James Pethokoukis

Politics and policy from inside Washington

Growth only way to avoid U.S. economic collapse

Jun 30, 2010 20:43 UTC

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.

Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less.  Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path.


Finally we are seeing Collapse in the mainstream media. What does this mean? It’s only being said in places like tiny Vermont, but Collapse is the breakdown of the unsustainable U.S. Empire: the largest, most brutal, most environmentally destructive empire of all time.

Vermont secessionists utterly reject the infinite growth paradigm as a key to the future, just as we led the opposition to the 1803 Louisiana Purchase, the national embargo of 1807, and the War of 1812. New England secessionists also expressed their opposition to a military draft at the Hartford Convention of 1814. Abolitionists in New England urged northern states to disengage from the Union.

What we have in common is a commitment to sustainable economic development, local food & energy production, to bring home the Vermont Guard troops from Afghanistan and Iraq, and to return Vermont to our status as an independent republic as we were until 1791.

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Financial reform meltdown

Jun 29, 2010 18:33 UTC

Democrats are reopening the House-Senate  conference committee to deal with GOP opposition to the $19 billion tax to pay for the bill.  This likely means that Dems not only didn’t have Scott Brown’s vote, but either Susan Collins, Olympia Snowe or Chuck Grassley went from “yes” to “no.”  Maybe all of them.

And maybe they will get the money from TARP or the FDIC. But banks had better hope U.S. Democrats have a Plan B. Yes, big lending and trading institutions face hard changes from the passage of U.S. financial reform. But legislative failure — suddenly less far-fetched than it seemed — might be worse. If they fail, the uncertainty, haggling and headlines could drag on into 2011. A few thoughts:

1) Lobbyists who started the July 4 holiday early following last week’s congressional compromise are probably regretting it.

2) Scuttling a major piece of legislation over such a trivial sum may seem unlikely in an era of trillion-dollar budget deficits. Then again, a similar fiscal debate is preventing the Senate from approving a new jobs bill despite high unemployment.

3) If reaching 60 proves impossible, the calculus will change. There’s an existing Republican counter-plan, and the party is apt to increase its ranks in the next Congress. The GOP reform plan isn’t all that different from what Democrats have put forward, but the banks consider the changes less onerous.

4) But 2011 Republicans, infused with Tea Party populism, might be a more combative lot. The House-Senate conference committee offered a preview. Conservatives tried to force banks to pay for the wind-down of $140 billion bailout recipients Fannie Mae and Freddie Mac. Incoming Republicans might also be more amenable to shrinking the banks as the only way to prevent the problem of “too big to fail.”

5) At the very least, the messy process would generate vast, new uncertainly for industry executives and investors. No wonder banks’ shares rose on news of the compromise agreement, despite its potentially heavy costs.

U.S. financial reform no longer a done deal

Jun 28, 2010 19:54 UTC

The political calculus for U.S. financial reform is suddenly more complicated. Last Friday’s 5 a.m. Capitol Hill compromise was meant to be the culmination of months of hard-fought wrangling. But Republican Scott Brown’s wavering and Democrat Robert Byrd’s death put the proposal back in jeopardy.

The legislation hammered out by congressional negotiators last week still needs to pass both chambers in Congress. In the Senate, it had been expected to get 60 votes, the exact number needed to defeat any Republican attempt to kill it. But few thought the bill would contain a $19 billion assessment over four years on financial firms, designed to pay for the new rules.

For Brown, the junior senator from Massachusetts who consented to an earlier version of the bill, the surprise addendum might be a poison pill. First, he has ruled out voting for any new taxes. Second, the fee might be interpreted as hitting mutual fund firms such as Boston-based Fidelity Investments.

If Brown defects, then Democrats would need to turn one of the two members of their party who voted against the earlier Senate version of the bill — Wisconsin’s Russ Feingold and Washington’s Maria Cantwell. The White House would try to argue that the bill had become tougher in the House-Senate conference committee. But if only one of them switched positions, the bill would still be temporarily a vote short of 60 thanks to the passing of West Virginia’s Byrd.

