James Pethokoukis

Politics and policy from inside Washington

Obama should be pro-market, not pro-business

Jul 21, 2010 11:00 UTC

Should the Obamacrats be friendlier to Corporate America? Big Business has certainly amped up its kvetching of late. But it’s not Washington’s job to be pro-business and make nice with CEOs. That smells of crony capitalism and often just means rewarding big campaign contributors with government favors. The better measure of any given Washington policy is whether it respects markets.

To hear many U.S. CEOs tell it the nation’s free enterprise system, as they call it, is faltering. General Electric boss Jeff Immelt, a member of President Barack Obama’s economic advisory board, says government and business are “out of sync.” Ivan Seidenberg, CEO of Verizon and head of the Business Roundtable, complains that “by reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”

The cranky guys in the suits make some good points. As the U.S. Chamber of Commerce pointed out in an open letter to the White House and Congress last week, the U.S. corporate tax rate is the second-highest among advanced economies, Congress has failed to push through key trade agreements and federal spending is on a worrying trajectory. In a nation suffering from a sluggish recovery after a deep recession, every government policy should be optimized for economic growth. Addressing some or all of these problems might nudge American companies to put to work some of the $1.8 trillion in cash they are sitting on, according to the Federal Reserve.

Yet while a pro-business agenda may intersect at points with a pro-market one, they are not the same thing. Pro-market public policies make markets function fairer and more efficiently for everyone. They encourage competition and “creative destruction” and entrepreneurial capitalism. Pro-business policies often shift taxpayer money and other government goodies to favored companies, raise barriers to entry and otherwise defend the status quo.

For instance, the Chamber wants the government to cut spending by reforming the social insurance system. That sounds good — but how about also reducing the $90 billion a year in subsidies and tax breaks that the Cato Institute reckons businesses get every year? The oil and gas industries alone benefit to the tune of $4 billion annually. It would be better to eliminate such distorting political blessings and then lower the corporate tax rate for everyone.

It’s clear the 11,000 registered lobbyists working in Washington aren’t all there to foster competition and boost market forces. Their job is to gain an edge for specific corporate paymasters. During the healthcare reform debate, for instance, Wal-Mart actually lobbied for employers to be forced to provide employees with insurance coverage. The company knew it could more easily afford it than many smaller retailers.

Or take financial reform. While big banks may complain about the tidal wave of new regulation, they also know they got off easy in some respects. They weren’t broken up, nor were size limits put in place. In fact, the biggest banks have gotten bigger since the financial crisis and have every incentive to keep doing so since the bigger they are, the more likely Uncle Sam will see them as too big to fail. And what sort of climate change policy has Big Business pushed? Cap-and-trade whose size and complexity make it the perfect target for lobbying and rent seeking.

What’s good for business can also be what’s good for America. Tackling the budget deficit is one example. But whatever companies and their lobbyists would have politicians believe, it’s not always so.


@Lee_A_Arnold The web site is a great idea– one I thought of long before the health bill. The question is, why doesn’t a web site like this already exist? We have ratings and comparison shopping sites for just about everything except for medical care. Why? Likely because government intervention in healthcare and protection of existing health providers and insurance companies has reduced competition and made it impossible and/or unprofitable to create such a web site. I have severe doubts over whether the government will succeed where the market failed.

Posted by Mikeikon | Report as abusive

Just how high would taxes need to go?

Jul 20, 2010 19:31 UTC

To reiterate, higher taxes are not the answer to deficit problem (via the Tax Foundation):

So for fun, we’ve been putting pencil to back of envelope to see how else lawmakers could raise revenues to erase the deficit using tax increases alone. The results (and these are very much back of the envelope) are truly frightening.

To erase this year’s estimated $1.5 trillion deficit, we would need either to:

  • Enact a 25% VAT (Greece is still a mess with a 19% VAT);


  • Take 130% of the taxable profits earned by U.S. companies this year (that’s what you call net operating losses);


  • Raise the top three tax brackets (28%, 33%, and 35%) to 100%. Actually, this would still not raise enough money to erase the deficit – of course, assuming all the wealthy taxpayers didn’t flee to Switzerland.


  • Take 100% of the business income earned by individual taxpayers in 2008.

In other words, new taxes are not the solution to Washington’s deficit problem. That is, unless we want to wreck our economy for decades to come.

ECB study casts doubt on wisdom of more stimulus

Jul 20, 2010 16:55 UTC

The EU’s central bank argues against spending more government cash (via taxpayers) to boost economies:

Finally, our results indicate that rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. In the spirit of Giavazzi and Pagano (1990) and Giavazzi, Jappelli, and Pagano (2000), we interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances. In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.

Me: The study also found that each $1 of government stimulus spending only produces 50 cents of GDP growth.


“In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.” – that is ‘Bankese’ for War. If nations go bankrupt and cannot provide the simple services that citizens have come to expect then people will expect more from the government – not less. The only thing left will be nationalist rhetoric, armaments and final expenditure in battle and death. The part about ‘larger fiscal consolidation’ is, of course, conquering other nations and absorbing their governments while ‘depresses private demand and output’ clearly refers to the destruction of the means of production on a large scale which depresses output and, of course, the deaths of many people – which would logically depress demand for as long as they are dead.

