James Pethokoukis

Politics and policy from inside Washington

How will the right deal with potential defense cuts?

Jun 15, 2010 17:42 UTC

Bruce Bartlett thinks budget deficits will create a schism among Republicans/conservatives:

At least a few Republicans are now openly suggesting significant cuts in the defense budget, raising concerns among conservatives primarily concerned about national security. I believe that ultimately national security conservatives will be forced to choose between cuts in the defense budget and tax increases to reduce deficits.

Me: I think this would be a really interesting  and important debate. To what extent should US defense strategy be focused on China (and a defense of the Taiwan Strait, I suppose) vs. hunting down terrorists and making sure they don’t have enclaves to operate (which may include some form of nation building)? It is sort of Machines (built by defense contractors) vs. Man budgetary debate. Missile defense systems and carrier battle groups vs., say,  retaining the veterans of the Iraq/Afghanistan wars. Geopolitical strategist Tom Barnett, whom I admire greatly, argues that while the US should maintain a powerful warfighting force of the sort that raced through Iraq, it will need to focus more and more on nation building in disconnected areas of the world. Both assume an active and globally engaged US defense posture  but yet have a very different perceptions of the future geopolitical landscape.

The way out of (national) debt

Jun 15, 2010 17:18 UTC

National Review’s Stephen Spruiell makes the following point:

Italy (debt-to-GDP: 118 percent) has put together an austerity package that relies mostly spending cuts to do the heavy lifting. Portugal (debt-to-GDP: 86 percent) has put together an austerity package that relies mostly on tax increases. Because Italy is cutting spending instead of raising taxes, it has better economic growth prospects, and will bring down its level of indebtedness more quickly, than Portugal. That markets believe this is reflected in CDS spreads of 189 basis points for Italy, compared with 289 points for Portugal.

Me: Traditional fiscal austerity (higher taxes and less spending) has a poor track record because higher taxes are a growth killer. The way heavily indebted nations escape their fiscal traps is either through inflation or higher growth or default. The US should take Door #2 while also cutting spending.

The U.S. state budget shortfall in a picture

Jun 14, 2010 20:08 UTC

This, from the Center on Budget and Policy Priorities:

stategap

The Dirty Shirt Theory and the Keynesian Endpoint

Jun 14, 2010 18:34 UTC

From Ed Yardeni:

The bears are mostly, and rightly, concerned that many economies around the world are overly leveraged. They claim that both private and public debt burdens are so great now that they are depressing economic growth. This has the potential to cause a deleveraging death spiral for the global economy according to the most bearish of the bears. The bulls believe that the global economic recovery has plenty of forward momentum and is self-sustaining even if many governments are forced to implement austerity measures to placate the Bond Gods.

Speaking of the Bond Gods, I was surprised that the clever folks at Pimco weren’t mentioned in the Businessweek article on the leading stock market bears. They are the ones who coined the phrase “The New Normal,” describing an economic outlook of structurally weak economic growth and persistently high unemployment. They argued that the stock market rally over the past year was a “sugar high.” Last week, they rolled out the “Keynesian Endpoint.” The gist of this concept is that many governments have maxed out their credit lines. As a result, they can no longer borrow as much as they need to prop up their flagging debt-burdened economies. So their only remaining policy options are to devalue their currencies and to restructure their debt, i.e., default. Pimco apparently likes the dollar and U.S. Treasuries because the U.S. is the “least dirty shirt,” according to Pimco’s Bill Gross in a June 4 radio interview on Bloomberg Surveillance with Tom Keene.

Me: Of course, this was the obvious flaw with all the Return to Big Government talk. Such a return is fiscally unsustainable. Markets will prevail.

