James Pethokoukis

Politics and policy from inside Washington

10 reasons why the US economy will stay weak

Sep 25, 2009 18:28 UTC

From David Goldman’s Inner Workings blog (the actual post of chock full of charts, expanded explanation):

10. Exports are down by a quarter from their June 2008 peak.

9. Credit growth remains negative.

8. Weakness in existing home sales show that despite record low mortgage rates, screaming bargains in lower-priced homes, and tax breaks, the housing market continues to weaken.

7. The Fed’s Household Wealth Survey for the second quarter sounds impossibly optimistic.

6. Total consumer credit outstanding is still falling, and at the fastest rate since World War II.

5. Business are still reducing inventories, and at the fastest rate on record.

4. The Fed is caught between a rock and a hard place. Monetary stimulus remains out of control.

3. Dollar devaluation has helped about as much as it’s going to.

2. The effect of fiscal stimulus will come to an end: no more cash for clunkers, bailouts of bankrupt municipalities (by taking over their spending requirements), tax subsidies for mortgages, and so forth.

1. Barack Obama. By toying with a trade war with China in order to appease his organized-labor constituency, Obama has taken a giant step away from a prospective solution.


Capable, intelligent, pragmatic, and sincere? Are you kidding me? Those terms usually are not consistent with socialism. You might want to study up a little.

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Is the US economy suffering from hysteresis?

Sep 25, 2009 18:10 UTC

That is, has the economy snapped in such a way that it can’t bounce back to its previous form? This might be true in the labor market. Mark Thoma takes a shot at the issue:

The 400,000 number used above assumes that employment will return to its pre-recession levels, but if  structural changes in the economy result in a lower normal level of employment, something many economists believe is a real possibility, then labor markets are even further off than indicated above. Personally, I believe that normal employment post-recession (i.e., after resources have moved out of housing, auto production, and finance and found new homes in other industries) won’t be far away from where it was pre-recession, but during the transition period, the rate of employment will be lower than pre-recession levels.

Me: Just how long will that “transition period” be? I think he is too flippant about the challenges of moving resources out of autos, housing and finance.  Wow, the hopes for clear energy must be awfully high!

WH adviser Romer: ‘Cringes’ at talk of exit strategy

Sep 25, 2009 18:03 UTC

CEA Chair Christina Romer at the Chicago Fed:

The economic historian in me cringes every time I hear mention of “exit” from fiscal
stimulus and rescue operations in the current situation. “Exit strategy” is one thing—of course
we should be planning for the time when private demand has recovered and governmentstimulated
demand can be withdrawn. But to talk seriously about stopping policy support at a
time when the unemployment rate is nearing 10 percent and still rising is to risk nipping the
nascent recovery in the bud.

Yes, Washington did help cause the financial crisis

Sep 25, 2009 17:44 UTC

There are, to be sure, lots of villains to blame for America’s financial crisis: regulators, Wall Street executives, credit ratings agencies, Alan Greenspan.

But the one baddie Washington doesn’t want to touch is, well, Washington. Its crime: pushing federal policies that favored ever-increasing home ownership, particularly from the mid-1990s on, and thus helping spawn the housing bubble at the center of the devastating meltdown. (We’ll focus on its legacy of financial bailouts another time.)

The sheer scope of the bipartisan, federal pro-housing undertaking is mind-boggling.

As Jeffrey Miron, a Harvard University economist, noted in testimony this week to the House Financial Services Committee, a list of past and ongoing efforts would include the Federal Housing Administration, Federal Home Loan Banks, Fannie Mae, Freddie Mac, the Community Reinvestment Act, the deductibility of mortgage interest, the tax-favored treatment of capital gains on housing, the HOPE for Homeowners Act and the $8000 homebuyer tax credit.

Then, of course, there are the Federal Reserve’s efforts to bring down mortgage rates.

