James Pethokoukis

Politics and policy from inside Washington

Paul Ryan’s revolution would finish Reagan’s

Apr 5, 2011 17:58 UTC

Is Rep. Paul Ryan’s “Path to Prosperity” potentially the most important and necessary piece of economic legislation since President Ronald Reagan’s tax cuts in 1981? Quite likely. The blueprint embraces free markets and individual choice to radically reshape America’s social welfare state for the 21st century and shrink government. Instead of looking for ways to finance an ever-expanding public sector, it would prevent Washington from growing to a projected 45 percent of GDP by 2050 (vs. 24 percent today) and instead reduce it to just under 15 percent by that year. Ryan would downsize government to its smallest size since 1950 and prevent the Europeanization of the American economy. The Ryan Path embraces dynamic growth, not managed decline and stagnation.

But what’s really important is that it affirmatively answers three questions: First, does the Ryan Path put the federal government on a sustainable fiscal path? Second, does it promote more economic growth and higher incomes? Third, is it politically realistic? Let’s take those one at a time:

1) Does the Ryan Path put the federal government on a sustainable fiscal path? Yes. It’s easily superior to President Obama’s 10-year budget plan which would generate average annual deficits of $947 billion and let debt as a share of the economy rise to a dangerous 87.4 percent from 62.1 percent in 2010. And Obama does nothing to alter the long-term fiscal glide path into insolvency.

By contrast, the Ryan Path would see debt-to-GDP peak in 2013 at 74.5 percent and fall to 67.5 percent by 2021, then continue to steadily decline until the entire federal debt is eliminated in the 2050s. Medicaid spending for the poor would be sent to the states in a fixed lump sum indexed for inflation and population growth. Medicare spending for seniors would be transformed into a system where recipients would choose among private plans, aided by a government subsidy that would grow more slowly than healthcare price increases. Indeed, the market-based plan would help lower healthcare inflation.

2) Does the Ryan Path promote more economic growth and higher incomes? Yes. Ryan uses extremely cautious economic growth figures, the same ones employed by the Congressional Budget Office, to arrive at his budget totals. But his plan would almost certainly result in higher growth and more jobs — generating more tax revenue and reducing debt even faster than Ryan estimates. It shifts vast resources from the public sector to the far more productive private sector. It also sharply reduces top federal individual and corporate income tax rates to 25 percent from 35 percent. (The U.S. currently has the highest corporate tax rate among advanced economies.) According to the Heritage Center for Data Analysis, the plan would create nearly a million new private-sector jobs next year and bring unemployment down to 4 percent in 2015. A flat tax on income and consumption would be even better, but Ryan significantly moves the ball forward.

3) Is it politically realistic? The risk is that Paul Ryan has created a plan only Paul Ryan can sell with his passion and deep expertise. He does make political concessions. The plan doesn’t, for instance, cut Medicare spending on current retirees or older workers. But austerity of that sort probably isn’t needed yet. Current trends, though, are leading toward a fiscal crisis that would result in both extreme and immediate benefit cuts and higher taxes.

And that, ultimately, is how the political case is made. The alternative to the Ryan Path isn’t the fiscally unsustainable status quo, but a future of harsh austerity beset by financial crisis, stifled by higher interest rates and marred by a lower standard of living. In short, the death of the American Dream and  the collapse of any social safety net.

But there is a way forward to another American Century and away from that nightmare. And Ryan has found it.

COMMENT

Purely partisan foolishness. To suggest that Ryan’s plan somehow restores “free markets” is a spectacular insult to the intelligence of anyone with enough education to be barely literate and enough sense to look one level deeper than the TMZ headline of the day.

Ryan’s plan cements the corporate cronyism that has driven our economy into the turf. What’s needed is a REAL return to free markets, and this plan doesn’t even scratch that surface.

Pethokoukis, you’re nothing more than a partisan shill. My dog could eat an inkjet cartridge and defecate a better-reasoned column than this.

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Dems may (again) target private equity firms to pay for corporate tax reform

Apr 4, 2011 18:55 UTC

Private equity firms could get roped into helping pay for U.S. tax reform. To help offset the budget cost of lower corporate rates, my industry sources tell me, Democrats in Congress are considering an attempt to alter the treatment of publicly traded partnerships. Such a move could bring in several billions of dollars a year from Blackstone, Fortress and Apollo, the latest buyout shop to move to the New York Stock Exchange. A similar legislative effort in 2007 failed, but this one might have legs.

The attempt four years ago suffered from the perception it was punitively targeting one firm. It landed the sobriquet “The Blackstone Bill,” and not without cause. It was introduced just as Steve Schwarzman’s firm was preparing to go public. The surprise bill would have slammed the qualifying partnerships at the time, Blackstone and Fortress, with a 35 percent corporate tax on profits before distributions to shareholders.

Fortress would have had a five-year grace period, but Blackstone probably would have been tagged immediately. No wonder the firm amended its IPO prospectus to warn that the bill could cause a “material increase in our tax liability and … a reduction in the value of our common units.”

