James Pethokoukis

Politics and policy from inside Washington

Why Washington should embrace innovation prizes

Jul 30, 2010 18:40 UTC

Innovation prizes put space tourism on the launch pad and helped Netflix better predict consumer movie preferences. Now they might even improve oil spill cleanup. Government should join in, too. In austere times, such rewards would be an efficient way for cash-strapped Washington to fund breakthroughs that drive economic growth.

Competitive prizes do have a successful history. In 1714, the British Parliament offered a £20,000 prize for anyone who could devise a way for sailors to accurately determine a ship’s longitude. It was eventually won by an English carpenter. In 1927, Charles Lindbergh won $25,000 from hotelier Raymond Orteig for his nonstop flight from New York to Paris. The $1 million Netflix Prize was decided in 2009 after a competition involving teams from more than 100 countries.

It was Lindbergh’s historic feat that inspired astronaut wannabe Peter Diamandis to start the X Prize Foundation in 1996. Its first award was pinned to space flight in 2004, and the organization has started a new one in response to the BP oil leak in the Gulf.

What attracted Diamandis to prizes is how they create leverage. Competitors for the Orteig Prize raised and spent some $400,000, while X-Prize teams poured in $100 million in the hopes one would win $10 million. Spending more than the actual prize money on offer enforces economic discipline, as it means the innovators need to consider a back-end business application to recoup their funds.

The first X Prize was financed by an insurer betting against its success. Scrounging up the dough for what Diamandis calls “mega-prizes” in the $100 million-to-$1 billion range would be even tougher. That’s where government can pitch in. Washington already dabbles, especially for defense research. But their use could be greatly expanded.

In the U.S., Congress should start by passing a bill now under consideration that would authorize all federal departments and agencies to use prizes. It’s supported by the White House, even though President Barack Obama was sort of dismissive of prizes during his campaign. (Back then, he didn’t think much of John McCain’s plan for a $300 million prize to create advanced battery technology.) But one of his top science advisers is Thomas Kalil, a big advocate of the idea.  And the administration has incorporated the concept into its national innovation strategy. Eventually the government could even finance “grand challenges” such as developing self-replicating nanotechnology machines or faster-than-light communications.

The key is to focus on areas where there is an identifiable market failure, or where success seems near impossible. If history is a reliable guide, private money could outmatch public expenditure by 10-to-one. That is an opportunity penny pinching politicians anywhere would be silly to pass up.

David Brooks vs. Paul Ryan

Jul 30, 2010 14:13 UTC

This bit of David Brooks’ column today jumped out at me:

Paul Ryan, the most intellectually ambitious Republican in Congress … has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale. … The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk — embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order.

Me:  The “risk shift” argument is a phony one. Unsustainable social insurance programs means risk has already been shifted onto American taxpayers. The only question now is how to structure that risk. And the only way to restructure entitlement programs so they don’t bankrupt America or saddle it with sky-high taxes is a plan like that advocated by Ryan.

COMMENT

Strong families increase the risk tolerance of individuals. Conversely, as traditional family life deteriorates, people turn to the nanny state for support. Causation goes in both directions. Any policy that strengthens the family increases support for the Ryan program. Shrinking the role of government in people’s lives strengthens family bonds. The “secure social order” that “heroic bourgeois families” seek is not the welfare state. It is the social conservative agenda: a legal framework for marriage that preserves families, schools that teach traditional values, government restrictions on pornography and the like.

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The second-quarter GDP report and the 2010 midterms

Jul 30, 2010 13:56 UTC

The uninspiring 2Q GDP report of 2.4 percent is now the new relevant data point, not the Zandi-Blinder study.

Politically,  the issue is not whether the U.S. economy will slip into a double-dip recession — though it is hardly out of the question for a negative GDP quarter to pop up this year.  It’s how the economy will impact voter mood in 100 days. Will they think America is back on track toward prosperity with growth below trend and unemployment hovering around double digits? That seems unlikely to me. And given that, this Cook Political Report forecast certainly seems realistic, if not a bit cautious:

The Cook Political Report’s current outlook is for a 32 to 42 seat net gain for Republicans. Currently there are 255 Democratic and 178 Republican House members and two vacant seats, one formerly held by a Democrat and one by a Republican. Republicans need to net 39 seats to reach a bare majority of 218 seats. … The Cook Political Report’s current outlook is for a 5 to 7 seat net gain for Republicans. Currently there are 57 Democrats, two independents that caucus with Democrats, and 41 Republican Senators.

COMMENT

There will be no double-dip because there has been no genuine recovery. Remove stimulus = remove growth = no sign of trade-gap getting anything but wider. If the US saw a consumer boom now, it would cost the Fed a fortune in further borrowing.

