James Pethokoukis

Politics and policy from inside Washington

Here is your lost decade

Jun 30, 2011 18:33 UTC

The recession started at the end of 2007. Well, the International Monetary Fund thinks things will stay bleak for years on end:

 

Note the unemployment rate.  While 5.6 percent is a lot better than today’s 9.1 percent rate, it is a) way above the 4.4 percent low-point of the George W. Bush administration, and b) is almost surely based off a shrunken workforce. I would like to hear the IMF’s take on the broader U-6 rate.

 

COMMENT

No, HERE’S your Lost Decade:

http://www.princeton.edu/~pkrugman/sixte en.png

The millions of job losses began in 2001 with the implementation of failed RightWing policies, and never returned to 2000 levels.

BTW, caught your act during your recent appearance on the ‘McLaughlin Group’:

A) Your whining about “class warfare” is belied by the fact that none other than Warren Buffett has gone on the record stating:

“There’s class warfare all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

B) Your claim that the “corporate yacht tax put thousands of people out of work” is contradicted by the reality that the national economy had already tanked BEFORE the enactment of the so-called “yacht tax”, and that the leisure industries, such as boats, RVs, ATVs, etc., are the first to feel it.

I had no idea that you were such a gullible sucker for RightWing propaganda.

What a shame.

Posted by JoeFriday | Report as abusive

Just a drop in the bucket

Jun 30, 2011 17:42 UTC

Let’s say the debt ceiling deal has $2 trillion in spending cuts. Even they are legit, they really don’t amount to much (via Cato):

 

Obamanomics, leaving on a jet plane

Jun 30, 2011 03:41 UTC

Buckle your seat belts low and tight, America, there’s going to be turbulence all the way to Election Day, 2012. It’s only the summer of 2011 and already we have kids vs. corporate jets, courtesy of the White House political machine.

The most newsworthy bit of President Obama’s press conference certainly had nothing to do with economics or America’s precarious fiscal position. Recall: The president’s most recent budget plan would add $9.5 trillion in cumulative new debt over the next decade. Eliminating a tax break for the purchase of corporate jets – it’s called “accelerated depreciation” and Obama has endorsed the deduction twice before to boost growth and create jobs – would save $3 billion, or 0.03 percent of that total.

Yet this is the place where the president has chosen to stand his ground, to say “Here and no further!” Obama astride the bridge Khazad Dûm. He challenged the GOP to “go talk to your constituents, the Republican constituents, and ask them, are they willing to compromise their kids’ safety so that some corporate-jet owner continues to get a tax break.”

Really? Would the food safety system – or National Weather Service or National Institutes of Health – would suffer if government extracts a few hundred million less a year from taxpayers? Is Uncle Sam really running such a lean-and-mean operation? Of course not. McKinsey consultants have found that if the U.S. public sector could just halve the productivity gap with the private sector, its productivity would be as much as 15 percent higher and would generate annual savings of up to $300 billion a year. If the president wants to get rid of corporate tax breaks, he should offset them by lowering the sky-high U.S. corporate tax rate while also cutting spending.

But the clumsy attempt at class warfare probably wasn’t even Obama’s most disheartening moment during the presser. Several others were at least equally as bad:

1) The president unnecessarily raised the specter of default if the debt ceiling is not raised by early August:

By August 2nd, we run out of tools to make sure that all our bills are paid.  So that is a hard deadline.  And I want everybody to understand that this is a jobs issue.  This is not an abstraction.  If the United States government, for the first time, cannot pay its bills, if it defaults, then the consequences for the U.S. economy will be significant and unpredictable.  And that is not a good thing.

Yet as the Bipartisan Policy Center noted in a new report, the federal government will take in some $170 billion in August while debt payments only equal $29 billion. Actually, that’s enough revenue to cover debt payments, entitlement (Social Security, Medicare, Medicaid) payments, unemployment benefits and payments to active-duty military with billions left over. It might be messy and chaotic, but that is not the same as default.

2) The president perpetuated this myth: “You can’t reduce the deficit to the levels that it needs to be reduced without having some revenue in the mix. “ Yet Rep. Paul Ryan’ s Path to Prosperity does just that, even while assuming — to satisfy the Congressional Budget Office — the economy grows at a snail-like 2 percent pace year after year for decades. If we need more money, grow the economy faster.

