James Pethokoukis

Politics and policy from inside Washington


Feb 11, 2010 19:21 UTC

What I think about what the blogosphere is thinking about.

No Pain Here: At the Enterprise blog, Mark Perry rounds up some great factoids about the boom in public sector wages. (“The number of federal workers making $150,000 or more has more than doubled since the recession started.”) As it happens, just read a great City Journal article on the role of the public employee unions on California’s economic problem. This is an issue with momentum.

Dubious Defender: The fabulous Fausta takes issue with the POTUS claiming he is a fierce advocate of free markets.

Growth Solution: Larry Kudlow has a great thought on the EU debt crisis: “Look, the problem here isn’t just debt. The problem also lies underneath the debt. In other words, there are no tax-rate incentives to promote economic growth. That, of course, would help dissolve the debt.”  American doesn’t need a Deficit Commission. It needs a Growth Commission.

VAT Valentine: Another MSM story singing the praises of value-added tax. Key bit: “The smart money says the VAT is America’s destiny, a destiny that comes closer with each passing budget.”

Credit Crisis: Like me, my pal John Tamny doesn’t think it would be such a bad thing for US debt to get a downgrade. This why Geithner should not have been so dismissive of the AAA rating threat.

White House Woes: Mike Barone gets its exactly right. The WH misread the election and electorate. And it started with the wrong-track stimulus plan.


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VAT Attack! Obama and middle-class tax hikes

Feb 11, 2010 18:12 UTC

As long-time readers know, I am convinced that the Obama administration is itching to slap the US economy with a value-added tax. Team Obama just needs to figure out how to do it politically. Listen to the POTUS in this BBW interview:

The whole point of it is to make sure that all ideas are on the table. So what I want to do is to be completely agnostic, in terms of solutions. What I can’t do is to set the thing up where a whole bunch of things are off the table. Some would say we can’t look at entitlements. There are going to be some that say we can’t look at taxes, and pretty soon, you just can’t solve the problem.

In short, how I read this is that Obama is willing to consider a broad-based tax hike on the middle class. Smells like a VAT. But I don’t see how the WH gets there absent a financial crisis that puts Washington into a panic, just as happened with TARP. Maybe if Congress rejects the proposals of the new deficit commission, a bad market reaction would be a catalyst to action.

Of course, Obama could suggest the Hall-Rabushka flat consumption tax, a favorite with conservatives. It is like a VAT with part of the tax paid directly by individuals. This makes the tax more transparent, which politicians don’t like. To them, transparency is a bug not a feature. But the concern on the right is that an invisible VAT would make it too easy to raise taxes and finance a vast expansion of government. But even with an H-B tax, conservatives have no interest in a tax that would raise the tax burden as a way of increasing revenue as a portion of GDP from around 18 percent.


VAT is the worst idea that has come out of the conservative think tanks like Cato Inst. and others. It is regressive, will impoverish the middle class of America even more and will be a nightmare to administer.

However, the US must increase its tax revenues. How? Pass an intangibles tax (tax on net worth) on all individuals, corporations, trusts, PICs, etc. with a net worth over $10 million. Just 1% intangibles tax on the super wealthy would more than balance the budget and not disturb one bit the life styles of over 99% of Americans.

Already states like NH and Fla have an intangibles tax instead of an income tax. The Federal Government should do the same thing.

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Paul Ryan’s Long (Deficit) Goodbye

Feb 10, 2010 23:07 UTC

Why should Tim Geithner be so confident that America will “never” lose its AAA credit rating? The White House doesn’t currently have a long-term plan to stanch America’s fiscal hemorrhaging. Hoping and wishing for a successful deficit commission does not make a plan. The Treasury secretary’s statement sounds like one of those perfunctory defenses of the dollar.

But the so-called “Party of No” does have a plan. And Republicans may have a chance to sell it should they retake Congress. Yet even if the plan works, the financial bleeding wouldn’t stop for decades.

To be accurate, Rep. Paul Ryan has a plan. The Wisconsin Republican is a rising party thinker and odds-on future Budget Committee chairman if Republicans capture the lower chamber. The Ryan plan does eventually put America into the black without raising taxes, according to the Congressional Budget Office. This is critical since growth-killing tax increases will only make budget balancing that much harder.

