James Pethokoukis

Politics and policy from inside Washington

Heck of a job, Larry (Summers)

Oct 28, 2010 14:23 UTC

This, to me, is the money exchange from President Obama’s appearance last night on “The Daily Show” with Jon Stewart:

Stewart: I remember thinking well that seems like the exact same person and why would you … so in some respects I get your frustration with this idea that ‘Well jeez, are you never satisfied?’ But again, the expectation I think was audacity going in there and really rooting out a corrupt system and so the sense is has reality of what hit you in the face when you first stepped in caused you to back down from some of the more visionary … like bringing a guy like Larry Summers …

Obama: First of all … if you look at how we have handled this financial crisis — if you had told two years ago that we’re going to be able to stabilize the system — stabilize the stock market, stabilize the economy — and by the way — at the end of this thing it, will cost less than 1% of GDP … I’d say we’ll take that because we saved taxpayers a whole lot of money. And in fairness, Larry Summers did a heck of a job trying to figure out how to …

Stewart: You don’t want to use that phrase dude.

Obama: Pun intended. Larry was integral in helping to think through some really complicated stuff.

Me:  Liberals like Jon Stewart really loathe the outgoing White House economic adviser. They blame him  for, in their view, a too small stimulus and for financial reform that wasn’t much harsher on the banks. And as Stewart alluded, they despise Summers role as part of  of the pro-market, pro-deregulation, anti-deficit Clinton Gang.  In fact, they view pretty much the entire Obama economic team as way too centrist and a betrayal of his campaign promises. No wonder Republicans are way more enthusiastic going into the midterm elections.


I blame “Heckuva Job Summers” for his antipathy to infrastructure investment. Even when he claims to support it, he limits that support to projects which can be completed, from conception to ribbon-cutting, within one year.

At least Brownie seemed to recognize he was failing and felt bad about it.

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Washington’s Ponzi scheme is getting worse. Thanks, Bernanke!

Oct 27, 2010 16:15 UTC

PIMCO’s Bill Gross puts out a particularly good market letter this month. A few key obervations:

1. He is dubious about QEII.

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009 … The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

2. No, he is really dubious.

We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

3. Fiscal policy is what’s called for.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

4. The whole deal raises inflationary risks.

Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme.

5. The Fed is enabling Washington’s profligacy.

Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves.

I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

Obama’s premature economic celebration

Oct 27, 2010 15:44 UTC

New York Times economics columnist David Leonhardt has been a dependable communicator of the White House take on domestic policy. And by those standards, today’s column was worth noting.  In his own gentle way, Leonhardt takes the Obama administration to task for a bit of premature economic celebration:

On the evening of Dec. 3 last year, the Bureau of Labor Statistics sent an advance copy of the next morning’s jobs report to the White House. … It showed that job losses had all but stopped in November, after nearly two years of big declines. White House aides exulted. Christina Romer, a top economist, brought a copy of the numbers to the Oval Office, and President Obama embraced her.  … Today, that brief period of optimism looks like one of the worst things that could have happened to the White House, other Democrats and, above all, the economy. The nascent recovery removed the urgency that the Obama administration and Democratic senators felt in early 2009. They still favored more action, like aid to states and tax cuts, but it was no longer their top priority. They assumed a recovery was under way.

Even through the spring, Team Obama  was upbeat, never buying the whole “New Normal” interpretation of the aftermath of the Great Recession.  This is a point Leonhardt fails to recognize.

But I keep coming back to the fact that this administration is full of people who knew that financial crises tended to produce weak recoveries — and that the typical policy mistake was being too timid. “We’re just not going to make that mistake,” Timothy Geithner, the incoming Treasury secretary, told me, as Mr. Obama was preparing to take office. “We’re not going to do that. We’ll keep at it until it’s done, whatever it takes.”

What? I don’t know what Leonhardt is talking about. I have found the WH to be dismissive of talk about “lost decades” and the long-term economic impact of financial crises.  And they are still skeptical of the work of Kenneth Rogoff and Carmen Reinhardt that shows high-debt countries suffer slower economic growth, at least at anything close to current U.S debt levels. Bottom line: Team Obama thought the economy would be doing a lot better by now, which would help ensure continued Democratic control of Congress. As I wrote in The Weekly Standard in August:

Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.”

