James Pethokoukis

Politics and policy from inside Washington

Weak economy shouldn’t overexcite Obama rivals

Dec 29, 2010 18:00 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON — The Federal Reserve economic forecast is bleak. It predicts high unemployment will plague the rest of President Barack Obama’s four-year term. The assessment provides the strongest reason yet for any Republican who ever dreamed of occupying the Oval Office to launch a campaign in 2011 to be the party’s candidate to challenge Obama in November the following year. And many will. But the president remains a formidable opponent.

The midpoint of the November 2010 economic outlook from Fed policymakers has unemployment ending 2012 at around 8 percent. Even if Obama’s trillion-dollar stimulus spared millions of jobs, Republican candidates will surely remind voters that the president’s economic advisers promised to keep unemployment from ever hitting that lofty level.

Obama’s team likes to compare its political plight to that of President Ronald Reagan. Unemployment was 8 percent or higher for half of the Republican’s first term, the last time the country experienced a recession anywhere near as bad as this latest one. And Reagan still won by a landslide. But the economy was racing and the jobless rate tumbling when he faced voters in 1984. Another White House incumbent who looked a guaranteed loser was Harry Truman in 1948. But blistering 7 percent GDP in the first half of that year helped Truman pull off the biggest upset in U.S. presidential election history.

Obama probably won’t have such wind at his back. An overhang of debt and housing problems should keep GDP growth moderate. Some at the Fed also reckon that even if growth picks up sharply, workers still won’t have appropriate abilities for available positions.

Perhaps with that in mind, a herd of Republicans are sure they have just the right skills for Obama’s job. The frontrunner, whether measured by polling, financial or betting market performance, is Mitt Romney, the former Massachusetts governor and head of private equity firm Bain Capital. But he will need to contend with a group of rivals that may include Sarah Palin, Minnesota Governor Tim Pawlenty and Senator John Thune of South Dakota. By late spring, the crowded field will be set.

GOP contenders shouldn’t get cocky, however. By 2012, Obama could have unexpected economic improvements to boast about. And the president’s own finances should be sound even if America’s aren’t. He could raise $2 billion for a second run — and sitting U.S. presidents rarely lose. What’s more, midterm election beatings seem to have little bearing on re-election odds. For now, those too are working in Obama’s favor, suggesting a better than even chance at four more years.

Obama hits 2011 with a needed running start

Dec 23, 2010 21:28 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own

Barack Obama looked like the walking dead after his party’s midterm wipeout.  But he revived during the lame-duck Congress and closed important deals on trade, taxes and arms control. The president will need the rest this holiday season should bring, however. His “to do” list remains hearty and lengthy. The following are some of the 2011 biggies that will require the head of steam he built up this year-end.

The budget. The numbers aren’t getting any better. Federal scorekeepers had been forecasting a 2011 gap of $1.1 trillion, or 7 percent of GDP. But the $858 billion stimulus package over three years could boost those totals to $1.4 trillion and 9.5 percent. And that’s running the books on a cash-in, cash-out basis more befitting a hot-dog stand than an economic superpower. Corporate-style accrual accounting methods, which factor in future pension and healthcare costs, show 2010 liabilities exceeded assets by $13.5 trillion, according to a new Treasury Department report.

Obama’s debt commission reported in early December, but its creator has yet to say which elements he supports. That time is coming. A bipartisan group of senators will introduce the panel’s recommendations early next year.

Taxes. There’s precious little time for back-slapping on the successful extension of the Bush-era tax cuts. A good chunk of America’s tax architecture is due to expire in two years. But the code’s temporary nature may not be its worst feature. U.S. individual income and corporate taxes will raise about $1.1 trillion in revenue this year. The debt panel has identified about $1.1 trillion in revenue-losing tax breaks. If Obama wants to get rid of these myriad holes, raise revenue and cut rates, Republicans may play ball.

Trade. Now that Washington and Seoul have tweaked their deal, the U.S.-Korea trade agreement should easily pass Congress. But the White House is showing little interest in submitting treaties with Colombia and Panama for legislative approval. To boost exports and reward U.S. allies, Obama should persuade or ignore his union backers and send the pacts to Capitol Hill.