The proposal stalled in committee, however. And later legislation that would have subjected carried interest, essentially performance fees, to the high marginal tax rate on ordinary income instead of the lower capital gains rate met a similar fate. Yet another attempt failed during last year’s financial reform debate.

But the push for broad corporate tax reform could provide an opportunity for congressional Democrats to revive the original approach, notes MF Global analyst Anne Mathias in Washington in a recent report, insight confirmed by my own reporting. There’s support on both sides of the aisle for reducing corporate tax rates this year, while also closing loopholes and eliminating tax breaks to make up potentially lost revenue. Republicans might accept the tradeoff to secure a lower overall rate — which might also lessen the sting for the buyout shops.

The industry would prefer the status quo, of course. And for now, the firms are betting reform is still at least a couple of years off. But if that schedule should accelerate — and it well could — the focus on private equity pocketbooks will sharpen.

COMMENT

In a time of economic recovery I just feel that it’s entrepreneurialism that’s going to help us out. But pinning corporate tax reforms on private equity firms is just going to discourage this and slow our attempts at achieving target growth levels.

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Buyout barons could help pay for U.S. tax reform

Apr 4, 2011 14:59 UTC

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

By James Pethokoukis

Private equity firms could get roped into helping pay for U.S. tax reform. To help offset the budget cost of lower corporate rates, Congress is considering altering the treatment of publicly traded partnerships. Such a move could bring in several billions of dollars a year from Blackstone, Fortress and Apollo, the latest buyout shop to move to the New York Stock Exchange. A similar legislative effort in 2007 failed, but this one might have legs.

The attempt four years ago suffered from the perception it was punitively targeting one firm. It landed the sobriquet “The Blackstone Bill,” and not without cause. It was introduced just as Steve Schwarzman’s firm was preparing to go public. The surprise bill would have slammed the qualifying partnerships at the time, Blackstone and Fortress, with a 35 percent corporate tax on profits before distributions to shareholders.

Fortress would have had a five-year grace period, but Blackstone probably would have been tagged immediately. No wonder the firm amended its IPO prospectus to warn that the bill could cause a “material increase in our tax liability and … a reduction in the value of our common units.”

The proposal stalled in committee, however. And later legislation that would have subjected carried interest, essentially performance fees, to the high marginal tax rate on ordinary income instead of the lower capital gains rate met a similar fate. Yet another attempt failed during last year’s financial reform debate.

But the push for broad corporate tax reform could provide an opportunity for congressional Democrats to revive the original approach. There’s support on both sides of the aisle for reducing corporate tax rates this year, while also closing loopholes and eliminating tax breaks to make up potentially lost revenue. Republicans might accept the tradeoff to secure a lower overall rate — which might also lessen the sting for the buyout shops.

The industry would prefer the status quo, of course. And for now, the firms are betting reform is still at least a couple of years off. But if that schedule should accelerate — and it well could — the focus on private equity pocketbooks will sharpen.

Incomes, not jobs, could sink Obama re-election

Apr 3, 2011 00:35 UTC

The Obama 2012 presidential campaign, which has now officially sprung to life, confronts a vexing political puzzle. The unemployment rate is plummeting. After the March jobs report release, White House economic adviser Austan Goolsbee pointedly noted that the full percentage-point decline over the past four months is the largest such drop since 1984.

That statistical coincidence dovetails neatly with this David Axelrod-endorsed narrative: Just as Ronald Reagan bounced back from a nasty first-term recession to win re-election in 1984, a jobs rebound will mean four more years for Barack Obama. Got that, MSM? Obama 2012 = Reagan 1984. Now shut your laptops and run along.

But as the Obama political shop has surely noticed, the unemployment rate isn’t the only politically important number on the decline. Simultaneously, their boss’s approval rating has fallen from 51.0 percent on Jan. 24 to 47.4 percent today, according to the RealClearPolitics poll average. A large-sample Quinnipiac survey out last week had Obama at 42 percent. And a recent Reuters-Ipsos poll found that Americans’ confidence in the way the country is going has slumped to its lowest point of Obama’s presidency with 64 percent believing the nation is on the wrong track. Even as more jobs are being created, so are doubts about Obama.

Keep in mind that forecasting models suggest a president with a 50 percent approval rating on Election Day has an 80 percent chance at re-election vs. just a one-in-three chance for an incumbent with a 45 percent rating. And polling analyst Nate Silver notes that every incumbent with an approval rating of 49 percent or higher since World War Two won re-election, while every candidate with a rating of 48 percent or lower lost.

Morning in America 2.0, Mr. Axelrod? More like Threat Level: Midnight. And here’s why: While jobs are growing, incomes are not. And income growth — or the lack of it — political scientists agree, is the economic variable with the most impact on national elections. Strong growth in real disposable personal income led to huge victories for Reagan in 1984, Richard Nixon in 1972 and Lyndon Johnson in 1964. Weak or negative growth doomed Jimmy Carter in 1980, George Bush in 1992 and John McCain in 2008.

