James Pethokoukis

Politics and policy from inside Washington

Dems/unions push new wave of investment taxes

Aug 31, 2009 18:42 UTC

American equity investors have suffered a lost decade of portfolio performance — the S&P 500 is about where it was back in 1998 — and trillions of dollars of lost net worth, so it may seem a terrible time to hit them with a $100 billion-a-year investment tax. And, of course, it is.

But good sense isn’t stopping the AFL-CIO from pushing just such an ill-advised plan. The nation’s largest labor organization is proposing a tenth of a percent tax on every stock transaction, to fund infrastructure projects that would, presumably, employ union members.

It would be a version of economist James Tobin’s proposal to levy a tax on currency trades as a way of reducing speculation and volatility.

Anti-globalization forces later latched onto the idea. More recently, so too have financial reform proponents such as Adair Turner, the chairman of Britain’s Financial Services Authority, who recently suggested Tobin taxes may be a way of containing the size of the financial sector.

Now organized labor is genetically hard-wired to figuring out new ways to clobber capital, forgetting that America’s investor class resides on Main Street as well as Wall Street. But you might figure its political allies could be a wee bit savvier.

Yet congressional Democrats are also toying with similar ideas. Earlier this year, a group of House members introduced a bill that would impose a quarter percent tax on all securities transactions, with the hope of raising at least $150 billion a year.

More recently, one of that bill’s sponsors, Representative Peter DeFazio, an Oregon Democrat, has proposed a 0.2 percent tax on crude oil futures contracts to tamp down on speculation and pay for national transportation spending.

With a stock transaction tax, investors would get hit directly through passed-along trading costs, just as a cap-and-trade emissions plan on business would quickly mean higher energy costs for consumers.

But there would also likely be some indirect, though severe, impacts.

To the extent that active traders are nudged aside, volume would thin and spreads widen. Some investment firms might choose to locate offshore or trade overseas.

And if that happens, these various transaction taxes would generate less revenue than expected — as well as cost domestic jobs — perhaps prompting tax proponents to advocate even higher levies to make up for the shortfall.

And don’t forget that the Obama administration is already proposing to raise capital gains tax by a third for wealthier Americans.

Maybe if the unions are really looking to fund more infrastructure spending through higher taxes, they could show some sacrifice by supporting taxes on members’ “gold-plated” healthcare plans, whose benefit costs may be 50 percent higher or more than the plan of the typical American worker.

So far unions have been vetoing efforts in Congress to use just such a tax to pay for healthcare reform. Then again, raising taxes of any kind during a period of economic weakness is a risky proposition.


They dont get it!! .. They will crush and cripple the market.. I pray for this country for the next few years..

Posted by Jeff Gold | Report as abusive

2012 Watch: Pawlenty the tax cutter

Aug 31, 2009 17:15 UTC

How much Tim Pawlenty pay Walter Mondale to say this:

He brings an almost Jack Kemp-like fervor to cutting marginal tax rates; an important predicate for any presidential run may be how Pawlenty handles a recommendation from a task force he appointed that the state replace some corporate and individual taxes with consumption levies. His emphasis on taxes rankles many Minnesota Democrats. “There is a long line of progressive Republican governors in Minnesota who are big supporters of education,” says Walter Mondale, the former vice president and U.S. senator. “He is much more interested in tax-cutting and has broken with that tradition.”

Do we need a Fiscal Fed for fiscal policy?

Aug 31, 2009 14:05 UTC

Long after the American economy returns to growth mode, the national debt will continue to soar. According to the Congressional Budget Office, the national debt — as low as 33 percent of GDP in 2001 — will reach 54 percent of GDP this year and grow to at least 68 percent by 2019. Beyond that, the increasing cost of mandatory social insurance spending will certainly push the U.S. debt-to-GDP ratio ever higher in the decades ahead.

So how will policymakers deal with the debt? Well, at some point they will raise taxes and cut spending. (No inflating away the debt, right? Promise?) Indeed, the inevitability of such actions seems an article of faith among bond investors who continue to lend cheaply to America. But uncertainties remain. Which taxes will be raised? Which programs will be cut? And by how much? And when?

For all the talk about the need for transparency in monetary policy, there is precious little in the area of fiscal policy. And this is most unfortunate. Eric Leeper, an economics professor at Indiana University, argues in a new paper that enhanced fiscal transparency “can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective … Fiscal policy is too important to be left to the vagaries of the political process.”

Of course, the political process is tough to escape in a democracy. Any budgetary limits Congress imposes on itself eventually can and likely will be evaded. But imagine, if you will, an amped-up version of the Congressional Budget Office. Like the Federal Reserve, the chairman and members of this “fiscal council” would be nominated by the president. And they would explicitly be tasked with the authority to recommend, or even set, deficit and debt targets.

