James Pethokoukis

Politics and policy from inside Washington

North Korea collapse could cost $1 trillion

Jul 13, 2009 16:43 UTC

This from my Reuters colleague Dean Yates:

South Korean estimates have said it would cost $1 trillion or more to absorb the North. Financial markets in Seoul would plunge given how expensive and messy such a transition could be.

My spin: I am sure the South has watched the German example closely and shuddered.


James is correct about the South drawing grim lessons from the German reunification experience. I recently viewed a documentary on NK in which a SK government adviser said precisely that.

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The bull case for the economy and Democrats

Jul 13, 2009 16:33 UTC
Brian Wesbury and Bob Stein of First Trust Advisers give the bull case for the economy. If these smart guys are right, 2010 might well be the third consecutive wipeout for Republicans. Some excerpts (bold is mine):
To be more precise, we are forecasting that real GDP grows at a 3.5% rate in the second half of 2009 and 4.5% next year. But, in all truth, we are much more confident about the overall 4%+ figure for the full 18-month period then about the exact growth rate for any particular quarter. …
First, we project business inventories are going to end 2010 about $25 billionlower than they are right now. (But with businesses no longer reducing stockpiles as forcefully as they have been in recent months, inventories will contribute 1.3 points to the real GDP growth rate.)
Second, we expect continued declines in the trade deficit, although not as quickly as in the last two years. The trade deficit was 5.4% of GDP in early 2007 and is now only about 2.2% of GDP. If the trade gap declines to 1.1% by the end of 2010, net exports can contribute 0.9 points to the real GDP growth rate.
Third, we expect home building to bottom later this year and rise in 2010, contributing 0.4 points to the real GDP growth rate. Housing starts are now only one-third of the long-term trend, justifiably so due to excess home inventories. But excess inventories have already dropped from about 4.5 million a few years ago to 2 million today. We think, realistically, it will take another three or four years to fully eliminate the excess.
Fourth, for government, we assume government spending contributes its long-term average of 0.4 points to real GDP growth, despite massive stimulus spending.
Fifth, despite our gut instinct that business investment in plant and equipment is going to turn around much faster, we assume an annualized rate of decline of 3.2%, which subtracts 0.3 points from the real GDP growth rate.
And last, we expect real consumer spending to rise at a relatively modest 2.1% annual pace, adding 1.5 points to the real GDP growth rate. To put this in perspective, we are forecasting that real consumption will be up at only a 0.6% annual rate from the end of 2007 through the end of 2010, the slowest three-year period for real consumer spending since World War II, including the early 1980s, when the jobless rate went up to almost 11%. It also means consumer spending drops to the lowest share of GDP since 2001.

About that terrible Consumer Financial Protection Agency …

Jul 13, 2009 16:25 UTC

I just debated the CFPA on CNBC with Conn. Attorney General Richard Blumenthal (who also said he was not going to challenge incumbent  Chris Dodd for US Senate in that state). A few things about the CFPA:

1) The financial crisis was not caused by duped mortgage borrowers, so this is an answer to the wrong question.

2) This bill is not just about clearer disclosure for credit card and mortgage debt. If a person gets a mortgage or credit card that he can prove was not suitable for him — or didn’t get something he should have — then it won’t matter how exhaustive or clear the disclosure of risk. There will be loads of litigation here, driving up credit costs. And determining suitability will also drive up costs.

3)  You will see a two-tiered financial system with most people having access to vanilla products only. The wealthy or supereducated will get access to financial boutiques and more personalized products. It is the hedge fund-ization of consumer finance.

Two good articles on this topic, one from my pal Stephen Spruiell; the other from Peter Wallison.

Why is the healthcare reform effort failing?

Jul 13, 2009 16:11 UTC

Healthcare reform enthusiast Ezra Klein (WaPo) seems very worried about the troubled healthcare reform effort:

To put it another way, every wonk in Washington — conservative or liberal — will tell you that health-care costs threaten to bankrupt the nation. But it is proving virtually impossible to get serious health-care reform through a Senate that requires 60 votes to overcome the filibuster.

My spin: Any why is that, Ezra? Because wonky Washington hasn’t made the case why higher taxes in a recession and more spending in a time of huge budget deficits are good ideas. The “It costs money because it will save you money” apporach is failing …


Health care reform is being tackled by congress as a problem of who pays what, and that approach though politically correct is no reform at all. Wake up America! your health system is one of the worst of the world, corrupt , overregulated , it is failing to serve the needs of the people, and it is bad system even for the wealthy, in any other place in the world Michael Jackson would had been able to get a non life threatening sleeping aid, my 4 year old niece would have received emergency attention in less then 4 hours screaming with othitis in an emergency room, it would be more important for an squizophrenic to take his meds than to go to the doctor just to get the prescription refilled.

