James Pethokoukis

Politics and policy from inside Washington

Trust but verify, China edition

Dec 15, 2009 13:47 UTC

The words of #42 (RWR) came back to me when I read this in the NYT:

China, which last month for the first time publicly announced a target for reducing the rate of growth of its greenhouse gas emissions, is refusing to accept any kind of international monitoring of its emissions levels, according to negotiators and observers here. The United States is insisting that without stringent verification of China’s actions, it cannot support any deal

Expanders vs. Restrainers

Dec 15, 2009 13:38 UTC

I actually agree with this greenie op-ed the UK’s Guardian, though the author and I are on different sides:

Humanity is no longer split between conservatives and liberals, reactionaries and progressives, though both sides are informed by the older politics. Today the battle lines are drawn between expanders and restrainers; those who believe that there should be no impediments and those who believe that we must live within limits.

Peter Orszag vs. the WSJ

Dec 14, 2009 20:29 UTC

OMB director Orszag didn’t much like a WSJ editorial about the lack of  fiscal prudence of ObamaCare. And he said so on his blog. I think Orszag makes a few reasonable points, like not counting on cost savings from the pilot programs.  But he side-stepped that fact that America will be spending more on healthcare, even if paid for. Then there is this:

For an economist, the irony is rich.  The editorial board that did more to bring supply-side economics – or in George H.W. Bush’s immortal words, “voodoo economics” – to Washington is raising the specter of a fiscally irresponsible health reform bill in which efforts to rein in health care cost growth are an “illusion.”  But the ironies run richer, since an editorial that hurls accusations of overselling cost containment itself displays more impressive rhetoric than substantive content. The Journal makes three fundamental claims. The first is that health reform represents a huge risk to the federal budget, and will end up exploding the deficit, because it relies on an array of speculative policies to control costs. What the Journal misses is the crucial difference between this health reform effort and the flawed supply-side economics that drove the country into the deep deficits of the 1980s.

Me:   1) The 1980s tax cuts saved the US from complete economic collapse, yet Orszag sees them only as an accounting issue. Also, the worst deficit-to-GDP year of the 1980s was like 6 percent. The US may well average that number over the next decade.

COMMENT

Umm Jimmy P, can you explain exactly how “the 1980s tax cuts saved the US from complete economic collapse.” Just askin’.

Also, even as a conservative I must acknowledge that U.S. economic growth has been rather lackluster since the Clinton presidency. So, what’s up with that, why didn’t supply side economics bring us robust growth and prosperity during the Bush years?

Posted by Bill, Fairfax, VA | Report as abusive

Obama vs. Wall Street

Dec 14, 2009 19:41 UTC

A few thoughts on the banker summit at the White House:

1) Some banks were already trying to boost small business lending, such as Goldman Sachs and JPMorgan.

2) Lending was likely to rise anyway as economic growth picks up, so it will be tough to determine if this WH meeting had any independent impact.

3) For the all the talk about loan supply, far less about loan demand and how uncertainty over Obamanomics is chilling small biz expansion plans.

4)  The Obama reform plan is not nearly as tough as the Obama rhetoric.  It doesn’t embrace, for example, the preemptive dismantling of large, interconnected firms. It doesn’t reduce the Federal Reserve’s regulatory reach. It doesn’t restore the law separating commercial and investment banking. It doesn’t even give bankruptcy judges the power to alter mortgages.

5) Banks have clearly lost control of the narrative. Someone needs to highlight the role of government in creating the financial crisis.

COMMENT

Point (5) is well-taken, although I wouldn’t hold my breath waiting for any mea culpas from the likes of Barney Frank or Chris Dodd or Fannie or Freddie or any of the senior bureaucrats who thought they had a winner (and votes) in extending mortgages to unqualified individuals. Moreover, banking regulators who altered reserve requirements to encourage banks to buy mortgage-backed’s rather than holding actual mortgages – by dropping the reserve requirements – have NEVER been fingered as culprits. So much simpler to blame Wall Street and whine about bonuses and compensation, as Mr. Obama DID NOT FAIL to do today. Unfortunately for the banks, the truth is very complicated and, while there is plenty of blame to go around, it wasn’t entirely the banks’ fault. I don’t envy the spot they’re in. The optics are awful.

Posted by gotthardbahn | Report as abusive

Cap-and-dividend instead of cap-and-trade?

Dec 14, 2009 15:37 UTC

The cap-and-trade approach to limiting climate emissions does not seem to be going anywhere in the Senate. But a more-populist bill introduced by Sens. Maria Cantwell (D-Wash.) and Susan Collins (R-Maine) might be another option. Its goal is to cut emissions 20 percent by 2020 and 83 percent by 2050. Key difference with the existing cap-and-trade approach (via The Hill):

1) Wall Street may be particularly disappointed in the new bill. The Cantwell-Collins bill, known as the Carbon Limits and Energy for America’s Renewal (CLEAR) act, would restrict trading in a new carbon market to entities regulated by the act, a move that may have more populist appeal. … Banks like Goldman Sachs that looked forward to new profits under the giant secondary trading market created under economy-wide cap-and-trade legislation are unlikely to get on board, however.