Here’s where it gets tricky. If that state’s Democratic governor immediately appoints a replacement for Byrd so that his or her vote can count in the Senate this week, there might have to be a special election this year to pick a successor to fill the remainder of the term. If he waits until July 3 or later to appoint a successor to Byrd — potentially missing the vote — no election would have to take place until 2012, a safer political option for Democrats.

With the Senate about to go on a week-long holiday, the second option would risk delaying final passage of the bill and its signing into law by President Barack Obama. That interregnum might give Republican leaders enough time to change a few minds their way. With votes unexpectedly scarce, Obama has more work to do if he wants a bill ready for his signature.


This year’s Golden Globe Award was voted the deadline in November 15th, before the World Cup qualifying play offs, which makes the C, not by virtue of its performance in the play offs Shen Yong, the competition become golden weight

Is financial reform in trouble thanks to Brown and Byrd?

Jun 28, 2010 16:26 UTC

The political calculus for U.S. financial reform is suddenly more complicated. Last Friday’s 5 a.m. Capitol Hill compromise was meant to be the culmination of months of hard-fought wrangling. But Republican Scott Brown’s wavering and Democrat Robert Byrd’s death put the proposal back in jeopardy.  I think the assumption is that Dem “no” votes Cantwell and Feingold will both switch to “yes” so that in the end losing Brown and temporarily losing the WV Dems vote won’t matter. But even though the early spin was that the bill got tougher on Wall Street at the end, bankers aren’t jumping from the windows today. That might irk Cantwell and Feingold and keep them against it. But I doubt it. Give the  bill a 80-90 percent chance of passage.


Feel sorry for the death of Senator Byrd, but holy cow! How the hell can a 92 year old man be making policy for a country? If there can be term limits for most positions then please PLEASE make age limits too. 70 seems reasonable, ie can’t run for office if one would take office after one’s 70th B-day. Just my two cents…

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U.S. financial reformers hang tough to bitter end

Jun 25, 2010 17:56 UTC

Even near the bitter end, big banks hoped Congress would pull its best punches. But the regulatory reform bill agreed early on Friday by U.S. House and Senate negotiators lands solid blows. Though no knockout, it looks set to constrain Wall Street banks’ risk-taking — and profit.

As the most radical reformers see things, of course, banks have just performed a successful bit of rope-a-dope. Despite the most serious financial crisis since the Great Depression, they haven’t been broken up like early 20th-century American cartels. And they will continue to be allowed to do things that go well beyond narrow lending to businesses and consumers. But it will be a far trickier task to turn that into lavish returns and bonuses.

Banks won’t be completely banned from running lucrative derivatives desks, as they once feared. But for riskier varieties of instruments, they will have to spin trading off into a separately capitalized subsidiary. Most derivatives will also have to be centrally cleared. Both changes are likely to affect banks like JPMorgan that have big derivatives businesses.

The Volcker Rule also survived the more than 20 hours of last-ditch negotiations. Banks will be largely barred from trading solely for their own accounts — a blow to Goldman Sachs and other firms that have done this very successfully over many years. The financial industry did win a concession on the private equity and hedge funds front, gaining the ability to hold small investments, relative to their capital, rather than none as originally proposed.

Large banks and hedge funds will also have to pay for the implementation of the bill with an unexpected risk-based fee. That will cost $19 billion over five years — hardly crippling, but a further burden nonetheless.

The extent to which these and other provisions will hit profits is unclear. A Citigroup analyst took a swing at it, calculating that earnings at Goldman and Morgan Stanley, for instance, could be reduced by a fifth. But such estimates should be taken with a grain of salt. It will take a while to fully digest the implications of the 2,000-page bill. And details on other key changes, like higher U.S. and global capital requirements, are still ahead.

Take the Volcker Rule. Though the fairly strict final version appears to be a defeat for the financial industry, the implementation process is complicated. Banks might have as long as seven years to come into compliance. In political terms, that means several congressional elections and myriad opportunities to weaken the limits. As it is, regulators have broad authority to permit trading that enhances a bank’s safety and soundness.