Even if the president can somehow strike all those important items from his list, there will still be a host of battles to be waged over financial, healthcare and energy regulation. And before Obama knows it, campaign season will be here.

Summing up Nancy Pelosi

Dec 22, 2010 20:07 UTC

The Washington Post asked readers to describe outgoing House Speaker Nancy Pelosi in a single word. It then made a word cloud from the responses:




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Like the economy, Obama is kind of stuck

Dec 22, 2010 19:54 UTC

Jay Cost thinks Obama, like the economy, is kind of stuck:

The macro trend, I would say, has essentially been flat for the last few months — as Americans have developed fairly stable opinions of the 44th president by this point that probably are not easily dislodged. In the long term, the way the president gets his numbers up will be to convince the country that he is a good steward of the economy, a view most of his fellow citizens do not hold at the moment.  This is why the tax cut deal was such a sensible compromise for President Obama to make, despite the criticism he received from his left flank.



Kyle Ate: Sorry, but its working. Huge financial crisis that barely dodged the bullet in 9/08 isn’t coming back instantly. However, swift, capable gov’t action (by both parties ) averted collapse and we’re on the road back. Fix you character and ditch your instant gratification stuff.

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Six ways government helped cause the financial crisis

Dec 22, 2010 19:53 UTC

Market failure or government failure? The BigGov party is promoting the former narrative, but the latter is more accurate in explaining how government created incentives for disaster. Mark Perry and Robert Dell lay it all out. Here is a sampling, but I urge you to read the whole thing:

1. Bank misregulation, in particular the international Basel capital rules, including a U.S. adaptation to them—the 2001 Recourse Rule—and the outsourcing of risk assessment by regulators to government-sanctioned rating agencies incentivized (not merely “allowed”) the creation and highly-leveraged systemic accumulation of the highest yielding AAA- and AA-rated securities among banks globally.

2. Continually increasing leverage—driven largely by Fannie Mae and Freddie Mac credit policies and the political obsession with taking credit for increased homeownership—into the U.S. mortgage system.

3.  The enlargement of the riskier subprime and Alt-A mortgage markets by Fannie and Freddie through the abandonment of proven credit standards (e.g., dropping proof of income requirements) during the 2004-2007 period, and their combined accumulation of a $1.6 trillion portfolio of these loans to meet the affordable housing goals Congress mandated. As of mid-2008, government entities had purchased, guaranteed, or compelled the origination of 19 million of the 27 million total U.S. subprime and Alt-A mortgages outstanding.6

4. The FDIC, Federal Reserve, Treasury Department, and Congress undertook explicit or implicit creditor bailouts for large financial institutions starting in the 1980s (First Pennsylvania, Continental Illinois, the thrift industry, the Farm Credit System, etc.) and continuing to 2008 (Bear Stearns). These regulatory decisions led to an absence of creditor discipline of financial institution leverage and risk-taking (especially at Fannie and Freddie) and the “too big to fail” expectation of a government bailout.

5. The increase in FDIC deposit insurance from $40,000 to $100,000 per account in 1980 combined with the unchecked expansion of coverage up to $50 million under the Certificate of Deposit Account Registry Service beginning in 2003. These regulatory errors of commission and omission reduced the incentives of business, institutional, and high net-worth depositors to monitor and discipline excessive bank leverage and risk-taking.

6. Artificially low and sometimes negative real federal funds rates from 2001 to 2005—a result of expansionary Fed monetary policy—fueled the subprime and Alt-A mortgage boom and widened the asset-liability maturity gap for banks (see chart below).


I would not blame fannie/freddie for the subprime mess. the banks and mortgage companies got into it first and drove the market. This sounds like another pin head argument that the subprime mess was caused by the community reinvestment act – a little more analysis and common sense reveals this is not true. It’s so easy to blame the weakest victims….. not a hint of classism here is there ?

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The truth about the U.S. budget deficit: It’s 13x worse than you think

Dec 22, 2010 19:45 UTC

Uncle Sam runs his books like he’s operating a hot dog stand rather than a $14 trillion economic superpower. It’s cash in (revenues), cash out (spending), forget about the future costs of Social Security and Medicare. But what if government bean counters acted like they worked for USA Inc., instead? The numbers would come out just a bit differently, accordingly to a little noticed Treasury Department report that didn’t escape the notice of my Reuters colleagues:

1. The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government’s liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier. Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.

