James Pethokoukis

Politics and policy from inside Washington

Forecasting the Bush tax cuts

Aug 17, 2010 13:38 UTC

Wall Street’s conventional wisdom is that markets like political gridlock — but not if inaction means hitting a weak economy with a big tax hike. When Congress returns from vacation, it needs to deal with the expiring tax cuts signed by President George W. Bush. The Obama deficit panel, however, could limit any extension of them.

The Obama administration says it wants to extend only that portion of the 2001 and 2003 tax cuts affecting the middle-class. Doing so would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation, not counting borrowing costs. Allowing upper-income rates to rise on investment and labor income, on the other hand, is predicted to generate about $678 billion over 10 years.

Few in Washington want to let all the cuts disappear at year-end. Doing so could potentially knock between 1 and 3 percentage points off GDP growth next year, according to various estimates. But that will be the undesired outcome if Congress can’t reach agreement. While most Republicans want to keep all the 2001 and 2003 Bush tax cuts, President Barack Obama and most congressional Democrats want to let the ones for the richest expire. Treasury Secretary Timothy Geithner says he’s confident the fledgling economic recovery could withstand the blow.

But news of decelerating U.S. growth is hardly helping his argument. And given voters’ anxiety about the economy, Congress – with the entire House and a third of the Senate up for reelection in less than three months – might not be quite as risk tolerant as Geithner. A new NBC News-Wall Street Journal survey finds 71 percent of respondents would accept extending all the tax cuts until the economy recovers.

The political calculus is complicated. Congressional Democrats trying to follow the Obama plan could hold a pre-election vote. But Republicans would likely reject a permanent middle-class extension if the upper-income tax cuts weren’t also included. If Democrats offered a full, temporary extension, the GOP would probably accept that compromise. Such a deal would run contrary to the White House’s intentions — but Obama hasn’t vowed a veto either.

Muddling matters further is the president’s deficit commission. One recommendation could be to cut future Social Security spending in exchange for expiry of Bush tax cuts for the richest. That means even an agreement on a one- or two-year extension could get partly overwritten soon after. The only thing for sure is that following the messy passage of stimulus, health care and financial reform, the battles aren’t getting easier. And the tax debate isn’t doing anything to help clarify America’s cloudy economic outlook.

COMMENT

Every thing we pick up says, Made in China. Soon our money will say made in China. A little on the light side, when you pick up a fortune cookie, it says Made in New York.
I agree with the top comment. I have suggested to my congress rep. that a national lottery would be the answer. People would much rather give money freely than be taxed. Bringing in more money should go hand and hand with cutting expenses. I think and always have that we should spend more time protecting our borders than going head first into a war for political reasons, (my opinion). We have lost respect around the world and it continues because we are so arrogant as to not wait on United Nations sanction. I believe we are in a war just like Vietnam. When we are fighting people who will never quit, as in Vietnam, how can we win. I am saddened over all the young men and women giving their lives every day. Remember several years ago when South Korea was burning our flag and saying, Yankee go Home. That has changed now. We can not and should not try and police the world. We went into Iraq supposedly over weapons of mass destruction and take out Saddam Hussein. We did and I think should have brought our troops home. We can not make every country a democracy, (actually we are a Republic).

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Black Wednesday and the 2010 midterms

Aug 11, 2010 17:27 UTC

I think we can officially declare Recovery Summer dead. Here is today’s tale of the economic tape.
Here is IHS Global:

Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2% rather than the 2.4% originally estimated, placing the economy on even shakier ground than it seemed, and underlining why the Fed has shifted towards an easing bias.

Action Economics:

The market’s might face their biggest downside economic surprise of this recent growth slowdown yet in the form of a downward Q2 GDP revision, which today’s U.S. trade deficit figures suggest will be a whopper. We now expect the 2.4% advance Q2 GDP gain to face a huge downward adjustment to the 1% area, with a hit from trade of as much as $18 bln that we conservatively peg at $12 bln, as the BEA’s seemingly pessimistic $45 bln deficit assumption for June turned out to be excessively optimistic instead. A change in China’s VAT rebate policy in June may explain a part of the surprise, though the GDP gain in Q2 is likely poised for an alarming 1-handle regardless of this distortion.

