James Pethokoukis

Politics and policy from inside Washington

Will 8.5 percent unemployment be enough to reelect Obama?

Nov 10, 2010 14:43 UTC

The Hill sets the economic bar awfully low:

Economists who study the labor market said this week that they expect unemployment in 2012 to average 8.5 percent, down more than a point from the 9.6 jobless rate of today. Heidi Shierholz, an economist at the Economic Policy Institute, said every forecast she has studied predicts rapid job growth in 2012, even though the national number will still be a far cry from full employment. “It’s still going to be so high in 2012, but people are going to be feeling better,” Shierholz said.

Mark Zandi, the White House’s favorite economist to quote because of his advisory role with Sen. John McCain’s (R-Ariz.) 2008 presidential campaign, sees the same picture. Zandi said Obama’s stimulus plan has achieved its goal. The plan, Zandi said, prevented another Great Depression while giving the public sector time to kick in and start hiring, which will be in full effect when Obama is running for reelection.

“The trend is going to be in strong favor of incumbents in 2012,” said Shierholz.

I really don’t think so, though Ms. Shierholz from the liberal EPI would surely like that to be the case.  There is a huge lag between what the numbers say about the economy and what people perceive. Bill Clinton won the 1992 election on the economy (“it’s the economy, stupid”) even though GDP had been growing for six full quarters. According to Gallup, 88 percent of Americans thought the economy was “fair” or “poor” in October 1992 with some 60 percent saying the economy was “getting worse.”

Two years later, it was the Democrats turn to feel the brunt of widespread economic anxiety as the Republicans captured both the House and the Senate. Even though the economy had then been growing for 14 straight quarters and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction. Hard to believe, but 3 1/2 years after the 1990-91 recession ended, the economy was still a big negative for voters and hurting the incumbent political party.

So let’s say the unemployment rate is 8.5 percent on Election Day 2012. That is twice as high as what Americans have grown accustomed to.  As recently as May 2007, it was 4.4 percent. It was also under 5.0  percent from July 1997 through August 2001.  And before this recession, Americans hadn’t seen 8.5 percent unemployment since 1983. In addition, housing will still be in the tank, and budget deficits will still be in the stratosphere.  Morning in America II? Good luck with that.


A better place to start is with the proposition that Obama’s mistake was to first bail out the “big people” and not bail out the “little people”.

Many of these little people had been hurting two or three years back into the W Bush years. A fair case can be made that Obama got elected when the trouble hit and the Republician candidate demonstrated that he did not understand the problems.

Both the big people and the little people did stupid, improvident things. How was the moral standing of the little people held to be so much lower that they got no bail-out (an unemployment check vs. a $3,000/mo. mortgage payment, was not considered a ‘bail-out’) yet the big people (the financial markets et al) got bailed out.

The same as what was done for the big people would have been something like a six month freeze on homestead mortgage payments and then the right, with court help if necessary, to reduce the principal to the fair market value of the home. The government given a lien on the back end to the extent of anything not paid in case property values went up some day.

Such a program would have had “Moral Hazard” flying on banners but didn’t the govenment in effect remove moral hazard for the big people?

The point is that if the little people are still facing foreclosures, 12% unemployment, and like fears are they doing to vote Republician in 2012? Stranger things have happened but I don’t think “feeling better” is going to cut it.

Obama is going to have to propose some sort of tough mortgage foregiveness, the only thing not yet tried*. If the Republicians shoot it down, which they probably will, let that be the debate subject in 2012.

* Obama’s HAMP and similar programs are so bad that they make him look even more like a handiman of the “finance” (i.e., the big people).

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Democrats now favor the Pethokoukis ‘extend and reform’ tax plan

Nov 10, 2010 13:53 UTC

Evan Bayh and Kent Conrad like my “extend and reform” proposal (via the WSJ):

Two top Senate Democrats floated the idea Tuesday of extending the Bush-era income-tax rates for a limited time only, and tying that move to an overhaul of the U.S. tax code or passage of policies to address the budget deficit.

At a news conference, Sen. Kent Conrad (D., N.D.), the current chairman of the Senate Budget Committee, said he would prefer to extend the current breaks only until a complete tax overhaul can be accomplished. “If I were able to make the decision, I would go for changing the tax system fundamentally,” Mr. Conrad said. “And I’d have an extension [of the Bush-era tax cuts] until that was accomplished.”

Sen. Evan Bayh (D., Ind.) suggested a similar approach. He proposed a two-year extension of all the current tax levels, to be followed by the implementation of policies to reduce government deficits.

And here is the sort of thing I have been proposing:

The Bush tax cuts look on the verge of cheating death. The White House is strongly hinting it will compromise with Republicans and agree to extend temporarily wealthy and middle-class tax reductions set to vanish at year-end. That would provide welcome relief since even partial expiration risks sapping economic growth during a flaccid recovery. But a two-year deal, while welcome, would also still leave the long-term state of the tax code in flux. Washington should use the extra time for sweeping reform. … Obama’s deficit panel may offer some suggestions next month, but the basics seem basic enough. Taxes should be lower, broadly applied and subject to as few market-distorting deductions and loopholes as possible. As Indiana Governor Mitch Daniels often quips, American needs a tax system that looks like someone designed it on purpose.

