James Pethokoukis

Politics and policy from inside Washington

Can Obama’s 2012 hopes survive 9%+ unemployment?

Aug 5, 2011 17:15 UTC

After looking at today’s anemic unemployment report, Goldman Sachs drops this H-bomb on the Obama campaign:

We have lowered our forecast for US real GDP growth further and now expect real GDP to grow just 2%-2½% through the end of 2012.  Our forecast for annual average GDP growth has fallen to 1.7% in 2011 (from 1.8%) and to 2.1% in 2012 (from 3.0%).  Since this pace is slightly below the US economy’s potential, we now expect the unemployment rate to be at 9¼% by the end of 2012, slightly above the current level.

2. Even our new forecast is subject to meaningful downside risk.  We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months.  There are three specific issues that concern us.  First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally.  Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly.  Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again.

The consensus used to be that President Obama might be OK if the jobless rate fell below 8 percent by Election Day.  That seems increasingly unlikely. The economy is, at best, in slow-growth mode, just churning and churning, creating few jobs.  Comparisons to President Reagan’s 1984 “Morning in America” campaign are looking ever-more ridiculous.  Under Reagan’s tax-cut driven recovery, unemployment fell from 10.8 percent in December 1982 to 7.2 percent by Election Day as the economy grew 4.5 percent in 1983 and 7.2 percent in 1984. In fact,  Jimmy Carter’s 1980 campaign might be the better comparison. The unemployment rate jumped from 6.0 percent in December 1979 to 7.5 percent on Election Day 1980 as the economy shrank 0.3 percent.


We are, by all measures, in the midst of a failing economic recovery. Under these circumstances, Americans expect that policymakers in Washington are committed to improving economic conditions further.

It’s against this backdrop that conservatives are committed to taking capital out of the economy, creating more public-sector unemployment, eliminating effective jobs programs, urging the Federal Reserve to stop focusing on lowering unemployment, and fighting tooth and nail to protect a tax policy that’s been tried for 30 years without success.

By their own admission, GOP officials have said economic growth is not their priority; Hoover-like deficit reduction is. While advocating this agenda, Senate Minority Leader Mitch McConnell has said, more than once, that his “top priority” isn’t job creation, but rather, “denying President Obama a second term in office.”

It’s time to face the fact that there are people who are prioritizing the destruction of a presidency over the needs of the nation. They are willing to crash the American economy, even the global economy, to accomplish this.

Oh, and senatorseven? Standard and Poor’s says it’s Republican obstructionism and intransigence on economic policies that caused them to downgrade America’s credit. But conservatives are rejoicing over this downgrade and attempting to blame Obama for fiscal irresponsibility. Every time I think conservative logic couldn’t possibly get more blisteringly ridiculous, you lower the bar yet again.

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Washington’s next challenge

Aug 3, 2011 19:30 UTC

By James Pethokoukis
The opinions expressed are his own.

Reuters invited leading economists to reply to Larry Summers’ ope-d on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Reuters Breakingviews columnist James Pethokoukis’ reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as well.

Like Larry Summers, I have a “multifaceted reaction” to Washington’s debt ceiling and budget deal. In fact, I have the exact same multifaceted reaction, except driven by completely different rationales.

1. Like Summers, I feel relief — but not because the agreement averted default and avoided harsh austerity. While the package doesn’t fundamentally change America’s fatal fiscal trajectory, it keeps the legislative momentum headed in the right direction with a focus on reducing debt via spending cuts rather than tax increases.

Nor do I think the process was some sort of “shabby spectacle.” The democratic process is always messy, and frequently driven by a sense of crisis. But it was designed to prevent tyranny; not to promote efficiency. And the recent House ban on earmarks ensured much of the haggling revolved around policy rather than political favors.

2. Likewise, I am cynical — but not about the nature of the debt deal. Future editions of Congress and the economic cycle will have great say about how much America taxes and spends in coming years. Fiscal norms are being set and attitudes changed now, such as when Congress rejected President Barack Obama’s recent budget 97-0. The new budget deal is part of that ongoing evolution.

