James Pethokoukis

Politics and policy from inside Washington

Obama economic team not necessarily on way out

Apr 8, 2010 23:10 UTC

Government officials are like professional sports coaches: Most are hired to be fired and fatigue nabs the rest.

Persistent talk about the imminent departures of President Barack Obama’s economics squad leaders, Timothy Geithner and Lawrence Summers, will surely prove right, eventually. But the day may be further off than many observers think.

From the get-go, Washington insiders pegged both experienced economic officials as short-timers. Personal tax issues marred Geithner’s confirmation hearing as Treasury secretary. Then stocks tanked when he touted a half-baked version of the administration’s bank rescue plan. And his involvement with bank bailouts as president of the New York Federal Reserve will never be popular.

As for Summers, none doubted his intellectual brilliance, but his appointment as National Economic Council director was considered an ill fit given its mandate to coordinate rather than generate policy. Some party liberals pegged Summers a victim of “cognitive capture” by Wall Street for his past role in deregulation. So recent press reports that he’s unhappy and wants to leave sooner rather than later seem superficially reasonable.

But both serve at the president’s pleasure. And the White House is on a bit of roll. Why tweak a winning team?

Healthcare passed and financial reform is gaining momentum. Then there’s the economy, a former politically toxic asset that is starting to rise in value as recovery takes hold and job growth reappears. Liberal criticism that a deficit-obsessed Summers was wrong to push an $800 billion rather than $1.2 trillion stimulus seems less relevant by the day.

The same goes for arguments that troubled banks should’ve been nationalized. Geithner’s much-derided bank stress tests attracted some $185 billion of private capital and sent bank stocks soaring. His approach to currency discussions with China also looks to be bearing fruit.

While some party activists and union leaders may wish for a house cleaning, there’s no pressing need for the White House to comply. Finding replacements would be tough. Anti-Wall Street sentiment limits the pool of possibilities, particularly at Treasury. Reshuffling existing personnel is problematic, too. Shifting budget chief Peter Orszag to the NEC would be a gift to Republicans, who would use the confirmation hearing of his successor to put the Obama budget deficits on trial.

While Summers and Geithner may possibly desire to leave mid term, there’s little reason to nudge them — if anything, the president should be begging them to stay put.

Stronger Chinese currency is good … and bad

Apr 8, 2010 19:19 UTC

This is from the New York Times is important (as outlined by me):

1) A stronger renminbi could prove a mixed blessing for the United States. If China cuts back sharply on purchases of Treasuries, then the Obama administration could find it harder to finance American budget deficits.

2) But with the Chinese economy booming, a small move in the renminbi may still leave the central bank struggling with trade surpluses and a tide of speculative investment into China. That could force it to continue buying Treasuries with the extra dollars.

3) A slightly stronger renminbi that fluctuates each day against the dollar will mainly hurt low-margin, labor-intensive industries in China like shoes and textiles, they said. Many Beijing officials have been worried about job losses in these industries if the currency appreciates. Much of this production is already starting to move out of China, notably to Vietnam and Bangladesh, where labor costs have stayed low. And Chinese factories producing these goods have been struggling to find enough workers in the last two months as the economy grew powerfully this winter, stoked by heavy bank lending, strong demand for workers in the retail sector and rising government spending on high-speed rail lines and other infrastructure investments.

4) More high-tech industries, like the production of computers, have tended to favor a stronger renminbi. Further migration of labor-intensive industries to other countries could free up more workers for high-tech work, making it it cheaper for these industries to import materials that are priced in dollars. Such a development would create more Chinese competition for high-tech operations in America, however.

Me: I certainly don’t think the Obama administration views this is a silver bullet for the U.S. economy or the elevated levels of unemployment. More like it might help at the margins. The real benefit of appreciation is avoiding a highly destructive trade war.


@ both Minipaws and JAmieSamans

The global financial markets are systematically and fundamentally flawed to begin with.

It was structural inefficiencies with the system is itself means that everything we learned in Econ 101 or even with Econ PhD’s couldn’t have forecasted the crisis.

The rules do not apply in a Greed motivated world.

Posted by Phead128 | Report as abusive

More on the future of Geithner, Summers and the Obama econ team

Apr 8, 2010 18:52 UTC

Bruce Bartlett adds this on the speculation about Tim Geithner and Larry Summers:

Keep in mind that one reason for creation of the NEC in the first place was to give Bob Rubin someplace nice to hang his hat while waiting for Lloyd Bentsen to move on after being given Treasury to protect Bill Clinton’s right flank. Keep in mind also that Geithner is widely viewed as being under Larry’s protection. Without that it is quite possible that Tim would be gone already, given the generally poor grades he has gotten from across the political spectrum. Finally, remember that the appointment as NEC director does not require Senate confirmation, which may be an attractive quality in this political environment.

Someone like Roger Altman, former deputy Treasury secretary, might be a good replacement for Larry and, eventually, Tim. Knowing how badly Roger would like to be Treasury secretary, I’d start packing my bags if I were Tim and Roger became my de facto White House boss.