Bill Gates’ Big Government plan for clean energy ‘miracle’

Jun 14, 2010 15:26 UTC

Bill Gates and a bunch of other top corporate executives want Uncle Sam to spend a lot  more on clean energy research and development. Here’s why:

Energy innovation is a commitment to long-term prosperity. If the United States invests in its clean energy future now, our nation can reap immense benefits. We have seen this work in other sectors, and it can work in energy. Public- and private-sector innovators have made miracles happen right here on home soil—Americans developed the computer and the Internet, delivered air and space travel and decoded the human genome. Standing on their shoulders, we can see a clean energy future within reach. By scaling the good technologies of today and discovering new technologies that do not yet exist, we have an opportunity to achieve a similar miracle in energy.

So they have created a new group to push their agenda, the American Energy Innovation Council. Here are some of its members:

Norm Augustine, former chairman and chief executive officer of Lockheed Martin; Ursula Burns, chief executive officer of Xerox; John Doerr, partner at Kleiner Perkins Caufield & Byers; Bill Gates, chairman and former chief executive officer of Microsoft; Chad Holliday, chairman of Bank of America and former chairman and chief executive officer of DuPont; Jeff Immelt, chairman and chief executive officer of GE; and Tim Solso, chairman and chief executive officer of Cummins Inc. The Council is advised by a technical review panel consisting of preeminent energy and innovation experts and is staffed jointly by the Bipartisan Policy Center and the ClimateWorks Foundation.

And group has five big recommendations:

1) Create an independent national Energy Strategy Board; 2) Invest $16 billion per year in clean energy innovation (vs. $5 billion currency); 3) Create Centers of Excellence with strong domain expertise; 4) Fund the Advanced Research Project Agency-Energy at $1 billion per year; 5) Establish and fund a New Energy Challenge Program to build large-scale pilot projects.

And this is how they plan to pay for it:

When there is a system to reduce greenhouse gas emission in the United States, it will likely generate revenue—in the form of permit sales, for example. The first $16 billion of these greenhouse gas revenues should be devoted to RD&D— because new technologies will make it far cheaper to reduce emissions. This is a virtuous cycle. The United States employs other user fees on the energy system today that could be expanded. Wires charges (a small fee on electricity sales) are a natural way to finance improvement in the electric sector, just as gasoline taxes pay for transportation infrastructure. Reducing today’s subsidies to fossil fuel industries could also cover much of the distance.

Me: Why, exactly, do they think this will work? Granted, when you are talking about trillion dollar deficits, this is not a great deal of money. So maybe it is worth taking a flyer. But the evidence would indicate it is a long-shot at best. A 2003 OECD study on what drives economic growth in advanced economies found “no clear-cut evidence” that government R&D — as opposed to private sector R&D — provides any economic benefit.

What does boost economic growth, according to that study? Avoiding this scenario, for one thing: “For example, high personal income tax rates can discourage entrepreneurship since entrepreneurs are self-employed and/or managing unincorporated businesses, whose profits are taxed through the application of a progressive rate schedule to personal income.”

COMMENT

Just to throw the conspiracy cookie in here: why do you think private industry would not stifle creative clean energy research as they have for the last 80 years? This is why government-sponsored research, with appropriate oversight, through private contractors could yield better results than a straight-up free market program.

Of course the interference could always be done (as it is now, also) through lobbying efforts, but it’s much easier and cheaper to buy competitors than congressmen.

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US ready may become world’s highest corporate taxer

Jun 14, 2010 14:21 UTC

The US has the second highest corporate tax rate among advanced economies. But maybe not for long. Tell the people the bad news, Reuters:

Japan’s ruling Democratic Party will seek a reduction in corporate tax to encourage economic growth as part of its platform in upcoming upper house elections, Japanese business daily Nikkei reported on Saturday. Without citing any sources, the daily said the Democrats want to cut corporate tax in order to increase the global competitiveness of Japanese companies. Rates charged to Japanese firms are high compared with other countries, Nikkei reported. Japan’s corporate tax is around 40 percent, about 10 to 15 percentage points higher than taxes in EU nations and countries like neighbouring South Korea, it said.