So by the time its provisions bite, lawyering and lobbying might have made the bill less painful for banks — though that didn’t happen as it made its way through Congress. For now, bankers can take comfort in still having a more or less intact business — and greater certainty about the rules that will govern it.

For banks, financial reform taking turn for the worse

Jun 24, 2010 15:27 UTC

Wall Street always knew financial reform was coming. The big banks never really thought there was a chance of killing it, not that they really tried to. In fact, once the effort moved into 2009, they wanted it over sooner rather than later. The longer the process dragged out, the greater the chance of something crazy popping up and the more political and profit damage they took. For instance: The “break up the bank” movement was almost successful. As it is, the Volcker rules and derivatives reform may end up far tougher than their worst-case scenario.

But now things are going pear shaped. House negotiators want big banks to pay for any future wind-down of Fannie and Freddie and are trying to slip in a bank tax to repay TARP funds. And the hits keep on coming. Democrats have concluded that with the unemployment high and Obama’s approval falling, bashing the banks is the best ticket they have in the November midterms. Liberals have always suspected that despite Wall Street grousing about reform, they were actually quite happy that it was not tougher.  Maybe, but now the complains are real.


The fact is that “big” banks are “too big to fail,” “too big to regulate,” “too big to manage,” and therefore, “too big to keep around…” More at:

http://wjmc.blogspot.com/2010/04/too-big .html

Thank you for the opportunity to comment…

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Dems push middle-class tax hike

Jun 23, 2010 16:05 UTC

The U.S. is pushing its G20 counterparts to focus  more on growth than deficits right now. Too bad America — or at least Congress — seems to be doing neither. Not only is Uncle Sam on pace to rack up another $10 trillion (at least) in debt over the next decade, but little is being down to boost growth and jobs. The latest: Democrats are now openly talking about extending the middle-class Bush tax for only a couple of years until, you know, when the economy is booming. Of course, we may still have unemployment at 8 percent then. I could see letting the Bush tax cuts expire and then replacing them with a more pro-growth tax policy.  But a $3 trillion tax hike? Nothing pro-growth about that.

Peter Orszag, the bizarro David Stockman

Jun 22, 2010 16:13 UTC

Peter Orszag never really seemed to want the job as President Barack Obama’s budget chief. His successor should be just as reluctant, having to deal with the fiscal aftermath of the stimulus and healthcare plans.

But there is little doubt Orszag will depart as the most consequential Office of Management and Budget director since the notorious David Stockman nearly torpedoed Reaganomics in the early 1980s by calling supply-side economics a sham. In hindsight, of course, Reaganomics looks pretty good, including 17 million net new jobs and a collapse in inflation.

But Orszag was no whistle-blower of some perceived fiscal sleight-of-hand. Instead, it was just the opposite. He was a facilitator and enabler, providing the intellectual firepower and energy behind Obama’s drive for healthcare reform. Orszag made the case to the president that reducing healthcare costs was an important element to slashing the long-term budget deficit. More importantly, he persuaded Obama the U.S. healthcare system was so inefficient, overall spending could be restrained while also providing near-universal health insurance coverage. In effect, “bending the curve” was a free lunch. Or at least close enough for government work.

It was an audacious claim, mostly based on a single controversial academic study. Republicans never bought into the theory, and neither did Orszag’s successor at the Congressional Budget Office, Uncle Sam’s fiscal scorekeeper. In the end, Obama was forced to cut future Medicare spending and raise taxes to make the numbers balance out — at least on paper. Few Washington observers think those cuts will happen, meaning that the budget deficit could explode if Orszag’s novel theories don’t pan out. And even if the cuts occur, many budget hawks were counting on them to make Medicare sustainable over the long-term, not create a new entitlement.

Too bad Orszag didn’t use his considerable political skills – Larry Summers was supposedly warned to be careful of the guy “wearing the cowboy boots and bad toupee” – to make the case for entitlement reform first. In that regard, Orszag’s legacy is uncertain at best.

The next head of OMB will need 24-carat credibility and authority. The president’s confidence won’t be enough. A potentially more Republican Congress will be needed to pass any fiscal austerity reforms recommended by Obama’s deficit panel. And voters will need to understand those painful fixes, while U.S. bond and currency investors will need to believe they’ll really happen.

