan. Economists say America needs to consume less and build more. So why not cut capital gains and corporate income taxes? Mark Bloomfield, president of the American Council for Capital Formation suggests a sliding tax rate. The longer an asset is held, the lower the tax rate — with a zero rate for assets held more than five years. This would encourage investors to move from cash back into stocks. A stronger stock market would be a huge boost to business and consumer confidence, as well as to long-term entrepreneurial activity. Corporate taxes are just as harmful. Their existence means earnings are taxed twice, as profit and as dividend income. Moreover, 70 percent of the corporate tax burden is suffered by workers in the form of lower wages. And since the U.S. rate is higher than every other major economy other than Japan, America is at a competitive disadvantage, made worse by the Obama administration’s aim to make foreign profits by American companies get taxed at high U.S. rates.

2) A worker stimulus plan. For the same amount of money as Obama’s original plan, workers could have received a massive tax cut. 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 the paycheck of a worker making $50,000 and, according to a study by former White House economist Lawrence Lindsey, increased employment by 4 million jobs in 2009. If you want more of something, tax it less. This plan would lower the taxation of labor, so America would get more of it.

3) A housing stimulus plan. Home prices are still falling and defaults still rising, with rising unemployment creating a vicious negative feedback loop. Since the downturn started with housing, maybe that is where it should end. Glenn Hubbard, dean of the Columbia Business School, and Columbia economics professor Christoper Mayer have suggested that the White House and Congress allow all mortgages on primary residences to be refinanced into 30-year, fixed-rate mortgages at 5.25 percent. In another version, investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management have proposed fully nationalizing Fannie Mae and Freddie Mac. Once that is done, the two entities could borrow at the same low rates as the U.S. Treasury. Then, Fannie and Freddie could offer 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.

4) A deficit hawk stimulus plan. Want to restore investor confidence in America? One way would be to get entitlements under control so bond investors wouldn’t fret about Uncle Sam inflating its way out of its debt woes or even defaulting. In theory, this would bring down real long-term interest rates and boost economic growth. The simplest move would be to do something about Social Security. An analysis run by Andrew Biggs of the American Enterprise Institute found that if a) Social Security benefits were linked to inflation rather than wages as of 2012 and b) the currently legislated retirement age was increased to 67, then allowed to keep increasing to 70 by the 2040s, the program’s long-term, present-value deficit of $5.7 trillion would turn into a $4.3 trillion surplus. That is a $10 trillion swing. Investors would be much impressed both by the move toward fiscal soundness and the evidence that America will not let itself turn into California.

5) A do-nothing stimulus plan. No $500 billion pricey second stimulus/recovery/reinvestment/spending plan. No $1.3 trillion healthcare plan. No competitiveness-killing cap-and-trade plan. No tax hikes at the end of 2010. Economy heal thyself (with some help from the Fed). And no spending the other 90 percent of the $800 billion first stimulus package. Hey, you’ve got to admire its simplicity. It would also show stock/debt/currency investors that Americans aren’t going to totally freak out over a recession by putting in place spending programs and patterns that will be hard to remove.

[See Pelosi is a vision in white — but not green.]

As for me, I would prefer doing both #1 and #4. They would help the economy’s long-term competitiveness and growth potential while restoring confidence today. That is a winning formula Team Obama might want to take a look at it.


Who is this James Pethokoukis guy anyway? He has NO BUSINESS BACKGROUND. He’s a talking head. He might as well be writing for Reader’s Digest.

Posted by Schvenzlerman | Report as abusive

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.

Posted by Samm Hall | Report as abusive

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/