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Larry Summers: US not doomed to low-growth future

Jul 11, 2009 12:34 UTC

This interesting bit from an FT chat with Larry Summers,  director of the National Economic Council

This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.


Does Summers see the deficits and entitlement bomb coming our way?

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Here comes the healthcare surtax!

Jul 10, 2009 22:41 UTC

From The Hill:

The House will propose raising taxes on people earning more than $350,000 a year to pay $540 billion for healthcare reform, Ways and Means Committee Chairman Charlie Rangel (D-N.Y.) said Friday. … Rangel said Democrats will seek to enact one large tax increase targeting wealthier workers to generate the revenue they need to finance their $1 trillion-plus healthcare reform bill. “We have decided that instead of putting pieces of different revenue raisers together, that the best that we can do [is] we would have graduated surtaxes starting at [$]350],000],” Rangel said. The tax hikes would begin in 2011 and raise $540 billion over 10 years, he said after a meeting with Democratic committee members.

My spin: The Californication of US economic policy continues as a smaller and smaller group of taxpayers shoulder more of the tax burden. Also, one more reason why American might suffer a Lost Decade of subpar economic growth.


Is anyone paying attention here!?! Will we have the America we all know when this guy is done wrecking EVERYTHING and driving us into the ground? Me thinks the odds are against it. Sad, just sad.

Thanks for nothing Obama voters!

Btw James, great blog, how Reuters (read: yet another leftist media outlet) allows you to write this stuff is beyond me. By all means, keep it up as long as you can. Please.

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Does the U.S. need a dose of Viagra economics?

Jul 10, 2009 17:53 UTC

The Obama presidential campaign was one of the all-time great branding efforts, from message to packaging to platform. So how disappointing it must be for the Obama administration that its signature achievement so far, the $787 billion American Recovery and Reinvestment Act, has been utterly misunderstood by the American public.  Listen to what megabillionaire Warren Buffett, an unofficial Obama economic adviser, had to say earlier this week: “Our first stimulus bill, it seemed to me, was sort of like taking a half a tablet of Viagra and then having also a bunch of candy mixed in … It doesn’t have really quite the wallop that might have been anticipated there.”

And apparently the Oracle of Omaha isn’t the only person disappointed by the lack of a priapic jolt. A recent Rasmussen poll found that 45 percent of Americans think so little of the results so far that they want the rest of the new government spending in the plan canceled, compared to 36 percent who disagree and 20 percent who aren’t sure.  Not surprisingly, 60 percent oppose a second stimulus plan, against 27 percent in favor. Been there, done that, didn’t get much out of it.

But the Obama plan was never meant to be Viagra. It was designed so that three-fourths of the spending would occur after 2009.  Now the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan. And while government spending on infrastructure projects may provide more stimulus per dollar spent — at least this is what Team Obama believes — it is slower to come on line.  Even the name of the plan was designed to send a “be patient” message. It could have been called the Get America Moving Act or the American Job Creation Act, but those titles would have been tremendously out of sync with what the ARRA was actually intended to do: boost the economy and jobs over the course of a long recession while also providing a downpayment on Obama’s healthcare, energy and education agenda. A two-for-the-price-of-one sort of deal.

And that political and economic calculus might have worked had the economy not fallen off a cliff. The unemployment rate is already higher than the administration’s worst-case scenario from last January and perhaps headed higher than the worst-case scenario found in its stress test for the banks.

And rising joblessness has joined with the housing crisis to create a vicious economic circle. Given all that, a pure dose of Viagra economics for the economy doesn’t sound like such a bad idea right about now, perhaps in the form a massive payroll tax cut.  “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,” argue Morgan Stanley economists Richard Berner and David Greenlaw in a new research note. Instead, American got a program that was “heavily back-loaded and full of spending that is unlikely to be stimulative.”

Or perhaps with business and investor confidence so depressed, we need some Prozac economics, via a cut in corporate and capital gains taxes.  At this point, the White House seems inclined to do none of the above, arguing for a wait-and-see approach, given than only 10 percent of the “stimulus” money has been pushed out the door. Maybe Team Obama fears a nasty bond market reaction at the prospect of even more government spending? Perhaps, though deflation rather than inflation seems in vogue among Wall Street worries.

But if a bond vigilante revolt is a concern — and it probably should be a consideration — why not combine a second stimulus with a plan to fix Social Security by moving back the retirement age and indexing benefits to wages rather than inflation?  Such a move would turn the program’s long-term deficit into a surplus and show the United States is serious about fiscal reform.