I am bothered, however, by the unwillingness of the current administration to clearly outline its vision for America’s fiscal future. The consensus of left-of-center economists and policy wonks is that America needs to tax and spend far above traditional levels in coming decades due to America’s aging population and public investment deficit. The White House should come clean and have an upfront debate with Republicans about where the country needs to go.

3. Additionally, I also suffer from economic anxiety — but not because temporary tax breaks and other stimuli are set to expire or fade just as the economy is rolling over. There is little evidence any of that stuff created jobs or growth during the past three years. America’s facing not just a lost decade but a lost generation. Avoiding that fate requires fundamental changes to tax, regulatory, education and immigration policy to boost productivity and enhance global competitiveness.

Right now I am not seeing a comprehensive approach to these issues from either party. The debt deal wasn’t the right vehicle for such changes. But one needs to be found ASAP. Instead of achieving escape velocity, the U.S. economy looks to be falling back to earth. Washington’s next challenge is clear.

More evidence U.S. economy approaching stall

Aug 2, 2011 11:33 UTC

The U.S. economy doesn’t like to hover. If it isn’t expanding at a 2 percent or higher annual pace, it risks slipping into recession. As I mentioned in a post last week:

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.

But rising unemployment can also be a warning signal. Goldman Sachs, for instance, has a “three-tenths rule of thumb” for the unemployment rate:

Technically, the “rule” is as follows: if the three-month average of the unrounded unemployment rate increases by more than three-tenths of a percentage point (35 basis points to be exact) from a trough, the economy has either entered recession already, or will do so within six months. The intuition behind this statistical regularity is that if the labor market stalls for more than a short period, a vicious cycle of weaker income growth, weaker spending and weaker hiring typically results. An important exception is in the early phase of economic recovery, when the unemployment rate often continues to drift higher for several months.

Currently, the three-month average rate is 9.07%, up from a recent trough of 8.90% in April. The unemployment rate would need to increase to 9.3% in July and stay there in August to trip the 35-basis point threshold; our forecast for Friday’s July labor market report is that the unemployment rate will remain steady at 9.2%.

So all eyes on Friday’s jobs report. Certainly some forecasters think the economy will be considerably stronger in the second half of this year. But from a political perspective,  the 2012 economic landscape looks like it will be nowhere near what Team Obama was expecting or hoping for: 4 percent GDP growth and sub-8 percent unemployment




Exports are doing well, though. I saw in one article: I read that exports were clocking along at a record level.
The company where my husband is employed can’t keep up
’cause of all the exporting orders for durables.

YET, I read that the trade deficit was widening,

And then there is this inflation “roof” going to collapse
in on Bernanke. Some of the “shingles” they want, of course, to mask our spending addiction, but these wild swings of the pendulum aren’t good timings for anyone.

Remember the fears of the double dip immediately after
the crash? Well, I think it’ll finally hit this time.

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A debt deal, but still plenty of fiscal uncertainty

Aug 1, 2011 23:22 UTC

President Obama says the debt ceiling and budget deal will “begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”  But only begin, and just barely. Consider the following questions (via IHS Global):

1)  We do not know whether the bipartisan committee of lawmakers will be able to come to an agreement, what that agreement will contain, or whether its recommendations will be accepted by Congress.

2) We do not know whether the automatic sequester would really be allowed to kick in if the committee fails. We do not know whether the Bush tax cuts will be extended in whole or in part.

3) We do not know whether the temporary payroll tax cut and emergency unemployment insurance benefits will be extended into 2012.

4) We do not know what shape a permanent deficit fix would take—one that addresses entitlements and revenues and goes well beyond even what the committee is charged with producing.

What is the nightmare scenario? It is unfortunately rather easy to construct a nightmare scenario involving another collision with deadlines at the end of 2012. Suppose that the bipartisan committee fails. That will mean that automatic sequester will be due to kick in on January 1, 2013. That is exactly the same day that the Bush tax cuts are scheduled to expire. So the result of political gridlock would be a massive fiscal contraction on January 1, 2013. The political landscape at that time would be in a state of flux anyway, because the new Congress would not yet have taken office, and the president might be a lame duck. To make the picture even messier, another (contested) increase in the debt-ceiling would be due at around that time.