2)  It would require fuel producers, rather than fuel users like electric utilities, to hold credits. The credits all would be sold at an auction. The cap-and-trade bills Congress has considered would distribute emissions allowances for free during the initial phase of the program in order to keep energy prices from rising too quickly.

3) Under Cantwell-Collins, revenues from the auction would largely go back to low- and middle-income households to offset higher energy costs the new carbon regulations are intended to cause. An average family of four would receive $1,100 annually in rebates, according to Cantwell’s office. In total, 75 percent of the auction proceeds would be returned to low- and middle-income households. The remainder would be distributed to a clean energy investment trust fund.

Me:  This cap-and-dividend approach has been called “100-75-25-0” policy: 100 percent of the permits are auctioned, 75 percent of the revenue is returned as dividends, 25 percent of the revenue is invested and zero offsets are allowed.

COMMENT

We agree on something!! Now show us where the Republican politicians (not a think tank somewhere) other than the Maine outliers are actually behind the initiative.

Posted by Chi Democrat | Report as abusive

Paul Ryan and the future of the GOP

Dec 14, 2009 15:19 UTC

This  commentary from  GOP thought leader Rep. Paul Ryan of Wisconsin really sets the intellectual and political framework for where the GOP might be headed.  He goes after Crony Capitalism, the melding of Big Money, Big  Business and Big Goverment. This is what’s next. Here are some important bits:

1)  Since bringing us back from the precipice however, the Troubled Asset Relief Program [TARP] has morphed into crony capitalism at its worst. … No longer concerned with preserving overall financial market stability, Treasury’s walking around money continues to be deployed to reward the market’s Goliaths while letting its Davids suffer.

2) Washington is working hard to nationalize other sectors of our economy too. The House Finance Committee is pushing a massive financial “reform” bill, effectively creating banking utility companies. The Treasury Department has effectively nationalized the housing finance sector, with Fannie Mae & Freddie Mac demonstrating how fast big businesses, through a federally blessed and backed oligopoly, can fall. Now, on both ends of Pennsylvania Avenue, health care and energy lobbyists continue to fall over themselves to cut their deals–knowing that if they aren’t at the table, they’ll be on the menu.

3) Big businesses’ frenzied political dealings are not driven by party or ideology, but rather by zero-sum thinking in which their gain must come from a competitor’s loss. Erecting barriers to competition is a key to maintaining advantage and market share. With Washington leading the way, it makes sense for the big boys to redirect their resources to their lobbying shop and government affairs office. They’re far less interested in expanding the economic pie than with making certain that they get their slice.

4) For every encroachment into the market by the federal government–under the guise of “reform”–there exist pro-market alternatives that Republicans must articulate and passionately defend. University of Chicago’s Luigi Zingales, who has written extensively on the issue of crony capitalism, reminds policymakers that the path forward requires “adopting a pro-market, rather than pro-business, approach.”

COMMENT

If Ryan ever regretted the vote on Medicare Part D, he must have a short memory. The difference between he and the Democrats in root philosophy in health care is zero. That is why they both put forth Health Care bills. Why? They both believe in the unconstitutional interference in health care by the government using taxes, tax credits to one group so that another benefits. Sounds like a statist to me. Does Ryan’s bill have surface differences. Sure it does. But once you allow an unconstitutional interference, it will end up growing ever larger.

To those who think that the GOP must start somewhere. How about with constitutional laws? If both parties, including Ryan, continually ignore the Constitution, in time human nature leads you to the same place. That we “must start somewhere” and “not be too picky about voting records” has been a hallmark call for the GOP for decades. Where did it get the country? What percent of of GOP in Senate and House voted for Medicare Act of 1965? Two shy of 50%. That is dangerously close to a majority. And over 40 years ago. On a bill often decried by GOP apologists as one-sided vote. When again did the GOP lose its small constitutional government compass? A Republican, incidently from Wisconsin, even helped write the Medicare 1965 bill.

from an AMA article on it see below excerpt: http://www.ama-assn.org/ama1/pub/upload/ mm/369/medicare.pdf

The Byrnes Bill
In contrast to the largely Democrat-backed King-Anderson bill, Republicans in Congress lent their general support to the Byrnes bill. “The bill was submitted by Congressman Thomas W. Byrnes of Wisconsin. Like Eldercare, it called for coverage of hospital and physician services for the aged through the purchase of private insurance. Administration, however, was to be federal. Financing was to come two-thirds from general revenues and one third from deductions on the individual pension checks of those who voluntarily chose to
participate in the program.” (Campion 274)

Posted by Wisconstitutionalist | Report as abusive

The coming assault on the Fed

Dec 11, 2009 15:09 UTC

This piece by Paul Krugman reinforces my feeling that the Federal Reserve is going to be hit hard for not doing even more to boost the economy. He wants the Fed balance sheet expanded even more to promote faster growth.