Barclays Capital:

The nominal US trade deficit widened to $49.9bn in June from $42.3bn in May, greater than we ($43.5bn) and the consensus ($42.1bn) had expected and the largest monthly widening in the deficit on record. In real terms, the trade deficit widened to $54.1bn from $46.0. This reflected both soft exports and a surge in imports: nominal exports were down 1.3% m/m (with a 2.2% drop in goods exports) and imports up 3.0% (with a 3.3% jump in the goods component). Both were fairly broad based, but imports were partly driven by a 53.2% surge in the volatile civilian aircraft component, following a 48.9% drop in May. The deterioration in the trade balance in June was much sharper than had been assumed by the BEA in the advance Q2 GDP report. As such, Q2 GDP growth is now tracking just 0.3% q/q (saar), relative to our previous tracking estimate of 1.6% and the initially reported 2.4%.

More and more, Wall Street seems to be converging on the Goldman Sachs forecast of  a second-half growth slowdown. Hard to see how that helps unemployment or Democrat chances of holding both the House and Senate. Remember, if the labor force had not shrunk by one million workers since April, the unemployment rate would be 10.4 percent. Voters may not know those numbers, but they know the economy is far from healthy.

Once more on Blinder-Zandi and the Obama stimulus

Aug 10, 2010 17:51 UTC

Great piece by Lawrence Lindsey in The Weekly Standard on the stimulus bill and the recent Blinder-Zandi analysis of it:

This is the economic equivalent of assuming there are 1,000 angels on the head of a pin, observing that we have 10 pins, and therefore calculating that we must have 10,000 angels. The math is fine. But it sheds no light on the key policy issue—were the recently passed acts of government stimulus cost effective? The degree of cost effectiveness was an assumed number, not one calculated using any version of the scientific method.

From a macroeconomic perspective, a targeted bill would have injected money directly into the cash flow of American households and small businesses where it was needed. Many of us who supported the administration’s call for a stimulus in early 2009 recommended the reduction of the payroll tax for both employers and employees, something with the same net revenue effect as what was passed. Such a payroll tax cut would have provided an incentive at the margin for continued work and employment for more than 90 percent of the labor force. The tax provision in the actual stimulus that passed did so for less than 15 percent of the labor force, and the spending provisions impacted only 2 percent of the labor force even under the administration’s assumptions. That is bad targeting.

Poll: Americans dubious of government forgiving mortgages

Aug 9, 2010 18:32 UTC

Superpollster Scott Rasmussen apparently noticed my recent column:

A new Rasmussen Reports national telephone survey finds that:

1. 58% oppose a proposal to have the federal government forgive a portion of the mortgage debt owned by troubled homeowners.

2. 63% of voters think a government mortgage forgiveness program is unfair to those who have been regularly paying their mortgages …  vs. 23% who disagree and believe such a program is fair.

3. 48% of homeowners think government-ordered mortgage forgiveness for some homeowners would be bad for the economy … 30% say it would be good for the economy, and 15% believe it would have no impact.

4. Nearly half (49%) of Democrats say government-ordered mortgage forgiveness for some homeowners would be good for the economy. Sixty-seven percent (67%) of GOP voters disagree and say the plan would be bad for the economy. Among unaffiliated voters, 33% say good, but 47% say bad.

5. Sixty-eight percent (68%) of the Political Class say a mortgage forgiveness plan would be good for the economy. Fifty-five percent (55%) of Mainstream voters feel otherwise and think it would hurt the economy.

COMMENT

I don’t believe most of those polled were aware of who would suffer if President Obama’s mortgage forgiveness plan would ever become a reality. The derivative default swap fiasco that ripped our economy to pieces was in large part to too how many times mortgages were sold. The only real loser would be the last owner of the mortgages and I don’t think the public really cares if they get burned. Maybe if that Geitner fellow relinquishes some real information regarding who stands to lose, the President will have an easier time selling the concept to everyone and once again embarrass the Senate republicans, again.

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Soak the rich?

Aug 9, 2010 15:27 UTC

It worries me when I hear folks, mostly liberals, speak fondly of the 1950s economy and its 90 percent marginal tax rates. In this piece, James Surowiecki advocates soaking the super-rich:

A better tax system would have more brackets, so that the super-rich pay higher rates. (The most obvious bracket to add would be a higher rate at a million dollars a year, but there’s no reason to stop there.) This would make the system fairer, since it would reflect the real stratification among high-income earners. A few extra brackets at the top could also bring in tens of billions of dollars in additional revenue.

There would be political advantages, too: the reform could actually make tax hikes on top earners more popular. Critics like to describe tax hikes as hurting small business, because small-business owners make up a sizable percentage of people in the top two brackets and because small-business owners, unlike Wall Street traders, are popular on Main Street. It would be harder to mount a defense of millionaires, which may be why this year a Quinnipiac poll found overwhelming support, even among Republicans, for a millionaire tax.