Consumer czar Warren not worried about GOP ‘enemies’

Oct 27, 2010 13:33 UTC

White House consumer czar Elizabeth Warren gave an interesting interview to the LA Times. Among the highlights:

1.  She says the only banks that new consumer rules will hurt are those whose profits are based on “tricks and traps.”  (That’s a phrase she used repeatedly in the chat.)

2.  She thinks she has plenty of power in her current role even if the exact limits are murky.

3. It kind of sounds like she would still like to head the new agency.

4. The consumer agency would have prevented the massive housing bubble and resulting financial crisis.

5.  I will let this bit speak for itself:

Are you concerned about what Republicans might do should they take majority control of the House or the Senate?

This agency has enemies, political and economic. That won’t change what I do. I’ll keep working every single minute to build a strong, independent agency to represent American families.


Obama deficit panel veers dangerously off track

Oct 26, 2010 16:39 UTC

Here’s the problem with President Barack Obama’s deficit reduction commission: Exploding debt caused by out-of-control healthcare spending is an Extinction Level Event for the U.S economy.  By 2050, according to the Congressional Budget Office, the national debt will likely be three times as big as the overall economy with Medicare and Medicaid gobbling up half the budget.

And that’s not even the worst news. Such a fiscal path would cause an economic implosion long before 2050. Financial Armageddon. Yet the Obama panel almost certainly won’t come to agreement on any fixes for healthcare entitlements. Probably not Social Security, either.

But the group is eyeing $1 trillion in annual tax breaks as a way of cutting the budget. These “tax expenditures” include a variety of credits and deductions for federally favored activities. Many economists on both sides – and a few brave politicians – agree, however, that such favoritism introduces harmful market distortions.

While low interest rates and lax regulation had star billing in the American housing bubble, the $89 billion mortgage deduction in 2008 also was a supporting player. It’s also true an aging society and advancing technology are prime drivers of rising healthcare costs. But so too is giving related benefits a $131 billion annual tax break.

Let’s say America axed mortgage-interest deductions, child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. All these are mentioned in a Wall Street Journal story on Monday. Analysis by Americans for Tax Reform finds the net effect would be a $2.4 trillion tax hike over the next five years. (Mortgage interest deduction: $638 billion; child tax credit: $60 billion; exclusion for employer-provided health insurance: $1.66 trillion, including higher FICA taxes.)

Such a fiscal drain would surely put America back into recession, unless marginal tax rates were also lowered to compensate.  Cutting the total amount of tax expenditures by half might allow the top income tax rate to be cut from 35 percent to 25 percent.  That is what you want in an ideal, pro-growth tax system: low rates applied to a broad base.

The politics are treacherous. That’s why major reform hasn’t happened in a generation. Back in 1986, Congress agreed to eliminate scores of tax loopholes for individuals. But lawmakers wisely sweetened the bitter medicine at the last minute by lowering the top marginal tax rate by nearly half, making those breaks less valuable. Many businesses were also willing to accept fewer tax breaks and pay higher total taxes in exchange for a simpler code and a lower rate, although this didn’t make it into the final bill.

Obama’s panelists should draw on this experience. They could advocate trimming some of the $90 billion in annual business tax breaks and subsidies while also paring the tax rate on profits, currently the second highest among advanced economies. And if they want to trim tax breaks for individuals, sharply lower marginal rates should accompany.

Austerity alone won’t solve America’s debt problem. We also need to boost growth. Some on the Obama panel seem to have forgotten this.


Any free marketer should be against all these welfare giveaways. We use euphemisms like “tax credits” but in reality they are not different than entitlement payments. They distort the free marker and have one group of people (renters) subsidize another group (mortgage debtors).

If the new Congress is truly free marketers, they will eliminate all these unfair welfare giveaways.

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Midterms are already locked and loaded

Oct 26, 2010 14:02 UTC

I think John Podhoretz aptly sums it up:

We’ve had 18 months of data points from many different sources that all tell the same story: Americans who vote have radically changed direction when it comes to which party they prefer. In both 2006 and 2008, voters said they preferred Democrats by margins of 8 to 12 points, and on Election Day handed Democrats landslide victories. But Republicans have led in the so-called “generic polls” since March 2009 without letup — and the gap between the two parties has remained stable at a level comparable to the previous Democratic advantage. This means that, probably at minimum, 16 percent of the electorate has shifted from voting Democrat to declaring its intention to vote Republican. That is an astonishing degree of change, and it’s why you’ve heard so much talk about this being an unprecedented election.

