James Pethokoukis

Politics and policy from inside Washington

How Obama redefines the ‘Chicago School of Economics’

Jul 22, 2009 18:35 UTC

Joel Kotkin writes a great, great piece for The American on why Red State economies have better long-term prospects than Blue State economies. But this excerpted hunk is especially insightful:

Many in the true blue states greeted Barack Obama’s election like the coming of a Messiah who would redress these serious problems.  … Yet hopes that Obama would emphasize such basic infrastructure now have been dashed. Instead, the stimulus has been largely steered to social service providers, “green” industries, and academic research.

This skewed allocation of resources reflects the administration’s roots in contemporary Chicago. It derives from a pattern of rewarding core constituencies as opposed to lifting up the whole economy.

The financial bailout reflects one part of this. Money lavished on bankers and lawyers, most of them in New York and Chicago, represents relief to what is now a core Obama constituency. Indeed the whole Troubled Asset Relief Program mechanism is being run by what Simon Johnson, a former chief economist at the International Monetary Fund, has described as a “wonderfully closed circle.”

This approach, notes University of Illinois political scientist Dick Simpson, comes naturally for an administration dominated by veterans of the Chicago machine. Politicians in the Windy City do not worry much about opposition—49 out of 50 aldermen are Democrats—and follow policies adopted by the small central cadre.

But machine politics do not necessarily work out so well for the rest of population. “The principle problem is that the machine is not subject to democracy,” notes Simpson, who remains hopeful for the Obama presidency. “There’s massive patronage, a high level of corruption . . . There’s a significant downside to authoritarian rule. The city could do much better.”

To be sure, there has been considerable gentrification in Chicago, as in many cities. Chicago’s “revival” also has been a classic case of blue-state economics, driven largely by a now fading real estate boom, the financial industry, a growing college and university population, and tourism. But overall, from the point of view of most middle and working class residents, Chicago’s political system has proved inefficient and costly. This can be seen in demographic trends that show Chicago as the only one of few large U.S. cities to lose population. At the same time, the middle class, particularly those with children, continue to flee to the suburbs.

Bad economy overwhelming Obama’s agenda

Jul 22, 2009 17:42 UTC

Just how much trouble is President Obama and his economic agenda in?  Allies will point to the president’s still-robust 55 percent approval rating, according to pollster Gallup, but that number has been declining steadily from a high of 65 percent in early March. (He’s actually a point lower than George W. Bush at similar points in their presidencies.) And while the House of Representives has passed historic cap-and-trade legislation, the bill seems to be going nowhere in the Senate and the president may have little to crow about at the December climate change conference in Copenhagen. Even his plan for a consumer financial protection agency looks like it’s in doubt. Then, of course, there’s healthcare reform, which Obama again will be making the case for during a prime-time news conference tonight.

But no matter how cleverly Obama makes his points or how skillfully he wrangles the Washington press corp, his efforts may be futile as long as unemployment continues to rise and sap American economic confidence. Here are the numbers that should worry team Obama: A recent AP-GfK poll found 54 percent of Americans think the country is on the wrong track, the same as in January and up ten points from mid-April. A recent Diageo/Hotline poll found 55 percent of American think the country is on the wrong track, the same as in early March and up 12 points from early June. A CBS poll has the wrong track number at 57 percent, up from 48 percent in early May and the same as in early March.

The trend is clearly not Obama’s friend, particularly with unemployment expected to continue to rise to at least 10 percent and stay elevated for some time. The outlook is dire enough that economist Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, has speculated that Obama might turn to extreme economic measures to juice the economy and his political fortunes: “We are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, that it would make perfect sense, for a country that always operates in its best interest — even if it may not be in everyone’s best interest — to sanction a U.S. dollar devaluation as a means to stimulate the domestic economy.”

That would certainly have the potential for worrying financial markets mightily. But as for now it’s tough to find much investor concern over Obama’s troubles or his bogged down agenda. The Dow has scored seven-straight winning sessions for the first time since April 2007, gaining nearly 10 percent over that span. With fear of a depression subsiding — see Larry Summers new favorite metric, the plummeting number of Google searches on “economic depression”, for evidence — political gridlock may again be good.


