Larry Kudlow isn’t thrilled with the Janet Yellen Fed pick. This is the crux of his beef:
There is no evidence in Ms. Yellen’s public opinions or speeches that she might use a market-price rule — targeting commodities, gold, bond rates, or the dollar — as a forward-looking inflation (or deflation) signal. So the absence of a commodity- or dollar-price rule will continue at the Fed. Ben Bernanke doesn’t use a market-price rule, and Obama’s additional Fed appointees — whoever they are — will undoubtedly come from the same Phillips-curve camp.
Supply-siders like myself who believe that only market prices can provide accurate signals of the supply and demand for money are going to be very disappointed. If the Fed supplies more cash than markets want, the inflation rate can go up whether unemployment is high or low. We learned this painfully in the 1970s, when high unemployment was accompanied by high inflation.
The only real remedy for the long-term (and other) unemployed is to have the economy grow fast, as it did after the severe recession in 1982 when unemployment peaked in December of that year at 10.8%, and then fell rather rapidly. There is no magic bullet to accomplish this, but I do believe it would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession. Instead, they should be concentrating on fighting the recession, and stimulating long-term economic growth.
Me: During the 1980s, the economy notched 19 quarters of 3.5 percent GDP growth or better. In the 1990s, the economy also notched 19 quarters of 3.5 percent growth or better. So far this decade before the recession? Just eight. Or look at the number of quarters of “hypergrowth”—5 percent or better. (This was JFK’s GDP goal in the 1960s, by the way.) There were 12 in the ’80s, eight in the ’90s. So far this decade? Just a single quarter, the third quarter of 2003.
1) The key to the consumer finance piece is how much influence regulators have in rule creation. Giving some final veto power to the systemic risk council with a two-third vote is a joke. Would never happen.
2) Does the bill end TBTF? Only if you believe regulators would actually wind down a big firm — or multiple firms. This is why some want to make banks smaller preemptively.
3) Do Democrats even want a bill? Senate Banking Chairman Chris Dodd does, though some Ds would love to use a stalemate as a way of portraying Rs as pro-Wall Street and campaign on it for the November midterms.
4) And what about Fannie & Freddie, housing policy, Fed policy — all keys aspects of true reform which the Dodd bill and the whole “financial reform” process ignore.
This HuffPo piece backs up my analysis of how liberal activists are starting to drive the financial reform agenda:
“To be honest, a lot of us were surprised,” said one consumer advocate closely involved in financial reform efforts. “It seemed like a deal of some sort was imminent and on track.”
The advocate noted that Dodd’s decision was likely influenced by the outcry from progressives and other pro-reform groups who argued that Dodd, a Connecticut Democrat not seeking reelection this year, was giving Republicans and Wall Street-friendly Democrats too much sway over the legislation. Dodd’s original reform proposal in November had called for a strong, independent consumer-focused agency to protect borrowers from predatory lenders.
“At the end of the day, though, there is only so much that reform advocates were willing to give on this,” the advocate said. “And because of the context — what the banks did to the economy and the bailouts — reformers have a lot of high ground right now. Democrats just don’t benefit from teaming up with the banks and losing the interest groups.”
The rap on Mitt Romney is that he is the protean presidential candidate. Always shifting, always morphing, ever eager to please in relentless pursuit of the Oval Office. If he was a contestant onAmerican Idol, the judges would surely knock him for “not knowing what kind of artist he is.” One week a crooner, the next a rocker. One campaign a moderate, the next a culture warrior.
Well, that’s the rap, anyway. Residue of the 2008 campaign. But in his new book, No Apology: The Case for American Greatness, it is the Omega Romney we see, the ultimate distillation. Like a wave function collapse in quantum mechanics where many possibilities become one reality — and that reality doesn’t seem so eager to please. Not at all.
So who is Mitt Romney, at least as revealed in print? Well, the slight 2012 favorite for the Republican presidential nomination is neither in style nor substance a natural Tea Party man. Golly, no. (On the book tour, he has already spoken out against the “temptations of populism.”)
Certainly a conservative. But government, for Romney, is not always and everywhere a problem. Sometimes it can be part of the the solution, as he frequently highlights inNo Apology. The book is certainly no closing argument to those on the right who suspect the Bain Capital co-founder and former Massachusetts governor is a moderate, Wall Street elitist. Or, even worse in the eyes of many on the right, the American version of Tory leader David Cameron. Certainly Sarah Palin would never write “TARP,” Climate Change,” and “Investment Spending” on her palm. But those are major policy points inNo Apology:
1) The widespread view among party activists is that the U.S. government should have let more banks fail in the fall of 2008. To them, the $700 billion bailout was just short of a socialist plot to nationalize the financial system. In the book, Romney does criticize Treasury Secretary Timothy Geithner’s management of the Troubled Asset Relief Program, claiming it has been turned into a slush fund for the White House agenda. But Romney supported the bailout in 2008, and isn’t flip-flopping now. He writes that TARP “prevented a systemic collapse of the nation’s financial system.” (This is certainly the economic consensus, even among center-right economists.) His potential GOP rivals — keeping in mind Romney hasn’t officially declared he’ll be running — will have a different perspective. The governor of Minnesota, Tim Pawlenty, for one, says the financial crisis was overblown, while Sarah Palin, the former vice presidential candidate, says Republicans know bailouts “aren’t the answer.”
