James Pethokoukis

Politics and policy from inside Washington

Drill, baby, drill — at least in some places

Mar 31, 2010 19:17 UTC

The new POTUS offshore drilling plan may be more aggravating for what it does not include (drilling in the Pacific, for instance) than pleasing for what it does. And as the Houston Chronicle points out:

But it is unlikely to win strong support from the fiercest drilling advocates in Congress and the energy industry, who have accused the administration of slow-walking conventional oil and gas production. They are expected to oppose many of the administration’s decisions — including the cancellation of planned lease sales in Alaska and potentially years-long waits before new drilling along the East Coast.

Me: And is it, along the WH nuke power plan, to make some version of cap-and-trade palatable? I don’t think it will be enough to get a comprehensive energy bill passed, Here is a bit from my RBV column today:

Even so, America will continue to be depend on imports to meet its vast energy needs. In the case of oil, nearly 60 percent of consumption is supplied internationally, including half from OPEC and a fifth from Canada. Similarly, Obama’s recent announcement of new loan guarantees for nuclear power plant construction is unlikely substantially change that sector’s share of the U.S. energy portfolio. But the White House hopes both efforts will help supply needed momentum to its energy and climate change agenda. Many Republicans and centrist Democrats favor an “all of the above” energy policy. Although a bill containing a nationwide cap-and–trade scheme for limiting carbon emissions passed the House, a parallel effort is dead in the Senate. Such caps are anathema to coal-state members of both parties.

COMMENT

More spin by Hussein. Puts this out there after the Public had been screaming for drilling all year, and he tried to sell Picken’s windmills and Gore’s Global Warming and knows all that stuff is decades away. Like his stimulus which he will claim is adding more jobs, he’ll take credit for the meager few Wells he will allow to be drilled. And speaking of seriously examining the sites for a year is another lie. The entire drilling map has been well documented for decades. Now with California bankrupt and sitting on top of capped oil wells, already dug , does he advocate taking off the caps and spreading the wealth ? When is America going to wise up to this fake ? The biggest scam to be hidden from the electorate , and one that would have made Barnham proud. There’s a Sucker born every minute “.. He never thought that America was a Nation of Suckers . But when he said it, America was full of Americans. Get ready, because Hussein is about to release an Amnesty bill that will unleash 30 million more illegals unto the ” Help Me ” rolls.

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Preventing the Great Stagnation

Mar 31, 2010 19:14 UTC

David Gitlitz, chief economist at High View Economics, has a thought or two about my “20-year bust” post:

Gordon is very good in his areas of expertise, but you’re right to point out that there’s nothing predetermined about this. Enacting full bore Obanomics would make even Gordon’s outlook look like a day at the beach. On the other hand, adopting a supply-side, free-market growth strategy would put in place the incentives to reinvigorate entrepreneurship and innovation and put us on track to restore at least the historical trend rate of productivity growth.

Me: Markets have a funny way of driving policy. A high-debt, high-tax, high-regulation economy would not be good for the dollar, bonds or stocks. And while we are on the topic, an interesting post from the great Larry Kudlow on where taxes are heading.

Obama and America’s 20-year bust

Mar 31, 2010 11:51 UTC

It is an alarming, jaw-dropping conclusion. The U.S. standard of living, says superstar Northwestern University economist Robert Gordon in a new paper, is about to experience its slowest growth “over any two-decade interval recorded since the inauguration of George Washington.” That’s right, get ready for twenty years of major-league economic suckage. It is an event that would change America’s material expectations, self-identity and political landscape.  Change in the worst way.

Now it’s not so much that the Great Recession will morph into the Long Recession. More like ease into the Great Stagnation. As Gordon calculates it, the economy will average only 2.4 percent annual real GDP growth over that span vs. 3 percent or so during the previous 20 years. On a per capita basis, the economy will grow at just a 1.5 percent average annual rate vs. 2.17 percent between 1929 and 2007.

That might not seem like much of a difference, but it really is. Over time, the power of compounding would create a huge growth gap measured in the trillions of dollars. To look at it another way, assume you had an annual salary of $100,000. If you received a 1.5 percent raise each year, you would be making $134,000 after 20 years, $153,000 after 40 years. But a 2.17 annual raise would boost your income to $153,000 after 20 years and $236,000 after 40 years.

