James Pethokoukis

Politics and policy from inside Washington

Why Obama’s magic number for reelection isn’t 270, it’s 215 (thousand jobs)

Feb 3, 2011 23:34 UTC

Team Obama would surely love to run a Reaganesque, “Morning in America” reelection campaign, cruising to victory by taking credit for a dynamic economic recovery. But for that scenario to play out — or anything close to it — the unemployment rate would have to drop a whole lot. (The president’s political advisers will be closely watching the January jobs report.)  In a new research note, analyst Matt McDonald of Hamilton Place Strategies, a policy advisory and strategic communications consultancy in Washington, makes the following points:

1) Usually in presidential election years, the magic number to watch is 270. But for 2012, the magic number may actually be 215. That is how many thousands of jobs the economy has to create every month for the unemployment rate to drop below 8 percent by Election Day 2012.

2) Since 1960, the unemployment rate has been above 7 percent during four elections: 1976,1980, 1984 and 1992. In three of these 4 elections, the incumbent party lost. Only in 1984 did Reagan win with 7.2 percent unemployment, which was in the context of a 1.3 percentage point drop in unemployment during the year prior to the election.

3) For President Obama, with a current unemployment rate of 9.4 percent, an unemployment rate below 7 percent is hard to envision by November 2012. However over the coming 2 years, he would see an improved political position from a significant drop in the unemployment rate. Current economic forecasting projects a fourth quarter 2012 unemployment rate of approximately 8 percent (CEA: 7.7 percent; CBO: 8.2 percent; Blue Chip: 8.4 percent). If the unemployment rate can break this 8 percent level, President Obama can credibly argue that he is making progress on jobs, even though the unemployment rate will still be historically high.

4) If we assume a straight-line projection of job growth and further assume 120,000 new entrants to the job market every month, the economy would need to create 215,000 jobs per month every month between now and November 2012 to get the unemployment rate below 8 percent. Every month we are above 215,000 new jobs, it gets a little easier to reach that 8 percent goal and every month we are below 215,000, it gets a little harder. This is the benchmark that interested parties should be watching tomorrow as the January jobs numbers are released.

McDonald does note a big complicating factor. Discouraged workers could rejoin the workforce as prospects improve. “This would have the effect of increasing the number of jobs needed each month to reduce the unemployment rate,” he notes.

Indeed, if the workforce had not shrunk so much during the downturn, the unemployment rate right now would be higher than at any point since the Great Depression. On the other hand, some economic observers, including those on the Federal Reserve, think the workforce may stay small. The longer people stay out of work, the longer they tend to stay on the sidelines since employers become biased against them. In addition, it’s unlikely that unemployed home construction workers or mortgage lenders will find their industries bouncing back anytime soon.

But whether Obama joins the unemployed in January 2013 may depend on whether 215,000 Americans find a job every month between now and Election Day 2012.

Time for new rules to limit Washington spending

Feb 3, 2011 17:47 UTC

If only U.S. Treasuries had covenants like corporate debt does. Instead of linking to EBITDA, metrics like borrowing or spending as a share of GDP could be used. That might be a stretch, but lawmakers are still trying to implement new fiscal rules. It’s an idea whose time has come – or at least come back.

Back in 1985, Congress passed a law requiring it to meet annual deficit targets on the way to a balanced budget in 1991. On its face, the effort was a complete bust. Congress routinely evaded the yearly limits, and the 1991 budget was $269 billion in the red. But much fiscal good was done. Before the recession hit in 1990-91, the deficit had fallen to 2.8 percent of GDP from 5.1 percent, while the rate of annual discretionary spending (excluding social insurance programs) also had declined substantially.

Two legislators have taken up the cause anew. Senators Bob Corker of Tennessee, a Republican, and Claire McCaskill of Missouri, a Democrat, want to reduce spending over 10 years to a cap of 20.6 percent of GDP, the 40-year historical average. Exceeding that limit would result in across-the-board spending cuts that could only be waived by supermajority votes in both chambers. Based on Congressional Budget Office baseline forecasts, hitting the proposed Corker-McCaskill target would create a small projected surplus.

