James Pethokoukis

Politics and policy from inside Washington

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.

A coming age of austerity? Maybe

Jun 18, 2010 18:26 UTC

A Reuters Breakingviews column:

Europe’s newish cult of austerity may have some converts in Washington. The U.S. Senate is having surprising trouble passing a routine spending bill that grows the budget gap. Bipartisan resistance could hint that deficit hawks are starting to gain the upper hand in Congress.

The upper chamber rejected a bill that would have added $80-billion over 10 years to the national debt. Now that’s hardly a massive addition given the United States may tack on $10-trillion or more in total new debt over that period. The bill was also laden with politically popular goodies: more unemployment benefits, summer jobs for teens and the extension of an R&D tax credit for business. Yet 52 senators still rose to block the bill: 12 Democrats and 40 Republicans. The uprising has forced Finance Committee Chairman Max Baucus to scale back the legislation.

The Senate struggle should be a political reality check for White House critics who demand it propose a pricey plan to create jobs. Voters are growing ever-more concerned about ever-growing national debt. And Congress is clearly skittish about grandiose spending ideas such as one think-tank’s dreamy scheme to have Uncle Sam spend US$40-billion a year to directly hire the unemployed to renovate parks.

Indeed, as the failed vote shows, the Senate won’t even freely spend money on programs that were previously rubber-stamped even if not paid for. Now many in Congress are demanding new expenditures be offset by tax increases (such as on investment manager income) or spending cuts elsewhere. This attitudinal change may bode well for Obama’s deficit commission, charged with keeping America solvent.

But there may be two more immediate impacts. First, congressional leaders could be pressured to try to actually pay for permanently extending middle-class tax cuts due to expire at year end. Even a two-year extension for 2011 and 2012 would cost nearly $300-billion. Second, the hunt for revenue may result in bigger-than-expected hikes in investment taxes. The working assumption had been that dividend rates, for instance, would rise from 15% to 20% next year, not 40% as the budget currently presumes. But doing that would cost $25-billion a year. The outcomes of those battles will show if this new fiscal religion is more than just a passing fad.

Did Goldmans Sachs just douse Dems 2010 election hopes?

Jun 18, 2010 15:25 UTC

Liberal pundits and economists such as Paul Krugman have no use for the White House “Summer Recovery” PR tour. (Note that it isn’t called the “Prosperity Tour.”) They continue to attack the Obama administration for worrying too much about the budget deficit and too little about high unemployment. The White House response has been three-fold.

1) We’re not obsessed with the deficit. “That’s obvious,” Republicans would undoubtedly and snarkily reply, pointing out that under President Barack Obama budget’s plan, deficits would average $1.2 trillion a year for the rest of his term. But the serious White House point is that deficits are only an economic problem in the intermediate and long run. Certainly, both Obama administration and Federal Reserve officials argue, financial markets don’t seem too concerned at the moment given the continued low level of U.S. bond yields. That is why Obama hasn’t rushed to propose some immediate austerity program such as deep cuts in entitlements or a broad-based tax increase. America isn’t Greece. At least not yet.

2) There is no appetite in Congress to pass a pricey jobs bill. As the difficulty in getting the Senate to pass the deficit-expanding “jobs bill” reveals, debt fears are starting to take hold on Capitol Hill. (Or at least fears that voters are starting to worry about all the red ink.) Consider these failed Senate votes a reality check for liberal groups clamoring for a “New New Deal.” The union-backed Economic Policy Institute, for example, wants to spend $400 billion to create nearly 5 million jobs this year. The think tank would try and pay for it with a tax on stock, bond and currency trading. But there is little support for that in Congress, and even the Treasury Department thinks it a bad idea.

3) The labor market may just surprise you — and in a good way! There is a statistical relationship called Okun’s Law (really more of a rule of thumb) between GDP growth and job growth. A simple Okun analysis leads to the conclusion that the unemployment rate rose higher than was warranted given the severity of the Great Recession Why? Perhaps businesses, fearing another Great Depression, panicked and just hacked their workforces to bits. Okun’s Law was suspended, but only temporarily perhaps.

If one buys this theory, then eventually there should be some payback for that psychological overreaction. At some point soon, unemployment should fall way faster than what the rate of economic growth would indicate according to Okun’s Law. At least this is what the White House —  and congressional Democrats hope. And if they are right, the job market might well unexpectedly strengthen right into the November midterm elections, helping avert the worst for Democratic House and Senate incumbents. No Republican tsunami.