How does he do it? By sharply cutting future social insurance benefits and partially shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.

The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.

The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.

One can quibble about Ryan’s policy choices. Democrats might prefer more taxes and fewer spending cuts. But the essential point is that politicians will, at best, push for a slow departure from massive deficit spending. The question is whether financial markets will be patient enough to allow such a terribly long goodbye.


This is what I heard…last year.

The plan to lower the deficit is simple.
Inflation at 100% over ten years.
The administration is engineering this
as we speak.

Posted by LP | Report as abusive

Financial reform hits double deep freeze

Feb 10, 2010 22:09 UTC

Even before the U.S. capital was buried under three feet of snow in a matter of days, Washington was frozen solid. Democratic bumbling and Republican obstructionism had sapped legislative momentum from key reforms in finance as well as healthcare and energy. That gridlocked state of affairs is unlikely to change even after Snowmageddon blows into history and the federal government reopens its shuttered offices.

Of course, even if Congress had some desire to make progress on those critical issues, Mother Nature would not have cooperated this week. A former city mayor was dead-on when he declared Washington not a snow town. Commuter trains into the city aren’t running, the Metro subway system offers only limited service, airports are closed and Amtrak closed its rail link to Wall Street (the Acela Express).

Even Pennsylvania Avenue, the main thoroughfare between the White House and Capitol Hill, is barely passable. As a result, federal agencies and departments have been shut all week, a bill that will run to about half a billion dollars in lost productivity and opportunity costs, according to government estimates. Both the House of Representatives and Senate have canceled all votes until after next week’s recess.

Of course, it’s an ill Snowpocalypse (residents’ other storm nickname of choice) that doesn’t blow someone a bit of good.

Toyota caught a break when a congressional hearing to investigate its car recall was postponed for two weeks. And lawmakers skeptical of climate change guffawed when the Obama administration chose the middle of this Arctic blast as the best time to announce a new agency to study global warming. Then there are the jokes. What’s Washington’s snow removal plan called? Spring.

But the snow will eventually melt, and there will be a general thawing out. If only the same warming could be confidently predicted for relations between Democrats and Republicans in this heated election year. As long as both sides keep things icy inside Congress, it really won’t matter much what the weather outside is doing.

Coming soon …

Feb 9, 2010 02:31 UTC

… the resumption of this blog. Until then, you can follow me on Twitter at http://twitter.com/JimPethokoukis.

Obama bails on ‘cap-and-trade thing’

Feb 3, 2010 16:07 UTC

President Barack Obama is now calling the carbon trading scheme that is supposed to heal the planet a “cap-and trade-thing.” That can’t be a good sign for the concept.

Here is the president in New Hampshire yesterday: “”The most controversial aspects of the energy debate that we’ve been having — the House passed an energy bill and people complained about, well, there’s this cap and trade thing. And you just mentioned, let’s do the fun stuff before we do the hard stuff. The only thing I would say about it is this: We may be able to separate these things out. And it’s conceivable that that’s where the Senate ends up.”

Whatever the impact on the environment, the probable demise of President Barack Obama’s cap-and-trade carbon plan would be a much bigger fiscal failure for the White House than the implosion of healthcare reform, at least over the near term. Taxing carbon was the hidden key to funding his administration’s policy agenda while limiting budget deficits. Now the White House is scrambling for a realistic Plan B.

For months, the Capitol Hill consensus has been that a legislative limit on carbon emissions isn’t going anywhere in 2010 or beyond. New job-killing regulations and taxes just aren’t popular when unemployment is in double digits. Now the White House seems to agree on the plan’s political prospects. But there already were hints of this in the new Obama budget proposal. Now Obama’s budget last year assumed auctioning emissions permits would generate $646 billion in revenue over 10 years. Of that amount, a fifth would have gone toward funding clean energy research, and four fifths to funding a worker income tax credit.

The administration’s new budget proposal simply contains an accounting line labeled “allowance for climate policy” followed by, well, nothing. Not a single dime of revenue is assumed for the years 2011 through 2020. The line item looks to be nothing more than a placeholder to keep hope alive for greener Democratic voters.

The near-term impact is that the worker tax credit won’t be renewed after 2011. But longer-term, the proposal’s failure would stymie administration efforts to get closer to balancing the federal budget.