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Did the Blue Dogs just rollover on healthcare?

Jul 22, 2009 17:38 UTC

Pelosi seems upbeat, but Arkansas Democrat Mike Ross less so:

The Blue Dogs share the President’s goal of providing the American people with quality, affordable health care reform that’s deficit neutral, and we have put forth a number of substantive policy proposals over the past several months aimed at achieving this goal.

We are making progress; however, we have a long way to go. The Blue Dogs will continue to work constructively with the administration, Chairman Waxman and members of the House and Senate to produce a bill that we can ultimately support.

Why you should or should not bet against healthcare reform

Jul 22, 2009 10:14 UTC

jamespethokoukiscropThe chances of sweeping healthcare reform have dropped dramatically over the past month or so.  (I still think the president will have something to sign by year end.) Mark Halperin of The Page gives his reasons why healthcare reform still has a good chance of happening, though what “healthcare reform” means is left undefined — and that is kinda important:

1. Reid, Pelosi, and the applicable committee chairs all are still on board (no one has taken their marbles and left, in part because the White House congressional affairs office has a great ear and many eyes).

2. Senators Grassley and Snowe haven’t given up.

3. Rahm Emanuel knows what’s possible.

4. If he can get a bill to conference committee, the press will start implicitly cheering more for success, and stop obsessing over every setback.

5. The health care industry and business community are still largely supportive.

6. Labor unions are likely to give in (maybe) at one or two critical moments.

7. Obama is not rattled.

And this article from The Hill makes some counterpoints:

If Democrats in the lower chamber do not pass a healthcare reform bill before the recess, it would be seen as a major step backward from the legislative timetable President Obama initially outlined. As recently as last week, leading Democrats were predicting they would pass bills through the House and Senate before adjourning for the summer. … In another blow to the Democrats’ healthcare reform efforts, the U.S. Chamber of Commerce on Tuesday launched an advertising campaign targeting a key aspect of Obama’s healthcare plan — a government-run “public option.” Another powerful industry group, America’s Health Insurance Plans, stated on Tuesday that a “government-run plan is a roadblock to reform.” … Hoyer on Tuesday confirmed that opposition was not limited to the Blue Dogs. … “It’s the spending and the cost. The [Congressional Budget Office score] last week was really a hit across the bow,” said Rep. Baron Hill (D-Ind.), a Blue Dog leader and member of the Energy and Commerce Committee. … Some members want to wait to see what the more conservative Senate will do so that members don’t have to make tough votes on issues, like raising taxes, that are difficult to get through the upper chamber. Complicating the healthcare reform effort is the fact that the Senate Finance Committee still hasn’t released its bill or indicated how it will be offset.


You hear how much different healthcare plans will cost but,nothing about “how much more it will cost if we do nothing.”

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Jindal’s GOP healthcare reform alternative

Jul 22, 2009 09:59 UTC

Bobby Jindal takes a shot at a Republican alternative for healthcare reform in the WSJ today: 1) IT-driven consumer choice; 2) health savings accounts; 3) medical lawsuit reform; 4) insurance reform; 5) pools for small business; 6) pay for performance rather than procedures; and 7) tax credits to help low-income working Americans buy health insurance. Fine, fine, I guess. But wouldn’t it better to describe how a real plan would work in people’s day to day lives and what it might cost or how it might reduce costs? Does this really change the debate at all, or merely show Jindal as wonky potential presidential contender?


Instead of a 1,018 page bill that nobody has read, can we not “reform” the qualifications for Medicare and Medicaid to include all less fortunate “AMERICANS” ?
This way, instead of creating another huge governmental waste program, we can use these already existing programs.
I cannot see any reason that any “AMERICAN” cannot qualify for these programs.
Just let your state and federal elected officials know that you are tired of supporting foreigners in our nation illegally !

