James Pethokoukis

Politics and policy from inside Washington

Blaming the American public

Nov 8, 2010 17:43 UTC

If the Obama wants to be a one-termer, he should pay attention to people like Hendrik Hertzberg:

Part of the Democrats’ political problem is that their defense, confusingly, depends on counterfactuals (without the actions they took in the face of fierce Republican opposition, the great slump would have metastasized into a Great Depression), deferred gratification (the health-care law’s benefits do not kick in fully until 2014), and counterintuitive propositions (the same hard times that force ordinary citizens to spend less money oblige the government—whose income, like theirs, is falling—to spend more). Another part of the problem, it must be said, is public ignorance.

Me: And none of that is likely to change substantially over the next two years. There will be no second acts for The Stimulus, healthcare reform will still seems off-point as best, and Americans will still think Washington should mimic the austerity of U.S. households. Messaging and optics isn’t going to cut it.

Tax cuts for companies — but not kids?

Nov 8, 2010 17:22 UTC

Doug Holtz-Eakin gives a perfectly lucid explanation of why the U.S. needs to cut its corporate tax rate, allow immediate expensing of capital purchases and end worldwide taxation of  profits. But then his deficit hawkishness emerges:

Note, however, that not all components of the Bush tax laws are equally likely to foster growth. Marginal tax rates and the taxation of dividends and capital gains directly affect companies’ decisions about innovation, investment, and savings. But refundable tax credits, marriage-penalty relief, and other targeted incentives within the Bush laws make no contribution to growth. These provisions may become unaffordable luxuries.

So the GOP is going to cut taxes on companies but be perceived as raising taxes on families and children? (I know, I know — 70 percent of corporate taxes are paid by workers.) An alternative is this proposal by economist Bob Stein, who think the GOP needs an  tax agenda that is pro-family as well as pro-growth. The biggest item would be a $4000 per child tax credit (offsetting income and payroll taxes) that would grow at the same rate as wages, not inflation. In turn, high-income taxpayers would get fewer deductions:

Overall, the plan is designed to be revenue neutral — and yet most taxpayers without children will pay a little bit less in taxes, while middle- class families with children under 18 years of age will pay substantially less. So who pays more? Primarily high-income workers, but also upper-middle-class taxpayers who do not have children in the home (either because they have decided not to raise children at all, or because their children have already turned 18).

To be blunt, the plan is a tax hike on the rich and makes the tax code even more progressive than it is today. Given the loss of the state and local tax deduction, the tax hike will be particularly acute for high earners from high-tax states. And although the top income-tax rate would be capped at 35%, that rate would kick in at lower income levels than it does today. The result would be a marginal tax-rate hike — and a corresponding weakening of work incentives — for many workers who today find themselves in the 25%, 28%, and 33% brackets.

Kevin Warsh, a pro-growth advocate at the Fed

Nov 8, 2010 16:24 UTC

Great, great stuff from Fed member Kevin Warsh in the WSJ. After giving his perfunctory agreement with QEII, he gets after it with a rousing piece of advocacy:

Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms—financial and otherwise—know the rules, and then succeed or fail. Regulators should be hostile to rent-seeking by the established, and hospitable to the companies whose names we do not know. Finally, the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade.

The deleveraging by our households and businesses is not a pattern to be arrested, but good prudence to be celebrated. Larger, more liquid corporate balance sheets and higher personal saving rates are the reasonable and right responses to massive government dissaving and unpredictable government policies. The steep correction in housing markets, while painful, lays the foundation for recovery, far better than the countless programs that have sought to subsidize and temporize the inevitable repricing. It is these transitions in our market economy—and the adoption of pro-growth fiscal, regulatory and trade policies—that lay the essential groundwork for greater, more sustainable prosperity.

Me: I would say there is as much as a 39 percent chance Kevin Warsh is the next Treasury Secretary of the United States.  First, I think Tim Geithner is staying for Obama’s full term. Second, betting markets currently give  39 percent chance Republicans take the White House in 2012. Warsh is highly respected in GOP policymaking circles and has a gold-plated resume. I could see Warsh at Treasury and eventually Glenn Hubbard/John Taylor at the Fed in a GOP administration.

COMMENT

Someone needs to explain to Sarah Paling that taking a class in high school in home economic doesn’t really prepare one for discussing macroeconomics. Geithner’s plan is brilliant!!! Either way the US wins.
After failing to get accommodations from the Chinese, Geithner is putting the Chinese in a no win situation. He is forcing the hand of every country to compromise or else. After failing to make any real progress, Geithner has adopted a more Israeli style of hardline negotiating! Geithner has masterfully created a situation where he will win on the currency conversion front or inflation or both; regardless of how well or how poorly Geithner does at persuading the G-20 to support his plan.
Currency conversion is not complicated. A strong dollar raises the value of Chinese US holdings, while a weaker dollar decreases the value of those same holdings. The fear of the Chinese walking away from the dollar completely is crazy… they own too many. Overtime the Chinese will decrease their holdings, but this was inevitable with or without Q2. Chinese revenue from sales in the US is on the decline and that decline is not going to be reversed anytime soon. Lower sales in the US means the Chinese simply have few dollars to buy US debt.
LET ME REPEAT… fighting the Federal Reserve and the currency traders would require massive purchases of the same dollars that they fear will go down in value!
Don’t feel sorry for China… China was and still is Fannie Mae’s largest bondholders, so China effectively got almost a half-trillion dollar bailout when the Fed stepped in and rescued Fannie Mae bondholders! China has exploited US policy thru fear and intimidation for far too long!
If the Foreign Central Banks try to fight the US Fed it will require them to buy mountains of dollars. It is not hard to imagine how pissed-off the Russians and Venezuela are about this prospect given their very vocal campaign to reduce their dollar holdings.
It is true that Japan, other Asian economy and developing countries will need to take some protective measures to limit capital inflows, but that seems to be a small price to pay to keep the US from falling into a Japan deflation or worse.
The doomsday scenario that Geithner fears is one where the US employment stumbles further and where the developing nation’s recovery pushes commodity prices to extreme levels. It would be terribly destabilizing!
Screw Germany. The German unemployment rate is half the US because of very shrewd maneuvering and favorable trade agreements. Russia hates anything that helps the US!
Hats off to Geithner!!!

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