Posted by cranston | Report as abusive

New U.S. budget chief is nod to markets

Jul 13, 2010 21:48 UTC

After spending all year reforming Wall Street, it now looks like President Barack Obama wants to reassure it. At the very least Jacob Lew, the newly nominated White House budget chief, reminds investors of better days. The last time he had the job, the budget was in surplus. And as an ex-Citigroup executive, he brings needed real-world experience to Obama’s team. But while the fiscal stakes are high, his profile probably won’t be.

Deficit vigilantes and bond and currency traders will be watching the new director closely, assuming he’s confirmed by the Senate, to see what magic he can work to help put the federal government on a path to solvency. There is little doubt Lew is a budget hawk. But he faces a far different set of challenges than when he was OMB director for President Bill Clinton from 1998 to 2001. Back then, he presided over four years of budget surpluses totaling more than $500 billion. During the coming four years, however, deficits could total $4 trillion, according to the Congressional Budget Office.

Lew is currently ensconced at the State Department. But before returning to government, he was a managing director of Citi Alternative Investments, which runs private equity, hedge funds and real estate investments.

Of course, that stint will predictably draw complaints by bank bashers of a conflict of interest, just as it did when Lew got his current job. But it is no handicap for Lew to have some intuitive feel for how financial markets will interpret his handiwork. For an OMB director these days — especially given a sense in boardrooms that Obama has undermined business interests — generating confidence is just as important as crunching the numbers.

But not generating tabloid headlines. Lew’s predecessor Peter Orszag has been the most high-profile budget chief in a generation — as much for his messy private life as for fiscal pronouncements. Orszag was also closely involved in healthcare reform, damaging his credibility with Republicans who argue he broke his promise to “bend the curve” on health costs.

Lew, on the other hand, helped hammer out a balanced budget agreement with Republicans in the 1990s. A fresh headline like that is something both Washington and Wall Street would love to see again.

VAT Attack! Will business go for it?

Jul 12, 2010 15:22 UTC

This WSJ story implies Big Business would accept a value-added tax for several reasons:

First, the VAT raises a lot of money, and Congress and the White House need a lot to avoid politically difficult spending cuts. According to one recent estimate, a VAT of 5% would raise $161 billion a year in 2012, even assuming that lawmakers build in protections for lower-income people (such as exempting necessities from the tax).

Second, many U.S. multinationals increasingly suspect they might have little choice but to accept a VAT, or some similar tax, if they hope to avoid further increases in U.S. corporate income taxes, or even win cuts in current rates.  … Some companies are hoping a VAT would encourage Congress to streamline and lower the corporate tax, something they regard as critical given international trends.

Third, even a few domestic businesses are beginning to eye the VAT as a possibility, despite the considerable administrative burden it creates. That’s largely because value-added taxes are imposed on imports at the border, and refunded to domestic businesses on their exports, making a VAT an effective subsidy for U.S. producers, according to the advocates. (Some experts disagree.)

Me: Why the rush to raise taxes? Here is the formula: a) cut spending; b) create a more pro-growth tax system; c) see what sort of budgetary gap remains.  As the Japanese election shows, voters are dubious of the need for dramatically higher taxes.


A super-sales tax is the last thing we need for our consumer-demand driven economy.

As for the end of the Bush tax cuts, that’s due to the Republicans trying to use Enron accounting for the budget. They assumed they’d be able to extend them permanently even though that would have been 10 years in the future. Just like Enron saying the receive leg of their swaps would always turn around in enough time to make their earnings goals.

And if we move to a VAT, keep in mind two points. First, Europe uses the VAT to supplement the individual and corporate income taxes. Second, we’d see a wave of VAT tax shelters, just like Europe. There are such things, I’ve seen them pitched by accounting firms.

Posted by Gaius_Baltar | Report as abusive

Christie’s moment of fiscal opportunity

Jul 12, 2010 15:04 UTC

The end of this NYTimes piece on N.J. Gov. Chris Christie sums up why Uncle Sam should not bail out the states:

It remains to be seen how well Mr. Christie will wear on New Jersey voters. Over the next year, people will begin to see the effects of his policies in their schools and towns, in his cut in funds for family planning or, for government workers, in their paychecks. The need to focus on fiscal issues has obscured some other areas where his positions are less popular, like his opposition to abortion.

It is also unclear how he would govern in boom times, when austerity is a harder sell. The governor said he would have preferred not to make some of his budget cuts, but suggested that in any climate he would have pushed for less government.

Me:  The economic crisis has created a moment of opportunity to make the sorts of budgetary changes need to put states on a sustainable path. This moment is being missed on the federal level. It is also illustrative that CC is focusing on cutting spending rather raising taxes, the exact opposite of the medicine that liberal/centrist DC policy wonks advocate.