There will be a slip away from Obama, because Obama has not moved any closer to the American people.

There will be a Republican President in 2014….IF the GOP’s more prominent members decide to get house-trained in the meantime….and IF their natural franchise of support learns some ethics….

http://nbyslog.blogspot.com/2010/07/citi group-buying-your-own-kind-of.html

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Zandi and Blinder make a weak case for Big Government

Jul 29, 2010 14:10 UTC

Mark Zandi and Alan Blinder have launched a maximum defense of all the government interventions in the economy since 2008. Without TARP, stimulus, various Fed actions  — the who kit and caboodle – their model estimates the following:

In the scenario that excludes all the extraordinary policies, the downturn con­tinues into 2011. Real GDP falls a stunning 7.4% in 2009 and another 3.7% in 2010 (see Table 3). The peak-to-trough decline in GDP is therefore close to 12%, compared to an actual decline of about 4%. By the time employment hits bottom, some 16.6 million jobs are lost in this scenario—about twice as many as actually were lost. The unemploy­ment rate peaks at 16.5%, and although not determined in this analysis, it would not be surprising if the underemployment rate approached one-fourth of the labor force. The federal budget deficit surges to over $2 trillion in fiscal year 2010, $2.6 trillion in fis­cal year 2011, and $2.25 trillion in FY 2012. Remember, this is with no policy response. With outright deflation in prices and wages in 2009-2011, this dark scenario constitutes a 1930s-like depression.

Here are few counterpoints. First, John Taylor of Stanford:

First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model.  … So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results.  … For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed

And bit from Arnold Kling:

The model assumes a Keynesian world, in which labor is a variable factor of production that responds to incremental increases in aggregate demand. That might be an excellent assumption for 1910, when 73 percent of the work force was blue-collar. By 2000, 73 percent of the work force was white-collar. See Wyatt and Hecker. In today’s Garett Jones economy, labor acts more like a fixed factor. Blinder and Zandi do not know this (they may know it, but I doubt that it is incorporated into the model). So they do not know about jobless recoveries, breakdowns in Okun’s Law, the high ratio of permanent job losses to temporary layoffs, etc. Instead, at best they are living in 1970, with some add factors thrown in to get the model to track recent data. … I know that they think this is for a good cause. They really believe that the stimulus and TARP were good policies that got a bad rap. But in my view that does not justify this unseemly exercise in propaganda dressed up as research.

Me:  And what about the opportunity cost? All those hundreds of billions which could have been “spent” on long-term cuts in corporate and capital gains taxes that would have made America more competitive and boost growth.  Even a tax holiday (as suggested by Art Laffer) would have been a more effective approach. Instead unemployment is headed back to 10 percent and GDP growth is sliding back toward 2 percent.

COMMENT

CDNRebel: Average American corporate tax levels stand at 38%, exceeded only by the Japanese, whose rates are 39% or higher. Canada’s corporate tax rates stand at 29% and are falling quickly. Irish tax rates are 15% (!). America taxes its corporations much too heavily and, believe it or not, America now has to compete with low-tax jurisdictions elsewhere. Chase away the big corporations and all their jobs with confiscatory taxation and you will never, EVER, replace all the jobs lost during the most recent recession. There is a lot going on outside America’s borders, more than just China. Try getting informed about it.

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Obama polls continue to melt during Recovery Summer

Jul 29, 2010 13:20 UTC

President Barack Obama’s “recovery summer” has become a summer swoon. GDP growth has downshifted, as have his poll numbers. And with Democrats likely to suffer big losses in November’s elections, the president will have to rethink his economic agenda or face gridlock in 2011.

A new Reuters-Ipsos survey puts Obama’s job approval at 48 percent, down two points from June. It’s a number that doesn’t bode well for Democrats in the congressional midterms. Since 1962, the party of a president with an approval rating under 50 percent lost an average of 41 seats in the House of Representatives. Republicans currently need 39 seats to retake the lower chamber, and thereby regain control over the initiation of tax and spending bills. (Other polls are even more discouraging. The RealClearPolitics poll aggregator has Obama at 46.0 approve, 48.7 disapprove.)

Drill a bit deeper into the poll and the danger for congressional Democrats appears even more acute. In the poll, 46 percent said they would vote Republican for Congress against 44 percent who preferred Democrats. In 2008, Democrats took 55 percent of that vote. For now at least, Republicans are also much more determined to vote in November’s polls than Democrats.

