James Pethokoukis

Politics and policy from inside Washington

The green jobs mythology, again

Aug 5, 2009 01:31 UTC

Joel Kotkin, whom I have been following for 20 years, continues to hit on all cylinders. This is a bit from an article worth reading in full:

This latest economic fad is supported by an enormous industry comprising nonprofits, investment banks, venture capitalists and their cheerleaders in the media. Their song: that “green” jobs will rescue our still weak economy while saving the planet. Ironically, what they all fail to recognize is that the thing that would spur green jobs most is economic growth. … Ultimately, environmentalists need to realize that the road to a green economy does not lie in promoting hysteria, guilt and self-abnegation while ignoring prohibitive costs and grim economic realities. Green enthusiasts should focus on promoting a growing economy capable of generating both the demand and the ability to pay for more planet-friendly products. After all, the economy needs green jobs less than green jobs need a thriving economy.

Ron Paul’s Fed audit idea: Are there any economists in favor?

Aug 4, 2009 16:04 UTC

I have taken a lot of heat about my coverage of Ron Paul’s idea to audit the Federal Reserve.  I would love to do a piece on economists in favor of the bill. So I am looking for names.  Now these have to be professional economists, people making a living from teaching or consulting. No self-taugt experts. Please leave names in the comment section below. And here is a bit from the good doctor himself on his bill:

The big guns have lined up against HR 1207, the bill to audit the Federal Reserve. What is it that they are so concerned about? What information are they hiding from the American people? The screed is: transparency is okay except for those things they don’t want to be transparent.

Federal Reserve Chairman Ben Bernanke, argues that HR 1207, the legislation to audit the Federal Reserve, would politicize monetary policy. He claims that monetary policy must remain independent, that is; secret. He ignores history because chairmen of the Federal Reserve in the past, especially when up for reappointment, do their best to accommodate the president with politically driven low interest rates and a bubble economy.

Bernanke argues that the knowledge that their discussions and decisions will one day be scrutinized will compromise the freedom of the Open Market Committee to pursue sound policy. If it is sound and honest and serves no special interest, what’s the problem?

He claims that HR 1207 would give power to Congress to affect monetary policy. He dreamt this up to instill fear, an old statist trick to justify government power. HR 1207 does nothing of the sort. He suggested that the day after an FOMC meeting, Congress could send in the GAO to demand an audit of everything said and done. This is hardly the case. The FOMC function under HR 1207 would not change.

The detailed transcripts of the FOMC meetings are released every 5 years, so why would this be so different and what is it that they don’t want the American people to know? Is there something about the transcripts that need to be kept secret, or are the transcripts actually not verbatim?

Fed sycophants argue that an audit would destroy the financial markets’ faith in the Fed. They say this in the midst of the greatest financial crisis in history brought on by none other than the Federal Reserve. In fact, Chairman Bernanke stated on November 14th 2007, “A considerable amount of evidence indicates that Central Bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance”.

They also argue that an audit would hurt the value of the U.S. dollar. In fact, the Fed, in less than a 100 years of its existence, has reduced the value of the 1914 dollar by 96%.

They claim HR 1207 would raise interest rates. How could it? The Fed sets interest rates and the bill doesn’t interfere with monetary policy. Congress would have no say in the matter and besides, Congress likes low interest rates.

It is argued that the Fed wouldn’t be free to raise interest rates if they thought it necessary. But Bernanke has already assured the Congress that rates are going to stay low for the foreseeable future. And again, this bill does nothing to allow Congress to interfere with interest rate setting.

Fed supporters claim that they want to protect the public’s interest with their secrecy. But the banks and Wall Streets are the opponents of HR 1207, and the people are for it. Just who best represents the public’s interest?

The real question is: why are Wall Street and the Fed so hysterically opposed to HR 1207? Just what information are they so anxious to keep secret? Only an audit of the Federal Reserve will answer these questions.