And the economic reason would be what, again? You’re not going  to balance the budget that way, and you only feed the mistaken view that taxing “somebody else” will bring fiscal solvency.

COMMENT

It is certainly true that you will never bring in enough tax revenue to erase these deficits, and most likely it will have the worst impact on the middle class if the tax cuts are allowed to expire. The storied American middle class is already being wiped out. I am a proponent of a flat tax though I do not know how politically viable it is at this time. The compromise I would strike is to add more brackets on the top end on the income tax but abolish the estate tax (its flat out immoral) and eliminate/reduce the capital gains tax for 5+ years. The very rich will have a choice…invest in American businesses or start to pay down the deficit. My guess is that you will see a sharp increase in investment in energy and new technologies that would increase the potential of job growth.

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Ezra Klein: Welcome to the Recovery

Aug 9, 2010 14:12 UTC

WaPo blogger Ezra Klein yet again comes rushing to the defense of the Obama administration by making the case that the economy is pretty much as good as can be expected given the nature of the financial meltdown and recession.

A look at the history of financial crises shows that our slow, halting recovery is right on schedule and the business community’s caution is predictable.Not all recessions are created equal. Recessions caused by financial crises take a lot longer to dig out of than their more common cousins. One is like the flu. The other, a car crash. When the flu goes away, you’re good. When a collision spins to a stop, that’s when the long, slow process of healing begins.

In “This Time is Different: Eight Centuries of Financial Folly,” Carmen Reinhart and Kenneth Rogoff study every financial crisis of the past 800 years. It’s an exhaustive study, and its conclusions are depressing for a country that believes itself exceptional even in its suffering: We’re not special. If you consider unemployment, housing prices, government debt and the stock market, Rogoff says, “the U.S. is just driving down the tracks of a typical post-WWII deep financial crisis.” In some areas, we’re even a bit ahead of the game: Economic output usually falls by 9 percent. We held the drop to 4 percent.

A few thoughts here:

1) Team Obama itself is dismissive of the R&R argument. The U.S. is so unique an economy (the dollar as the global reserve currency, for instance), they argue, such historical and cross-economy comparisons are not applicable.

2) I would like to see a counterfactual simulation run on this plan: a $400 billion payroll tax holiday in 2009, a permanent 10-percentage point cut in corporate taxes,  a five-year extension of all the Bush tax cuts (giving time to totally revamp the code), and a regulatory freeze.

Can mortgage relief become a free-lunch stimulus?

Aug 5, 2010 19:18 UTC

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.

COMMENT

I’m afraid you have it all wrong. While developing our farm for our retirement the massive residential building that ensued from Government incentives and wall street thieves, and Black Swan Economic Fools caused us to end up with a development that is now underwater. Also, our home that we have owned for 28 years is now worth less than the mortgage, due to our borrowing a modest amount in order to deal with government policy based problems. Bad decision you say. Poor investment you say. The real estate market will not recover and neither will our economy if we continue to bail out the thieves of wall street who created this problem along with a congress and former administration which aided and abetted the thieves. Main street is where the real economy of the US is based. Steal from main street and give it to the rich, that’s what has been done so far and I guess what you continue to advocate while hiding under the cover of budget deficits created by government and wall street. I worked both in the Marine Corps in Vietnam era and in civil service in their college summer program. My father retired from civil service GS-17. Deep sixing was standard practice when I was in the Military, and the civil service is filled with people who run their own businesses out of their government paid for office. We have a lot of waste, but it is not out here in Main Street. We work for a living. Where is Robin Hood when we need him? Get main street back to work and our taxes will end the deficit.

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Obama’s August (Housing) Surprise, Part 2

Aug 5, 2010 19:15 UTC

The Treasury Department has officially denied it is planning the mother of all mortgage bailouts. And I have no reason to doubt Team Geithner. But of course that assumes that the whole idea was not being cooked up by the White House political team (Rahm and Ax) and not the good folks at Treasury. During the financial reform debate, banking lobbyists continually complained that Geither and Summers had been usurped by R&A in policymaking. And I have gotten zero pushback from the WH. Food for thought. More to come.

