James Pethokoukis

Politics and policy from inside Washington

Oh yeah, that was a lousy jobs report

Jun 6, 2011 20:14 UTC

My pal Tim Kane at Growthology lays it all out:

– The unemployment rate is now 9.1 percent, up from 8.8 percent two months ago. That’s important. Although research shows the U rate is more reliable than the payroll employment numbers over the long term, it might still suffer from a one month blip due to turnover in the survey sample. But a second increase in two months all but nails the coffin shut. By that I mean that the U.S. is experiencing if not a double recession then a historically stagnant recovery.

– The May payroll gains of 54,000 are nothing short of stunning. The U.S. lost 8 million payroll jobs during the recession. Adding 54,000 a month will get the nation back to normal … never! A recovery in the job growth number needs to average 400,000 a month to achieve the simplest recovery in 2.5 years. As it stands, the BLS commissioner is trying to emphasize the good news that the average payroll growth has been 220,000 for the previous 3 months. Let’s be clear: that is not a silver lining, it’s an indictment of the current course.

– The long-term unemployed increased in May by 361,000. Add that to the disturbing uptick in weekly jobless claims, stuck north of 400,000 a month.

– The labor force increased by roughly 1.2 million a year before the recession, peaking at 154.7m in Dec 2008. Two and half years on, it is 153.7m (a million souls fewer). Another way to think of this is that the labor force has roughly 4 million in extra-normal slack, people who have officially left/not joined the labor force but will come in as the economy recovers. This is a recipe for the unemployment rate to rise as things get better, but what we are seeing is the unemployment rising even as conditions slip.



Withdrawal of Fed nominee sets bad precedent

Jun 6, 2011 19:56 UTC

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

WASHINGTON — Nobel laureate Peter Diamond won’t be joining the Federal Reserve’s board, and neither might anyone else for some time. Washington is making the U.S. central bank almost as much of a political target as the Supreme Court. The result could be lengthy vacancies and perhaps less independence.

Senate Republicans were looking to repay Democrats for blocking President George W. Bush’s reappointment of Randall Kroszner to the Fed in 2008. Many also wanted to use the nomination as a way of expressing displeasure over the bank’s bond-buying program and President Barack Obama’s fiscal policy. Opposing Diamond allowed them to tick all those boxes.

Despite his potentially valuable labor market expertise, the Massachusetts Institute of Technology economist’s support of the Fed’s quantitative easing and Obama’s stimulus spending provided the political rope needed to rationalize his rejection. Those positions enabled the GOP to rally conservative interest groups against a Fed nominee. The influential Club for Growth, for instance, threatened to rate poorly any Republican who voted for Diamond, terming him an “activist Keynesian.”

A disturbingly similar process unfolds when the nation’s highest court has an opening. Interest groups scour the records of potential nominees for any morsel of controversy. The frequent result is that it’s the jurist with the shortest or most easily defended paper trail being selected, rather than the best qualified.

With this mood also hanging over the Fed, it may be nearly impossible for Obama to fill the two current board vacancies, no matter what a potential nominee’s views or resumé. As the 2012 election nears, it will be tempting for the GOP to stall the process until 2013 when there might be a different president or greater Republican strength in Congress.

And if the slots ever get filled, the attacks on Diamond are more evidence that new board members will face a Congress showing less deference than in the Alan Greenspan or Paul Volcker eras. Republicans — at least those who don’t want to abolish the Fed — want the bank to focus solely on controlling prices. Democrats want the bank to do more to juice jobs, the other part of the central bank’s sometimes awkward dual mandate.

So perhaps Diamond shouldn’t feel too bad about returning to Cambridge, Massachusetts. His dream job isn’t what it used to be.


Quick hits on money and politics

Jun 6, 2011 18:53 UTC

1)  “Taxpayers are still subsidizing billionaire bankers” – Tim Carney, Washington Examiner

They sure are. No one believes Washington will let big banks go bust when the next financial crisis hits. As a result, banks have lower borrowing costs than if the market believed the American taxpayer would not again ride to the rescue. In short, Dodd-Frank fails to fix the biggest problem with the U.S. financial system.

2)  “Obama Tunes Out, and Business Goes on Hiring Strike” – Michael Barone

Obama’s phony budget plan marked both an economic and political turning point, Barone says in a piece with Ayn Randian feel to it:

After April 13, Obama Democrats went into campaign mode. They staged a poll-driven Senate vote to increase taxes on oil companies. They launched a Mediscare campaign against Ryan’s budget resolution that all but four House Republicans had voted for. That seemed to pay off with a special election victory in the New York 26th congressional district. The message to job creators was clear. Hire at your own risk. Higher taxes, more burdensome regulation and crony capitalism may be here for some time to come. One possible upside is that economic bad news may no longer be “unexpected.” Another is that voters may figure out what is going on.