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Cash for clunkers: a bad idea and a false promise

Aug 4, 2009 15:55 UTC

David Rosenberg of Gluskin Sheff weighs in on cash for clunkers, the feel-good story of the Summer of 2009, and why it reminds him of a similar phenomenon earlier this decade (bold is mine):

In the aftermath of 9-11, the Big Three unveiled 0% financing to rejuvenate auto sales, which were moribund at the time. So what happened was that motor vehicle sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October — a 3,643% surge at an annual rate! Retail sales skyrocketed 6.6% that month (+116% at an annual rate), a record that holds today. And instead of declining, as was expected, real GDP recovered at a 1.4% annual rate, with the consumer expanding 6.4%, at that time, the best performance in two years.

But what all these gimmicks do is bring forward consumption — they don’t “create” anything more than a brief spending splurge at the expense of future performance — the pattern gets distorted as opposed to there being any real permanent change in the trend. Auto sales dropped the next three months, following which they came right back down to around 16.0 million units; retail sales also fell each of the next three months.

Now there was also a production part to the story, and automotive output rebounded hugely in November (+4.2%) and December (+3.4%) of 2001, with the three-month trend finishing the year at a +25% annual rate. The ISM index jumped from the 40.8 low in October 2001 to over 50.0 by February 2002 and then to a peak of 54.4 in June.

Autos can be a really big swing factor and they are like motherhood to politicians but in reality, they account for less than 3% of spending and 2% of output in the U.S. economy. But even after a 3,643% annualized surge that got so many people excited over V-shaped recovery prospects back in late 2001 and early 2002, let’s have a look at what the GDP performance (percent change at an annual rate) actually was back then:

2001Q3: -1.1%

2001Q4: +1.4%

2002Q1: +3.5%

2002Q2: +2.1%

2002Q3: +2.0%

2002Q4: +0.1%


Just wanted to post up the following quote from a yahoo finance article on people’s experience with the “Cash for Clunkers” program. It clearly supports my position that most clunker participants would have purchased a used vehicle.

Respondent was dealing with a failing Buick, and had 2 choices.

“I was going to get her a used car, but Cash for Clunkers made it possible to buy a new Elantra. It was an absolute no-brainer.”
http://finance.yahoo.com/family-home/art icle/107474/what-i-got-with-cash-for-clu nkers.html?mod=family-autos

I think that it is very clear that the clunkers program will not necessairly bring new auto sales forward, but will certainly impact used car sales. I believe this respondents position is fairly common.

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Cash for clunkers, a new government entitlement?

Aug 4, 2009 14:55 UTC

The great Stan Collender over at Capital Gains and Games makes a point I wish I would have concerning cash for clunkers:

If the Senate goes along this week, spending will be increased substantially — $2 billion is still a great deal of money — so the dealers and manufacturers that want to sell more new cars will continue to have a federal subsidy to do so and the clunker owners who moved too slowly to get the benefit in the first few days will still be able to participate. … At most this is a reconfirmation that very little has really changed in the budget debate. Even those who over the past few months have been routinely and resoundingly criticizing the federal deficit as being too high are willing to tolerate it being even higher if they personally benefit from the spending increase or tax cut being considered. It’s still everyone else’s subsidies, benefits and tax reductions that are questionable.


I think that this program is the MOST WASTE of money there ever was. Why in the name of sensibleness, are they pouring into the engine a glass like substance that kills the automobile? A lot of these automobiles are really not “clunkers” but good used cars that people that don’t have much mone can buy! How more stupid can our government get only to make money move around? Government needs to keep their nose out of business and let business take care of itself. I hate paying taxes for such foolishness! We close down auto plants, we put more and more people on the street out of work and we come up with some hairbrain scheme to supposidly solve the problem. This country has lost it’s vision and bearing. Only the Lord can straighten it out!

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5 reasons why Obama will hike middle-class taxes

Aug 4, 2009 10:16 UTC

JamesPethokoukiscrop.jpgC’mon, how about some Walter Mondalesque candor from the Obama White House on taxes? Yes, yes, it was 25 years ago this summer that the Democratic presidential candidate self-immolated on the issue at his party’s convention in San Francisco. But surely Americans have become more urbane and sophisticated since then as to what makes for sound economic policy, oui?

