James Pethokoukis

Politics and policy from inside Washington

Is Elmendorf’s CBO too pessimistic or is Orszag’s OMB too optimistic?

Apr 12, 2010 17:01 UTC

White House budget chief Peter Orszag thinks his old colleagues at the Congressional Budget Office are being too pessimistic over the potential budget savings of healthcare reform (via The Hill):

“I think if anything, the deficit impact may well turn out to be larger than what was projected by the Congressional Budget Office for two reasons,” Orszag said at an event sponsored by the Economic Club of Washington. ”One, if you look at the history of projections on major pieces of legislation, they’ve tended to be too conservative rather than too optimistic,” he said. “And second, the scoring largely does not take into account this evolution toward paying for quality, which I think in this decade will begin to pay off.”

Me: Interesting, the International Monetary Fund thinks Orszag’s Office of Management and Budget might be too optimistic about its overall fiscal forecasts. This from the folks at e21:

The IMF working paper makes a compelling case that the Office of Management and Budget (OMB) uses unrealistically low interest rates in its forecasts of future debt and deficit levels, assumes too rapid a recovery, and overstates the speed at which countercyclical entitlement expenditures will fall in response to economic growth. As the IMF explains (page 14), “aging and health related spending are not the key drivers of this debt build-up.” Indeed, policy choices are.

Optimism is nothing new. As the IMF explains, “the past record of budget projections shows a strong tendency for ‘optimistic’ budget forecasts.” With the exception of 1993 to 1997, OMB projections have underestimated the growth of deficits and debt. What’s different about the Obama team’s projections is the magnitude of their optimism. The IMF estimates that to stabilize debt below 70% of GDP would require a fiscal adjustment of about 3.5% of GDP. In nominal terms, that would require some combination of spending cuts and tax increases equal to roughly $600 billion in 2014 alone.

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.

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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.

Verily, Volcker avers VAT is in the vicinity

Apr 7, 2010 14:57 UTC

Reuters has the scoop:

The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

Me:  It would be tough to find a think-tank economist or policymaker who doesn’t believe a VAT is on its way as part of a strategy to raise taxes.  (As I wrote earlier this week.) And not just on the rich. On the broad middle class.  But it is no magic bullet.  A VAT can be tricky to implement and could merely fuel more government spending. This will be a major political battle. I don’t see how it happens without a financial crisis as a spur. At the very least, a VAT would have to replace much of the current tax system and accompany major entitlement reform. Where to begin!?


This will make the nuclear wars look like middle class kindergarten.

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Net neutrality ruling strikes blow for freedom

Apr 7, 2010 00:28 UTC

Right about now the White House is probably thinking about packing the courts. Just as the Roosevelt-era Supreme Court voided a key New Deal effort to regulate commerce in 1935, a U.S. appeals court just put the kibosh on a Federal Communications Commission effort to regulate the Internet. This far and no farther, the court said to further federal intervention in the American economy.

The appeals court kneecapped FCC intent to impose net neutrality as part of its grand broadband plan. Such rules would seek to prevent phone and cable companies from potentially charging providers that supply huge amounts of bandwidth-gobbling traffic. This regulatory debate has been turned into an unusual David (scrappy web firms) vs. Goliath (entrenched telecoms) morality metaphor. Despite being three times larger by market capitalization, Google, for example, still has far more “cool” cachet than Comcast, which challenged the FCC. The Davids are also Friends of Obama, giving massively to his presidential campaign.

But what it all really comes down to is who will pick up the tab for future network upgrades to handle applications such as high-definition video. In a net neutral world where prices were fixed at, essentially, zero, the telecom operators would pay — before passing costs along to consumers, of course. On the other hand, maybe operators want to charge content providers tolls for putting their traffic into express lanes. Or perhaps another business model is just around the bend. Under net neutrality, the current system would be locked into place.

Government should have high hurdles to clear before setting prices. In the end, net neutrality seems little more than rent-seeking by content providers who wish to use government to distort market forces in their favor. It’s akin to a computer maker successfully lobbying for price controls on shippers like FedEx when transporting goods from China. When it bought new planes, the shipper would have to eat the cost or pass it downstream.

The Internet tussle is unlikely finished. The FCC might ask for the decision to be reconsidered or seek review by the U.S. Supreme Court. The Obama administration could also turn to Congress to clarify the regulator’s authority. A more radical option, one advocated by consumer groups, would be for the FCC to legally reclassify broadband. Such a move would give the agency broad power to regulate the Internet like it was the old-fashioned landline telephone service. That sort of command-and-control apporach hardly seems a policy suited for the 21st century.


Striking a blow for Goliath again, Jim? How in hell a hollow victory for the monolith of mediocrity could possibly represent Freedom© is an excursion into Newspeak as craven as it is unworthy of serious consideration.

It appears to take more mental effort than your average tea-partying Yahoo can summon up to comprehend the first thing about net neutrality, whereby individual communication freely prevails without constraint of corrupt court-facilitated corporate excuse-makers. Comcast violates this principle.

Just remember what happened to Goliath in the end. That is what’s in store for Comcast – and all who fail with it.

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Create jobs, don’t go green

Apr 6, 2010 19:18 UTC

As usual, Joel Kotkin nicely encapsulates the problem at hand:

Now the question is whether the president can refocus on jobs. This will take, among other things, backing off the economically ruinous climate change agenda. Even the most gullible economic development officials are beginning to realize that “green jobs” are no panacea. In fact, as evident in Spain, Germany and even Denmark, over-tough green legislation can destroy the productive capacity of the most enlightened industries. Similarly in green strongholds like California and Oregon, the mounting climate change jihad could slow and even explode the incipient recovery by imposing ever more draconian regulation on businesses that can choose to migrate to less onerous locales.

There are some hopeful signs of Obama’s repositioning. His recent moves embracing nuclear power and off-shore oil drilling, however inadequate, show that he’s at least trying to triangulate between the green purists and the unreconstructed despoilers. Some sort of moderated energy legislation–there’s no way to get the more radical House version through the Senate–would reassure businesses and the public that the president has jobs as his No. 1 priority.


I agree with Liberty Lover with one caveat. Private industry necessarily makes it’s decisions with some weight on long term considerations and most weight on what will sustain their enterprise in the short term.

Fossil Fuels are a finite energy source with geographical and political aspects that can be ignored only at our peril.

Like it or not, a country’s local, state, and federal governments collectively make many decisions every day. Those decisions should place more weight on long term factors than private enterprise is able to do.

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