Not bad for government work

Nov 10, 2010 13:21 UTC

This (from USA Today)  will only encourage the Chris Christie Republicans:

Federal salaries have grown robustly in recent years, according to a USA TODAY analysis of Office of Personnel Management data. Key findings:

•Government-wide raises. Top-paid staff have increased in every department and agency. The Defense Department had nine civilians earning $170,000 or more in 2005, 214 when Obama took office and 994 in June.

•Long-time workers thrive. The biggest pay hikes have gone to employees who have been with the government for 15 to 24 years. Since 2005, average salaries for this group climbed 25% compared with a 9% inflation rate.

•Physicians rewarded. Medical doctors at veterans hospitals, prisons and elsewhere earn an average of $179,500, up from $111,000 in 2005.

Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005. Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis. Members of Congress earn $174,000, up from $141,300 in 2000, an increase below the rate of inflation.

Congressional Republicans have definitely noticed what has been going on in New Jersey and would love to  trim federal payrolls. Indeed, within their “Pledge to America” is this proposal: “We will impose a net hiring freeze on non-security federal employees and ensure the public sector no longer grows at the expense of the private sector.” As it is, half of federal workers are due to retire in the next five years, by some estimates. Not replacing all of them is an option, I suppose.

Sarah Palin (and Germany and China) against Obama

Nov 9, 2010 19:05 UTC

Of course, Sarah Palin is quite right in her concerns about the economic impact of more quantitative easing.  At best, Ben Bernanke’s efforts may add a third of percentage point to GDP. Maybe. And at what cost? Bubbles in commodities and emerging markets, capital controls, currency interventions, further erosion of America’s role as an economic model. All for, as Palin puts it, “temporary, artificial economic growth.”   Or as Kevin Warsh of the Fed puts it:

But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed’s price stability objective might no longer be a compelling policy rationale. …  Overseas—as a consequence of more-expansive U.S. monetary policy and other distortions in the international monetary system—we see an increasing tendency by policy makers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. Extraordinary measures tend to beget extraordinary countermeasures. Heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery.

Or as PIMCO’s Bill Gross puts it: “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. Public debt, actually, has always had a Ponzi-like characteristic.”


“(QE2 is) somewhat of a Ponzi scheme” -institutionalized/government run Ponzi scheme, and currency manipulation.

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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.


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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Tea Party’s other big win: death of cap-and-trade

Nov 5, 2010 18:42 UTC

Looks like Tea Party America has busted a cap in cap-and-tax. Following sweeping Republican election victories, President Barack Obama has conceded his cap-and-trade plan to cut carbon emissions is dead for the foreseeable future. “I think there are a lot of Republicans that ran against the energy bill that passed in the House last year, Obama said at a Nov. 3 press conference. “And so it’s doubtful that you could get the votes to pass that through the House this year or next year or the year after.”

Yet Obama added that cap-and-trade  “was just one way of skinning the cat.” You see, the president has a plan B: Let the Environmental Protection Agency work its magic on American business. The EPA would begin regulating pollution from large factories and power providers starting in January. Now Obama acted like the agency has no choice. “The EPA is under a court order that says greenhouse gases are a pollutant that fall under their jurisdiction,” he added.

But that isn’t quite true. The Supreme Court ruled in 2007 that the EPA had the right to regulate emissions of greenhouse gases under the Clean Air Act – but it was not mandated to act. Even regulators admit this alternative is more economically harmful than a system where companies can offset carbon use by purchasing tradable permits. (And a straight carbon tax offset by payroll tax cuts would be even better.) But that drawback is a desirable feature to the White House. They’ve been hoping the threat of onerous EPA action would spur business to bring Republicans around.

The GOP response earlier this year was to try and strip the EPA of its relevant authority. The effort didn’t work, but it might next year. Republicans could try the same approach or attempt to cut funding for what it now mocks as the Employment Prevention Agency. Either measure would easily pass the GOP-controlled House. The Senate, still run by Democrats, would be a tougher slog. But between six additional Republicans and a dozen nervous red-state Democrats up for reelection in 2012, an anti-EPA bill might have the 60 votes needed for passage.

Obama could still veto the bill, of course. But legislation that merely forestalled EPA action until the economy perked up might stay his hand.  Or Republicans could attach it to some more important spending measure, reducing the chances of a veto. And the threat of defunding — and endless Capitol Hill hearings — could make the EPA think twice

If all else fails, business has its own Plan C: tie the agency up in court. The EPA’s last big clean air effort inspired a decade of legal challenges. One tactic works regardless of which party is in power: If you can’t legislate, litigate.