[Find out five ways to boost the economy and create jobs]

Nope. If you had any doubt that higher taxes are still poisonous policy in center-right America, all you had to do was listen to White House Press Secretary Robert Gibbs yesterday. He briskly and precisely walked back the White House from the ambiguous statements made by Tim Geithner and Larry Summers on the Sunday chat shows. “I am reiterating the president’s clear commitment in the clearest terms possible that he’s not raising taxes on those who make less than $250,000 a year,” Gibbs said.

But what’s so clear, Mr. Gibbs? “Commitment” in this context is a schemer’s word, the much-weaker-yet-more-conniving sibling of “guarantee.” Did Broadway Joe express a mushy “clear commitment” to winning the 1969 Super Bowl? Clearly not. In any event, feel free to ignore Gibbs or any other White Housespinmeister who gives the impression that President Obama raising middle-class taxes would be the equivalent of playing himself in a Hollywood biopic — so unlikely as to be fanciful. It’s not and here’s why it will happen eventually:

1) Obama knows the budget math doesn’t work. Put aside today’s budget mess. It’s gospel among center-left wonks (the kind of folks who give Obama economic advice) that structural government spending as a percentage of GDP is headed sharply higher over the long term because of entitlements — and there’s little that can be done about it. The ratio has been around 20 percent or so the past few decades, and number crunchers forecast a sharp rise to 25 percent (best case scenario) to 30 percent (worst case) of GDP over the next few decades. Tax revenues typically hover around 18 percent of GDP. That gap — representing $500 billion to $1 trillion a year — will need to be closed or else cause economic chaos. The possible answers: a) less spending, b) higher tax revenues from higher growth, or c) higher tax revenues from higher rates on the non-wealthy. Oh, and the wonks are convinced “a” is a political impossibility and “b” an economic one. They’re wrong, but that’s what they think.

[See if Obama's big economic gamble is paying off]

2) Obama seems to prefer tax hikes to spending cuts. Reduced future healthcare spending needs to be a huge part of the budget solution, and ObamaCare doesn’t make the grade at this point. Right now the various Obamacrat plans actually make things worse by failing to “bend the curve.” What’s more, Obama has proposed nothing as president to make Social Security solvent. And during the campaign, his preferred fix was higher payroll taxes rather than commonsense measures like extending the retirement age or changing how benefits are calculated. Of course, Obama has also proposed raising income, investment, corporate and energy taxes. Cut spending or raise taxes – forObama it’s an easy pick, unfortunately.

3) Obama has already tried raising taxes. Let’s, for the sake of argument, ignore the increased federal cigarette tax that would certainly seem to be a violation of Obama’s tax pledge. Call it a misdemeanor offense. But what about his cap-and-trade proposal, a de facto energy tax on everyone? Before the plan was modified in the House, the White House expected the plan to bring in some $80 billion a year from 2012 to 2019 by auctioning off carbon emission permits (probably to pay for healthcare reform). And making energy more costly is as about as broad-based a tax as you can get.

[Find out how healthcare taxes would affect you]

4) Obama’s advisers are for higher taxes. Let’s review, for example, what White House economic adviser and guru Larry Summers said on Sunday about tax hikes: “There is a lot that can happen over time. It is never a good idea to absolutely rule things out no matter what.” Indeed, Summers won’t rule it out because he thinks all the Bush tax cuts need to go, not just the ones for so-called rich folks. Here is Summers from earlier this year on Meet the Press when he put no qualifiers on letting the Bush tax cuts expire at the end of 2010: “I don’t think there’s any question they have to be repealed. The country can’t afford them for the long run. … They can’t be, they can’t be part of the long-run budget picture.” Not for anyone, it seems.