The federal tax subsidy alone amounts to some $200 billion a year, according to the Tax Policy Center. Put it all together and it’s clear that Uncle Sam created immense incentives for home ownership, from which Wall Street eventually found a way to coin huge profits.

Well, at least for a while. Even former Federal Reserve chairman Paul Volcker conceded this week to the same committee that government housing efforts, in the form of Fannie and Freddie, were a “factor” in the crisis.

But while Washington is creating financial regulations and regulators, going after banker pay and questioning the role of the ratings firms, it seems intent on leaving its pro-housing policy bias intact.

That may be necessary for a while, until the housing market finds it legs. But then it’s time for Uncle Sam to gradually get out of the housing business. Breaking up and privatizing Fannie and Freddie would be a good start to an exit strategy, as would phasing out the mortgage interest deduction.

The risk of maintaining the status quo isn’t so much that we’ll have another housing bubble. Rather, it is the continuing opportunity cost of devoting so much precious capital toward housing.

Finding a better use for $200 billion a year in a country with a crumbling infrastructure, a yawning budget deficit and an uncompetitive tax system shouldn’t be hard.


I will be greatful for your great support. Your services are really great

How to kill a democracy

Sep 25, 2009 17:27 UTC

The Tax Foundation does the math:

New reports from the Tax Foundation show that President Obama’s policy proposals will increase the financial dependence of middle-income Americans on the federal government.

“Attempts to put ‘price tags’ on health care and cap-and-trade proposals vary among government agencies and think tanks,” said Tax Foundation President Scott Hodge, “but one vital question has been left unanswered: Counting all federal taxes and spending, how would these policies affect American families’ financial ties to the government? The foundation’s new ‘fiscal incidence model’ answers that question.”

“Currently the bottom 60 percent of the income spectrum receives more in federal spending than they pay in federal taxes,” said Hodge. “By 2012, if President Obama’s proposals on taxes, health care and climate change become law, the bottom 70 percent of American families will, as a group, be receiving more in federal spending than they pay in federal tax.”

Even if none of Obama’s policies becomes law, the extent of current income redistribution is remarkable: The top-earning 40 percent of families will transfer $826 billion to the bottom 60 percent in 2012. If Obama’s policies become law, the federal government will redistribute nearly $1 trillion from the top-earning 30 percent of families to the bottom 70 percent (those earning up to $109,000).

Me: I don’t think this is either a) sustainable, b) good for future economic policy or c) good for American democracy


probably because it
a)will eventually eat up the 61st %’s wealth so they rely on the government, then the 62nd, then the 63rd…
b)removes incentive to be in the top 40%, and encourages people to stay poor
c)people who need the government to survive would have a hard time voting against the dominant party for fear of losing their entitlements

Why the US budget deficit is worse than you think

Sep 25, 2009 14:40 UTC

The great Dan Clifton of the Strategas Research finds this gem:

Douglas Elmendorf, director of the Congressional Budget Office, told the National Economists Club that today’s deficits are more troublesome than in the early 1980’s. Projected deficits are twice the deficit in the early 1980’s but more importantly there is a growing disconnect between current law and provisions set to expire which will eventually be extended. Most notably there is (and will be) growing pressure to extend the expiring stimulus provisions in addition to the usual expiring provisions.

Me: See, while tax cuts get sunsetted, spending programs never die. And this is why the $800 billion stimulus is going to cost a lot more than $800 billion.


The budget deficit is the most significant issue at the federal level.

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G20: A global test for US economic policies?

Sep 25, 2009 14:20 UTC

This from the lede of today’s WSJ piece on the G20:

The Group of 20 nations is close to an agreement that would require members to subject their economic policies to a type of “peer review,” according to several senior G-20 officials, in a shift that would expose the U.S. and China to broad scrutiny of the way they run their economies.

Me: My gosh, I hope this is not one more step toward tax policy harmonization which would likely lead to higher US taxes and the addition of a VAT tax. On the other hand, the elevation of the status of the G20 is a good idea, especially if it can eventually have a global security component.