But a brand new study from the economics team at Goldman Sachs throws cold water on all this. Their analysis is that the deviations from Okun’s Law were within the historical norm, so no sharp rebound (bold is mine):

It is a common belief that employment and hours worked fell more sharply during and after the 2007-2009 recession than can be explained by moves in real GDP, or in more technical terms, that “Okun’s law”—the empirical relationship between jobs and GDP—broke down during and after the recession. Many forecasters believe that this implies a large amount of pent-up hiring, as the “error” in Okun’s law proves temporary and firms hire aggressively in order to return staffing levels to more normal levels relative to production.

In contrast, we have argued that the relationship between employment and GDP remains quite similar to past cyclical norms, and that employment growth will therefore follow GDP growth without a “special hiring dividend.” … The bottom line is that there is no convincing evidence for a breakdown in Okun’s law, and hence no particular reason to expect a large amount of pent-up hiring during the recovery. … Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.”

And here is a chart to help visualize the point:


Bottom Line: Unemployment of 9.5 percent or so for the rest of the year seems baked into the cake (this is what the Fed and the economic consensus see) unless GDP growth starts to boom. And good luck finding forecasters who believe that. So far, this recovery has fit into the slow-growth, New Normal paradigm. Although it was a deep recession just like in 1981-82, the recovery has only been half as robust. Voters may not blame Democrats for the Great Recession, but they will likely hold them accountable for the Not-So-Great Recovery.


Goldman Sachs has doused a lot of people’s hopes. Why would they leave out the Democratic Party?

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Banks: No friends left in Washington. Except Barney Frank. Kind of

Jun 17, 2010 18:54 UTC

U.S. financial reform keeps getting tougher on big banks — so they need to take friends wherever they can find them. Right now, that means Massachusetts Democrat Barney Frank, the liberal chairman of the House Financial Services Committee.

Not that Wall Street can afford to be choosy right now. Much to the industry’s dismay, sweeping regulatory legislation became more draconian as it moved from the House to the Senate. America’s continuing economic woes kept the spotlight on Wall Street’s role in the financial crisis, as did the Securities and Exchange Commission’s lawsuit against Goldman Sachs.

Senate Republicans, potential allies, were of no help. By not offering legislative amendments at a key stage of the Senate debate, they created a playing field for moderate Democrats to battle liberal Democrats. Even worse, the Obama administration, a moderating force behind the scenes despite some populist presidential rhetoric, has also been on the sidelines of late. Just as negotiators from the two chambers began hashing out a deal, the Gulf oil spill began monopolizing White House attention.

There was a moment when there was a real chance, for instance, that banks would have to dump their highly profitable derivatives desks. But Frank quickly jumped out and said the notorious Senate provision went “too far.” It now seems likely that banks will be able to keep those units as long as they are separately capitalized. In addition, Frank has been more sympathetic towards the financial sector’s positions over changes to deposit insurance, rules regulating credit raters and how the president of the New York Federal Reserve bank gets appointed.  Frank realizes that an overly strict bill risks alienating the few Republican senators who might actually vote for it.

Not that Frank is doing the banks’ bidding. He supports a stricter version of the Volcker Rule than passed the Senate, one that could ban most proprietary trading and investment in private equity and hedge funds. America’s most unpopular industry should consider it a trade-off – for banks keeping their swaps desks – from one of the few friends it has left.

Watching the watchmen

Jun 17, 2010 18:38 UTC

A good piece on financial regulatory reform over at VoxEu:

Furthermore, the bill does not address the risk of political capture. The same politicians calling now for stricter lending standards called for extended home ownership only a few years ago. The future roles of Fannie Mae and Freddie Mac are notably absent from this Bill, and neither is the issue of mortgage subsidisation being addressed. And there seems to be rather more political oversight than less. While accountability of regulators is important, the line between accountability and capture is a thin one.

Will the new framework help prevent the next crisis or at least reduce its probability significantly? The answer is a firm no, not because the reform steps are damaging or wrong, but simply because they only provide the framework, within which the different actors and most importantly regulators, central bankers, and politicians will act. As shown clearly on this site by Ross Levine (2010), it was the violation or intentional ignoring of rules that led to the build-up of the bubble and the subsequent bust, not the lack of regulatory power or proprietary trading.

Me: Thus all the concern about regulatory discretion …

Here’s what’s missing

Jun 17, 2010 18:09 UTC

How to lower the unemployment rate. How …  to … lower … the unemployement … rate. Lesse, I dunno …maybe growth the economy faster? Here is a bit from the UCLA Anderson Forecast:

Significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

Tepid growth leaves plenty of excess capacity, subdued pricing power and very little inflation. This will allow the Federal Reserve to postpone interest-rate increases that the Forecast expects to come late this year or early next, as the sustainability of a modest recovery becomes clear and as the need for preemptive action against future inflation begins to dominate monetary policy decisions.