Help wanted: U.S. über-bank regulator

Jul 9, 2010 21:53 UTC

Washington, D.C.-based institution seeks new leadership after near-brush with death and potential future of irrelevance. Strong executive skills required to manage merger with failed rival. Banking and regulatory experience are essential. Must love consumers. Lobbyists, academics need not apply.

That’s not how the White House will recruit its replacement for the Comptroller of the Currency to replace John Dugan, who is leaving next month. But maybe it should. Given the new OCC chief’s expanded portfolio, a broad range of experience is indispensable. First up is restoring the reputation of a regulator that’s been charged with lax oversight of banks before the financial meltdown and having scant interest in consumer protection.

Next is helping implement myriad new provisions of soon-to-pass financial regulatory reform, including the absorption of the smaller Office of Thrift Supervision, the regulator largely credited with missing the failings at American International Group’s financial products arm and lenders Countrywide, Washington Mutual and IndyMac. The comptroller will also sit on the new systemic risk council with the Treasury Secretary, Federal Reserve chairman and other financial regulators.

So who’s up for such a broad task? That depends. If President Barack Obama is looking for a candidate already intimately involved in the transformation of the nation’s regulatory architecture, he could go with Daniel Tarullo, the Fed governor in charge of bank supervision. The former Georgetown professor and author of a book on capital standards served in the Clinton administration.

But why would he want the job? Although the OCC will pick up the powers of the thrift regulator, oversight of the very biggest bank holding companies will be the purview of the Fed. In that respect, the OCC could be considered a step down for Tarullo.

That paves the way for an up and comer, such as Richard Neiman, New York’s top state bank regulator since 2007. Neiman knows Washington, too. He worked at the OCC earlier in his career and serves on the congressional oversight panel for the bank bailout. Even better, Neiman has actual private sector experience as head of TD Bank USA.

True, a business background would make him an anomaly among Obama appointees. But it would help him understand the real-world implications of his decisions. Whatever the choice, the White House needs to get cracking on defining, and filling, the position to achieve its hoped-for transformation of the financial regulatory system.

Raise taxes by $751 billion to save $19 billion

Jul 8, 2010 20:01 UTC

Kevin Williamson of National Review doesn’t think much of the CBO report that finds a climate change bill would reduce the deficit by $19 billion:

That piffling $19 billion deficit reduction is achieved by imposing a tax hike of three-quarters of a trillion dollars — the CBO puts the number at $751 billion — on the American people, and then spending all but the last $19 billion of the revenue generated. Here’s a radical idea: If you want to reduce the deficit by a (paltry, embarrassingly tiny, too slightly to really seriously mention it) $19 billion, how about you just pass a $19 billion tax hike and skip the part where you spend more than the cost of the Iraq War creating a new politically driven securities market to chase marginal atmospheric benefits related to the emission of carbon dioxide, which is not even the most important greenhouse gas? For perspective, you could just cancel the Depression-era farm-income stabilization program and save a nice round $20 billion.

That $19 billion in savings is great — if you only look at the balance sheet at Treasury and ignore cap-and-trade’s effects on the economy, the actual economy that exists out there in the real world. The Obama administration estimates the cost of cap-and-trade at 1 percent of GDP per year ($146 billion dollars), scholars at the Heritage Foundation put it at $393 billion per year, and others have estimated even higher costs. You know what the Obama administration’s numbers and the Heritage Foundation’s numbers have in common? They’re all a heck of a lot more than $19 billion — orders of magnitude bigger.


Has anybody in DC checked their electric bill lately or does somebody else pay for that as well?

Posted by Scarybarry | Report as abusive

A pro-growth Fed?

Jul 8, 2010 19:08 UTC

Washington continues to twist itself into knots over what to do about the weak economy. Congress can’t bring itself to spend anymore taxpayer dough on “stimulus.” So now it’s the Fed’s turn, apparently (via the WaPo):

One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank’s interest rate target is likely to remain “exceptionally low” for an “extended period.” … Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed … A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance.

Me: If the Fed wants to ensure it gets a lot more scrutiny from Congress, engaging in quasi-fiscal policy will guarantee it. But please, no one consider tax cuts — the one thing that might boost the economy and get the GOP to vote for.

Obama vs. business

Jul 8, 2010 13:30 UTC

Does this sound to you like the Obama administration takes seriously the concerns of American business that its economic policies are hurting the private sector? Treasury Secretary Tim Geithner on CNBC’s Kudlow Report:

I think businesses are doing now what businesses always do, which is they want their taxes lower and they’d like to operate with less regulation, as they always do. Our job, though, is to make sure, again, we’re creating the conditions that make this economy work better for the country as a whole. Now, just remember, when the president stepped into this job, business of America was out of business.


Tim is indicative of a DC based chameleon. It spouts the colors of in the moment politi-think regardless of hysterical perspective or rationality. Oops I’ve landed here so I must say this. It goes to show that just because you live and hobnob in the world of high finance it doesn’t mean you should be taken seriously.

Posted by Scarybarry | Report as abusive