James Pethokoukis

Politics and policy from inside Washington

What to do about China?

Dec 20, 2010 19:21 UTC

More and more, I think, China will be the defining issue of the 2012 presidential campaign. This Weekly Standard piece by Irwin Stelzer is a must-read on the topic:

The Communist regime sees trade policy as merely one weapon in a war aimed at overtaking the United States as the world’s preeminent economic and, by extension, military power. The undervaluation of the renminbi is a necessary means of keeping China’s export machine running at full tilt so as to create jobs for the millions who are moving from the country to the nation’s cities. Lacking democratic legitimacy, the regime’s principal claim to the loyalty, or at least the submission of its people, is its ability to provide jobs and a rising standard of living, doubly important in this period of transition to a new generation of leaders in 2012. Americans chortle: that mercantilist program of subsidizing exports cannot be sustained forever, as the inflow of dollars will sooner or later trigger inflation. Right: indeed, that is already happening, and forcing the regime to adopt a variety of measures to curb credit and inflation.

But largely irrelevant in the longer term on which the Chinese are focused. By the time the Chinese decide they will have to allow the renminbi to appreciate, they will have accomplished two long-standing objectives. First, their vaults will be stuffed with an even larger hoard of American IOUs, enough to give them an important influence over U.S. foreign policy. “How do you deal toughly with your banker?” asked Hillary Clinton of the then-prime minister of Australia, Kevin Rudd, at a luncheon last year. His answer is not recorded.

It is true that if the Chinese start to dump U.S. Treasuries and dollars, the value of their own piles of dollar-denominated assets would decline. But if the broader geopolitical objective were served, that would merely be a cost to consider as part of the military budget.

Second, by then the Chinese will have copied enough American and Western technology to be in less need of an undervalued renminbi—they will have made-in-China products that can dominate world markets even if their currency approximates its market value. The camels that trod the old Silk Road laden with spices and porcelain will have been replaced with air and sea freighters hauling solar panels and all sorts of goods based on copied technologies and purloined intellectual property. To cite just one example, the high-speed trains that China is now selling worldwide are based on technology brought to China by French, German and Japanese companies.

Obamanomics replaced by Reaganomics?

Dec 20, 2010 19:02 UTC

This Larry Kudlow commentary is a nice companion piece to my previous post:

In one fell swoop, Obamanomics is out the window. Reaganomics 2.0 is now in the driver’s seat. …  In the new session of Congress — which will feature a true Tea Party GOP conservative majority — new spending-limit policies can fill in the blanks left by the tax deal. But if President Obama has the acumen to see that a pro-growth economic policy is tied to low tax rates, the GOP should take great care not to cede that message and lose the economic-growth high ground. … A great battle will be joined over the spending, taxing, and regulatory mandates of Obamacare, which is probably the biggest job-killer of all. Conservative reformers in the new Congress will force this fight, along with tax, spending, entitlement, and monetary reform. Behind all this, however, the new Tea Party GOP must maintain a message of economic growth and prosperity.


The next big battle must be over regulations. The public prefers lower taxes thanks to several years of debate. But regulations are less visible to the public, politicians use corporations as agents to impose them, and the public thinks corporations are responsible for them. This is Reaganomics 2.0.

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Obama pivots as liberal dream collapses

Dec 20, 2010 18:58 UTC

Well, that was quick. America’s supposed generational shift toward an embrace of high-tax, high-service Big Government didn’t even make it a full two years. The new public policy consensus — built around favorite liberal issues of the environment and income inequality — promoted by Washington elites has been a flop with the public.

The nation’s ruling class thought for sure the financial crisis and subsequent Great Recession would create so much economic insecurity that it would be easy to pass a broad expansion of the welfare state — all financed by a combination of higher income taxes on the rich and new energy taxes on the middle class.

Instead, concerns about the federal budget deficit and competition with China became paramount. And the liberal agenda of healthcare reform and cap-and-trade suddenly seemed terribly off-point. So within a span of seven weeks, Democrats lost control of the House and then their legislative agenda.

First, the $858 billion tax deal. The near-term economic impact may modest. Some $500 billion of that total is merely the “cost” — as government bean counters look at things — of extending current income tax policy. Consumers will save most of the payroll tax cut, while extending the funding of unemployment insurance will make unemployment a bit higher than it would otherwise be.

But longer-term, the package is extremely bullish. It shows clearly that the “battlespace” of the coming Republican-Democrat fiscal clash will almost entirely be on the spending side of the ledger. There is little appetite among the public for sending more tax dollars to a wasteful and inefficient Washington. And the debate over restructuring the U.S. healthcare system will be between trusting government rationing or trusting market efficiency and choice.

The failure to pass a 2011 budget is also tremendously positive. It shows the impact of the Tea Party movement has not waned since the November midterms. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.

