James Pethokoukis

Politics and policy from inside Washington

An economic double whammy

Oct 4, 2010 16:38 UTC

My pal Don Luskin  gets it just right in the WSJ today: America is wrong on both taxes and trade.

All else being equal, if the Bush tax cuts don’t get extended, that’s a 2.3% hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31. … Now to protectionism. Last week the House passed the Currency Reform for Fair Trade Act. … The bill, if passed by the Senate and signed by the president, would mandate that the Department of Commerce take a foreign country’s currency interventions into account in determining whether its trading practices are unfair. In the case of China—the target at which this bill is aimed—Commerce would determine that the amount by which the yuan is allegedly undervalued.  … Surely China would retaliate. That makes the bill a nuclear threat of mutual assured economic destruction. If carried out, it would crush trade between China and the United States, which are huge export markets for each other.

As Luskin also points out,  a rising yuan is no silver bullet — there’s lots of risk with little potential reward. Along with the tax increases, Washington is amazingly anti-growth right now. Instead, they need to make growth the new government initiative.

COMMENT

Perhaps, perhaps not. Is it possible Team Obama is spending all its spare time reading polls and predictions for the mid-terms? Trying to figure out how to get the Democratic Party back on the rails, and letting policy slide in the meantime?

With respect to Mr. Luskin’s excellent points, it’s not like anybody in the White House a) understands what Mr. Luskin is saying or b) cares. Everything is about appealing to the LCD blue-collar union vote. Watch for more class warfare rhetoric. So sad. Mr. Obama is facing being just a half-term president.

Posted by Gotthardbahn | Report as abusive

TARP reconsidered

Oct 4, 2010 16:28 UTC

Interesting piece by former FDIC head Bill Isaac on the bank bailout:

In truth, customers of money market funds had already been calmed when Treasury issued a 100% guarantee of their money – before TARP was enacted.  The FDIC had the authority to reassure depositors under existing law, as was in fact done shortly after the TARP was enacted.

Two weeks after the TARP was enacted, Paulson abandoned the toxic asset plan and announced that the money would instead be used to shore up the capital of banks.  I had argued against the TARP in part because I believed capital infusions would support much more new lending than would the purchase of toxic assets.  Moreover, I believed capital infusions would be far less costly to taxpayers.

However, the TARP was not needed for capital infusions because the FDIC had existing authority to provide capital to banks.  I preferred strongly that the FDIC manage a capital infusion program rather than the highly politicized program Treasury implemented.

Treasury made two egregious mistakes on the capital program and many smaller ones.  The first blunder was to order nine large financial institutions – CitiGroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Bank of New York/Mellon, Merrill Lynch, Morgan Stanley and State Street – to accept $125 billion of taxpayer money that most of them did not need or want.

To some extent he adopts the John Taylor theory that it was the chaotic nature of the TARP roll-out that destabilized markets. Yet he also says he was in favor of capital injections.

COMMENT

“Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

http://www.worldthinktank.net/pdfs/TheFl owofTrade.pdf

on Wal*Mart’s China web page!

“Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development.”

http://www.wal-martchina.com/english/wal mart/index.htm

Now, with a six to one trade deficit with China….when was the last time you seen a George Washington..!!!!

Retail makes NOTHING…

Governments only make MORE DEBT…

It’s time for less of those two and for America to get back to what it does best….MAKE STUFF..

cause George Washington on that dollar can’t help anyone in the United States of America if he is being held in a foreign hand.

Made In America is the only way out of this mess cause foreign made put US here.

Posted by madmilker | Report as abusive

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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