The head of the council would regularly testify before Congress, as does the Fed chairman, on the nation’s fiscal soundness and whether particular new policies would make things better or worse. Leeper notes that in 2007 Sweden established an eight-member Fiscal Policy Council that offers an independent, no-holds-barred analysis of whether the government’s fiscal policy objectives are being met and are sustainable over the long term.

A U.S. version, for instance, might testify as to whether Congress is ignoring pay-as-you-go budget rules. Or it might actually set a debt target that Congress would have to vote up or down on. The key here is to create an institution with as high a profile as the Fed’s that can highlight current fiscal policy and its real-world budgetary impacts, as well as solutions.

And if the budget situation continues to deteriorate, the council might even be given the power to set some broad budgetary parameters, such as federal spending increases being limited to population growth plus inflation.

And who would be the first chairman of the Fiscal Council? You could do a lot worse than master communicator, legendary tightwad and respected financier Warren Buffett.


I would like to clarify one important point. The term “Fiscal Fed,” though catchy and alliterative, appears nowhere in my paper and I find it to be counterproductive. Dedemocratizing fiscal policy is not my intent. And suggestions to do so bring to a screeching halt precisely the conversation I’d like to encourage.

The remainder of your column is constructive and does get to the heart of the issues I have tried to raise.

Krugman: U.S. budget is fine if nothing goes wrong. What?

Aug 28, 2009 16:28 UTC

What a weird column from Paul Krugman. He says Americans shouldn’t worry about the ten-year budget forecasts ($9tr debt,  70 percent of GDP) because a) plenty of other nations have had far higher ratios, b) other countries continue to lend to the US, and c) it’s the longer-term liabilities that are the problem.

But at what point do interest rates rise — especially since huge current deficits give markets scant confidence that America is serious about fiscal soundness? And the current deficits make the fixes to entitlements harder to do. Clearly Krugman wants a Stimulus 2.0 program. He should take a look at my plan to create fiscal space in the present by dealing with entitlements now. And heaven help us if we get another financial crisis within the next generation …


I understand your criticisms of his article, but you should look at it two ways.

First, he was emphasizing that we should not reign in various stimuli too quickly, since this could further damage the economic recovery. Second, while US debt will be a high ratio, it must be perceived from a relative perspective. Countries like Japan and Italy, have not collapsed under the weight of massive debt, yet….

I believe Krugman does not want the spectre of future debt to cloud present judgment. While he does endorse addressing long term entitlements in other articles, I think he is not yet comfortable with the current economic rebound, and is still in “staring into the abyss” mode.

He often has many good insights and opinions, but I will admit that lately he has been off his game. Its almost as if since Obama became president, he no longer has a Bush administration to eviscerate. This makes some of his arguments seems contradictory and aimless, like he is just thinking out loud.

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The U.S. debt trap: the odds on seven solutions

Aug 28, 2009 16:08 UTC

How will America escape its debt trap? The indispensable Arnold Kling puts some odds on various scenarios. An excerpt:

1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on

2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance.

3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending.  I give this a 25 percent chance.

4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.

5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.

6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide.

7. Default. The U.S. simply refuses to pay some or all of its debt.  I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).

Me: I think #3 is mostly likely, though I hope #2 happens — and there is a greater chance of that happening than most policymakers realize.


im betting on the gold price. ive taken on many long positions in gold stocks to hedge against the rest of my porfolio. i really beleive that the high level of debt will continue to erode the dollar well into 2020. from this outlook (and the nearly inverse correllation between the gold price and the usdx) i am quite confident. i use http://www.goldalert.com to check the spot gold price. i would definietly recommend gold investment to gain better leverage within the market.

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More business attacks on climate change bill

Aug 28, 2009 12:28 UTC

I don’t think cap-and-trade is going anywhere soon, but its opponents are not letting up on the pressure (via The Hill):

Advocates for manufacturers and small businesses are launching a multimillion-dollar ad campaign against climate change legislation in states represented by senators likely to determine the bill’s fate.

The National Association of Manufacturers (NAM) and the National Federation of Independent Business (NFIB), groups that have historically leaned Republican, are targeting the House Waxman-Markey bill as a threat to the economy because it would raise energy costs.


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Where healthcare reform is heading

Aug 28, 2009 11:51 UTC

Karen Tumulty of Time opines:

The bill most likely would attempt to cover children who have not received coverage under other federal programs, and possibly their parents. It might also expand the Medicaid program to low-income people who do not currently qualify.  … If the Senate decides to pass the bill under parliamentary rules that prevent a filibuster, it may also have to get rid of other provisions that do not directly affect federal spending, such as those that attempt to encourage wellness programs and more preventive care.