Indeed, some GOP insiders believe the president — with a bit of nudging — may be ready to strike a deal to reform the tax system and cut future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama now seems willing to anger some within his own party in order to get legislation passed and win the reelection.

But if Obama does manage to somehow eke out a second term, it will be as president of a country that he may understand a bit better than he did two years ago. His true value and concerns in 2008, it turns out, were not those of most of his countrymen. Most Americans were not itching for government-run healthcare, a vast energy bureaucracy, an expansion of union power or new penalties on success and wealth creation. To a great extent, the term Tea Party America is redundant. The U.S. remains a center-right nation, and prosperity usually ensues when its leaders understand this.


Obama did not pivot-he lost, and Harry Reid caved. They’re not happy. This is not going to help any Dem in 2012.

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US tax deal, budget feud set stage for 2011 cuts

Dec 17, 2010 23:23 UTC

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

To nations suffering austerity, it must seem as if Washington has gone mad. First, the U.S. Congress fails to agree on a 2011 budget. Then lawmakers overwhelmingly pass another giant stimulus. But both events actually hint at some chance of more disciplined fiscal action next year.

President Barack Obama will quickly sign the $858 billion stimulus/tax cut bill that funds unemployment benefits for 13 months and extends Bush-era tax cuts for two years. Of course, the bulk of the headline cost — $500 billion — comes simply from keeping tax rates as they have been, so it’s not traditional stimulus. It’s just keeping bad stuff from happening. And government bean counters would not score the renewal of a temporary welfare program as a spending increase. Still, the bill does delay any effort at deficit reduction since it does not pay for funding jobless benefits.

All this makes budget hawks wince, both at home and abroad. But even the International Monetary Fund concedes that America has the capacity to boost its sluggish economy through short-term tax cuts or spending increases — as long as it has in place a credible plan to reduce the longer-term fiscal gap. (And the best deficit strategy is cutting spending while also boosting growth through smart ( meaning low) tax policy.

That plan isn’t drawn up yet, but it could be getting closer. Democrats and Republicans in Congress are gridlocked over the $1.1 trillion budget for 2011. So they will probably pass a temporary spending measure to keep the government running for another month or two. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.

Indeed, some GOP insiders believe the president –  with a bit of nudging — may be ready to strike a deal to reform the tax system and cut future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama now seems willing to anger some within his own party in order to get legislation passed.

The key to any longer-term deal on the deficit is to make it happen before presidential politics starts to intrude by the middle of 2011. That’s not going to be easy — but the flurry of activity at the end of 2010 provides a glimmer of hope.

The seeds of change

Dec 17, 2010 17:21 UTC

Yuval Levin sums things up correctly and thusly:

This opening of the eyes of the Republican appropriators (brought about by a groundswell of outrage from conservatives) is the most important part of the omnibus story, and maybe of the lame-duck Congress in general. Combined with the minor revolution John Boehner is attempting to enable in the House Appropriations Committee (by appointing some new members who might be best thought of as a kind of crop of anti-appropriators) it has the potential to change the culture of Congress (which has long consisted of three parties: Republicans, Democrats, and appropriators) in a very important and constructive way—if it lasts.

Congress throws a tea party

Dec 17, 2010 17:07 UTC

Overall, a pretty good day for those who believe in low taxes and less spending. Here is the money graph from my upcoming Reuters Breakingviews column:

Democrats and Republicans in Congress are gridlocked over the $1.1 trillion 2011 budget. So they will likely pass a temporary spending measure to keep the government running for another month or two. This creates a situation next year where incoming Tea Party Republicans can a) combine a threat of government shutdown with b) a refusal to raise the national debt ceiling to c) squeeze deep spending cuts from Obama and congressional Democrats. Indeed, some GOP insiders believe the president —  with a bit of nudging — may be ready to strike a deal on tax reform and cutting future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama is now seems more than willing to anger liberals within his own party and scuttle past campaign promises to get legislation passed.

Of course, the biggie is healthcare and that is going to have to be settle by voters in 2012.  But what a change from January 2009 when Obama’s election was supposed to signify a generational political swing toward more activist government.

The conservative case for a VAT

Dec 16, 2010 16:26 UTC

Over at NRO, Duncan Currie gives it his best shot:

Despite being more efficient than an ordinary sales tax, a VAT carries significant administrative costs, and piling it on top of the present U.S. tax structure would be a mistake. But using the VAT to eliminate a sizable amount of distortionary U.S. income taxes would yield a far more growth-friendly system than the one we have today. Over the long run, America must reorient its economy away from consumption and toward investment while boosting its dangerously low savings rate. A VAT is certainly not the only way to promote those objectives, but it should at least be part of the conversation.