Scott Hodge of the Tax Foundation finds this peculiar:

On the same day that Japan’s Nikkei business daily is reporting that the Japanese “government is aiming to cut tax on company earnings by five percentage points next fiscal year,” the Wall Street Journal is reporting that “Democrats are trying to boost their political fortunes ahead of this year’s midterm elections by attacking corporate tax rules they say encourage U.S. multinationals to send jobs overseas.”

Me: What the US should be doing is putting a long-range deficit reduction plan into place and then boosting growth through cuts in corporate and capital tax rates.

Obama budget cuts only a start

Jun 9, 2010 19:39 UTC

Cutting 5 percent of optional government spending won’t plug America’s fiscal hole. Still, President Barack Obama’s proposal may buy a bit more time with nervous financial markets. It could even kick-start a needed rationalization of government outlays. Every little helps — but Obama needs to go further.

The tweaks that Obama seems to be calling for land well short of the big cost-cuts eventually needed to get the U.S. budget in order. They would affect only discretionary spending unrelated to security, and only starting in 2012. In that year, the projection for such expenses (outside defense and homeland security) is roughly $600 billion. So a 5 percent cut would be $30 billion, or 0.2 percent of GDP. The budget deficit that year is expected to be $915 billion, or 5.8 percent of GDP, according to the Congressional Budget Office. The cuts, in other words, would easily disappear in the overall deficit forecast’s margin of error.

Entitlements are where the real money is. A 5 percent cut in health and pension programs, for instance, would amount to $105 billion. And such “mandatory” spending will increasingly dominate. Currently, this category of spending is half as large again as all discretionary spending. By 2020, that ratio could expand to 120 percent unless Obama’s deficit commission is able fashion a set of entitlement reductions acceptable to Congress.

Then again, even small cuts in wasteful or inefficient discretionary spending are good news. Obama also wants federal agencies to identify their poorly performing programs, an effort to force them to measure and critique performance — and cut expenditure that doesn’t get results.

And Obama has plenty more scope. Defense spending is half of the total discretionary category. Some Republican budget hawks might even applaud well-chosen cuts. And reducing the federal workforce by 25 percent would save $650 billion by 2018, according to simulations run by the Committee for a Responsible Federal Budget. Eliminating earmarks — self-serving pork slipped into spending bills by members of Congress — would save another $160 billion by that year. It would also show the public that Congress takes austerity seriously.

The 5 percent cuts may be at least 50 percent PR. But if they make voters more willing to accept future fiscal pain, they are 100 percent a good start.



Why Meg Whitman can save California

Jun 9, 2010 13:18 UTC

As former Goldman Sachs CEO and ousted New Jersey Governor Jon Corzine can attest, a business background hardly guarantees political success. Though California is no startup website, former eBay boss Meg Whitman, now the GOP’s nominee for governor, might have the right skill-set to tackle the Golden State’s fiscal challenges.

Not that getting the top job will be a simple click of a mouse. Although Whitman handily beat primary opponent Steve Poizner 64 percent to 27 percent, it took $80 million to do it. And California is a heavily Democratic state. Candidate Barack Obama won by 24 percentage points over John McCain in 2008. And her opponent in November Jerry Brown, is a former governor and canny pol. But Whitman’s billion-dollar fortune and voter unhappiness with Democrats nationwide might be enough to seal the deal.

Then the fun would really start. The state’s $1.8 trillion economy is afflicted by a 12.6 percent unemployment rate — the nation’s third highest — and a budget gap of $19 billion. And California has at least another $60 billion in underfunded public employee pension liabilities (perhaps as much as $500 billion when adjusted for realistic market returns and volatility), helping it earn the lowest credit rating among the nation’s fifty states.

The dire situation would seem to require a chain-saw-wielding turnaround artist capable of slashing spending and smashing unions. But a governor is not an all-powerful CEO, as many execs-turned-politicos have discovered. Instead of making unilateral decisions, governors must persuade legislatures and interest groups, as well as rally public opinion.

