James Pethokoukis

Politics and policy from inside Washington

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.]

Washington and Beijing’s new yuan policy

Jun 21, 2010 14:32 UTC

What does China’s new currency policy mean in terms of efforts in Congress to pass an anti-China currency bill?  Here is some of what some smart people told me. First Gary Hufbauer of the Peterson Institute for International Economics:

1.  The Chinese decision ratifies the forecast I made a while back — announcement of “flexibility” prior to G20 confabs.

2.  This will take the heat off Geithner and put the Schumer bill on the back burner.  Schumer and Geithner can both claim victory.

3.  Going forward, my expectation is that “flexibility” will translate into RMB apprecition against the dollar of around 0.5% per month, for a cumulative appreciation not more than 15% over the next two years.

4.  As the euro weakens against the dollar, China will claim (rightly) that its real effective XR is also appreciating, and that takes some of the edge off of pressure to appreciate the RMB against the dollar.

5.  My guess is that other Asian countries will appreciate against the dollar as well, but less than China.

Next up is the Philip Levy of the American Enterprise Institute:

1. To me, the puzzle is why they did not do this back in February. The move relieves a great deal of the pressure on the Chiense to revalue and they incur minimal costs in terms of export sector pressure. The only position that really united the bulk of Western critics was that Chinese stasis on currency was unacceptable. As soon as this becomes a debate over the appropriate rate of appreciation, the critics will split.

2. There will certainly be continued criticism. It is highly unlikely that China will appreciate much faster than the 6 percent annual rate they followed from 2005-2008. That’s not going to deliver the millions of jobs that Fred Bergsten, Paul Krugman, and the Economic Policy Institute have been promising. Those critics were talking about a 25-40 percent appreciation all taking place while the United States is in a liquidity trap. I never bought their premise, but if you did, time was of the essence.

3.  I doubt Sen. Schumer or Chairman Levin will be satisfied with a steady but minimal rate of yuan appreciation, but it should certainly reduce pressure on Secretary Geithner to name China a currency manipulator.

4. And, of course, it will be interesting to see whether the Obama administration will take a firm stand. If they threatened a veto, it would be the first time they’d blocked a measure because of anti-trade content within (going back to Buy America and Mexican trucks). My understanding was that Schumer had hoped to attach the provision to must-pass legislation anyways. I would be thrilled to see the Obama administration take such a firm stand, but surprised as well.

Me: Beijing’s currency concession might temporarily defuse Capitol Hill critics who want to limit imports. But it won’t dispel them. With American unemployment high and congressional elections just months away, China is just too convenient an economic scapegoat. Only if PetroChina oil was fouling the Gulf of Mexico right now could China be a more tempting political target. Trade relations are sure to remain contentious.


China’s Central Bank has sought to defuse the huge pressure being built up on China to appreciate its currency.In a statement,the Bank it talks about “reforming the currency”.There is no hard numbers about appreciation or the timeline of the reforms.It would surprise me that China appreciated the currency too soon as its economy is already slowing down.http://bit.ly/dnpa7I

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Rahm Emanuel headed back to Chicago?

Jun 21, 2010 14:14 UTC

That is the implication of this UK story about the White House chief of staff. But Marc Ambinder is dubious:

Beware the soothsayers who know the exact day and hour when the trumpets shall sound and Rahm Emanuel, the White House chief of staff, announces his resignation. First, Emanuel has said, repeatedly, that he’s told President Obama that his shelf life is about two years.  …  But Obama has no interest in seeing Emanuel depart, and Emanuel will probably stay at least long enough to oversee other staff departures and additions. Turnover at that point is normal. It’s safe to say that a chunk of the economic policy team will be keen in moving on, as efforts shift from crisis mitigation to building a new economic foundation.

Me: When I was on The McLaughlin Group a couple of weeks back, I was asked to come up with a prediction ahead of time. But the segment went a different direction, and I didn’t get to use it. My prediction was going to concern a coming shakeup in the WH economic team. But really, that is not hard to predict.  There is the burnout factor, of course. And neither Christie Romer nor Austan Goolsbee — to take two names — are creatures of Washington and sure don’t seem like they would become DC lifers. It would be a bit early for Tim Geithner to leave — Treasury secretaries usually stick for at least two years — but who knows? There are also plenty of rumors about budget chief Peter Orszag being  a short timer, perhaps to be replaced by Gene Sperling, currently at Treasury. And Larry Summers — well, he deserves a blog post of his own.