James Pethokoukis

Politics and policy from inside Washington

More on the big W

Aug 24, 2009 18:39 UTC

Having talked to a number of former White House economists/center-right economists in recent weeks, this analysis by Tony Fratto almost perfectly echoes what they told me:

Given the precarious state of household balance sheets and the continued uncertain outlook for the financial sector, an economic recovery with dips back to negative growth is already likely over the next two years. If the Fed gets wrong the sequencing, magnitude, or coordination (in the U.S., and across borders) of policy – or sends the wrong signals about its intentions — even that likely expectation would prove optimistic.

Are Obama’s healthcare troubles actually a good thing?

Aug 24, 2009 15:34 UTC

Mickey Kaus gives his theory:

It’s easy to forget that, even if Obama’s health care effort is bogging down, the effort itself still serves his presidency as a crucial time-waster, tying up Congress and giving him a reason to postpone (or the public a reason to ignore) those other divisive, presidency-killers. Obama needs some excuse for putting off unpopular Democratic demands; health care’s a good one. If he keeps failing to pass health care until spring, that might not be such a bad outcome. In fact, even quick passage was maybe never in his interest. There are things more unpopular than struggling. … Cap and trade, immigration legalization, “card check”—these are not what you’d call confidence building appetizers leading up to the main course of Obama’s presidency.

Me: None of it works when Americans have less and less confidence in Obama. And that number will continue to work against him as long as unemployment stays high.


Democrapic policies – from illegal amnesty, to card check, to “the fairness doctrine”, to health care, to affirmative action quotas, to lawyers for terrorists, to tax hikes – are all disasters for the US and unpopular.
It just goes to show that the health and happiness of America is not their primary concern – buying votes from special interest groups is.

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The strange Republican embrace of Medicare

Aug 24, 2009 15:08 UTC

Chris Edwards over at the Cato Institute is also unsettled by how the GOP is endorsing the status quo with Medicare spending to score political points:

Yet the taxpayer costs of Medicare are expected to more than double over the next decade (from $425 billion in 2009 to $871 billion in 2019), and the program will consume an increasing share of the nation’s economy for decades to come unless there are serious cuts and reforms. Even the Obama administration talks about “bending the cost curve” to slow the program’s growth.

Yet Republican National Committee chairman, Michael Steele, takes to the Washington Post today to defend Medicare against any cuts, while at the same time criticizing the Democrats as “left-wing ideologues:” … Steele uses the mushy statist phrasing “our seniors” repeatedly, as if the government owns this group of people, and that they should have no responsibility for their own lives.

Fiscal conservatives, who have come out in droves to tea party protests and health care meetings this year, are angry at both parties for the government’s massive spending and debt binge in recent years. Mr. Steele has now informed these folks loud and clear that the Republican Party is not interested in restraining government; it is not interested in cutting the program that creates the single biggest threat to taxpayers in coming years. For apparently crass political reasons, Steele defends “our seniors,” but at the expense of massive tax hikes on “our children” if entitlement programs are not cut.

Some terrible unemployment data

Aug 24, 2009 14:33 UTC

This from IHS Global Insight:

Although there are increasing signs that the economy has bottomed out, IHS Global Insight’s summer forecast shows that a job recovery is still a ways off for most of the nation’s metropolitan areas. Of the 363 metros in the country, just one—McAllen, Texas—will add more than 1,000 jobs this year. While most areas will begin increasing employment again in 2010, it will be tepid, with only 118 metros crossing the 1,000-job mark next year. Solid gains will not return for the majority of the country until 2011.

The slow recovery means it will be well into next decade before most areas regain the jobs lost during this recession. Not surprisingly, auto-ravaged Detroit will see the largest employment decline (more than 15%) among major metro areas, and will need years, if not decades, to recover. The housing-bust metros of the Sunbelt (Phoenix, Arizona; Riverside, California; Tampa, Florida) will all suffer steep drops and not return to pre-recession levels until 2013 or later. At the other end of the spectrum, Texas metros and Washington, DC, have avoided the brunt of this downturn and, thus, will be among the first to recover.


Not much of an insight; employment numbers are a lagging indicator, and given the depth and breadth of this recession why is it surprising that it will take a long time to get back to ‘norms’ that really shouldn’t have been the norm in the first place? And the other shocker – places hurt more by the recession will take longer to recover. I feel like Neo in the Matrix – “Woah!” Brilliant. Dig a little deeper, pal, b/c this isn’t really news, it’s filler.

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Too soon for a Bernanke victory lap?