In any event, cutting taxes seems to be nowhere on the congressional agenda. For instance, higher taxes on incomes and capital gains are being floated as one way to pay for healthcare reform. But as the jobless rate continues to rise — Buffett thinks 11 percent isn’t out of the question — both the White House and Congress might finally start reaching for the pills.


“the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan”

7 %?

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The all-powerful consumer? Feh. Boost business …

Jul 10, 2009 17:42 UTC

My colleague, confidant and occasional kick-boxing sparring partner, the fantastic Felix Salmon is worried about what comes the Day after Tomorrow:

While previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: if consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.

Well maybe we should quit worrying about the banks and The Consumer and pay attention to a different sector of the economy (via another friend of mine and occasional kick-boxing sparring partner, Larry Kudlow):

So here’s a novel thought for all the geniuses down in Washington. Help businesses for a change. You can begin by stopping the taxing of overseas corporate profits. Do not hike the minimum wage. Back off cap-and-trade. Do not nationalize health care. Stop the anti-trust assault on phone companies, pharmas, Google, airlines, and multi-nationals.

And how about a six-to-twelve-month payroll-tax holiday? That would make it cheaper to hire new workers. What about a corporate tax cut? And immediate cash expensing for business-investment write-offs? In other words, cut the tax cost of hiring, investing, and doing business. Because it’s businesses that create the jobs and the incomes for families all throughout America.

And if you are still worried about the housing story or bank toxic assets, how about a capital-gains tax holiday?

Does anyone in Washington understand the way the world really works? It’s called incentives. That’s what this is all about. And we’re going to need many more of them if businesses, investors, and families are to start prospering once again.

Is Falling America losing out to Rising China?

Jul 10, 2009 17:15 UTC

There was a bit of a kerfuffle about the new Fortune global 500 rankings which showed  that the number of U.S. businesses fell to lowest level ever while more Chinese entries appeared than ever before. A few thoughts:

1) While I realize what the trendlines are, remember that there were still 140 U.S. companies on the list. That is almost as many as China (37), France (40), Germany (39),  and the UK (26) combined (142). And where are the powerful Chinese global brands?

2) While the focus of the past year has been on American economic weakness, let’s not forget China has a wildly inefficient capital allocation system, a quickly aging population, and a repressive political system out  of sync with the 21st century economy it wishes to have.

3) But I think the one amazing advantage China has, in addition to all those engineers it is graduating and its lower business and investment taxes, is a sense of urgency about economic growth. That country’s leaders have to maintain a high-octane economy that will continue to pump out millions new jobs  and increase incomes every year to meet rising expectations. Here in America, the priority seems to be capping carbon emissions and universal health insurance and redistributing wealth from the top 1 or 2 or 3 ( or 4 or 5 …) percent of Americans via higher taxes. China can’t afford zero-sun thinking or policies.

Is cap-and-trade a lump of coal for Democrats?

Jul 10, 2009 16:42 UTC

The wonderful Jennifer Rubin of the Contentions blog opines thusly:

By December we will see how attractive a massive energy tax would be. (Talk about a lump of coal in your stocking.) But Boxer is smart to shove this off to the side. Democrats who cast a hard vote in the House and are now being pummeled by conservatives, business and taxpayer groups, and potential opponents (as are the Republican Eight who are in the dog house with the base). Those who supported cap-and-trade despite warnings about job losses and the adverse impact on the already struggling economy (especially in energy-producing states) are finding little support for having placed a pet issue on the liberal wish-list ahead of their constituents’ economic interests. Then the G-8 didn’t help matters either. And really, if the EPA’s own administrator says it will have no effect on climate, what’s the point of the whole exercise?

So this may turn out to be the worst of all worlds for the Democratic House leadership and the White House, who forced vulnerable members to walk the plank for nothing. Environmental groups will be furious if large Democratic majorities and a Democratic president can’t deliver. And yet those members who tried to deliver will be tagged by opponents in 2010 as disregarding bread-and-butter concerns during a recession.

My spin: And is it possible that by year end, there will be no passed and signed climate change bill, no healthcare bill (or merely a rump version) and no financial reform bill? And all Obama would have accomplished is an $800 bill stimulus bill that might well be perceived as a failure given double-digit unemployment?


James, you’re dead right on this and quite honestly the bond market knows it, which is one reason we’ve come back about 60bp from the 4 percent level on the 10 year note. The Obama agenda is dead. Let me repeat that: THE OBAMA AGENDA is dead. The best will be, as you said, some sort of half-assed rump bill. I search in vain for any other time in American history great dreams have crashed with such heart-stipping speed. Obama could still “redeem” himself, with, say, a payroll tax cut. Will he? No. It’s over.

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