Some argue the cap is far too low given an aging U.S. population, rising healthcare costs and higher debt interest payments. Indeed, it would require a hefty 20 percent Medicare cut by 2025. But such reductions aren’t unreasonable, says the CBO, if Medicare was to be turned into a subsidized voucher program for seniors, as some Republicans propose.

The Obama debt commission had a slightly different perspective, arguing for limits that focused on debt instead of spending. It’s an approach the International Monetary Fund also endorses. But whatever form such rules might take, expect the general concept to be a part of the debate over raising the U.S debt ceiling. Congress would still hold the key to its own fiscal handcuffs, of course. But escaping austerity might prove just a bit harder.

Democrat control of Senate could fall victim to Obamacare

Feb 3, 2011 16:37 UTC

Ed Carson of IBD’s Capital Hill blog, highlight the 11 red state senators who voted against repealing Obamacare:

Eleven Democrats up for re-election next year represent states in which Republicans won a majority of the 2010 popular vote for House seats: Florida, Michigan, Missouri, Montana, Nebraska, New Jersey, Ohio, Pennsylvania, Virginia, West Virginia and Wisconsin.

Especially vulnerable:

* Montana’s Jon Tester and Missouri’s Claire McCaskill won in 2006 with less than 50% of the vote.

* Ben Nelson of Nebraska may have sealed his fate with his infamous “Cornhusker Kickback” in exchange for being the 60th ObamaCare vote.

* Virginia’s Jim Webb, who narrowly won in 2006, is at least semi-vulnerable. And he could retire after a single term, some have speculated.

Meanwhile, a 12th red-state Democrat, North Dakota’s Kent Conrad, recently announced he would not seek another term. That seems a likely GOP pickup.

Some other longtime Democratic senators could choose to retire, especially if they face the prospect of a grueling campaign. For example, Wisconsin’s Herb Kohl will be 77 in 2012.

I know it’s early, but it would be  very surprising, I think, for Rs not to retake the Senate next year. The Dems really needed to make a better showing in 2010 given how many seats they have to defend in 2012 and 2014.

Saying ‘buh-bye’ to Obamacare

Feb 3, 2011 16:14 UTC

The always insightful Keith Hennessey show the path to repeal:

The path to repeal is straightforward and, while difficult, achievable. … In 2012 win the White House, hold the House majority, and pick up a net 3 Republican Senate seats to retake the majority there. … In 2013, use reconciliation to repeal ObamaCare, requiring only a simple majority in the Senate. … Repeal of the subsidies, the individual mandate, the insurance provisions, and the Medicaid expansions would, in each case, directly affect spending and revenues, so it would be a straight-up-the-middle use of reconciliation for deficit reduction. Democrats who argued in 2009 that it was OK to use reconciliation to create these provisions would find those same rulings working against them in 2013.

At the moment Democrats are hanging their hat on the CBO-scored deficit reduction associated with the two laws. This CBO score means that a straight repeal amendment faces a Budget Act point of order and therefore needs 60 votes to succeed. If Republicans were in 2013 to try to repeal the laws as-is, CBO would score them with increasing the deficit. That’s not impossible to do through reconciliation, but it’s a trickier path.

Still, this is a solvable problem. The best policy way to address this would be to leave some (most?) of the Medicare savings in place, and not repeal them. I’d also favor leaving the “Cadillac tax” on high cost health plans in place.

COMMENT

Can we please get back to jobs…Pretty-pretty please. Symbolism is sticking a knife in the back of America the beautiful.

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America and the world, in one chart

Feb 3, 2011 16:05 UTC

My pal Tim Kane over at Growthology offers up a way at comparing the U.S. and everybody else:

worldgdp

Any way you slice it, U.S. corporate tax rates are too high

Feb 2, 2011 20:35 UTC

David Leonhardt (NYT) makes the point that U.S. companies often pay far less than the top statutory corporate tax rate of 35 percent:

Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades. …

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”

It should also be noted that whether you are talking about the statutory rate or the effective rate, the U.S. is still at uncompetitive levels (via Tax Foundation):

corprate

corprate2

COMMENT

Rubbish. Any taxes at all are too high for James Pethokoukis. Corporate tax rates in the United States are among the lowest in the world. Combine that with the loopholes that corporate lobbyists have bought for their clients, and most US corporations pay no tax at all.