For Gordon, the culprit is weaker productivity. Productivity, economists like to say, isn’t everything — but in the long run it is almost everything. A nation’s GDP growth is little more than a derivative of how many workers the nation has and how much they produce. And if Gordon  is correct, U.S. productivity is about to weaken. He forecasts that over the next two decades, the metric will grow at just a 1.7 percent annual rate. From 1996-2007, economy-wide productivity averaged just over 2 percent with GDP growing at 3.1 percent.

Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)

All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.

But maybe Gordon is wrong. Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market) weather the storm better than most expected. Maybe nanotechnology or genetic engineering will be the next Internet and ignite further creative destruction. Yet even if Gordon is correct, Americans still control their own economic destiny.

Since the 2008 election, American economic policy has been about wealth preservation (keeping the economy from sliding into a depression) and wealth redistribution (healthcare reform.) Wealth creation? Not so much.  That needs to change. Washington needs to focus on growing the economy and competing with the rest of the G20 nations, including the other member of the G2, China. Every policy — from education to trade to the tax code — needs to be seen through that lens.

America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation — or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

Now they face another choice. Preserve wealth, redistribute wealth or create wealth.  Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century.

COMMENT

This state of affairs are known to many Americans and in general public.
Because of economic slow down, no clear cut policy on major issues,last two years banks financial crisis, not much appreciated exports from America, more expenditure on Iraq/Afghans areas, some misconception on Mr.Obama!s new health care proposals made his downward rating on his policies,actions etc.,from Americans.
Mr.Obama wants to do more welfare measures to native Americans and to others as early as possible.
Those who attracts by his or speeches may be short lived.
America was in very pretty positions and enjoying their wealth for many centuries.
Now, other nations had started moving towards forward journey and getting favorable results from now and then.
If government wants to build more cash reserve, more expenditure on running and sustaining economic and social growth, creating more infrastructure, then, our college economics speaks in real terms.
There is no other ways, only to get more revenue by regulations, more and more exported industries formation,more productive work, increase their standard of income,then, some taxes to be levied and can be collected from many high,upper classes.
Still,some years to go and to find what happens on American soil by Mr.Obama and his team.
These findings may be a search type for any corrections and bring his ratings to upwards.,

Posted by mdspatsy | Report as abusive

Becker on on what healthcare reform should look like

Mar 30, 2010 19:28 UTC

An amazing piece of healthcare analysis by the University of Chicago’s Gary Becker. The whole analysis deserves reading, but a few key points:

1) Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. … As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further.

2) Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. … The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.

3) Health savings accounts (HSAs) have been one of the most important innovations in the health care field during the past decade. … There is little mention of HSAs in the new bill, and certainly no encouragement to their expansion.

4) The American health care delivery system needs greater transparency and easier access to medical information by consumers. The bill takes a valuable step in this direction by encouraging the development of online medical records and medical histories for all individuals, no matter how many doctors they have seen, or how often they have moved.

5) Proponents of the bill claim it will save hundreds of billions of dollars during the next ten years from cuts in Medicaid and Medicare, but it is far from obvious how such cuts will materialize. … . I do not see how the bill will lead to Medicare savings since there is no increase in out of pocket payments by Medicare enrollees, and Congress is likely to continue to override any scheduled cuts in payments to Medicare doctors and others.

6) The only truly efficient way to handle the pre-existing condition issue is to try to develop an insurance system in which young adults, who generally have few serious existing medical conditions, can take out long-term healthcare insurance.

7) Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes.

Waste, fraud and abuse at Social Security

Mar 30, 2010 16:57 UTC

The super-insightful Andrew Biggs looks how the Crist-Rubio debate dealt with Social Security — and finds laughable the former’s comments about restoring the system’s long-term solvency by rooting out waste, fraud and abuse:

As a general rule, when a politician mentions “waste, fraud, and abuse” it should be interpreted the same as if the candidate wore a sign saying “I’m not serious.” That’s not to say that we don’t have problems with fraud, but that the real problem is simply that the government spends too much.

This is particularly so in the case of Social Security, which is one of the most efficient federal government programs. Social Security takes money from young workers, calculates a benefit for retirees based on their earnings and their years in the workforce, and cuts them a check. There’s not a lot of discretion involved, which reduces chances for things to go wrong. Sure, there are problems in the disability program and I’m confident there are folks getting disability benefits who actually could work. But that’s the fault of the eligibility criteria passed by Congress in the 1980s more than any problem of vetting applicants by the Social Security Administration. On this issue, at least, Crist was very unimpressive.

What did impress me, though, was the fact that Rubio—who, after all, is running for the Senate from Florida—was willing to be upfront about the hard choices awaiting us on Social Security. In part this may be due to the character of the candidate, who struck me as a principled conservative.