3) Maybe the biggest economic issue of the year, other than the anemic recovery, is the National Labor Relations Board attack on Boeing and its decision to open an aircraft assembly line in right-to-work South Carolina. This de facto attempt to impose wage controls on one of America’s largest exporters by limiting where it can do business is a dagger aimed at the heart of the American free enterprise system. But here, sadly, is the president again leading from behind:

Essentially, the NLRB made a finding that Boeing had not followed the law in making a decision to move a plant.  And it’s an independent agency.  It’s going before a judge.  So I don’t want to get into the details of the case.  I don’t know all the facts.  That’s going to be up to a judge to decide.

Who knows, maybe the president just has something against jet airplanes,  akin to his apparent dislike of those job-killing ATMs. But this seems certain: Obamanomics took flight in 2009 as a purist Keynesian experiment in economic management from high above. The ultimate Dreamliner for Democrats. Now, two-and-a-half-year later, it’s begun its sputtering descent.

Geithner has plenty of dough to pay debt interest, Social Security …

Jun 29, 2011 20:48 UTC

My pal Conn Carroll points to this study from the Bipartisan Policy Center which has this killer slide:

The math seems pretty clear, though BPC adds that the whole process of prioritizing would be pretty messy and chaotic.

 

COMMENT

Geez Louise! Y’all “policy people” just don’t get it. If you were a creditor and KNEW that the your debtor (e.g., US government) couldn’t pay ALL its bills and was having to pick and choose which of its bills it pays, you would not have much confidence that you would be paid ALL of what was owed to you EVEN if the debtor said that they would put your bill at the top of its list of bills!!!

For example, if you missed a payment on ONLY your Bank of America credit card bill, guess what Amex and every other creditor would do to you EVEN IF you never missed any other payments? That’s right! Even a moron knows that they would lower your credit limit AND increase your interest rate. Plus no one else would lend you money at favorable rates in future. You’ll pay through your nose.

Contrary to the slide above that looks that it was produced by an imbecile, your credit rating is NOT a mathematical formula!

These people doing these analyses are just poor, fools and clowns. So Congress can go ahead and play with fire? We are the idiots who will get burned.

Posted by Mangojulie | Report as abusive

Where the debt ceiling debate might be headed

Jun 28, 2011 17:02 UTC

This decision tree from Societe Generale (via Business Insider)  seems more or less correct. I think there will be a deal by Aug. 2 (or whatever the deadline ends up being).  But it is the content of the final austerity plan that remains impossible to predict.

 

 

 

 

 

The long, slow slog back to full employment

Jun 28, 2011 14:50 UTC

A neat chart from the Council on Foreign Relations:

And the explanation. At least one of them:

The shape of U.S. labor market declines and recoveries—as measured by the current level of employment relative to the prior peak—has changed dramatically over the past two decades. From the 1940s through the 1970s, they exhibited a V-shape of sharp declines and rapid recoveries, as seen in the chart above. By the 1990s they took on a U-shape, signifying longer, persistent unemployment.

“During times like the 1950s and 1960s, a rising level of educational attainment kept up with this rising demand for skill,” MIT economist David Autor writes, “but since the late 1970s and early 1980s, the rise in U.S. education levels has not kept up with the rising demand for skilled workers.”

The labor demand differential is particularly stark today: unemployment among the college-educated stands at 4.5%, compared with 14.7% for those without high school degrees. Unemployment compensation, the main tool in the U.S. arsenal to address joblessness, was created back in 1935 to buffer relatively short stints of unemployment, but the need today continuously to extend benefits is a sign that policy has got to address the skills mismatch far more effectively.

Americans aren’t eating the dog food

Jun 28, 2011 14:47 UTC

A few data points, two from today and one from last week:

–  Consumer confidence fell in June to the lowest point since November 2010 on concerns about the slack labor market and sputtering recovery, according to a Conference Board report released on Tuesday. The Conference Board, a private-sector industry group, said its index of consumer attitudes fell to 58.5 in June from a revised 61.7 in May. Something more like 90 is what you want to see with a healthy economy.

– “Only 37 percent of registered voters approve of [President Obama's]handling of the economy, his lowest rating ever, according to a new McClatchy-Marist poll. …  Overall, 45 percent said that they approved of the job the president is doing, while 47 percent disapproved, a range that’s held relatively steady since late 2009.”

– And this from an AP poll:

For the first time this year, less than 50 percent of respondents to an Associated Press-GfK poll say Obama deserves re-election. The new poll shows a virtual split of 48-47 in favor, raising a new hurdle for the president as economic concerns strip away the gloss he briefly gained in May after the death of Osama bin Laden. What’s more, four out of five now believe the economy is in poor shape, with 36 percent calling it “very poor,” a new high in AP-GfK polling.

At the same time, Wall Street and the Federal Reserve continue to downgrade their economic expectations.  As I wrote yesterday:

The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time.