Real disposable personal income fell 0.1 percent in February. Average hourly wages were flat in March, and have grown at a 1.8 percent annualized rate over the past three months, according to the Economic Policy Institute. With inflation running around 2 percent, this means the average American is falling behind, his standard of living dropping. As the Brooking Institution figures things, between October 2010 and February 2011, real hourly and weekly earnings in the private sector fell 1.1 percent.

Even Goolsbee knows those numbers won’t improve a whole lot unless the unemployment rate moves sharply lower. Yet the official White House economic forecast has unemployment averaging 8.6 percent in 2012, not much below the current 8.8 percent rate. (The broader U-6 rate, which includes discouraged workers and part-timers who want full-time gigs, is a sickening 15.7 percent.) JPMorgan economist Michael Feroli thinks a combination of so-so economic growth, a vast pool of unemployed, higher energy prices and the expiration of the 2011 payroll tax cuts means income growth will likely remain “tepid” going forward.

So for now, consider Obama a favorite to win a second term — most presidential incumbents do — but only by the narrowest of margins. If incomes stay stagnant — and if Republicans can nominate someone with a strong, passionate and specific pro-growth economic message — Election Night 2012 could be a long one.

COMMENT

I work at a very big software company that all of you have heard of — there is only one reason why this company hires Indian IT firms — PRICE!!!!! In India and China, there is plenty of SLAVE LABOR and the U.S. Govt. has decided to equalize U.S. JOBS and Salaries with these SLAVE LABOR conditions to do one thing: support a CEO to average worker pay gap of 400X (see below.) Don’t listen to anything else that the companies say, it’s about price. We could easily train Americans to develop these skills on the job in about three months. Price includes training and having to deal with workers who require health benefits and everything else that a person working should get.

There’s a big difference from the old days when American people cared about one another and nowadays where greed rules the day: while corporations have robbed pension funds that were committed to, banks have falsely appraised real estate for the past 10 years and aren’t held to account for the fraud when the borrowers are held to the falsely valued loans, and executives get paid 400 TIMES the average worker — see the following article:(http://www.opednews.com/article s/The-Wide-Divide–You-Are-B-by-Steve-Ell iott-080616-912.html), Americans continue to vote for the creators of these schemes: Republican schemers. It’s crazy how you are shooting yourself in the feet, ladies and gentlemen. Please get a clue. Yeah, Obama is not the best and is having a hard time, but if you think cutting more decent jobs is the answer, watch out because I can replace ANY U.S. Worker, and I mean any, (skilled or not, doctor, lawyer, IT, CEO, McDonald’s person, whatever) with a Chinese or Indian worker who will cost 5% of your total salary — want to compete with that? And I mean ANY job.

Posted by NoMoreUSDream | Report as abusive

What the March jobs report means for Obama 2012

Apr 1, 2011 19:59 UTC

OK, the unemployment is now down to 8.8 percent, and the economy added 216,000 jobs last month. Here is the political economy of the situation, which is not as good for Team Obama as you might think:

1) Let’s not overstate the strength of the report: a) based on last two nasty downturns, 1974-75 and 1981-82, jobs should be growing roughly 400K a month; b)  nominal wage growth over both the last quarter and year have both been 1.7% vs. 2.1% inflation; c) the number of people who have been unemployed less than five weeks rose by 59K, first increase since November; d) the share of the unemployed who have been unemployed for more than 26 weeks also hit a record high of 45.5 percent. (Numbers compilation courtesy of the Economic Policy Institute.)

2) Political scientists have found only so-so correlation between unemployment and presidential election results. It’s really income growth that counts. And over the past year — and past two months — that has been negative. Shorter: jobs are being created, but they are not so high paying as before. Note that WH economic adviser Austan Goolsbee said today that he does not expect strong income growth unless the unemployment rate moves lower.

3) So let’s say it is Election Day 2012 and the unemployment rate is 8 percent — but housing is still frozen, wages are flat and broader unemployment rate is 15 percent. Then I think it is a 51-49 situation, with the winner depending on what kind of political athlete the GOP nominates.

4) I also note that O’s recent approval in the Quinnipiac poll was 42% and Reuters had the right track/wrong track number at 31-64 — the worst level of O’s presidency. This shows that a falling unemployment rate is necessary but not sufficient to boost voter optimism.

5) As I have written before:

It takes a while for people to really perceive that an economy has turned around, especially if unemployment is high. Bill Clinton won the 1992 election on the economy (“it’s the economy, stupid”) even though GDP had been growing for six full quarters (and at a pretty good clip). 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.

That’s right 3 1/2 years after the 1990-91 recession ended, the economy was still weighing negatively on voters and hurting the incumbent political party. Is it so hard to imagine, then, that three or four years from now voters will also be unhappy about the state of the economy and blame the party in power, the Obamacrats?

COMMENT

Blah! Blah! Blah! We should be thankful for any positive news, unless you get a biased reporter like James. Blah Blah Blah

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