COMMENT

First Older citizens paid along with their employers out of their own monthly earnings into the social security retirement insurance. So those checkks being cutare what we paid into. It is not taken from younger workers. The government stole what older workers paid into for their retirement and illegally took it for war. This was money that did not belong to the government it is not nor has it ever been entitlements not any more than if someone opens a bank account to save for their future and the banker steals it for his own use. Theft is theft and the government had no right to steal social security insurance paid into by workers of years past.

A lot of the waste is done by social security administration workers who do not follow their own rules and demand recipeints follow them and who waste time and paper who work but do not want to work. Pigs at government trough. Go sit in a SS office someday or employment office or DSHS office and watch how many “Breaks
” they take and if you watch close some play computer games and eventually when they feel like it call someone to their desk but they are lazy and NOT earning their wage. Most are like this. They get paid too much money and do NOT want to help. Most also are rude and act we are taking money right out of their pocket. When it is money WE paid into it is NOT their money and they would not have a job but for SS or unemployment paid insurance paid by employees and employers. People get mad at the wrong people and think we are not entitled to it. YES we are we PAID into it out of our hard earned wages and long hours of work.

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7 keys to financial reform

Mar 30, 2010 16:53 UTC

Here is what you need to know about financial reform. If a bill in any way allows vast amounts taxpayer money to be poured into banks, then the bill does not end Too Big To Fail. Banks will assume this power will be used. Second, any bill that requires prescience by regulators and then the will to act on unpopular forecasts is doomed to fail. Keep that in mind as your read some key insights from the great Nicole Gelinas on fin reform:

1) The biggest financial crises arise from too much debt. Borrowers and lenders, ensconced in a bubble, fail to see the need for cash as a cushion against error. When the bubble bursts, it leaves behind so much debt that it bankrupts the financial industry.

2) Existing regulators should move toward consistency in their borrowing limits–requiring a financial institution to put a consistent level of cash down behind any debt security or derivative instrument, even if the government thinks the investment is perfectly safe, as it did with mortgage securities.

3) Further, existing regulators should wean financial companies off their reliance on the cheap overnight debt that they borrow from global markets to fund their investments.  … Regulators could require firms to put down greater cash cushions proportionate to this borrowing.

4) These rules would encourage the most important regulation of all: market discipline. Individual companies would still fail to meet their obligations, but they would not bring down the entire financial system in the process.

5) Instead of adding to Dodd’s 1,336-page bill, Washington should repeal the 2000 law that forbids existing regulators to set consistent rules for all derivatives instruments.

6) Then, Washington should tweak the bankruptcy code so that, for example, financial firms can go bankrupt without giving their creditors the right to pull their derivatives contracts, destabilizing the financial world.

7) We need politicians and regulators to implement simple rules that don’t require faith in omniscient, micro-managerial government planning.

Me: I would also add that there is a great need for financial transparency by Wall Street so markets can better judge their creditworthiness.

COMMENT

All this debate and no one really gets it. Stealing from one another has become an acceptable norm. How can I say this? The evidence is in how our society defines what it means to ‘steal’. Our lack of action to address the systemic thievery starting with the S&L crisis and moving through 3 decades is testimonial to our failure to punish white collar theft therefore we believe that white collar thievery is acceptable. Unless the perpetrator is armed with a deadly weapon our society cannot wrap its collective heads around what it means to steal from one another.

What is hilarious is by refusing to address these systemic white collar crimes we are in affect providing lunatic fringe radical groups to move away from theorizing about taking power into the realm of application demonstrated by arming themselves with deadly weapons.

Until we confront our inability to punish systemic white collar crime financial reform is meaningless.

It’s pathetic.

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7 reasons a VAT is a dicey proposition

Mar 29, 2010 15:38 UTC

My guy Pete Davis over at Capital Gains and Games unsheathes the katana and slices up the VAT. Not so easy to implement he says. A brief summary of his reasons (though read the whole thing, of course):

1. Like the U.K. when it adopted its VAT in 1973, the U.S. will struggle for at least two years and probably longer to implement a VAT.

2. Compared to our income tax, the VAT is regressive.

3. Tax reformers lambast the complexity of our income tax with good reason, but somehow assume that the same people who legislated that complexity will legislate a clean VAT.

4. I can’t think of a faster way to kill Rust Belt jobs than to impose a VAT.

5. Housing would be hurt by a VAT even if it is zero rated.

6. Exporters would benefit from a VAT, but that benefit would be partially offset to the extent that the dollar appreciated against the currencies of our trading partners.