In the piece,  Currie more or less outlines a proposal similar to what Gov. Mitch Daniels suggest a month or so ago: Lower existing taxes rates and add a VAT.  I don’t believe he means for this to be a tax increase. Higher government revenue would come from higher economic growth.  Of course, many liberals see a VAT as an efficient way to dramatically raise taxes. Roger Altman, perhaps the replacement for Larry Summers in the White House, has recommended a $500 billion VAT.

In theory, I don’t have a problem with the Currie-Daniels approach, though I would prefer to have the income tax repealed. I also don’t think it would automatically lead to higher and VAT taxes and higher and higher spending — especially not after reading this piece. As Currie notes:

Moreover, while the VAT can lead to higher spending, it does not inevitably have that effect. Consider what happened in Canada, where the Progressive Conservative government of Brian Mulroney implemented a federal VAT in 1991. Since then, as economists William Gale and Benjamin Harris of the Urban-Brookings Tax Policy Center point out, “the size of the Canadian federal government has shrunk significantly.” The VAT rate started at 7 percent, but it has fallen to 5 percent under the Conservative government of Prime Minister Stephen Harper, which has also slashed corporate taxes.

In New Zealand, it was a neoliberal Labour government that embraced the controversial consumption tax. During the mid-1980s, Prime Minister David Lange and his finance chief, Roger Douglas, spearheaded a radical program of fiscal consolidation that included massive income-tax reductions, deep spending cuts, ambitious deregulation, and a 10 percent VAT.


Gale + Harris also mention that there is a sub-national level of VAT in many of the Canadian provinces which is added on to the federal rate, resulting in total VAT rates as high as 13%. Other provinces (the “hold-outs”) who have not harmonized their provincial sales taxes with the federal GST to form the Harmonized Sales Tax “HST”, continue to impose single stage sales taxes, which, unlike the VAT / HST, are not recoverable by way of deduction or input tax credit. This is with the exception of the natural resource rich province of Alberta which has no provincial sales tax. From 2013 Canada intends to impose a Corporate Tax rate of 15%. Certainly a decent model for any US VAT architects to look at.

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Sarah Palin vs. Simon Johnson and Washington wisdom

Dec 16, 2010 15:33 UTC

This is the kind of thing that really burns me. Here is Simon Johnson, former chief economist at the IMF, over the at the NYTimes econ blog:

The weakness in the Palin-Gingrich position is that while they want to balance the budget, they want to do so primarily by cutting spending. This is very difficult to do, as most of the spending issues over the next 30 years are about Social Security (a little) and Medicare (a lot). …

Cutting or limiting nonmilitary discretionary spending may play well with voters, but it is simply not big enough to make much difference. If Ms. Palin and Mr. Gingrich are willing to put military spending on the table, that would help, but this is fast becoming a taboo subject for all Republicans.

Of course, Johnson is being absolutely ridiculous here. Palin has flat out endorsed Paul Ryan’s fiscal Roadmap for America, a blueprint for radically restructuring entitlements. He is also wrong that cutting defense spending is taboo among Republicans. Plenty of conservatives, at least, think there are lots of smart cuts that could be made. But Washington insiders like Johnson —  and most of the people I hear give presentations at symposiums around town —  think just like he does. They assume spending can’t be cut, thus taxes must be raised dramatically. So when Palin  and Ryan and other true budget hawks actually say “Yes, lets revamp entitlements,” it just doesn’t penetrate their noggins. They can’t take “yes’ for an answer.

Then there’s this: Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures as spending cuts and higher taxes. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.  … [Faster growth] is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt.  And that means keeping taxes low.


Is Mr. Pethokoukis — are you — serious?

Much like this hollow post, the Roadmap for America is big on general talk and completely thin on details or actual plans. Roadmaps are laudatory and constructive when they present a vision, but can also be obfuscatory when used as stall tactics (both the post and the Roadmap for America are of the latter type).

And that’s for the very reason that Mr. Johnson points out — that Republicans aren’t really serious about cutting military spending or any other entitlements that damage their political popularity. Mr. Pethokoukis, you should read Mr. Johnson’s article, entitled “Paul Ryan is Not a Fiscal Conservative,” which is available free of charge: http://baselinescenario.com/2010/11/04/p aul-ryan-is-not-a-fiscal-conservative/. Perhaps a substantive response would serve you readers best.

Also, the notion that Simon Johnson is somehow your standard “Washington insider” is a lazy and transparent way of saying “I don’t like what he says.” Beyond that, it’s also absurd. Johnson has been highly critical of most Washington policies, ranging from Dodd-Frank, the bailouts, Obama’s light posture towards banks and financial institutions, etc. If you’re not willing to do your research, perhaps you could go as far to choose a more appropriate, albeit hollow, dismissive term.

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