Posted by GetpIaning | Report as abusive

Are Democratic moderates breaking right on spending?

Feb 2, 2011 17:19 UTC

A nice piece of analysis of the Corker-McCaskill budget proposal from Jed Graham over at IBD’s Capital Hill blog:

On Tuesday, Sen. Claire McCaskill, D-Mo., joined with Sen. Bob Corker, R-Tenn., to propose the Commitment to American Prosperity Act, which would gradually lower the ceiling for all federal spending to 20.6% of GDP by 2020, down from a projected 24.7% this year.

The Corker-McCaskill CAP bill goes a big step further than President Obama’s Fiscal Commission, which aimed to reduce spending to 21.8% of GDP by 2020. And it does so without the inducement for Democrats of more than $1 trillion in tax hikes over the coming decade.

Under the Corker-McCaskill vision, entitlements would no longer be entitlements; rather, they’d have to vie for annual budget dollars like any other program and their spending could grow faster than the economy only if spending on other programs were to shrink as a share of the economic pie.

McCaskill is among nine first-term Democrats elected in 2006 who could face challenging re-election battles in 2012. While she is the only Democrat to sign on to the bill introduced with eight GOP backers, McCaskill’s move may be the clearest sign that vulnerable party moderates intend to make significant progress on deficit reduction this year.

“At a time when many families have been forced to tighten their pocketbooks, Congress must also learn to do the same,” McCaskill said in a statement. “This bill isn’t just about cutting back this year or next year; it’s about instilling permanent discipline to keep spending at a responsible level.”

Debt ceiling battle could turn into trench warfare

Feb 2, 2011 16:09 UTC

Republicans aren’t scared to toy with the U.S. debt limit. Both parties now seem to agree that failing to raise the country’s borrowing cap would be a disaster. But brinkmanship looks likely as Republicans hold out for cuts far deeper than Democrats will easily accept. Pushed far enough, the tactic could still rattle Treasury markets.

Leaders inside the GOP certainly know their recent political history. And they have no intention of allowing their party to suffer a repeat of what happened in 1995. When Republicans took control of Congress that year, they squandered public confidence by being seen as responsible for shutting down the government in a budget dispute with President Bill Clinton.

The political damage would be far worse today if Republicans took the fall for making Uncle Sam look as though he might default on his obligations. But the GOP also must contend with its new Tea Party colleagues. The newcomers say they want to radically shrink the federal government in exchange for acceding to raising the debt ceiling. At $14.3 trillion currently, the limit could be reached in two months. One faction says it wants to cut non-security spending by 50 percent — also excluding Social Security and Medicare — by $2.5 trillion over 10 years. Sen. Rand Paul of Kentucky is prepared to go even further.

By contrast, President Barack Obama is looking to trim just $40 billion a year by freezing current spending at current levels. Reconciling what GOP spending hawks want and what Obama would conceivably accept will be difficult. Republican leaders are already planning for temporary gridlock. One option is to explicitly prioritize paying the interest on public debt. All other spending would need to be cut by $125 billion for each month the stalemate continues. Another path would be to raise the ceiling, adopt the Obama freeze but also include strict spending caps. Sen. Bob Corker of Tennessee and Sen. Claire McCaskill of Missouris have cooked up a bill that would do the following: “Put in place a 10-year glide path to cap all spending – discretionary and mandatory – to a declining percentage of the country’s gross domestic product, eventually bringing spending down from the current level, 24.7 percent of GDP, to the 40-year historical level of 20.6 percent.”

The release of Obama’s budget in two weeks will give a better sense of the gap between the two sides. Until it is closed, investors in U.S. bonds need to steel themselves for rhetoric that sounds more alarming than the consensus on the debt ceiling suggests.

COMMENT

No way! Keep printing new money, keep devaluating the dollar!

Love to see the figures of our interest payments on the national debt: Much of the budget is getting sent to bolster the holders of our bonds economies of China and the middle east.

Our tax dollars hard at work. Fix this and more ambitious social will be more realistic.

The pain is too great though, and the politicians will keep kicking the can down the road; they care more about their jobs than America.

Freeze the deficit? How about balancing the budget? Better yet, how about paying down the debt?

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