7. State government sales tax revenues would be directly impacted by a federal VAT.

Economic guru: US faces its worst two decades in history

Mar 29, 2010 14:04 UTC

Get ready for the Long Recession.

Well, at least a long period of time where it is going to seem like the US economy is kind of sickly. That is the conclusion of productivity guru Robert Gordon in a new paper. He says US living standards now face their slowest two-decade growth rate “since the inauguration of George Washington.” More:

The statistical trend for growth in total economy [labor productivity] ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007.

For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”

The paper approaches the task of forecasting 20 years into the future by extracting relevant precedents from the growth in labor productivity and in MFP over the last seven years, the last 20 years, and the last 116 years. Its conclusion is that over the next 20 years (2007-2027) growth in real potential GDP will be 2.4 percent (the same as in 2000-07), growth in total economy labor productivity will be 1.7 percent, and growth in the more familiar concept of NFPB sector labor productivity will be 2.05 percent. The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.

Me: There is no more basic political and economic issue than a nation’s standard of living. If  Gordon is right, this will dominate US politics as another sign of American decline.

COMMENT

Or Plan B we could just throw the Democrats out of office (which even the “Greatest Generation” wouldn’t do), rip Obama’s poisoned laws out of the ground, and get our economy back to a nice happy 4.5% unemployment rate.

Posted by Joshua A. Schaeffer | Report as abusive

A Wall Street conspiracy to kill Social Security?

Mar 26, 2010 11:37 UTC

Finally, a Wall Street conspiracy theory without Goldman Sachs at its heart. This one posits that bond rater Moody’s wants to ding the U.S. credit rating so panicky politicos will privatize Social Security. That would sent big bucks to the firm’s big bank clients. If only it were true.

This bit of speculation comes from Dean Baker, a respected Washington think-tank economist, albeit with a liberal bent. Baker suggests that Moody’s increased debt warning of late “could be a reflection of the Wall Street agenda to cut” America’s social insurance safety net. Shifting government pensions into the private sector could entail billions, if not trillions, of retirement dollars flowing into personal portfolios managed by investment firms.

Like most conspiracy theories, this one reveals more about the storyteller than about reality. Baker, like other left-of-center economists such as New York Times columnist Paul Krugman, think Washington too concerned with deficits given the anemic economy. And they lump President Barack Obama into that camp, too. They fret this New Frugality — somewhat laughable give trillion dollar deficits — will be further fed by Obama’s new deficit commission. And they especially worry the panel will recommend trimming back Social Security to preserve its solvency. Add in displeasure that financial reform isn’t tougher on the major players in the financial meltdown, and a juicy tale of corporate collusion emerges.

A better theory: Raters have been intentionally insouciant so as not to incur the wrath of Congress as it fashions new regulations for the firms. U.S. debt-to-GDP may hit 90 percent by 2020, according to the Congressional Budget Office. The CBO also says that Social Security, which accounts for 16 percent of the government’s $46 trillion in long-term liabilities, will in 2010 for the first time pay out more in benefits it takes in from taxes.  That is six year earlier than predicted. The slow economy is the near-term cause. But the event marks a key milestone in the program’s long descent toward insolvency. Benefit cuts and tax hikes seem inevitable. But those will lower an already paltry rate of return, especially for younger workers.

Letting Americans shift at least some of their government-directed savings into the real economy would generate a bigger nest egg.  This is done in Chile and Sweden, for instance. Yes, stocks are risky. But the market ultimately reflect the real economy. If it booms, so will portfolios. And if doesn’t, Social Security is in even deeper trouble. If there isn’t a conspiracy, someone should hatch one.

COMMENT

clinton surplus – thought congress developed the budget in with the President and approved by the senate. So it is the clinton/newt surplus, is it not?

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Google: Freedom is important, too

Mar 25, 2010 12:32 UTC

Heartened to hear the words of Google co-founder Sergey Brin in the WSJ:

China has “made great strides against poverty and whatnot,” Mr. Brin said. “But nevertheless, in some aspects of their policy, particularly with respect to censorship, with respect to surveillance of dissidents, I see the same earmarks of totalitarianism, and I find that personally quite troubling.”

Me: I especially like the “whatnot” part. Prosperity is important. But so is freedom. And the West waits for China to make as much progress with political freedom as it has with economic freedom — though even the latter has a long way to go. More change will come, especially as this generation of leadership passes

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