Me:  I know it’s easier said than done. But everything government does from now on needs to be optimized for growth.


It’s apparent from the recent employment stats that companies are really cracking the whip on their current employees, rather than bringing on more help. Average workweek hours are up, overtime up, factory workweek up and so on. Companies aren’t hiring, I would guess, because of the endless uncertainty emanating from Washington. Obama and his minions keep threatening new regulations, new taxes, new this, new that without any regard for the legitimate concerns of business over how much all this will cost. More and more I believe industry wants to hire but will wait until the dust settles in Washington. That means November at the earliest before the employment stats start improving.

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Obama’s clean energy pivot goes awry

Jun 16, 2010 17:51 UTC

Imagine if your local fireman started lecturing you on fire safety and the need for more research into advanced flame-retardant materials while your house was engulfed in flames. (“Dude, shut up and save my dog!”)

I mean, maybe Barack Obama’s Oval Office address would have been an effective energy speech had the Gulf gusher already been capped. But the oil is still flowing. And until it stops, shifting from the BP spill to the broader White House energy agenda seems an awkward political and policy pivot. The whole thing had an air of unreality to it.

Obama tried to cleverly argue that the spill is less like a natural disaster than it is an epidemic. One does its damage in minutes, the other in months or years. So not only must America be patient, but it is also entirely appropriate to use the oily mess in the Gulf as a catalyst to quicken America’s long-term shift away from fossil fuels.

But an appeal to focus on the future sure seems like a hard sell to an American public watching damage estimates rise daily. A government panel announced the same day as Obama’s speech that it thinks as many as 60,000 barrels a day are flowing into the Gulf. That’s double last week’s projection and way above the original guess of 5,000.

But in his speech, Obama could offer no new hope for a quick end to the crisis, only plans for cleanup (including how BP will pay) and prevention — and a potential clean energy future. But the president’s green dreams may turn into a nightmare if Republicans smash the Democrats in the November congressional elections. And the spill is making such a rout ever more likely by slowly eroding the president’s popularity.

But Team Obama and his Democrat allies on Capitol Hill don’t see it that way. They believe the oil leak disaster has helped persuade voters that action is necessary even if it creates a short-term drag on the economy. And they are betting more Republicans will decide they can’t any longer merely oppose Democratic plans.

For his part, Obama says he wants to “aggressively accelerate” America’s shift away from fossil fuels through business subsidies, government R&D funding and carbon emissions pricing through a cap-and-trade system.

But is there any evidence any of this would actually work? Obama’s 2009 stimulus package increased funding for alternative energy research, and currently the government is spending about $5 billion a year on everything from renewables to smart grid technology. And a new group of business execs, including Microsoft’s Bill Gates and GE’s Jeff Immelt, is pushing Washington to triple that level of funding. They point to such successful government R&D efforts as Internet and Human Genome Project.

But energy has been tricky for Uncle Sam. For instance, the 1970s energy crisis led to a federally funded synthetic fuels project beset by cost overruns and technical failures. (The 1980s collapse in oil prices didn’t help, either.) And a 2003 OECD study found that government-led R&D doesn’t seem to boost economic growth, or at least not in ways that can be easily measured by economists.

But first things first, Mr. President. The Pivot can wait.


What is needed are energy systems that are inexpensive, clean, and self contained, do not rely on fossil fuels and can be developed and maintained locally. You think I am dreaming I can feel that in my bones! Yet over the past (give or take ) hundred years or so, scientists, inventors and various curious people, have developed ideas and innovations, that would help us move totally away from our reliance on the presently accepted norms of oil, coal and gas – aka ‘fossil fuels’. Consider the work of Nikola Telsa and Stanley Meyer for starters!

If our governments are sincere in their attempt to reduce carbon emissions, and also reduce our dependence on fossil fuels, then why have they hidden this information from us? It is known that they have had knowledge of most of these innovations and scientific discoveries for a very long time. How do you define ‘sincerity’? Or better still can you say ‘sincerity’ and ‘government’ in the one breathe? An oxymoron!

http://just-me-in-t.blogspot.com/2010/06  /define-sincerity.html

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BP oil spill pollutes Obama energy speech

Jun 16, 2010 16:08 UTC

The United States needs a long-term change in its energy policy. Right now, it needs oil to stop gushing from the broken BP well into the Gulf of Mexico. Barack Obama tried to tie long and short together in his first Oval Office address. But the White House will struggle to get Americans to focus on the future as long as the spill continues.