3)  “The Real Cost of the Auto Bailouts” – David Skeel, WSJ

Great analysis that notes a) neither GM nor Chrysler would have collapsed without the bailout, b) the true cost of the bailouts is closer to 430 billion and c) the following:

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.

None of this suggests that we should be unhappy with the recent success of General Motors and Chrysler. Their revival is a very encouraging development. But to claim that the car companies would have collapsed if the government hadn’t intervened in the way it did, and to suggest that the intervention came at very little cost, is a dangerous misreading of our recent history.

Oh, it now looks like the much heralded Chevy Cruze is a lousy product.

4)  “Among GOP, anti-tax orthodoxy runs deep” -WaPo

Oh, so now when a political party sticks to its principles, it’s a bad thing? BTW, I am still waiting for the “Among Dems, big government orthodoxy runs deep” headline.


China to US: Forget debt ceiling, cut spending

Jun 6, 2011 17:49 UTC

If you listen to Treasury Secretary Timothy Geithner and the rest of Obama administration, failure to raise the debt ceiling by Aug. 2 risks “catastrophic economic and market consequences of a default crisis.

Funny, the Chinese government — holder of $1.1 trillion in U.S. government debt — doesn’t seem to think so. I recently returned from a fact-finding mission to the Middle Kingdom. And my big takeaway is that Beijing isn’t too bothered by the Washington back-and-forth over raising the debt ceiling — provided the result is a long-term budget fix. For that, even a delayed interest payment might be acceptable. But brinkmanship in Congress that only punts the issue, and shirks from meaningful reform, would quickly turn investors in Beijing and elsewhere off.

When asked about government reaction to a temporary stoppage of debt payments on those holdings, a respected top official with an influential government advisory group reminded that investment represents “patient capital.” If a delay in Washington facilitated deep spending cuts, Beijing would grudgingly accept it.

Not that Beijing would be thrilled about it. Chinese officials are concerned about the reaction from a nationalistic public that already thinks America is too quick to blame China for its economic woes. To avoid a subsequent worsening of already fragile relations with Washington, then, Beijing would need to persuasively argue that it gained something in exchange for its forbearance. So the worst-case scenario is a delay that only results in a temporary hike in the debt limit.

But then again, I don’t believe Geithner’s deadline. As analyst Dan Clifton of Strategas notes:

Treasury is not restricted from prioritizing interest payments over other expenditures, and revenues are coming in at 10 times the rate of interest payments. Moreover, cash flow is so strong that prioritizing interest payments over other expenditures will not jeopardize Social Security payments. As such, we expect continued interest payments but a semi-government shutdown to occur which would delay long term spending projects and aid to state and local governments until an agreement could be reached. The net effect of this is that investors should be focused more on the economic implications of a semi-government shutdown than the potential for a US default.

So my advice to the spending hawks on Capitol Hill — of both parties — is to listen to China, stand firm and get something big in return for raising the debt limit. At minimum this would be getting at least $1 in spending cuts for every $1 increase in the debt ceiling, along with the spending caps found in the McCaskill-Corker bill.  Even former Clinton economist Alice Rivlin thinks raising the debt ceiling should be linked to a long-term budget plan.

The debt ceiling provides an opportunity for real fiscal reform, one that shouldn’t be wasted.


>>Too Funny, the Commies telling Øbama he’s too far to the Left!>>

Even funnier when you consider that I’ve seen many moderate Progressives on Facebook regularly calling Obama a “Republican” President.
He certainly courts big corporate, and even more so come election season. Then again when it costs a billion dollars to run for office today, and so many can’t find jobs while CEOs pull in million dollar salaries, I suppose there is no where else to go for the money :(

Posted by sruthj217 | Report as abusive

Not a (Peter) Diamond in the rough

Jun 6, 2011 17:26 UTC

The problem with the Federal Reserve is not that an “activist Keynesian” — in the words of the Club for Growth — like Peter Diamond can be appointed to such a powerful economic policymaking body. His views are, unfortunately, well within the mainstream of economic policymaking. The problem is that Diamond and the other Fed members really don’t matter. As one former Fed member said to me, “If you see someone from the Fed talking on TV and he’s doesn’t have a beard, feel free to ignore him.”

In other words, the only guy that counts is The Ben Bernank.  And it should be of great worry to Americans that one man — or even group of men and woman — have so much control over the U.S. economy. It is the Federal Reserve that is the problem. It is an unaccountable central bank printing money to buy bonds to goose a dysfunctional economy that is the problem.