2) Romney doesn’t sign on to the belief of many conservatives that man-made climate change is the Hoax of the Century. He said this in the 2008 campaign, as well. But it would be easy to change positions in light of the explosive revelations of those climate scientist emails and shoddy United Nations research. But Romney is sticking. As he puts it in the book: “I believe that climate change is occurring — the reduction in the size of global ice caps is hard to ignore. I also believe that human activity is a contributing factor. … Scientists are nearly unanimous in laying the blame for rising temperatures on greenhouse gas emissions.”
Of course, this doesn’t mean Romney is a cap-and-trader. Like Danish economist Bjorn Lomborg, he believes in remediation and mitigation efforts that make economic sense, not trillion dollar programs to reduce carbon emissions. From that perspective, Romney suggests he would be willing to entertain the notion of a carbon tax whose revenues would be used to offset payroll taxes. This is a favorite idea of many economists, include Harvard’s Gregory Mankiw, a Romney adviser and chairman of President George W. Bush’s Council of Economic Advisers.
3) Romney spends almost a full chapter of the book in a lively and extremely important discussion of the role of productivity and innovation in the U.S economy. And while he eventually makes his case for a lower tax rates on company profits and capital gains, he first advocates more government funding for basic science research, particularly in engineering and the physical sciences.
This is not to say that nothing in the Romney agenda syncs with the Tea Party zeitgeist. Much does, particularly on the budget deficit.
1) He lays out a compelling case for treating federal government finances like a corporate balance sheet where long-term liabilities are recognized.
2) He recognizes the huge cost of public employee unions bleeding state treasuries (and hamstringing education reform).
3) He seems fond of a plan to cut the growth in Social Security benefits for higher-income people by linking benefits to inflation rather than wages.
4) As for Medicare, he believes — as does the Obama administration — that the program must move away from a fee-for-service model. Unlike the Obama administration, Romney also seems to favor eventually giving retirees “credits” to buy their own basic health insurance, with the wealthier paying more out of their own pockets. He then moves onto a spirited defense of RomneyCare in Massachusetts, calling it imperfect but a big improvement over the status quo — and nothing, nothing like ObamaCare. Nothing. Expect to hear that a lot.
And supporting seemingly every Romney policy proposal is an insightful McKinsey study or piece of cogent analysis by noted Harvard economist and competitiveness expert Michael Porter. Clearly Romney’s not a guy who would govern or lead America according to his gut. But that is not who Romney is. He was an investor, not a day trader, after all. Deep, quantitative analysis is what private equity guys and management consultants do.
Whether Republicans want a modernizing, non-ideological Mr. Fix-it who will go where the data take him is another issue. Right now, maybe not. He’s a bit too cool, a bit too technocratic for a party base in the thrall of populist Tea Party-ism. But in 2012, after possibly four years of sluggish, New Normal economic growth, they might.
So it looks like financial reform is going to be Dodd-Dodd rather than Dodd-Corker. The consumer finance regulator is like the new public option, a real deal killer. Also not helping is the wider, harsher version of the Volcker Rule that a group of Dems have proposed. I call it the Goldman Sachs Rule since it is targeted at the supposed conflicts of interest GS has. Throwing GS into the mix further politicizes the process and makes compromise tougher. A real poison pill. But that might be the idea all along. Push a weak, Democrat-only bill vulnerable to a host of anti-bank amendments on the floor of the Senate. Then force Republicans to vote against them with the midterm elections looming. With the economy weak and healthcare unpopular, financial populist may be the only card Dems have to play.
Washington is obsessed with optics and messaging. Indeed, U.S. proponents of limiting carbon emissions hope rebranding their “cap-and-trade” proposal as “pollution reduction” will boost the flagging proposal on Capitol Hill. But the real problem is the product, not the packaging. There are far more politically feasible and economically effective ways of dealing with climate change.
1) As it is, the Obama administration and Capitol Hill Democrats are late to the name-change game. Republicans have already effectively rebranded “cap-and-trade” as “cap-and-tax.” And as much as Washington insiders argue that America is woefully undertaxed, the American public heartily disagrees. Higher taxes are still political poison. Especially ones that hit the broad middle class. And especially during a time of historically high unemployment. Americans aren’t stupid. The whole point of a cap-and-trade plan is to eventually make carbon more expensivee. And that “cost” or “tax” or “pollution reduction” will eventually come out of their pockets.