5) Obama doesn’t seem to think high taxes are harmful. Think about this: Not only was the top income tax rate a stratospheric 70 percent when President Reagan took office in1981, the tax code was not indexed to inflation. A lethal combo for economic growth. But here’s what Obama wrote about the Reagan tax cuts in The Audacity of Hope: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions — and did lead to the wasteful industry of setting up tax shelters.” That’s it! Heavens, if Obama doesn’t think the pre-Reagan tax code wasn’t a disincentive to working, saving and investing, is there any tax system that he would find anti-growth?

Bottom line: The belief in the need for higher, European-style taxes (like a VAT) fills the policy cloud that surrounds Obama. It’s hard to overstate this. It’s right up there with global warming. Obama knows he faces a looming fiscal crisis and higher taxes will be his weapon of choice. To paraphrase Mondale, “Obama will raise middle-class taxes. He won’t tell you (yet). I just did.


What about help for the lower class?

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What Ben Bernanke is telling Congress about Ron Paul’s Fed audit plan

Aug 3, 2009 18:12 UTC

This bit from the WSJ‘s interview with John McCain caught my eye:

“You have no idea the pressure I was under,” he says. “I remember being on the phone with President Bush, Vice President Cheney, the Treasury secretary and [Fed Chairman Ben] Bernanke. They assure me the world financial system is going to collapse if I don’t vote for the bill. So I do the impetuous and rash thing by saying, look, I have got to go back to Washington and see how I can help. And by the way, so did Obama—but it was McCain that was the impetuous one. Obama came back to Washington.” Mr. McCain grumbles, “He was at the White House with me. But he wasn’t impetuous.”

Me: I can tell you that Ben Bernanke is pitching a line to key congressional members in private about Ron Paul’s Fed audit bill that is not too dissimilar to what he told Congress back in the fall of 2008.  Except back then he was saying failure to pass TARP would kill the economy. Today, it is the passage of a bill that would kill the economy, the Fed chairman says.


We’re asking for a simple audit and Bernanke thinks the economy is going to collapse.. again. It’ll surely collapse if he has anything to hide.


Cash for clunkers is Obamanomics in microcosm

Aug 3, 2009 17:58 UTC

Think of “cash for clunkers” as a sort of bizarro twin of that “bucks for banks” program from last autumn. You know, the one where Congress authorized $700 billion to keep financial clunkers on Wall Street up and running.

Thank goodness the automobile version won’t be nearly as expensive for taxpayers, consisting of a mere $1 billion in incentives for individuals to trade in their old gas guzzlers for new, (at least slightly) more fuel-efficient vehicles.

And giving away free money turned out to be so wildly and unexpectedly popular that the House quickly passed a bill giving away another $2 billion before heading out on August holiday. Now it’s up to the Senate to pass a similar extension before it takes the rest of the month off.

It shouldn’t. Although there’s no doubt the program encouraged a mad rush into automobile dealer showrooms, what will be the net effect of the deluge once it subsides? Probably not much.

An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.”

In other words, the program gets much of its juice via stealing car sales from the near future rather than generating additional demand. In practice, it works much like tax policies and subsidies to encourage women to have more children. Studies have found that women may have children earlier than they would otherwise, but they don’t necessarily have more kids.

The rebate program is also emblematic of the administration’s unwise approaches to economic policymaking. It borrows money to generate economic activity, which in effect borrows growth from the future, since eventually that loan will have to be paid back through higher taxes.

It picks and promotes a particular industry in a sort of small-scale industrial policy. It also places an emphasis on consumer spending as a route to renewed prosperity over greater investment — and isn’t that how the American economy got in trouble in the first place?

And for those reasons, cash for clunkers isn’t just a whimsically named government program that helps automakers clear out some inventory and generate a bit of quick cash flow, while also making average Americans feel they’re finally getting their bailout.

If that’s all it was, cash for clunkers wouldn’t be such a big deal. Rather, it is evidence that no one in Washington is learning any economic lessons. And that is a very big deal.