2. The report was instituted under former Treasury Secretary Paul O’Neill, the first Treasury secretary in the George W. Bush administration, to illustrate the mounting liabilities of government entitlement programs like Medicare, Medicaid and Social Security.

3. The government’s net operating cost, or deficit, in the report grew to $2.080 trillion for the year ended September 30 from $1.253 trillion the prior year as spending and liabilities increased for social programs. Actual and anticipated revenues were roughly unchanged.

4. The cash budget deficit narrowed in fiscal 2010 to $1.294 trillion from $1.417 trillion in 2009. But the $858 billion tax cut extension package enacted last week is expected to keep the deficit well above the $1 trillion mark for another year.

5. Among key differences between the operating deficit and the cash deficit were sharp increases in costs accrued for veterans’ compensation, government and military employee benefits and anticipated losses at mortgage finance giants Fannie Mae and Freddie Mac.

6. The report said the present value of future net expenditures for those now eligible to participate in these programs over the next 75 years declined to $43.058 trillion from $52.145 trillion a year ago — a change attributed to the enactment of health-care reform legislation aimed at boosting coverage and limiting long-term cost growth. The overall projection, including for those under 15 years of age and not yet born, is much rosier, with the 75-year projected cost falling to $30.857 trillion from last year’s projection of $43.878 trillion. The report noted, however, that there was “uncertainty about whether the projected reductions in health care cost growth will be fully achieved.”


Sitting presidents should be required to address the Financial Report of the United States each year in their State of the Union address.

A little more gritty reality and a little less fluff would be useful.

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A brief rundown of the 2012 White House wannabees

Dec 22, 2010 16:30 UTC

Jonah Goldberg sizes up the possible GOP presidential contenders (presented in outline form by me):

1. By my count, 24 people benefit from nontrivial presidential buzz: Sarah Palin, Mitt Romney, Newt Gingrich, John Thune, Tim Pawlenty, Mitch Daniels, Mike Pence, Rick Santorum, Haley Barbour, Mike Huckabee, Bobby Jindal, Paul Ryan, David Petraeus, Ron Paul, Jeb Bush, John Bolton, Bob McDonnell, Jim DeMint, Chris Christie, Herman Cain, Gary Johnson, Judd Gregg, Marco Rubio and Rick Perry.

2. Rubio, Ryan and Jindal … are all wisely sitting out the presidential contest … though the GOP’s three golden boys are ripe vice-presidential picks.

3. Former Florida Gov. Jeb Bush and the governors of New Jersey, Virginia and Texas — Christie, McDonnell and Perry — probably aren’t running. … Also, there’s growing buzz that Huckabee … may not run because he’s got a big new contract with Fox News in the works.

4. DeMint … has said he’s not running but acts like he might be. … Gregg … acts likes he’s not running but hasn’t ruled it out. Pence … definitely wants to run but now may switch to the Indiana governorship.

5. Barbour … could be a front-runner (and a hilarious, adept debate opponent for Obama), but his plans remain murky.

6. In many respects, Thune is the GOP version of John Kerry: a candidate with presidential hair who seems “electable” despite not having done much.

7. That leaves us with a top tier of five front-runners: Romney, Palin, Gingrich, Pawlenty and Daniels. Romney is the organizational front-runner; Daniels is the first pick of wonks and DC eggheads; Palin probably has the most devoted following among actual voters; Gingrich will dominate the debates, and Pawlenty (vying with Daniels) is the least disliked.

I am beginning to think the field of legit contenders might actually be quite small in the end. But my dark horse entry is still Jeb Bush.


I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)

Net neutrality rules a blow to free markets

Dec 21, 2010 18:34 UTC

Milton Friedman had it right. Business is no friend of free markets. The Federal Communication Commission’s “net neutrality” ruling is more evidence of this. What the FCC should have done is called it a year, went on holiday and left the Internet alone.

Instead, it found a solution in search of a problem. And that solution was more or less supplied by Verizon and Google last August. To a great extent, the new rules codify that blueprint, which — at least as those companies see things — acknowledged both the inevitability of some government rule-making and the need to better divvy up future costs and revenues between telecoms and content providers.