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

So why isn’t the Fed doing it? Part of the answer may be political: Ideological opponents of government activism tend to be as critical of the Fed’s credit expansion as they are of the Obama administration’s fiscal stimulus. And this has probably made the Fed reluctant to use its powers to their fullest extent. Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation, which they see lurking just around the bend even though there’s not a hint of it in the actual data.

Me: The Fed is going to get hammered if it starts clearing the balance sheet and raising rates while unemployment is still elevated. Expect more attacks by Congress like Barney Frank’s wish to depower the regional Fed presidents, kicking them off the FOMC. Yes, the Fed is getting his in Congress by this audit bill. But the worst is yet to come.

COMMENT

More reason to be short the dollar!

Posted by Johnba | Report as abusive

VAT Attack! Will deficit commission lead to a VAT?

Dec 11, 2009 15:02 UTC

That is one theory offered up as the eventual outcome of the C0nrad-Gregg deficit commission. And today in the NYT, there is a story extolling the virtues of a VAT.  Indeed, it is a great revenue raiser, and liberals love it because they think Americans are undertaxed and don’t want to cut spending to reduce the long-term structural budget deficit.

Now given that it will take 60 votes by Congress to approve the commission’s reforms, I am not so worried about a huge tax increase passing with phony spending cuts.  A currency or bond market crisis, though, could lead to calls for a VAT to show markets the US is serious about the deficit. And the WH would love to slap one on the US economy,  A better solution is actual cuts in the rise in entitlement spending accompanies by a more growthy, efficient tax system. I like the Hall-Rabushka flat consumption tax, as long as it replaced the existing taxes on labor and capital and corporate income.  It has VAT-like features, but is not hidden the way a VAT is. Here is Greg Mankiw:

If you look at the economic effects, a VAT is similar to the Hall-Rabushka Flat Tax, which many economists love. Essentially, the main difference between a VAT and the flat tax as developed by Hall and Rabushka is that firms get to deduct wages as a cost under a flat tax, but then those wages are taxed at the household level. Other than this minor change of shifting the responsibility for the tax on wage income from the firm to the household, the Hall-Rabushka flat tax and VAT have identical economic effects. (There is also an exclusion for the first X thousands of dollars of wage income under Hall-Rabushka, making it progressive in average tax rates, but the same result can be accomplished with a VAT as well by rebating some of the revenue via a demogrant.)

My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

COMMENT

I do not believe that the Hall-Rabushka flat tax is border-adjustable, which is a prime competitive advantage to the VAT, which is accepted as border-adjustable by OECD under GATT rules.

Posted by SteveA | Report as abusive

The risk of a supertax on banker bonuses

Dec 11, 2009 14:31 UTC

U.S.-based bankers shouldn’t worry too much about their bonuses. Even though Wall Street remains wildly unpopular and Washington needs more revenue, it’s unlikely U.S. authorities will follow their UK counterparts with a giant windfall tax on banker payouts.

That upcoming election cycle will certainly give American politicians all the impetus they need. A combination of fat payouts of 2009 bonuses in the first quarter and high unemployment will tempt incumbent lawmakers to play the populist card ahead of the 2010 vote.

But past efforts at such radical moves have failed. Congress is again struggling to raise taxes on carried interest, the profit generated by private equity firms and hedge funds. Some Democrats want such performance-based compensation to be considered regular income taxed at a 35 percent rate rather than the current capital-gains treatment it gets with the accompanying 15 percent rate.

The policy logic is plausible. Plus, as Warren Buffett has famously argued, fund managers shouldn’t pay lower tax rates than their office assistants.

But legislation to change carried interest taxation probably isn’t going anywhere. Sure, the House just voted in favor of it. But the bill is DOA in the Senate, which has shown scant interest in direct higher taxes on the wealthy or on capital. For example, it declined to copy one of the House’s preferred methods of paying for healthcare reform — a surtax on the wages and capital gains of top earners.

Moreover, New York Democrat Charles Schumer, a key player on the Senate Finance Committee, is an avowed opponent of higher taxes on alternative asset managers.

What’s more, the United States has already trod this path unsuccessfully. The House voted overwhelmingly to tax 90 percent of AIG bonuses, but the effort went nowhere in the Senate. The Obama administration didn’t push the issue, and polls showed only a bare majority in favor once the issue was fully explained. There were also substantial questions about the constitutionality of a tax targeting a specific group.

U.S. bankers have another six weeks or so to stew before seeing an actual bonus check. But in reality, they should be able to enjoy the holidays.

The UK banker bonus supertax

Dec 10, 2009 20:50 UTC

I don’t see this happening in the US.  I mean, the effort to raise taxes on private equity carried interest, while passing the House, is going nowhere in the Senate. And that is far less controversial and a less stupid idea. And remember how the 90 percent tax on AIG bonuses fell flat back in March.  The one caveat, as Dan Clifton notes in an earlier post,  here is that 2010 is an election year and the combo of big bonuses  and high unemployment could cause endangered Ds to play the populist card and try something

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