James Pethokoukis

Politics and policy from inside Washington

Rahm Emanuel leaves the White House

Oct 1, 2010 18:39 UTC

First a bit from my Reuters Breakingviews column on the departure of Rahm Emanuel:

On a West Wing organizational chart, the profane and pugilistic Emanuel was Obama’s tough-guy bouncer, controlling the flow of people and information into the Oval Office. He was — as a humorous name plate in his office read — the Secretary for Go [Expletive] Yourself. But Emanuel was much more. He was Obama’s economic consigliere, virtual shadow treasury secretary, and de facto prime minister.

Indeed, it would be impossible to write an accurate financial history of the past two years without acknowledging the critical role Emanuel played. While still an Illinois congressman and House leader during the autumn of 2008, Emanuel helped push the $700 billion bank bailout bill through a reluctant Congress.

Once in the Obama White House, Emanuel massaged and manipulated the wonkery of the Obama economics team into a politically workable form. When some advisers pushed hard for a $1.2 trillion stimulus in early 2009, Emanuel downsized it, knowing that his old mates in Congress would balk such a lush package

And it was “Rahmbo” to the rescue after the stock market tanked in response to Treasury Secretary Timothy Geithner’s February 2009 speech on the banking crisis. Obama ordered Emanuel to whip the understaffed Treasury team into fighting trim. And that was just fine with the banks. They considered Emanuel — who made millions in a previous guise as a managing director at Wasserstein Perella — a fellow traveler.

So Wall Street is sad to see him go. Republicans should be, too — at least those who desire fiscal reform. Emanuel was a big believer that politics is the “art of the possible.” Obama will be under plenty of pressure from his unhappy liberal base to appoint a successor who will be the guardian of traditional liberal principles. But that’s a recipe for gridlock. America needs a closer, not an ideologue, whispering in the president’s ear.

Addendum: I think Obama tries to get a deal on spending, eventually agrees to one-year extension on all the Bush tax cuts, and — as they say — “draws some contrast” with the GOP on GSE reform. I think Pete Rouse will be a facilitator of that. But it is also amazing how little clarity there is about next year because of the potentially sweeping nature of the November midterms.

Tax debate should bypass old German theory

Oct 1, 2010 16:35 UTC

The expiry of Bush-era tax cuts at year end, as originally legislated, could knock back the already anemic U.S. recovery. Deficit hawks reckon that’s an acceptable risk, saying America just can’t afford to extend them. But that viewpoint assumes some belief in Wagner’s Law, which posits ever-higher public spending — a bit of dogma in need of debunking.

If Congress can’t agree to extend the 2001 and 2003 tax cuts on labor and investment income, real GDP growth in 2011 might be as much as 1.7 percentage points lower and the unemployment rate 0.8 percentage point higher than otherwise, according to the Congressional Budget Office. But those who worry about the growing U.S. budget deficit fret that even a temporary extension would eventually turn permanent and boost the cumulative shortfall by some $3 trillion over the next decade.

The wrinkle is that by historical standards, the feds would still have full pockets. Revenue as a proportion of GDP has historically averaged about 18 percent. Even if all the tax cuts were permanently extended, revenue would average around 19 percent in coming decades.

That’s really anomalous is spending, headed to 35 percent of GDP by 2035 according to the CBO, half as high again as its historical average. Medicare is a big chunk of the problem. To keep the government’s health program for retired people at its current cost of 3.1 percent of GDP would mean slashing expected spending increases by more than a third.

That’s unlikely to happen, some budgeteers say, citing Adolph Wagner, the turn-of-the-20th-century German economist. He theorized that as nations get wealthier, citizens demand more government services even it means higher taxes. But the rise of the Tea Party movement hints that the public may be coming around, grudgingly, to the idea of less spending — as long as it keeps their taxes down. Even the Democratic head of President Barack Obama’s budget commission thinks outlays should be held down at around 21 percent of GDP.

Some academic research also suggests reducing debt through spending cuts is less injurious to growth than using tax increases to raise cash. Call that the Austrian School way. But neither that nor Wagner’s German School approach is pain-free. That is why, so far at least, U.S. politicians have shied away from committing to either.

Obama could use another deal maker by his side

Oct 1, 2010 16:19 UTC

The remainder of the Obama presidency may hinge on whether the White House can reach a grand agreement with Republicans on critical tax and budget issues. The departure of White House chief of staff Rahm Emanuel to run for Chicago mayor makes that a bit harder. As befits a former investment banker, he understood how to close a deal. Negotiating skills are still in high demand at the White House.

On a West Wing organizational chart, the profane and pugilistic Emanuel was Obama’s tough-guy bouncer, controlling the flow of people and information into the Oval Office. He was — as a humorous name plate in his office read — the Under Secretary for Go [Expletive] Yourself. But Emanuel was much more. He was Obama’s economic consigliere, virtual shadow Treasury secretary, and de facto prime minister.

Indeed, it would be impossible to write an accurate financial history of the past two years without acknowledging the critical role Emanuel played. While still an Illinois congressman and House leader during the autumn of 2008, Emanuel helped push the $700 billion bank bailout bill through a reluctant Congress.

Once in the Obama White House, Emanuel massaged and manipulated the wonkery of the Obama economics team into a politically workable form. When some advisers pushed hard for a $1.2 trillion stimulus in early 2009, Emanuel downsized it, knowing that his old mates in Congress would balk such a lush package.

And it was “Rahmbo” to the rescue after the stock market tanked in response to Treasury Secretary Timothy Geithner’s February 2009 speech on the banking crisis. Obama ordered Emanuel to whip the understaffed Treasury team into fighting trim. And that was just fine with the banks. They considered Emanuel — who made millions in a previous guise as a managing director at Wasserstein Perella — a fellow traveler.

So Wall Street is sad to see him go. Republicans should be, too — at least those who desire fiscal reform. Emanuel was a big believer that politics is the “art of the possible.” Obama will be under plenty of pressure from his unhappy liberal base to appoint a successor who will be the guardian of traditional liberal principles. But that’s a recipe for gridlock. America needs a closer, not an ideologue, whispering in the president’s ear.

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