The FCC’s new rules would ban providers such as Comcast and Verizon Communications from blocking or delaying lawful Internet traffic, such as online services offered by competitors. But the giant telecoms and landline providers would be allowed to sell faster service to content companies such as Google and Amazon. And they could increase rates for subscribers who use the Internet for tasks that gobble bandwidth such as high-definition video.

Certainly, it could have been worse. As I wrote last April:

This regulatory debate has been turned into an unusual David (scrappy web firms) vs. Goliath (entrenched telecoms) morality tale. Despite being three times larger by market capitalization, Google, for example, still has far more cachet than Comcast, which challenged the FCC. But what it all really comes down to is who will pick up the tab for future network upgrades to handle applications such as high-definition video.

In a net neutral world where prices were fixed at, essentially, zero, the telecom operators would pay — before passing costs along to consumers, of course. On the other hand, maybe operators want to charge content providers tolls for putting their traffic into express lanes. Or perhaps another business model is just around the bend. Under net neutrality, the current system would be locked into place.

Government should have high hurdles to clear before setting prices. In the end, net neutrality seems little more than rent-seeking by content providers. It’s akin to a computer maker successfully lobbying for price controls on shippers like FedEx when transporting goods from China. When it bought new planes, the shipper would have to eat the cost or pass it downstream.

Now the fight turns to Capitol Hill, with Republicans especially eager to do battle. The GOP views the ruling as an initial effort by the Obama administration to push its agenda through regulatory agencies now that Democrats no longer completely run Congress. Expect the Republican-controlled House to quickly pass a disapproval resolution under the Congressional Review Act to overturn the ruling. If the measure then gets 51 votes in the Senate, it would be up to President Barack Obama to sign or veto.

Hopefully his recent pivot to the center will continue for at least a little while longer.


Thanks President Obama for another sell-out by your administration. You are now fully engaged in complete double-talk. This is not net neutrality and you know it. This is a complete cave-in- your specialty – to the ATT’s, Verizons, Comcasts and Googles of this world. Along with the tax-cut fiasco you really are racking up quite a record as a Republican. What about a few considerations for the people who fought hard to elect you.

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Net neutrality compromise won’t calm new Congress

Dec 21, 2010 17:40 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON – Under the so-called net neutrality proposal from the U.S. Federal Communications Commission, broadband access providers like Comcast and Verizon would be prevented from blocking or discriminating against lawful Internet traffic. But they would be allowed to sell faster service for those who want to deliver video, games and the like. And they could increase rates for subscribers who use the Internet for those tasks that hog bandwidth.

To a great extent, the rules codify a compromise plan cooked up last August by Verizon and Google. That blueprint acknowledged both the inevitability of some government rule-making and the need to better divvy up future costs and revenue between the layers of pipes and those who deliver material through them.

Both views will do battle on Capitol Hill. Democrat Senator Al Franken says the FCC’s plan is “worse than nothing.” Republicans, meanwhile, see the ruling as an initial effort by the Obama administration to lean on regulatory agencies now that Democrats no longer completely run Congress. Expect the GOP-controlled House to quickly pass a disapproval resolution under the Congressional Review Act to overturn the ruling. If the measure gets 51 votes in the Senate, it would be up to the president to sign or veto.

By trying to play Internet traffic cop, the FCC may wind up getting run down. In the meantime, it’s just creating logjams elsewhere.

Why Chris Christie’s war may determine America’s future

Dec 20, 2010 20:27 UTC

Why the combative governor of New Jersey must succeed in dismantling the NJ teachers unions:

There are many teachers who inspire students. And then there’s Curtis Robinson, the sort of teacher who inspires tenure reformers. During his 18 years teaching disabled students in Paterson, Robinson hurled classroom chairs, punched a boy in the chest for failing to do his homework and shoved another kid against a blackboard until he cried, staff and students said.

Robinson still insists he had a gift with children. But he admits that using cocaine after school early in his career sometimes made him “preoccupied.” “Immediately after work, I’d have a line or two,” he told The Record in August. “I been teaching so long, you can function with your eyes closed.”

That’s probably true, thanks to the extensive job protections for teachers in New Jersey. Because Robinson was tenured, it took more than four years of legal proceedings to fire him, costing the state more than $100,000 in legal costs.

Please, read the whole thing.