Posted by JOHN F. KOSTRUBAL | Report as abusive

Bernanke: I saved the economy. Give me another term

Jul 21, 2009 22:23 UTC

This from Mike Feroli of JPMorgan (bold is mine):

Beyond the issues surrounding the economy and exit strategies, another aspect of the testimony that was of interest was the political angle. Bernanke made his strongest case to date that Fed actions have helped prevent what could otherwise have been an economic catastrophe. His very first sentence of the testimony read “Aggressive policy actions taken around the world last fall may well have averted the collpase of the global financial system.” After listing the notable imporvements in credit markets, he goes on to say “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit.” These statements should be seen in the context of the whithering criticism of the Fed’s conduct of policy, some of that criticism coming from within Congress.

Me: Interestingly, the betting markets dropped the chances of Bernanke’s reappointment to 67 percent, down 3 points.


this persons you all call bernanke and geither paulson they are all people that cause all this mess that where all in and the funny part about all this is that the people that are over this deceitful humans just turn there heads away like nothing happen and how can bernanke tell us about employment when all he is a privatily own banker,you all got to be joking,is this real,this is one big nightmare,will this ever end.

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Bernanke warns Congress

Jul 21, 2009 17:58 UTC

IHS Global on Bernanke’s talk-talk:

Bernanke wanted to send the message that Congress needs to prepare its own “exit strategy” from unsustainable budget deficits. His formal remarks made no mention of a possible second stimulus package (under questioning he said that the idea was “premature”), and he said that policymakers should begin planning “now” to restore fiscal balance. He didn’t offer prescriptions on what to do (whether to raise taxes or cut spending), but said that postponing choices would only make them more difficult. He said that agreement on a sustainable fiscal path could lower long-term interest rates and boost confidence – the implication being that lack of agreement would do the opposite.


HOW can bernanke warn anybody,When he cause all this mess,PEOPLE DON,T know that congress NEVER voted to have this so call name federal reserve,these bankers took this on them self when congress went on HOLIDAY break with no approvel from congress which they think they can make there own laws,AND DID YOU ALL KNOW THAT THESE PEOPLE ARE HOLDING AMERICANS GOLD FROM FORT KNOX AND THEY PRINT OUR MONEY WITH OUR PAPPER AND THEN THIS PEOPLE CHARGE US INTEREST ON OUR OWN MONEY,PLEASE WAKE UP AMERICANS,GET RID OF THESE DECEITFUL PEOPLE.

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What healthcare reform might actually look like …

Jul 21, 2009 12:39 UTC

One Capitol Hill watcher sends me this on what a Democratic fallback position on healthcare might look like:

I think that a “compromise” plan looks something like an individual insurance mandate and some further coverage mandates/restrictions (like not allowing denial of coverage based on pre-existing conditions).  If they didn’t want to “fall quite that far back,” so to speak, they could couple such a plan with substantial subsidies for people up to 400-500% of the federal poverty level.  This would mean no “public option,” but it would still represent something the Democrats could call health care reform.

That kind of a plan would probably have some legs, assuming the cost/pay-fors weren’t an enormous problem.  … Many Republicans seem to have already conceded that an individual insurance mandate is acceptable, so I think that’s the route Democrats could use to get closer to their preferred destination.


I really can not understand what is the matter with he fed. they seem to think that by keeping the interest rates low that they are helping people . This ladies and gentleman is the WORST thing that can be done for the building trades and large buys.

who in this country have the most disposal income? I hope you got i right and that is seniors. and what do they spend ?? NOT their capital!!! They spend and give away there interest. so with this in mind WHO is benefiting from low interest?? The people that put us in this situation.
Please do not make us a Third Class Country . We now because of past policies now a Second Class Country.
Please do what is right for the country not Goldman Sachs

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Two cheers for Goldman Sachs

Jul 20, 2009 20:18 UTC

The PR folks working for Big Oil have to be breathing a sigh of relief these days. All the populist outrage that is usually spewed at the Exxons and Halliburtons of the world is being  redirected at Goldman Sachs — and its gleaming, glittering $2.7 billion second-quarter profit amid the wreckage of the American financial system.

The specific charge is that Goldman is supposedly making big profits via risky trading activities financed, in effect, by Uncle Sam.  Two pieces of evidence here: First, Goldman’s Value-at-Risk measure, a much-debated way of calculating daily losses, has  been steadily increasing.