One option would be a disciple of Bill Clinton, the last president to balance the budget. A bolder choice would be David Walker, the government’s former chief auditor. He now runs a foundation created by Blackstone Group co-founder Peter Peterson devoted to fiscal sustainability issues. Walker is a fire-and-brimstone preacher on the deficit, albeit one with a penchant for folksy aphorisms. He could both crunch the numbers and communicate them. But given the magnitude of the challenge, getting him might take some convincing.


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U.S. economy still starved for credit

Jun 21, 2010 15:39 UTC

So says Paul Kasriel of Northern Trust: “I consider this financial sector net credit contraction the major headwind for the economy, preventing a more normal robust cyclical recovery.”

And here are some eye-opening charts:


This one, too:



The Fed is filled with bankers, and bankers love austerity in the forms of scarce capital and high interest rates. Clearly, the Fed resents having to lend money at low interest rates, as do banks in general. The most important objectives of the Fed (low inflation and high economic growth) are all well-served by maintaing economic austerity, regardless of how those austerities derail people’s lives. As long as people are not starving, and until interest rates go up sharply, there is no reason or incentive for the Fed to lend money to anyone. Again, the Fed is manned by bankers who love austerity in the forms of scarce capital and high interest rates, and until the Fed gets its way, the Fed mantra will continue to be, “let them eat cake…”

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How to grow the U.S. economy

Jun 21, 2010 15:11 UTC

Andrew Liveris, chairman and CEO of Dow Chemical, has some ideas, which he outlines in a USA Today op-ed. Here is an excerpt followed by my take:

1. New infrastructure that leverages private investment in plant and equipment, and modernizes our nation’s communication networks, electric grids and air, sea and land transportation systems. [Me: I am not sure we need $2 trillion in fixes like civil engineers contend, but this is a proper role for government.]

2. R&D that’s cutting edge. The experiences of competing countries demonstrate that R&D investment leads to greater economic growth, worker productivity and higher standards of living. [Me: Sure, businesses love tax credits and subsidies to do research, but there is very little economic evidence that government can do much to directly affect innovation beyond creating a fertile climate.]

3. Education that leads the world. The U.S. needs to enhance student skills in science, technology, engineering and mathematics, where we widely lag global competition. [Me: I certainly don't think this is a money issue. Here is a great article in the NYTimes about how better classroom management skills have a near-miraculous impact of student achievement.]

4. A “pro-trade” policy that creates a “level playing field” with limited tariffs and barriers to entry. The U.S. should adopt pending trade agreements such as Doha, which ensure that same treatment with key foreign partners — reciprocal market access to enable free and fair American participation.  [Me: Agreed. Subjecting your country to maximum competitive intensity will boost innovation and growth.]

5. An alternative energy strategy that will secure the abundant energy that industry needs to stay competitive. Energy is the lifeblood of U.S. manufacturing, but we have no comprehensive policy to support it. We should become far more efficient in its use, seek lower carbon alternatives and, with proper safeguards, expand traditional supply. [Me: Not sure what this mean in practice.]

•Regulatory reform is required for U.S. manufacturing, especially as concerns the environment. Regulation is necessary, but smart regulation isn’t always practiced. All too often, we see rules that bog down product innovation or that lack a solid scientific basis. [Me: Yes. If  America needs a czar, it should be someone to looks at bad regulations.]

6. U.S. tax policy should support manufacturing, not militate against it. Our corporate taxes rank second highest among countries that belong to the Organization for Economic Cooperation and Development, and are only going up. The House’s jobs bill will raise taxes $80 billion on U.S.-based corporations and small employers. Next year, taxes will rise on capital gains, dividends and small businesses. Also, the U.S., unlike every other major OECD economy, taxes on a worldwide, not territorial, basis. [Me: Agreed.]

7. Reform in civil justice is needed to support advanced manufacturing and end lawsuit abuse. In the U.S., unlike other OECD countries, plaintiffs’ lawyers unduly burden corporations with demands for compensation disproportionate to their client’s injuries, or even when there’s no injury. [Me: Agreed.]