Internal White House estimates predicted cap-and-trade auctions might generate two or three times as much revenue as forecast in last year’s budget, or up to $1.9 trillion. By contrast, proposed tax hikes on upper-income Americans would raise $678 billion. The extra money from cap-and-trade could have taken a big bite out of the $8.5 trillion 10-year deficit projected in the latest budget — just the kind of broad-based, if politically stealthy, tax that Obama’s economic advisers think is necessary to balance the books.

The administration’s healthcare plan was supposed to knock another $132 billion off the 10-year deficit, according to the Congressional Budget Office. With that on the back burner too, Democrat deficit hawks are left hoping Obama’s proposed fiscal commission can somehow create a menu of spending cuts and tax increases that could actually win congressional approval in 2011. Sadly for Obama, that’s about as likely as that “cap-and-trade thing” passing.


He is right, it is the latest ‘thing’ in hats, i.e. “de Bono hats”, and the speech writer better look for another job.

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Illinois Senate race … meh

Feb 3, 2010 15:49 UTC

Illinois voters are not too thrilled with their choices for US Senate, according to Public Policy Polling:

I think one of the most striking things about last night’s Illinois primary results for Senate is how poorly both Alexi Giannoulias and Mark Kirk closed.

In the December Chicago Tribune poll Giannoulias was at 31%, followed by Cheryle Jackson at 17%, and David Hoffman with 9%. There were 35% undecided. Giannoulias ended up with 39% to 34% for Hoffman and 20% for Jackson. That suggests that over the final seven weeks of the campaign Hoffman picked up more than 70% of those who had been undecided to 23% for Giannoulias and less than 10% for Jackson. Not too impressive and you have to wonder how far Hoffman’s momentum would have carried him if he’d had another week or two.

Kirk didn’t do all that well as the campaign heated up either though. In that December survey he had 41% to 3% for Patrick Hughes and a total of 10% for the variety of lower tier candidates in the race. Based on the final results he appears to have picked up about 37% of the undecideds from that point on to 35% for Hughes and 28% for the assortment of less serious candidates. Given how little money any of his opponents were spending that’s not too impressive.


Robert Zadek is the only option to the Status Qou.

Robert Zadek has worked with Ron Reagen, Henry Kissinger, has work form Warren Buffets office to solve a London Metals bankruptcy. Robert is also the only Independent Conservative for Illinois.

The Status Quo Robert Zadek

For Abortion Against Abortion
Against Guns For Guns
Career Politian Experienced Businessman For Cap and Trade Against Cap and Trade
For amnesty Illegal means Illegal
Raising taxes Flat Tax

Check out RobertZadek.com

The next Treasury secretary will be …

Feb 3, 2010 15:43 UTC

Well, Simon Johnson thinks it should be Tom Hoenig, president of the Kansas City Fed:

  1. He’s currently the only senior Fed official who has been outspoken (or even spoken out) against banks that are undoubtedly Too Big To Fail (TBTF).  Hoenig has been a beacon of clarity on this issue over the past year.  Compared with central bank officials – and almost everyone else – Hoenig stands out as a model of straight thinking and a proponent of tough action.  With his disarming but no nonsense approach, he is the perfect person to take on the likes of Lloyd Blankfein (Goldman Sachs) and Vikram Pandit (Citigroup) both in the corridors of power and in the nitty gritty of their rather sordid business models.  Hoenig is a career bank supervisor and nobody’s fool.  Blankfein and Pandit are just two more guys who run banks that have gone bad.  You know how that movie ends.
  2. Hoenig, who sits on the Federal Open Market Committee, is also an inflation hawk – at least by today’s standards.  This makes some would be supporters – including fans of his attitude on TBTF – rather wary of advancing his name (e.g., as chairman of the Fed Board).  This hesitation is understandable although likely mistaken; you don’t keep the federal funds rate essentially zero for long when nominal GDP is growing at more than a 6 percent annual rate.  In any case, the issue is irrelevant for the Treasury job.  The Treasury Secretary’s responsibility in a modern administration is to run financial sector policy, meaning bailouts and how to avoid them.  Peter Orszag has the budget and Ben Bernanke (gulp) holds the monetary tiller.  What we desperately need is someone who can sort out our largest banks.
  3. Tom Hoenig is almost certainly a Republican, although – as head of a regional reserve bank – the full range of his views, outside of banking and money, are not widely known.  Paul Krugman reasonably points out that if he (Krugman) were nominated for the Fed (or Treasury or anything else), this would likely run into trouble in the Senate.  Hoenig is a completely different kettle of fish, appealing to sensible Democrats and Republicans – yes, there are a few – who increasingly worry about massive banks and their electoral implications.  And while financial sector policy is job one, serious efforts to address the budget – led by people of all ilk with a strong grip on economic realities – also lie in our future.  Either that or the republic will perish.  Not a tough choice in the end, but it does need to involve at least a few Republicans.
  4. He’s a Republican.  See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.
  5. The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close.  Sure, but that’s the point.
  6. He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.