I did some research and made a list of Pros and Cons to the Cash for Clunkers program. So far, it’s 6-Pro, 12-Con.http://www.CashForClunkersInstruc tions.com(And I added a video – Jon Stewart on Cash for Clunkers, for kicks)

Higher growth vs. rising unemployment

Aug 3, 2009 17:54 UTC

Two fun factoids:

1) During the past two recessions, the unemployment rate kept rising for 15 months (1990-91 downturn) and 19 months (2001 downturn) after the recession officially ended, according to the National Bureau of Economcic Research.  If that happens now, we are looking at rising joblessness right smack into Election Day 2010.

2) During the first quarter of the last 10 economic recoveries, real GDP rose 5.8 percent on average, with a high of 17.2 percent during the first quarter of 1950 and a low of 1.4 percent during Q4-2001. That from Ed Yardeni. Here are the first two quarters of growth from each of the past three recessions: 1981-82 (0.3, 5.1), 1990-91 (2.7, 1.7), 2001 1.4, 3.5).

Bottom line: There is going to be a quarter coming up that Obama can crow about — but won’t because of rising unemployment.

6 economists on why Ron Paul’s Fed audit idea is wrong

Aug 3, 2009 17:01 UTC

I asked a half dozen economists who are very concerned about Federal Reserve independence what they thought about Rep. Ron Paul’s bill to audit the Fed. This was my specific question: “Given that Congress can already grill the Fed chairman during Humphrey-Hawkins (and occasional other congressional appearances), how would a GAO audit really threaten Fed independence in practical terms?”

Here is what they told me:

Robert Schiller, Yale University:

The GAO audit proposal is from Ron Paul, who has advocated abolishing the Fed and returning to the gold standard. Maybe people think that this is his foot in the door, a first step in the plan. When King Louis 16 called for a meeting of the Estates General in France, it led to a chain of events that resulted in his beheading!

Lee Ohanian, UCLA

My view is that there is a major difference between general economic questions from Congress to a Fed that isn’t open to a GAO audit and that doesn’t get its budget from Congress, versus a detailed audit by the GAO, which would create an explicit Congressional assessment of Fed operating procedures. An important reason why so many economists argue for independence is because there is substantial cross-country evidence that Central Banks which are more closely tied to the legislature have much higher inflation rates than in highly independent Central Banks. I do think Congress should be able to ask questions of the Fed during regular testimony, and Chairman Bernanke has certainly done more than his predecessors to explain what the Fed is doing and why.

James Hamilton, UC-San Diego

My own concern is not about a specific step such as a proposed audit but rather is a response to what I see as a changing political climate in which I fear it will be more difficult for the Fed to withstand pressure to monetize the deficit.

You ask, why should we be concerned about an audit if we’re not concerned about Congress grilling representatives of the Fed?  My answer is, I am concerned about the manner in which Congress has been grilling representatives of the Fed.

Anil Kashyap, University of Chicago

An audit suggests that they can force them to supply all the background information in real time that goes into a decision and presumably compel all members of the FOMC to share their thinking on any issue in real time.  This information is disclosed after 5 years, with good reason.

The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy.  That would be a disaster.  (Akin not just to having Supreme Court arguments on TV but also the process of them writing the decisions being televised.)

You want people to be able to change their mind and to be able to vigorously debate all sides of an issue.  If you put all this in public and subject to immediate second guessing it will shut down the give and take that is critical to reaching good decisions.

Michael Woodford, Columbia University

The level of intrusiveness of the GAO would surely be significantly greater — indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert Congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to.

It is important to remember that the GAO already has the authority to audit the Fed, and does, except that the bill giving the GAO this authority in 1978 specifically excluded certain aspects of the Fed’s activities from GAO audits — essentially, decisions about monetary policy. The only purpose of the new bill is therefore to decrease the Fed’s independence with regard to monetary policy decisions.
Considerable historical experience suggests that political interference with monetary policy decisions can lead to regrettable outcomes — which is why Congress itself decided to forswear such interference. The dangers are especially great at a moment like the present one, when the prospect of large government deficits for years to come could easily make short-sighted decisions to use monetary policy to facilitate the financing of those deficits all too tempting. It is ironic that many of the proponents of reining in the Fed claim that their concern is preventing the Fed from further weakening the value of the currency, when the opposite would almost certainly be the consequence of their bill if passed.