But here are some of the reactions to my piece:

1. A New $800 Billion Stimulus Through Fannie and Freddie? (Dan Indiviglio of The Atlantic)

2. Is Obama about to forgive billions in  mortgage principal? (Ed Morrissey of Hot Air)

3. An August Surprise from Obama (The Daily Caller)

4.  Help coming for homeowners (Kevin Drum of Mother Jones)

5. An August Surprise from Obama? (Glenn Reynolds at Instapundit)

6. White House to bail out underwater mortgages? (Moe Lane at Red State)

COMMENT

This is my own personal response to the idea of an August Housing Surprise. In a nutshell, I think it’s a terrible idea.

http://youngconservative27.blogspot.com/ 2010/08/throwing-more-money-at-mortgage- problem.html

I used to have a friend who would always ask me for a couple of bucks so she could get something to eat, and she would always promise to pay me back. I always told her that it wasn’t necessary, since it was just a couple of bucks. Over time, though, it started to add up. One day, we learned that a hurricane was coming, and she needed some “real money” so she and her friend could leave town until it all blew over, so to speak. I gave her forty bucks, but I told her this wasn’t like the other times, and that until she paid back the forty bucks, I wouldn’t give her any more money, no matter how little. She never paid back the forty bucks, and I never gave her any more.

Governments have a very specific responsibility with taxpayer money to spend it responsibly and not waste it. With welfare, President Clinton worked with Congress to ensure that people on welfare would someday return to the workforce, which would benefit all of us in the long run. That’s an example of responsible stewardship of taxpayer money. The TARP program is supposed to be another, although it still hasn’t been repaid and the government has accepted stock in smaller banks and lenders in lieu of repayment.

As far as mortgage “bailouts”, that’s simply complete irresponsibility. I would never have been able to “make” my friend repay the forty bucks; all I could do was what I said, to never give her anything else. The government, on the other hand, continues to give and give (our money) to people who will never be made to repay.

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An August Surprise from Obama?

Aug 5, 2010 04:26 UTC

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:

1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.

2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:

GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.

And this from Mizuho Securities:

As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping  up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.

Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.

3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.

But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

4) And don’t think the White House is worried about financial market reaction. If they thought it would pass Congress, they would be submitting a $200 billion Stimulus  2.0  (3.0?, 4.0?) right now.

August is supposed to be a slow month for Washington politics. But maybe not this one.

COMMENT

HUD recently sent a letter to mortgagees/lenders basically encouraging them to reduce principal on mortgages where the principal amount exceeds the home value. The Treasury provides the lenders and 2nd lein holders monetary incentive paid for by the U.S. Taxpayer.
(the formula for determining their incentive payment can be found here: https://www.hmpadmin.com/portal/docs/ham p_servicer/sd1005.pdf

I don’t know about you, but I have paid my mortgage payments during the past 20 years even when my principal owed was more then the value of my home in the 1980′s. Purchasing a home is a long term investment. The value changes with demand for homes.

As long as the borrower has the means to pay their mortgage they should not have their loan modified and principal forgiven at the expense of taxpayers.

Even those that are behind on the mortgages should only be provided the opportunity to refinance at the current historically low interest rates; and only if they qualify. Too many of these rewritten loans have defaulted a second time at the expense of taxpayers.

If a lender wants to avoid a foreclosure by reducing the principal and rewriting the loan at current interest rates it should not be done at the taxpayers expense. It is to their own advantage to do so as if they foreclose the house will likely sit there and the cost of maintaining it and advertising it will far outweight reworking the loan with the borrower.

Fannie and Freddie are still making loans that do not require even 10% down. They continue to buy bad mortgages and now the Treasury is going to give them Billions more and are authorized to continue to do so.

Enough already. No more Federal Money to bail out Fannie and Freddie which are now basically owned by the Federal Government. It has to stop.

This is why they didn’t include them in the new Financial Regulations Bill which the Dems said did not promote bailout financial institutions because they were too big to fail. They knew they would be bailing out Fannie and Freddie for years.

Posted by fedupwithfedgov | Report as abusive

U.S. should shun hair-of-the-dog housing plan

Aug 4, 2010 19:30 UTC

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.5 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.

COMMENT

“That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.”

That’s not the foundation. Obama, in 2009, outlined the five pillars (not of Islam and not the seven pillars of wisdom from the Book of Proverbs in the Hebrew Bible).

Obama’s pillars are (1) regulate Wall Street while rewarding financial “innovations” (I guess he missed the role of such innovations in the Panic of 2008), (2) more government spending on education, (3) more government spending on technology and subsidies to support otherwise uneconomic sources of energy, (4) more government spending on health care, and — amazingly enough — (5) less government spending.

Nothing here suggests anything even vaguely resembling fiscal prudence.

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