Second, Goldman is benefiting from several government interventions and programs — such as the guarantee of its debt, an ability to tap the Fed’s discount window and its implicit too-big-to-fail status — that give it access to supercheap capital (thus the snarky nicknames “Government Sachs” and “Goldie Mac”).

To those who hate Goldman as a symbol for modern capitalism, that evidence is merely a current reaffirmation that the firm is a “great vampire squid wrapped around the face of humanity,” as a recent Rolling Stone article put it.

Rather than an example of succubus capitalism, a more reasoned and clear-headed analysis would see Goldman’s government-enabled success as a market distortion caused by an unprecedented government intervention into the private economy.

And to the extent that such fat profits would not exist without government and taxpayer backing, what should be government’s response to the distortion? New regulations to limit trading activities, perhaps, or a bailout tax paid by Goldman and other TBTF firms (We’re looking at you, JPMorgan.)

Then again, maybe what’s necessary is to remove the distortion. This is all so reminiscent of the constant worrying by good-government types about the influence of lobbyists and campaign cash on the political process. The usual suggested remedy is limits on political donations, whether in the form of cash or cash-in-kind such as independently produced political advertisements.

Of course, lobbying government is a rational response when government can tax, spend, regulate and subsidize this or that business activity to the tune of trillions of dollars every year. (Now there’s your vampire squid.)

So why not try an alternative response: Shrink government largess and power, thus reducing the need and incentive to influence it with campaign cash.

Goldman plays the lobbying game. During the 2008 campaign, the company (via its political action committee and employees) donated just under $1 million to the Obama campaign and just under a quarter of a million to the McCain campaign. And right now, it is unapologetically playing the bailout game, too.

It’s also worth keeping in mind that to some extent Team Obama wants banks to play the game, to take advantage of  government financing (as well as the Fed’s zero interest rate policy) to earn their way out of trouble and avoid nationalization or further direct federal financial aid needing congressional approval

Of course, if Goldman is out of the woods and acting more like a hedge fund than a bank, then perhaps it should be stripped of bank status and cut off from all government aid, as Charlie Gasparino of CNBC has suggested.

Yet even then, Goldman will still benefit from the implied TBTF guarantee. So one possible solution is to end that market distortion by preventing financial institutions from getting big enough to need rescue. Even better would be to end market expectations of government rescue, though that doesn’t seem likely under the current administration, which has embraced the TBTF policy by advocating the creation of a systemic risk regulator to monitor such firms.

Yet even then, Goldman, thanks to its huge role on Wall Street and Washington, is likely to be a popular target for populists across the political spectrum. What academic Bernard Lewis has said of the West also seems true of Goldman: “It is not possible to be rich, strong, and successful and be loved by those who are none of these things.”

Oh, and if Goldman is capable of generating bubbles, as the Rolling Stone article suggests, it might want to gin one up in oil and get people agitated about Big Oil again.


I would be interested in hearing the specifics of what exactly the government created market distortion Goldman is profiting from and why Goldman is unique in their ability to profit from it.

The case against Ben Bernanke

Jul 20, 2009 20:11 UTC

My pal John Tamny doesn’t think the Fed chairman deserves a second term for the following reasons

1) Bernanke is too much of a political operator.

2) Bernanke thinks too much economic growth causes inflation.

3) The dollar has collapsed vs. gold during Bernanke’s tenure.

4) Bernanke was a TARP enabler.

5) Zero percent interest rates are  a market of Fed failure.

Bottom line:

Here’s hoping the Obama administration ignores the establishment consensus, and realizes that the job of Fed chairman should be a prosaic, undesirable one, whereby the chairman is humble in his actions with an eye solely on issuance of a stable dollar.

Bernanke’s past and present lust for the job of Fed Chairman signals an expansive vision about what the position entails, and this means he’s unfit for the role, which should have greatly diminished prestige. Indeed, the fact that he covets the position so much tells us all we need to know about his love of status and rank. As Bagehot observed, “such men are dangerous.”


You’re smart. You should have a tv show!

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