There will be objections to be sure.

  • He’s just a regional Fed governor. True, but so was Tim Geithner.
  • He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.
  • The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close. Sure, but that’s the point.
  • He’s a Republican. See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.

Obama and middle-class tax cuts

Feb 3, 2010 15:35 UTC

The Tax Foundation thinks the White House is too sensitive about charges that middle-class taxes are going up:

The Administration’s outrage is a bit overdone, though, for three reasons:

Democrats didn’t support most of the middle-class tax cuts in 2001. The only Bush tax cut provisions that enjoyed any Democratic Party support in 2001 were the 10% rate and the doubling of the child tax credit from $500 to $1,000. In running for president, Obama made the political calculation that the middle- and upper-middle income tax cuts (marriage penalty relief, cutting the 28% rate to 25%, and cutting the 31% rate to 28%) were unassailable; hence the $250K threshold promise. (Throw AMT relief in that basket.) In his progressive heart, Obama can’t really believe those cuts were virtuous. And now the Administration is desperate for big new sources of tax revenue, so there is suspicion that middle-class tax hikes are coming. As many commentators are pointing out, the new fiscal commission is exactly the vehicle that could deliver those tax hikes in a way that would look as if the President were being forced to do it, that he didn’t break his tax promise willingly.
Bush’s middle-class tax cuts were huge. Even now the President uses the phrase “mostly for the wealthy” in describing the Bush tax cuts as a package, which is false (at least by his own, new definition of wealthy — over $250K). Even the most anti-Bush tax think tank in town, Citizens for Tax Justice, can’t come up with numbers that portray the tax cuts for people over $250K as reaching 50% of the whole package.

So many shocking things have happened that rational expectations are shaken. No one thought this Congress and Administration would allow the estate tax to reach full repeal, as it did on January 1, a month ago. But they did, violating every premise of progressive tax policy. And quite aside from politics, it’s a nightmare for executors. Following that shocker was the health bill train wreck, resulting in a level of political and fiscal uncertainty that is almost unprecedented for a non-crisis situation.


Well it’s April 15th and middle class taxes went down. A lot.

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We are all Austrians now (when it comes to economics)

Feb 3, 2010 15:19 UTC

Or so says Ed Yardeni, who puts the current economic situation in a philosophical perspective:

We are all Austrians now. Over the past few weeks, in Los Angeles, San Francisco, Sacramento, New York City, and London, I’ve run into more and more institutional investors whose economic and financial views either knowingly or unknowingly reflect the influence of the Austrian School of Economics. I am in Zurich today and Geneva tomorrow.  … How do you know if you are an Austrian? Here is a simple test. Answer yes or no to the following question: “I believe that this will all end very badly.” If you agree, then you are probably worried that all the government policies that rescued us from a depression in 2008 and 2009 only postponed the coming wipe-out of debt and the collapse of asset prices–and will actually make the inevitable calamity even worse.

I share these concerns, but I believe that Globalization will save us from such an awful fate. The end of the Cold War marked the end of the greatest trade barrier of all times. The resulting proliferation of free trade liberated billions of people around the world from their lives of quiet desperation. Standards of living are rising rapidly, especially in emerging economies, as prosperity displaces subsistence. Previously immiserated people are less miserable. They are earning enough so that they can both save and have more discretionary income to improve their material well-being. In other words, Globalization is stimulating more growth in incomes, saving, and consumption. Such growth is the best antidote for the grim Austrian prescription of debt deflation.


Yes, we are all Austrians now…

http://www.youtube.com/watch?v=d0nERTFo- Sk

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