The president certainly gave it his best shot. He argued that the BP  mess is more like a persistent epidemic than a one-time natural disaster. The moral of the analogy is two-fold. First, America must be patient in dealing with the oily mess in the Gulf. Second, the disaster should encourage a national shift away from fossil fuels to cleaner sources of energy.

But for the American people, the future sure looks a long way away. A government panel announced the same day as Obama’s speech that as many as 60,000 barrels of oil are flowing into the Gulf every day. That’s double last week’s projection and way above the early estimate of 5,000 barrels a day.

It is almost two months since the explosion which started the leak, but Obama could not offer a quick solution. There were only plans for cleanup, including harsh words on how BP will pay, and prevention — and a potential clean energy future.

The president’s green dreams may turn into a nightmare if Republicans smash the Democrats in November’s congressional elections. The spill, which is slowly eroding the president’s popularity, makes such a rout ever more likely.

Still, some polls suggest a national willingness to make economic sacrifices for the sake of kicking the oil addiction. And the first step need not be too expensive. A new study from the Environmental Protection Agency shows that one proposed energy bill, which includes a carbon emission trading scheme, would cost the average American household only about $100 a year.

So Americans might be amenable to the president’s long term message — after the crisis is over.

Why economy may not save 2010 Democrats

Jun 15, 2010 20:41 UTC

“Hope” wasn’t just a major theme of Barack Obama’s 2008 presidential campaign. It also might be a one-word summation of the 2010 midterm campaign strategy devised by the White House and Democrats on Capitol Hill. They hope voters get more comfortable with healthcare reform. They hope voters really care about the technocratic bank bill. And, most importantly, they hope voters begin to sense some impact of a slowly recovering economy on their personal financial situation.

Oh, and they sure hope the dang hole gets plugged, of course. It’s that last one that’s really biting Democrats at the moment. Obama’s approval rating, after more than a year on the downswing, had finally turned around in April. Then came the gusher in the Gulf. The president’s numbers are now at the lowest level of his presidency. According to weekly Gallup polling, just 46 percent of Americans approve of his job performance (with 46 percent disapproving). If history is a guide, Democrats will suffer heavy losses should Obama’s low numbers persist into November.

Certainly the BP “well control incident” — as the company might put it — is playing a big role in all this. Polls consistently show a ten percentage point gap between those who think Obama is blowing it vs. those who think he’s on top of things. And the closer voters are to the spill, the more critical they are. Just take a look at these numbers from Public Policy Polling. While Louisianans are way angrier with BP than Washington by 53 percent to 29 percent, they are pretty mad at both. By 50 percent to 35 percent, they now think President George W. Bush did a better job handling Hurricane Katrina than Obama’s job responding to the oil spill. Maybe Obama’s prime-time energy speech will turn things around. We’ll see.

But the prime shaper of the 2010 political backdrop is still the economy. A growing gaggle of economists now fret that growth will decelerate in the second half of 2010. Even bullish Ben Bernanke’s Federal Reserve is looking at a Plan B should the economy slow sharply. No double-dip recession, perhaps, but not enough economic oomph to dramatically lower the unemployment rate. In fact, it may again top the 10 percent level before year end. And if it doesn’t, the reason is more likely a shrinking labor force — as measured by government statisticians — than a surge of new jobs.

And the following numbers will only add to the sense of deepening Democratic gloom. A poll for NPR looked at the state of the races in 70 competitive House districts. Just 41 percent of voters favored Dems vs. 49 percent for the GOP. In the 30 most-competitive districts currently held by Democrats, Republicans led 48 percent to 39 percent. And in the 60 Dem districts overall, Obama had just a 40 percent approval rating.

But these results may be the ones most worrisome to Obamacrats in Washington. Only 37 percent of voters in the Dem districts believed the following: “President Obama’s economic policies helped avert an even worse crisis, and are laying the foundation for our eventual economic recovery.” On the other hand, 57 percent agreed with this statement: “President Obama’s economic policies have run up a record federal deficit while failing to end the recession or slow the record pace of job losses.”

In Washington, they call that “losing the narrative.” Democrats can only hope they can somehow get it back.


The reasons why Dems are losing are as follows: (1) they’re supposed to be Democrats, not Republicans, (2) they seem incapable of explaining anything simply and clearly, (3) they are spineless, (4) they are clueless, and (5) they have sold out to big business.

The ONLY reason why Democratic candidates will win against a Republican opponent is because the Republicans are choosing people who are completely insane.

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