U.S. federal debt now bigger than entire U.S. economy

Jun 27, 2011 19:03 UTC

A scary chart from the Bank for International Settlements looking at the rise in government debt around the world since Lehman exploded:

And here is a breakout of those numbers:

 

Why the GOP shouldn’t go wobbly on taxes

Jun 27, 2011 17:59 UTC

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike. If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years –  its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

 

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is. The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b)  the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

And as bad as those numbers are, they don’t fully take into account the economic impact of all that debt. When the CBO does makes those calculations, total debt as a share of output is not 187 percent of GDP – the number you frequently see in media accounts – but rather 250 percent of GDP since economic growth would slow sharply due to debt overload. And more than likely the economy would suffer a debt crisis long before 2035 came around.

3. The key to boosting tax revenue is faster economic growth. A team of economists from the American Enterprise Institute recently fashioned a debt-reduction plan that would raise tax revenue to a long-term level of 19.9 percent of GDP. That’s pretty high when you consider there have only been three years in U.S. history that have seen a higher tax burden. Its tax plan:

To achieve this goal, the income tax system would be replaced by a progressive consumption tax, in the form of a Bradford X tax. To address environmental externalities in a more cost‐effective and market‐based manner, energy subsidies, tax credits, and regulations would be replaced by a carbon tax.

But the AEI team also notes that such a tax plan would more than likely boost growth:

Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax can boost economic growth, although the magnitude of the gains depends on the assumptions that are made and on the detailed provisions of the consumption tax. One widely cited study estimates a 6.4 percent gain in long‐run output from the adoption of an X tax.

Our plan also reduces transfer payments to the elderly, which should further increase private saving and long‐run growth. These growth effects have not been taken into account in the estimation of our plan. Accounting for them suggests that actual revenue requirements are lower than those stated above. For example, if our plan increases long‐run output by even 5 percent and if government spending does not increase in response to the expansion of output, then the actual long‐run revenue requirement will be 19.0, rather than 19.9, percent of GDP.

Revenue of 19.0 percent of GDP happens to be the same revenue requirement of Rep. Paul Ryan’s Path to Prosperity debt-reduction plan. And tax reform isn’t the only thing that can boost economic growth. Increasing high-skill immigration, implementing regulatory reform, and raisng productivity in education, government and healthcare could pump up economy-wide  GDP growth by at least a full percentage point, according to McKinsey Global Insitute.

Bottom line: Higher taxes would hurt the economy, wouldn’t solve the debt problem and aren’t really needed anyway.

 

COMMENT

“1. The last thing the economy needs is a tax hike.”

Au Contraire.

Raising taxes on the Rich & Corporate worked like a charm for both Presidents FDR and WJC. It all depends what you do with the money.

The periods of greatest economic prosperity in this country occurred when the top federal personal income tax BRACKETS were at 81%, 85%, and even 91%, while the top corporate federal income tax BRACKET was at 50%, AND after the top federal income tax brackets were raised on the Rich & Corporate.

~

“2. Tax revenue isn’t the problem. Spending is.”

Wrong.

According to the independent non-partisan Congressional Budget Office, the vast overwhelming majority of our current federal deficits and debt, as well as our medium-term projected future federal deficits and debt, are from the massive drop in federal income tax revenue as a direct result of the numerous rounds of massive tax cuts for the Rich & Corporate enacted during the previous administration.

Not even close.

Posted by JoeFriday | Report as abusive

Does Pelosi want a debt ceiling crisis?

Jun 27, 2011 15:36 UTC

After watching Nancy Pelosi on Sunday, Jonathan Chait speculates that she just might:

Think through what happens if the government defaults on its debt. You have an economic crisis. People get mad at House Republicans, which helps Obama, but the economy also teeters, which ultimately hurts Obama but does not hurt House Democrats very much. Indeed, a default crisis would seem to increase the chances of the 2012 elections producing a Republican president and a Democratic House. I suspect Pelosi knows that.

Granted, this is a highly cynical view of Pelosi. But I would guess many members of Congress care more about keeping their seat and expanding their influence vs.  a member of their party winning the White House. And if the economy has to suffer in the process, so be it.  I will also add that GOP leaders on Capitol Hill think a debt crisis would definitely hurt the party — just like a government shutdown — not to mention the economy.

Already the media is framing Eric Cantor’s departure from the budget talks as a case of Rs putting the interests of the rich and oil companies ahead of that of the average American. And the White House seems to think playing the populist, class-warfare card is a winning strategy. So it seems that both Pelosi and Obama want to push this to the wall.

COMMENT

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