How many climate scientists did it take to change a light bulb? NONE. But they did have consensus that it would change.
Why wasn’t Climate Change ever regarded as the number one issue of prime importance to everyone since we were told climate change was to have been immanent death for the planet, as in SAVE THE PLANET?
Why did we enjoy condemning our kids to their graves with CO2 death warrants and CO2 death threats? This is liberal love?
Was it necessary to threaten my kids with death by CO2 just to get them to turn the lights out more often?
Why were there thousands of more “consensus” scientists than protesters?
Why did CO2 levels rise despite our contributing less with the world economic downturn?
Wouldn’t the plants have shown effects long before the climate would shown effects?
Why did the leftwing hope for the CO2 misery to really have happened and the rightwing discounted it as corrupt exaggerated and politicized science?
Why were scientists not called what they were, fallible and mortal human beings and lab coat consultants?
Didn’t scientists pollute the world in the first place with their chemicals?
Why didn’t the countless thousands of consensus scientists march in the streets if this was certain death we were facing?
Since Climate Change denied ancient climate, did the doomers therefore deny evolution too? Who’s the knuckle dragging neocon now?
Why didn’t the people know that the UN’s scientific warning, predicted the effects of CO2 were to have been anything from “nothing at all” to “unstoppable warming” (death)?
Will history view climate scientists as being to science what witch burners and The Crusades and abusive priests were to religion?
History has already shown that Climate Change was to the Democrats what the Iraq War was to the neocons, lies, and fear and politics.

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U.S. tax cuts may cheat death, but reform needs life

Nov 5, 2010 15:25 UTC

The Bush tax cuts look on the verge of cheating death. The White House is strongly hinting it will compromise with Republicans and agree to temporarily extend wealthy and middle-class tax reductions set to vanish at year-end. That would provide welcome relief since even partial expiration risks sapping economic growth during a flaccid recovery. But a two-year deal, while welcome, would also still leave the long-term state of the tax code in flux. Washington should use the extra time for sweeping reform.

The tax cuts enacted by George W. Bush became an important talking point for the midterm campaigns. Besides the national GOP victories, liberal Washington state provided a glimpse into how the country seems to be thinking about the issue. Voters there overwhelmingly rejected a measure that would have raised income taxes on the richest 1 percent to pay for education and health spending.

Higher taxes remain politically toxic in the slow-growth, high unemployment U.S. economy. That’s one reason why White House press secretary Robert Gibbs said his boss is willing to haggle. President Obama already was on board with permanently extending middle-class cuts costing $2.9 trillion over a decade. He now also seems ready to accept a brief extension of cuts for the rich that will add to the tab.

The deal is likely to be a combined two-year extension. Republicans reckon their 2012 negotiating position would be stronger by keeping both sets of cuts on the same schedule since the high-end ones are less popular. But the timing also ensures the hot-button matter will get new life during the presidential election season.

The only potential silver lining to this unpleasant sausage-making is that it provides a window for a long overdue discussion about a longer-term fix. America needs a more stable and simpler tax system to become more competitive.

Obama’s deficit panel may offer some suggestions next month, but the basics seem basic enough. Taxes should be lower, broadly applied and subject to as few market-distorting deductions and loopholes as possible. As Indiana Governor Mitch Daniels often quips, America needs a tax system that looks like someone designed it on purpose.

The Dow knows — all the Bush tax cuts will be extended

Nov 5, 2010 01:29 UTC

The Dow industrials are up 2 percent today as Wall Street figures out what DC insiders know: All the Bush tax cuts will be temporarily extended, more than likely during the “lame duck” session in December.  Robert Gibbs gave it all away today after Obama hinted as much yesterday:

Two days after congressional elections, White House spokesman Robert Gibbs signaled that Obama might consider a compromise with Republicans that would keep tax breaks not only for the middle-class but for wealthier Americans as well. “He’d be open to having that discussion and open to listening to what the debate is on both sides of that,” Gibbs told reporters. “Making those tax cuts for the upper end permanent is something that the president does not believe is a good idea,” Gibbs said. He said he believed the discussion would take a large part of the final weeks of this year’s U.S. congressional session.

A few more points:

1. The only question is if Obama will get much in return, such as approval for his national infrastructure bank (or likely his fave tax cuts such as the Making Work Pay credit or AMT).

2. Is this a sign of Obama shifting to the center? Look, even if Obama doesn’t want to move right, the Dem Senate will. There are a dozen Dem senators from red-states up for reelection in 2012. They are not going to follow Obama off a cliff on taxes or anything else.

3.  If all the tax cuts were left to expire, it would drop GDP growth by 2-3 percentage points. Even just letting the high-end ones expire would cost 0.2 percentage points of GDP and boost the unemployment rate by as much as 0.7 percentage points (based on Goldman Sachs’s estimate and Okun’s Law).

4.   2011 could be the year of the tax cut. GOP may put in for a corporate tax cut, and Obama may offer a payroll tax cut, in addition to his business tax cuts. Starts to look like an all-of-the above, tax cut  bidding war to boost a weak economy.