Another problem with trying to write a scaled-back bill is that so many elements of health reform are interconnected, politically and substantively. … Making an individual mandate work requires subsidizing people who could not buy insurance on their own, and that is expensive. Cut the subsidies and the mandate back too far, and insurance companies — deprived of the millions of new paying customers promised under broader proposals — could end their support of the deal, which would include new requirements that they sell affordable policies to people with pre-existing conditions.

Me: This is what I have been saying. A rump bill passed in the senate under reconciliation would expand children’s health insurance (SCHIP) and expand Medicaid and perhaps pay for it all with a surtax on upper incomes, though some Dems think they can push through a public option, too. Anything else — regulations, health exchanges — would have to pass in a separate bill. But  a hard-line move by Dems would through Congress into an uproar and I doubt anything else would pass.


From the Tumulty article: “may have to get rid of other provisions…….that attempt to encourage wellness programs and more preventative care”

Good. The American people know these types of “programs” are always where major pork is buried.

Posted by Elizabeth | Report as abusive

Study: possible to predict stock market crashes

Aug 28, 2009 11:40 UTC

The most obvious way to predict a stock market crash is to find out when I go all in. But there may be another, says New Scientist:

Now a team of physicists and financiers have bucked the trend by successfully predicting a steep fall in the Shanghai Stock Exchange. …  The idea is that if a plot of the logarithm of the market’s value over time deviates upwards from a straight line, it’s a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies. By projecting the trend, the team can predict when growth will become unsustainable and the market will crash.

Sornette, Zhou and colleagues applied their model to the Shanghai Composite Index, which tracks the combined worth of all companies listed on the Shanghai Stock Exchange, the world’s second largest. Early this year, the index gained 50 per cent in just four months. In July, the team predicted that the index would start to fall sharply by 10 August. The index duly began to slide on 4 August, falling almost 20 per cent in the subsequent two weeks.

Me: I assume this would also work with individual stocks. Econophysicist Didier Sornette has a paper that puts his approach in a bit more context.


This is a very interesting development! I figured there was a way to predict steep drops based on an accelerating upward trend, kind of like an asymptote. This could prove invaluable in the future.

However, I did not need a logarithm to predict that the Shanghai index would fall. All the news surrounding the Chinese economy points to an inflated stock market based on inflated real estate and excessive risky lending.

Personally, I think the Shanghai index is a lagging indicator, and it will likely fall precipitously sometime this fall/winter. I dont believe that China is immune to the world financial crisis, it just hasnt caught up with the rest of us yet. It will be very interesting to see the consequences of this situation.

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How fast will the U.S. job market bounce back?

Aug 27, 2009 18:11 UTC

Economist Robert Brusca thinks he knows:

Right now the job losses in this cycle number 6.9mln, a drop of 5.9% from the peak. It has taken 19 months to get these losses in place. The metrics above suggest that the forecast of how long it will take to get them back should be about 19 months as well (we’ll use 20 months since jobs are still falling). And while that is a long time – nearly two years- it is not so long to restore 6.9mln jobs. If we get them back in 20 months it will take job gains averaging 345,000 per month. Right now that seems like an amazing number. Yet, that is what history says happens. So we’ll see.

And here is a table from Brusca showing how long it took to loose jobs in previous downturns and how fast the economy recovered them:




I think we must hope for the better situation.Recession time soon gets over and we would definitely have many jobs in future.

Tobin taxes, again

Aug 27, 2009 16:51 UTC

If FDIC chief Sheila Bair really wants to cause a regulatory stir, she ought to take a look at what Lord Turner, chairman of the Financial Services Authority, is up to. He wants to trim down the size of the U.K. financial sector (via the Telegraph):

If higher capital requirements did not eliminate “excessive activity and profits”, options could include taxes on financial transactions, so-called Tobin taxes, after the economist James Tobin. The economist suggested a small tax on foreign exchange transactions in the 1970s to discourage speculative trading.

Me: Generally, the theory is that such a transaction-based tax could only work on the international level since market participants would inevitably jurisdiction shop. Here are four possible benefits from a Tobin tax from the George Soros-funded Open Society Institute:

First, it is likely to generate significantly greater revenues. Second, it maintains a level playing field across financial markets so that no individual financial instrument is arbitrarily put at a competitive disadvantage versus another. Third, it is likely to enhance domestic financial market stability by discouraging domestic asset speculation. Fourth, to the extent that advanced economies already put too many real resources into financial dealings, it would cut back on this resource use, freeing these resources for other productive uses.

Interestingly, only the third reason had any appeal initially to economist James Tobin who certainly didn’t view it as a “capitalism tax” the way anti-globalists do. The idea has also received some support in the past from White House economist Lawrence Summers.


This article is really helpful and give us information on how Tobin tax would be beneficial for all of us. We really need a stability in our economy as soon as possible.

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