It’s a challenge that would not be entirely unfamiliar to Whitman. True, ebay was a growth business for most of her tenure. But growing the online auction firm into an Internet giant required massaging and nurturing a large and disparate community of buyers and sellers. She had to discern the messages of the marketplace and react astutely. As governor, she would need similar capabilities in balancing the needs of differing constituencies, be they voters, teachers unions or municipal bond investors.

Whitman also understands how government can accidentally create an environment hostile to business. The Tax Foundation ranks California as having the third-worst tax climate in the nation, including high sales and capital gains taxes. The candidate says if she was starting eBay today, she might choose Texas over California. If California voters see things the same way as the Whitman campaign come November, they just might “buy it now.”

COMMENT

Socialism is collapsing, and Jerry Brown can help that process along by finishing what he started.. Whitman, like any Republican, will prolong the agony by negotiating with the Legislature, stupidly believing, like Arnold, that you can do business with liberal fascists. Socialism has to completely collapse to allow freedom to emerge from the ashes. Politics will not solve this problem.

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Back to recession in 2011? (Even kind of rhymes)

Jun 7, 2010 14:43 UTC

Tax-cut guru Arthur Laffer worries about next year. He attributes the economic rebound this year to workers and business pulling forward economic activity into 2010 to avoid more taxes and regulation in 2011. As he puts it in the WSJ today:

In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Me: That is the supply-side version of things. But even Keynesians should worry. Goldman Sachs ran a study awhile back looking at what would happen if all the 2001 and 2003 tax cuts were repealed. As I have written:

Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

COMMENT

Sub:Appeal to all world citizens.To me world is one country.
Hello Sir/Madam,
Pls do not think its a general recession.Its a tremendous failure of the global administrators(not leaders).They shd not cont. anymore.In global administration only sefless and honest people are required……….and I don’t see any other option.The development and all good things are created by only selfless and honest people,not by those people who are enjoying luxury in unacceptable level.If you pls try to understand what I meant.
thanking you,with kind rgds….Chinmoy Chatterjee from India.

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Here comes the iPad tax

Jun 7, 2010 14:21 UTC

It’s almost as dodgy a notion as nuking BP’s gusher. The U.S. Federal Trade Commission is mulling ways to subsidize the flailing news industry. Paying for it could involve head-scratchers like taxing iPad sales. What the media industry needs is innovation not intervention.

America’s struggling newspapers might like a $35 billion-a-year cash infusion. They have historically drawn 80 percent of revenue from advertising. But Internet competition — from Google to Craigslist — has halved that since 2000. Classified ad revenue alone has plunged to $6 billion from $20 billion.

But the FTC’s “possible policy recommendations” draft paper seems out of sync with a nation wary of more government bailouts and spending. Among the various subsidies: a program to pay young people to work at small-town papers. Federal funding for public radio and television might get a boost from $400 million a year to $7.5 billion, matching the per-capita spending level of Canada. Newspapers could get a tax credit for every journalist they hire. Taxpayers could also elect to donate $200 of their federal income taxes to industry non-profit organizations. (Wisely, no dollar estimate for that is given.)

In this age of austerity, all that spending would at least be paid for. Radio and TV broadcasters would be taxed up to $6 billion a year. A 2 percent sales tax on TV advertising would bring in as much as $6 billion. A 3 percent tax on monthly mobile phone service would be good for another $6 billion.

Then there’s a 5 percent tax on consumer electronics – the iPad levy – which could generate $4 billion. As if all this money weren’t enough, changes to copyright law would make it harder for search engines to make use of newspaper content.

The trouble with all this, is that government support for Old Media at the expense of New Media seems inconsistent with also advocating cutting support of Old Energy (oil) in favor of New Energy (wind and solar.) Instead of addicting newspapers to government handouts — which would also raise issues of journalistic independence from the state – it would be better to keep the playing field level.

New business models will continue to emerge and evolve, especially as the economy and ad climate improves. Journalism has a future even if traditional newspapers may not.

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