I think Jon Corzine may also have aspirations for being Treasury secretary, but considering how badly his term as governor of New Jersey went I suspect that considerable time will need to pass before he is politically viable again.

Me: I think all this is really premature. I think Geithner’s stock has skyrocketed and will only elevate further if the economy improves the way the WH thinks/hopes it will. Roger Altman, by the way, wants a VAT, like, yesterday.  And a BIG one.

Bernanke’s strange comments on U.S. deficits

Apr 8, 2010 17:10 UTC

Cato’s Mike Cannon thinks Ben Bernanke’s comments on budget deficits should have come weeks ago. And he thinks he knows why they did not (excerpts):

If Bernanke really wanted to warn the American public about the dangers of rising budget deficits, then a congressional debate over creating two new entitlement programs would be the most important time to deliver that message.  … Had Bernanke delivered his populist warning before January 28, it could have jeopardized his confirmation by the Senate to a second term as Fed chairman. Had he done so between January 28 and March 21, he would have suffered a storm of criticism from Democrats (and possible retribution when his term came up for renewal in 2013) because his sensible, responsible warning would have made moderate House Democrats more skeptical about ObamaCare’s new entitlements.

Bernanke’s behavior thus reveals why ObamaCare’s cost would exceed projections and would increase the deficit. Knowledgeable leftists, notably Tom Daschle and Uwe Reinhardt, recognize that Congress is no good at eliminating wasteful health care spending because politics gets in the way. (Every dollar of wasteful health care spending is a dollar of income to somebody, and that somebody has a lobbyist.) The Left’s central planners believe they can contain health care costs by creating an independent government bureaucracy that sets prices and otherwise rations care without interference from (read: without being accountable to) Congress. ObamaCare’s new Independent Payment Advisory Board is a precursor to what Daschle calls a “Health Fed,” so named to convey that this new bureaucracy would have the same vaunted reputation for independence as the Federal Reserve.

Politics affects Bernanke’s behavior and the Fed’s behavior. Politics will defang the Independent Payment Advisory Board, and many of ObamaCare’s other purported cost-cutting measures.

Me: This is worrisome. Too much of policy, whether it is  future a Health Fed or the deficit commission, is based on the ability of outside panels to end run Congress —  and of Congress to ultimately cede power.

CBO’s Elmendorf on the VAT

Apr 8, 2010 16:41 UTC

The Weekly Standard reports some interesting bits from a breakfast chat by Congressional Budget Office Director Doug Elmendorf. The charming Mary Katharine Ham has some quotes:

1) “Many people in Congress are interested in it,” he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it’s been implemented. “We’ve had conversations with a number of members and their staffs.”

2) Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 budget deficit, which the CBO predicted will be 90 percent of GDP: ”That would put us in a very select group of developed countries,” he said. “There are relatively few developed countries that have debt-to-GDP ratios that high.

3) “Economists think about people deciding how hard to work or how many hours to work,” he said, explaining that the decision to take a higher paying job or work more hours is partly based on being able to buy more stuff with one’s money. “Any wedge between value you’re producing for your employer and what you can buy is a wedge that can distort. It is still a tax.”

4) “If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to,” he said. “The VAT tax itself could become very complicated.”

5) “It’s not impossible that the [deficit]problem could go away,” he said. “It’s also no less possible that it could get a lot worse.” The CBO’s 90-percent figure was intended to fall somewhere in the middle of all possible outcomes.

Why Geithner and Summers may stick around for a while

Apr 8, 2010 13:56 UTC

I am writing a column on this, given the rumors about Larry Summers soon departing.  But a few quick thoughts:

1) The only folks who really seem hot for these guys to leave are liberal activist groups and union folks. Basically the Huffington Post crowd who want to break up the banks and spend another trillion dollars on stimulus.

2) I think the WH believes the economy will begin to be a slight breeze at its back in the months ahead, a not unreasonable economic conclusion. Why muddy the narrative with departures?

3) If Summers is sick of the job, he’s sick of the job. Whatever. But I don’t think there is a great desire to push him out by the WH political team or the POTUS.

4)  As for Geithner, his slow start, including tax troubles, made him a permanent subject for resignation rumors. But the success of the stress tests and perhaps now some movement on the China currency issue  have thickened his heat shield considerably.

5) What if the Dems lose both houses of Congress in the fall? The assumption is that there will be a total house cleaning on the other end of Pennsylvania Avenue as well. I am not so sure about that.  Replacements for the econ team would be tough to find given the party’s anti-Wall Street fervor, especially at Treasury. Plus, if Obama thinks his policies are right and progress is being made, then he is is going to stick. Recall that after the 1982 disaster for Republicans, President Reagan didn’t replace Don Regan at Treasury. Now after the Dem 1994 disaster, Lloyd Bentsen did leave, but he was never going to be a long-termer anyway.