Aug 24, 2009 14:18 UTC

It was a pretty upbeat Ben Bernanke that spoke over the weekend at the Fed conference. But a few cautionary statistics from Ed Yardeni:

(1) Commercial bank loans are down $293.1bn ytd through August 12.

(2) Commercial banks are still failing. Indeed, 77 lenders have been closed ytd, compared with 25 in all of 2008.

(3) The delinquency rate for mortgage loans on 1-to-4-unit residential properties rose to a seasonally adjusted rate of 9.24% of all loans outstanding as of the end of Q2-2009. The percentage of loans in the foreclosure process at the end of Q2 was 4.30%.

(4) The combined percentage of loans in foreclosure and at least one payment past due was 13.16% on a non-seasonally adjusted basis, the highest ever recorded in the delinquency survey conducted by the Mortgage Bankers Association.

(5) There was a major drop in foreclosures on subprime ARM loans during Q2, suggesting that the government’s mortgage mitigation programs are working. However, they are aimed mostly at distressed borrowers with resets rather than prime borrowers losing their jobs. Indeed, there were increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.


Commercial foreclosures are coming. There’s true now!

Dude, where’s my civilization-wrecking depression?

Aug 24, 2009 13:57 UTC

Geopolitical thinker and strategist Tom Barnett is disappointed with the resilience of the global economy and institutions:

As always, I am disappointed that roving gangs don’t roam my streets and we haven’t all been reduced to survivalism. Still waiting on the many wars as well. Not even getting a slew of new leftist governments.

As global recessions go, a complete disappointment for the professional hysterics. But I’m sure it’s a complete anomaly to be explained away. I look forward to the posts, and place my continuing faith in an electronic Pearl Harbor (over a decade now in the frantic predicting/making) that will bring the entire world to its knees overnight, ending life as we know it. Certainly, when it comes, it will render all our current problems completely meaningless in comparison, so I wonder why we’re even bothering to debate healthcare reform.

Me: And all that money I spent on a bug-out bag has been wasted! Wait, there is still Captain Tripps, I mean, the swine flu! And what about peak oil?


It will happen James and I hope you live long enough to see it. Why are reporters always such fools?

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How Obama could prevent a second recession

Aug 24, 2009 13:41 UTC

Is the light at the end of the tunnel an oncoming train? That’s the worry of many economists who fret that after a couple of quarters of moderate growth, the U.S. economy will either lapse into a state of torpor or relapse into recession. In a new Financial Times op-ed, Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade creates a strong risk of just such a “W-shaped” economic scenario.

If so, unemployment would remain really high. And, given that prospect, you just know incumbent Democrats facing re-election in 2010 would love to vote for Son of Stimulus. The big drawback: Doing so would risk the wrath of budget-conscious independents, as well as bond investors who share Warren Buffett’s stated concerns that all this red ink could sink the dollar.  Plus, a backup in interest rates would negate any positive effects from more stimulus.

But Olivier Blanchard, chief economist at the International Monetary Fund, may have cracked the code on to boost the economy and not spook bond investors and budget hawks. Blanchard’s grand bargain, one I have been suggesting for months, is for government to spend more money in the short term to boost growth while simultaneously taking strong action to reduce the long-term budget deficit. “The trade-off is fairly attractive,” Blanchard said in a report this week. “IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.”

Fiscal space is good! When you’re dealing with gobsmacking budget numbers, small cuts (or even just nicks in the rate of growth) can make a huge, real-world difference. As the Peterson Foundation figures it, Uncle Sam has run up some $55 trillion in long-term liabilities. Minor tweaks that make that number a bit more manageable in the future would create huge fiscal opportunities for more pro-growth measures today.

One example: the Dartmouth Institute for Health Policy and Clinical Practice calculates that if Medicare spending across America “grew at the San Francisco rate of 2.4 percent per year instead of the current national average (3.5 percent), Medicare would achieve a cumulative savings of $1.42 trillion between now and 2023.” That’s a nice chunk of change. Or, as an analysis I commissioned from the American Enterprise Institute revealed, extending the Social Security retirement age while at the same time indexing benefits to inflation rather than wages would turn a $5 trillion present value deficit into a $5 trillion surplus.

Can America afford to upgrade its rotting transportation infrastructure and electrical grid while also, say, lowering corporate and investment tax rates to a more internationally competitive level? Yes and yes. If entitlement liabilities are downscaled, the U.S economy can generate more than enough future economic growth and excess tax revenue tomorrow to “pay for” smart investments today. That would create jobs and strengthen America’s economic foundation -– and keep the bond vigilantes at bay.



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