Meanwhile, 31 percent of respondents said they “strongly disapprove” of Obama’s performance, a five point jump. The economy is draining his popularity more and more every day. The Reuters poll suggests it is his weakest issue, and voters are gloomier about America’s direction than they were last summer. That’s not an unreasonable assessment. Though the U.S. economy is expanding, the annual growth rate is probably now closer to 2 percent than 3 percent — not enough to chip away much at the 9.5 percent unemployment rate before the elections come around.

A change of control in Congress might seem a harbinger of gridlock next year. The dark scenario would involve battles as Republicans try to repeal parts of recent healthcare and financial sector legislation. But with greater numbers, the GOP might in fact feel more secure and thus more willing to haggle — as it did during Bill Clinton’s presidency.

Hashing out compromises would, however, also require Obama to shift toward the Republicans on key issues like taxes and regulation. Doing so would be a much better option than spending his next two years defending the sweeping reforms passed in his first two.

COMMENT

The same people that say, “the Fed Gov doesn’t do anything right” are the same ones criticizing it when it doesn’t instantly accelerate a $13T battered economy (worst since 1933) in 18 months. I would have more respect for their arguements if they had any logic or consistency to them.

Gov is only 1 component of GDP, about 25% of it. It can only do so much when the other components, Consumer+Investment+Trade spending are still hung over from 2008. I’d have to say Fed policy (equal amounts of infusion of $$ by deficit spending and tax breaks) has helped the recovery (at a minimum). It would be difficult arguement to say the policies have hindered recovery. In other words, it would have done better on its own, with no Gov investment or tax breaks.

The recovery is slow bt it IS a recovery. I wish every company in America instantly had demand to hire all the unemployed people but I also live in reality. Its more of a function of economics like supply-demand rather if the president is a Democrat or Republican. Politicians know this but they still BS you into thinking its greener on the other side. Don’t believe the hype.

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Kudlow: WH dismissive of business complaints

Jul 26, 2010 13:47 UTC

From the Great One, Larry Kudlow:

Then there’s the confidence-threatening war between business and the White House, which is also related to the liberal tax revolt. It’s still a battle royale between the nation’s business leaders and the administration over taxes, spending, regulation, and trade.

Treasury man Geithner made lite of this war at a Christian Science Monitor breakfast this week. A Daily Caller headline read: “Geithner Bored by Complaints from Business about Obama Policies.” White House chief of staff Rahm Emanuel also doesn’t seem that concerned. In a Wall Street Journal interview with Jerry Seib, Emanuel was a bit more conciliatory about reexamining regulatory issues, but he was still inconclusive.

There are two big things that businesses want right now: One is an across-the-board corporate tax cut, including cash expensing for investment. This is the single most powerful job-creator of all. The other is a senior business executive in one of the key economic policy slots in the White House. Neither of these requests seems to be on the table. But to conclude that the White House is burying the hatchet with business you’d have to see these conditions met.

So far it ain’t happening.

COMMENT

Starting to get boring; big corps want a big tax break, but what have they done to deserve one? They ship out all the jobs to the third world; they have so many loopholes in the tax code that nine-out-of-ten pay miniscual to no tax at all; they continue to spend liberally on lobby groups and advertising (TV news spots included) that somehow make them seem to be victims.

What I would propose in the face of all this propoganda is an offer of a flat-tax/no loophole policy for corporations: 15% (less than half what it is now), no deductions, take it or leave it. My guess is – with no loopholes to exploit – they will leave it and move on to exploit the developing world more fully.

PS: Kudlow is not the Great One; Wayne Gretzky is! Kudlow is a minor thinker who has been too insulated to have a fair taste of reality, but at least he can debate in earnest which is very important for real progress to be made in America. I will say this in Kudlow’s defence he was the first to make Cramer look like the utter buffoon, double-talking hedgie whore that he is. But I digress…

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Bernanke right, Geithner wrong on Bush tax cuts

Jul 26, 2010 13:30 UTC

Ben Bernanke, the Federal Reserve chairman, doesn’t want tax rates to reset higher at the end of this year, even for the rich. The White House and the Treasury think differently. Here’s how an off-the-record Bernanke might try to talk Tim Geithner, the Treasury secretary, around to his point of view.

From:      Ben Bernanke <HelicopterBen@xxxxx.com>

To:          Tim Geithner <ObamaFan2008@xxxxxxx.com>

Subject:   Bush tax cuts

Date:       July 25, 2010

T-Dawg: First, major congrats on getting the financial reform bill passed. Trust me, I don’t want to have to make another late-night trip to Capitol Hill to beg Congress to bail out the banks. (Still worried about TBTF, though.) Man, can that Pelosi give a guy the evil eye! Hope the bill doesn’t cost you that future CEO gig at Goldman! (Totally joking!)