This Intrade chart supports his point:


Austerity by default

Oct 26, 2010 13:55 UTC

Some folks want austerity in the worst way. They may just get it, says the NYTimes:

What could result is “deficit reduction by gridlock,” said John Podesta, the president of the progressive Center for American Progress and a chief of staff in the Clinton White House. That would be the outcome if Republicans, as expected, block additional unemployment aid and if the parties deadlock in the lame-duck session over pending appropriations and the Bush tax cuts that expire Dec. 31. That would leave lower spending levels in place for the fiscal year 2011 and force Mr. Obama and Republicans to try to reach a tax compromise next year.

Again, I find it hard to believe that Congress would ensure a recession by letting all the Bush tax cuts expire. I still think a deal gets struck in January.

Geithner’s view may be askew

Oct 26, 2010 13:35 UTC

Ed Yardeni thinks Tim Geithner is off point:

Tim Geithner thinks he can solve the world’s economic problems by getting countries with large trade surpluses to reduce their surpluses and by getting countries with large deficits to reduce their deficits. The problem is that fixing the world economy isn’t as simple as suggested by Mr. Geithner. Multilateral approaches rarely work because it is so hard to get universal agreement on what to do.

China’s competitive advantage has less to do with the foreign exchange value of its currency than the pitiful provision of social welfare by the nation’s government compared to the abundance of social welfare provided by the American government. This is the major source of the global economy’s imbalance. This is why the US trade deficit with China has totaled $1.8tn since December 2001, when China joined the World Trade Organization. That number contributed greatly to China’s record hoard of international reserves, which totaled $2.6tn during August. Think of that sum as the money that the Chinese did not spend on social welfare at home, but did so abroad, especially in the United States.

Problems must be recognized to be solved. There is, in fact, growing recognition of the causes of the global imbalance. The Chinese may be starting to move toward providing a better standard of living for their workers, though there is little discussion yet about providing a comprehensive social welfare safety net anytime soon. European social welfare states are moving to downsize their safety nets. In the US, the November 2 congressional elections will determine if Americans have the determination to bring back a modicum of fiscal discipline.


Chinese Supplier Survey: Yuan Appreciation Will Hurt Exports

We talk so much about how China needs to allow its currency, the renminbi (or yuan) to appreciate. We talk some about how an appreciation of the renminbi will bring back American jobs (by making Chinese exports relatively more expensive and U.S. exports relative less so) ­– though that is debatable. But we talk very little, if at all, about the effect of a renminbi appreciation on manufacturers, on workers, and on consumers in China.

It’s a gap I have been lamenting (and the reason we’re working to ask small and medium-sized suppliers in China what their perspectives are on U.S./China trade). So I was absolutely thrilled this morning to get a press release highlighting the results of a survey of Chinese suppliers. The bottom line? “China suppliers are convinced the yuan’s appreciation will affect exports negatively, even if the currency strengthens only 2 percent against the US dollar.” (It has already strengthened about that much since the summer.)

Find more survey results at http://futureofuschinatrade.com/article/ chinese-supplier-survey-yuan-appreciatio n-will-hurt-exports

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GOP poised to gain tax, banking clout in U.S.

Oct 25, 2010 20:38 UTC

The U.S. Republican party will probably retake the House of Representatives from Democrats in the Nov. 2 elections and fall just short in the Senate. Whatever the exact electoral results, it seems certain the GOP is poised for a major upgrade in political influence. Herewith, Breakingviews offers a primer on how the shifting balance of power may sway key financial and economic issues in the coming year.

The Bush administration’s 2001 and 2003 tax reductions on labor and investment income are scheduled to expire at the end of 2010. The Obama administration and Democratic congressional leaders want to extend only those cuts affecting family income under $250,000. Republicans want to extend all the cuts for at least two years. The GOP will push this issue hard, whether in the post-election “lame duck” period or in 2011 when the next Congress is seated. President Barack Obama’s position is unclear. For all his tough campaign rhetoric against extending the high-end cuts, he has not threatened to veto a temporary extension.