Michael Feroli, JPMorgan

That’s a fair question. At H-H the Chairman is accountable for the Fed’s decisions. But I do think there is a distinction between asking questions and having all the conversations audited. For one, that could stifle the openness of the debate: to take an example, the Chairman always has to dance around the issue of NAIRU because it can be misperceived by economically illiterate members of Congress as meaning the Fed wants to engineer a certain amount of unemployment.

With audited conversations, the debate could become stilted. I think a GAO audit would also risk appearing as an official verdict on Fed decisions, as opposed to twenty different Congressmen questioning the Fed, which is much more clearly the opinions of some politicians. Finally, even if the step isn’t a major one, it’s a move in the wrong direction: if the markets and foreign investors perceive it that way, it could immediately push up borrowing costs even if theaudit are only a symbolic increasing of Congressional oversight of monetary policy.


Ugh. Post rational, logical and fact-based arguments that clearly explain why Uncle Ron’s fan are psychotic fringers and they come out of the wood work. If you all truly want high inflation rates and larger lending fees then by all means, take full access of the Fed. I find it the height of hypocrisy that those who complain about the govt being too big and having too much power can simultaneously advocate for giving Congress control over monetary policy decisions.

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Libertarian economist disagrees with Ron Paul’s plan to audit Fed

Aug 3, 2009 16:39 UTC

I just got this email from an economist with strong libertarian leanings who also thinks that Ron Paul’s plan to audit the Fed is a bad, bad idea:

Congress delegating its monetary authority to the Fed is the only feasible approach. Opening the door to giving 535 politicians the authority to influence policy is a recipe for disaster. Sure a price rule would be great, and so would peace everlasting. It ain’t gonna happen. The most you can realistically ask for is to have policy conducted by people who get it right more than wrong. It’s an imperfect resolution, but we live in an imperfect world.

Me: Again, if don’t like monetary policy under Bernanke, would you like it any better under Pelosi and Reid? If you want monetary policy linked to market indicators, fine. But make that case directly. The Fed audit would only spook the markets, and with good reason.  Unless, of course, you expect a Fed audit to reveal a worldwide conspiracy like this one from the film I Married an Axe Murderer:

Stuart Mackenzie: Well, it’s a well known fact, Sonny Jim, that there’s a secret society of the five wealthiest people in the world, known as The Pentavirate, who run everything in the world, including the newspapers, and meet tri-annually at a secret country mansion in Colorado, known as The Meadows.
Tony Giardino: So who’s in this Pentavirate?
Stuart Mackenzie: The Queen, The Vatican, The Gettys, The Rothschilds, *and* Colonel Sanders before he went t-ts up. Oh, I hated the Colonel with is wee *beady* eyes, and that smug look on his face. “Oh, you’re gonna buy my chicken! Ohhhhh!”
Charlie Mackenzie: Dad, how can you hate “The Colonel”?
Stuart Mackenzie: Because he puts an addictive chemical in his chicken that makes ya crave it fortnightly, smart-ss!


http://www.youtube.com/watch?v=e3zo7zjYk 2E

I strongly believe we need a federal reserve audit. The recent stock market action suggests to me the federal reserve is intervening in a free and open market. I believe the biggest beneficiary of this TRILLION DOLLAR stock market move in a couple of weeks was Goldman Sachs. Goldman Sachs sells derivatives in our equity markets its apparent that Goldman Sachs Has Total Control Over our stock market using the unlimited capital available from the federal reserve. I believe Goldman Sachs doesn’t have the best interest of our markets. They are misusing the federal reserve to manipulate the stock market and making huge 100 BILLION DOLLAR profits THIS IS ILLEGAL people expect our government to obey the laws just like citizen. Also this manipulation without regards for cost continues to put our government and the people more and more in debt




Imagine controlling the Federal Reserve portfolio of commodities and equities. TO DO WITH AS YOU PLEASE!!!!!!!

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