Second, those Bush-era tax cuts that are set to expire. Look, I told Congress  that extending them might help support the fragile economy, while you said they should expire, at least for the rich. And Congress seems on both sides of the issue — of course!

I know you guys are worried about the $1.5 trillion budget deficit. So am I. And I know the president campaigned against extending the tax cuts. But as I told Congress, the economic outlook was “unusually uncertain.” I’d prefer that the few monetary policy bullets I have left stay in the barrel.

So maybe you guys could help with fiscal policy. While letting all the Bush tax cuts expire would help lower the budget deficit by $341 billion over the next two years, it would also be the equivalent of about 3 percent of GDP in fiscal tightening over that period.

Letting rates rise on just the wealthy would be less contractionary, but could still bite. Here’s the thing: Your Treasury economists have found that capital gains taxes, mostly paid by the rich, have a big economic impact. Cutting them could generate enough growth to recoup 50 percent of the lost revenue. And I just ran across a Berkeley study hinting that the tax burden on higher earners may be at the point of diminishing returns. And if you look at history, cutting capital gains taxes is followed by more initial public offerings and more venture capital. That’s all good stuff.  Plus, letting income taxes on the “rich” expire would raise taxes on two-thirds of small business profits.  Just to be on the safe side, maybe we should leave rates alone for the next year or so.

As for the deficit, you probably saw that POTUS’s commission may agree to match every $3 in spending cuts with $1 in tax increases. Getting that sorted out correctly is more important than short-term tax revenue.

Anyhoo, I am wheezing on longer than my Humphrey-Hawkins testimony. Take care and say hi to Summers for me. (Hope he’s not still cranky about my second term!)

Cheers,

BB

COMMENT

Yawn. Why do rich need tax cuts? So they can buy stock/bonds/treasuries and sit on it? To incentivize becoming ultra-wealthy in the first place? So they can spend more on ultra-wealthy gadgets, villas and trips – often OUTSIDE of America? I haven’t really ever heard a compelling reason for tax-cuts for the rich… but I think I disagree on what the level of ‘rich’ is: $250k/yr for a working couple is not rich. I would argue the bar needs to be set at $1m/yr for a working couple, $400k/yr for singles. Times have changed and the levels of what constitutes ‘excessive’ wealth deserving of a higher tax rate need to change with it. Thoughts?

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Government Motors and the Great Re-inflation

Jul 22, 2010 16:29 UTC

OK, let me get this straight:  President Obama says he wants to build a New Foundation for the U.S. economy based on savings and investment, not debt.  So the government borrows billions to prop up General Motors.  And now General Motors uses that money to go out and buy AmeriCredit for $3.5 billion so it can more easily lend money to subprime borrowers.

This strikes me as being along the lines of using tax credits and low interest rates to re-inflate the housing market. Same old, same old. As the WSJ put it last week:

Even as lenders struggle to pull themselves out of the credit crisis, signs of a new and potentially dangerous infatuation with risky borrowers are emerging. From credit cards to auto loans to mortgages, the hunger for new business as the crisis ebbs is causing some financial institutions to weaken lending standards and woo borrowers who mightn’t be able to pay.

Did Obama just sign a bailout out bill?

Jul 21, 2010 19:58 UTC

I think on this matter, this American Banker interview with Sheila Bair is instructive: But does this bill stop them from happening?

BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it. In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.

Would the Fed’s 13-3 emergency powers allow a bailout?
BAIR: Not for an individual institution, no. This is more like the debt guarantee program, or the Transaction Account Guarantee program, which we just extended yesterday. It’s for those types of programs. … This would only help healthy institutions. And if there were a default on those programs, it would automatically trigger resolution or bankruptcy and the government would have priority claim off the top.

But if we ran into the same kind of situation as 2008, won’t the government find some way to prop up the big banks if several were in danger of failing?

BAIR: If there is a true systemwide problem, that’s why you have systemwide liquidity support — through either a debt guarantee program or lending program by the Fed. It would have to be generally available. Again, if there is a default on it, that automatically triggers a bankruptcy or resolution; regulators can decide which.

Me: If multiple banks get in trouble, government does have the option of giving them support. But more importantly, does Wall Street believe it would be bailed out, even if it meant Congress bypassing the law or changing it on the spot? If you look at the cost of bank funding, it seems clear that the implicit Too Big To Fail guarantee still exists. And a gaggle of regional Fed bank presidents agree.

The state of Obama’s approval ratings

Jul 21, 2010 15:40 UTC

Well, they’re not good and signal great danger for Democrats in the midterm election. The good folks at RealClearPolitics sums things up nicely:

polls

COMMENT

Isn’t advising Obama that he should be more pro-market about as useful as the same advice to Marx, Lennin, or the favorite in the White House Mao?

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