2) Whatever you call it, an overarching, national cap on carbon emissions is going nowhere in the Senate after passing narrowily in the House. (The recent scientific clash over climate change data hasn’t helped its prospects in the upper chamber.) A possible Plan B is a gradual, sector-by-sector approach to cap-and-trade starting first with electric utilities and eventually expanding to various manufacturing sectors over the decade.
3) But that misses the point. The core political problem here is not how carbon is priced or what the method is called, but rather what is done with the revenue. The original Obama plan was to take some of the money from auctioning carbon permits and devote it to clean energy research. The rest would, temporarily, pay for middle-class tax cuts. But the suspicion has lingered that the money would eventually be funneled toward healthcare reform funding.
4) For the public to accept a rising carbon price, the money must be permanently returned to the public. Gaining momentum is a bipartisan plan where 100 percent of carbon permits are auctioned with 75 percent of the revenue returned as “dividends” and 25 percent invested in energy research. And in his new book, 2012 Republican presidential frontrunner Mitt Romney echoes an Al Gore idea of a carbon tax whose revenues are used to offset individual payroll taxes. Indeed, there are indications that key anti-tax crusaders would be willing to accept a carbon tax plan if the potential revenue was fully refunded in some fashion.
So forget the rebranding. Time to launch a new product.
They won’t, of course. Kind of extreme. But Cato’s Richard Rahn makes an interesting intellectual case:
Despite all of this intellectual brainpower and experience within the Obama economic team, Obamanomics has so far been defined as a series of seemingly ad hoc decisions based on neither economic theory nor philosophy. … Though the Obama administration adopted traditional Keynesian “stimulus” deficit spending during the recession, even the Keynesians thought deficits should only be run at the bottom of the business cycle, not throughout the business cycle, as is being proposed.
When Richard Nixon decided to institute price and wage controls against the advice of his CEA chairman, Paul McCracken, Mr. McCracken resigned. His successor as chairman, Herb Stein, was able to keep his intellectual integrity by famously stating, “This administration believes that price and wage controls are best administered by people who do not believe in them.” Some of President Reagan’s political advisers were furious that Reagan’s acting CEA head, William A. Niskanen, would not say and endorse things he did not believe. Lawrence B. Lindsey, George W. Bush’s first head of the National Economic Council, was vilified by many in the administration for correctly stating that the cost projections for the Iraqi war were grossly understated.
Advisers cannot expect to win every issue, but to be effective andtruly do their job, they have to know which issues are important enough to either win or resign over.
Me: At the very least, Team Obama has to be going crazy about the lack of effort on trade.
Washington doesn’t know how to handle Rep. Paul Ryan’s outline for how to balance the budget without raising taxes. House Majority Leader Steny Hoyer says the Wisconsin Republican’s plan is “unsustainable.” (Well, it makes Big Government unsustainable.) And an analysis from the Tax Vox blog takes issue with his revenue estimates.
Of course, the issue here is spending, spending, spending. The Washington Consensus is that taxes must go up, that it is not politically possible to cut spending. Ryan is trying to prove that consensus wrong with a little bit math and little bit of moxie.<
Here are some fun facts about California’s fiscal situation, in light of state college students protesting a 32 percent tuition hike (via WSJ):
1) In 1999, the Democratic legislature ran a reckless gamble that makes Wall Street’s bankers look cautious. At the top of a bull market, they assumed their investment returns would grow at a 8.25% rate in perpetuity—equivalent to assuming that the Dow would reach 25,000 by 2009—and enacted a huge pension boon for public-safety and industrial unions.
2) It let firefighters retire at age 50 and receive 3% of their final year’s compensation times the number of years they worked. If a firefighter started working at the age of 20, he could retire at 50 and earn 90% of his final salary, in perpetuity
3) In 2002, the state legislature further extended benefits to many nonsafety classifications, such as milk and billboard inspectors. More than 15,000 public employees have retired with annual pensions greater than $100,000.
4) In the last decade, government worker pension costs (not including health care) have risen to $3 billion from $150 million, a 2,000% jump, while state revenues have increased by 24%.
5) This year alone $3 billion was diverted from other programs to fund pensions, including more than $800 million from the UC system.
6) The governor’s office projects that over the next decade the annual taxpayer contributions to retiree pensions and health care will grow to $15 billion from $5.5 billion, and that’s assuming the stock market doubles every 10 years. With unfunded pension and health-care liabilities totaling more than $122 billion, California will continue chopping at higher-ed.