What to expect: Action might be delayed until sometime in January, but the Bush tax cuts are likely to be given another year or two of life. That’s because Republicans are unified on the issue, including moderates who fear Tea Party primary challenges in 2012 if they blink. And the anemic U.S. economic recovery has drained much of the fight from congressional Democrats. One possible compromise might see Republicans approve Obama’s plan for a national infrastructure bank.

The bipartisan deficit panel appointed by the president is scheduled to vote on recommendations by Dec. 1. It needs 14 of 18 members to agree on any recommendation a) for balancing the budget, excluding debt interest payments by 2015 or b) to “meaningfully improve” the long-run gap between spending and revenue. While Congress does not have to vote on its findings, the bipartisan panel will greatly influence the fiscal agenda on Capitol Hill.

What to expect: Republicans on the panel are being pressured to reject tax increases, while Democrats will resist cuts to Social Security benefits. But any deal struck will likely revolve around the old-age social insurance program. As in other developed countries tightening their belts like the UK and France, seniors may be asked to work longer before getting full benefits, and the wealthier among them may get fewer benefits or pay more in taxes. One potential surprise would be a deal on tax reform that would see a simplification of the tax code and reduction of loopholes. But Congress may come up with its own approaches. The likely top GOP budget writer, for instance, has already designed a detailed deficit reduction plan.

Financial reform
Passing the sweeping Dodd-Frank bill last summer was only the first step.  Now bureaucrats must begin implementing new rules about liquidating troubled financial institutions, limiting risky bank activities and creating an agency to regulate consumer financial products. But Republicans say they want to roll back some of the reforms, charging they will hurt consumer lending and lead to more bank bailouts.

What to expect:  Obama would surely veto any major changes to the legislation. But the enlarged GOP presence on key congressional committees will give the party greater ability to pressure regulators as they fine-tune details of the new rules. It will also be easier for Republicans to block policies and personnel they disfavor.

The administration’s bank tax to compensate for any losses in the Troubled Asset Relief Program has little chance of passing in its present form. It may resurface later as a way of repaying taxpayer funds injected into mortgage lenders Fannie Mae and Freddie Mac. The most likely scenario is that reforming those institutions gets delayed until after the 2012 presidential election. A wild card is the ongoing foreclosure mess. Democrats may push for a national moratorium during the lame duck session. And continued housing weakness may compel a bipartisan attempt to bolster housing.

This may be one of the few areas where Democrats and Republicans can find some common ground. A majority of House Republicans recently voted with Democrats to penalize countries, such as China, that keep their currency cheap to subsidize exports. There are also three completed bilateral trade agreements waiting for congressional approval.

What to expect: The Senate may pass the currency bill, although a veto by Obama still seems likelier than not. The prospects are better for the trade deals with Colombia, Korea and Panama. All are favored by Republicans.

Obama’s plan for a cap-and-trade system to reduce carbon emissions passed the House but never made it through the Senate. Republicans unified against what they called “cap-and-tax,” as did many Democrats from coal-producing states. The whole idea also seemed off-point to voters worried about jobs.

What to expect: Republicans profess an “all of the above” approach toward energy, supporting both nuclear and alternative energy. Both parties and the administration will likely support added incentives and even a bit more increased direct spending on government research on renewable energy. But it seems unlikely there will be any successful attempts to put a price on carbon, even though some potential GOP presidential candidates tentatively support doing so. Republicans may also try to limit the ability of regulators to limit carbon emissions without congressional approval.

Obama deficit panel partying like it’s 1986

Oct 25, 2010 14:19 UTC

The WSJ says President Obama’s deficit panel is looking at cutting various tax breaks — also known as “tax expenditures” — as a way of reducing the budget deficit:

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.

The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

A few thoughts here:

1.  Lots of this stuff distorts markets, particularly in housing and healthcare. We get too many resources devoted to building McMansions and giving workers gold-plated health plans.

2.  So I am all for reducing/phasing out hundreds of billions in these tax breaks in a 1986-style tax reform bill.

3. But at the same time, we should be reducing marginal tax rates. The code should be simpler, broader and flatter.

4. And only by reducing marginal rates, at least somewhat, would such a plan ever pass.

5. In fact, it took a deep cut in marginal rates to get the 1986 reform done. Individual taxes went down, business taxes went up, though many CEOs didn’t mind so much since the system was simpler.

6. Take another look at the Wyden-Gregg plan for tax reform, since it may be a model for the panel.