On the debt ceiling deal, direction more important than degree

Aug 1, 2011 13:55 UTC

If you want to read the bill yourself, here you go. And here is a nice summary from MF Global:

Ø Debt Ceiling increase in three tranches for a $2.4T total:

o Immediate $400B raise

o Second $500B raise, subject to congressional disapproval (the old McConnell-Reid Plan)

o Third and final $1.5T raise, subject to congressional disapproval

Ø $917B in cuts through the Boehner Plan’s spending caps

Ø Special Committee of 12 Members of Congress with mandate to recommend $1.5T in deficit reduction by November 23, 2011 and Congress is required to vote on recommendations by December 23, 2011

o Simple majority to pass recommendations out of committee

o Fast Track process for votes on House and Senate Floors

o Trigger/Sequester modeled after Gramm-Rudman model

§ If Special Committee can’t agree to recommendations, triggers $1.2 trillion in across-the-board cuts, half would be Defense cuts and the other half would be non-Defense cuts. Non-defense cuts would exempt Social Security and Medicaid, and only impact providers in the Medicare cuts.

Ø Balanced Budget Amendment votes on House and Senate floors

Having now arrived at the beach in the Outer Banks, NC, I am trying to write as little as possible, so brief thoughts only:

a)  This deal does not fundamentally change America’s fiscal trajectory. But that said, it does keep the momentum going for further fiscal fixes. I have been comparing it to the War in the Pacific. This deal is Guadalcanal or, probably more accurately, Tarawa. Hopefully, this new congressional committee to cut spending will be the next island, maybe Saipan. Iwo Jima and Okinawa come in 2013. That will be the time for fundamental entitlement or tax reform.

b)  As far as 2012 election impact, the deal might be more like the killing of OBL — an ephemeral boost rather than a political game changer. Obama is probably happy that few of the cuts happen next year. The White House would view major cuts as a drag on the economy. (Yet liberals still really hate this bill.) Far more important is that time is running out for a major economic acceleration that would dramatically lower unemployment or boost wages. It is growing more likely the jobless rate will be closer to 9 percent at the end of 2012 than 8 percent. As it is, Obama’s approval rating is down around 40 percent, according to Gallup.  The GOP nomination is certainly worth having.

c) Next up: Figuring out deficit neutral ways of boosting the economy. If unemployment stays where it is or the economy veers toward recession, I don’t expect Washington to sit on its hands.  The idea of a tax holiday on foreign earnings of U.S. corporations will get a further hearing. The inflow of money would be used for hiring, buying equipment or stock buybacks/dividends.  Republicans would be greatly in favor. All would have a positive economic effect on the economy. And the tax revenue — some $40-50 billion — could be used for some stimulus plan Democrats would like. Maybe this one from economist Ed Yardeni:

(1) The federal government should provide a $20,000 matching subsidy toward a down payment on a house to any homebuyer who puts up at least the same amount and is approved for a mortgage loan. The program would be capped at two million existing single-family homes. So the cost of the program would be $40 billion. The purchased property would have to be the primary residence of the buyer.

(2) This program could be paid for by slashing the corporate tax rate on repatriated foreign earnings from 35% to 10%. We estimate that doing so could easily raise the $40 billion necessary to finance the program. Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.

(3) Rental income would be tax free for 10 years for homebuyers who purchase existing single-family houses as rental properties. They would not be eligible for the down payment subsidy. The 10-year tax-free status of the rental income would be transferable to new owners during that period. The number of rental units under the program would be capped at one million.







“Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.”
Oh, he was ASSURED, was he? Let’s play a little game called “what’s more likely?” If the US lowered corporate taxes to 10%, would it be more likely that business owners would repatriate all that money and hand the government $124 billion out of the goodness of their hearts and a fine sense of civic responsibility, or would it be more likely that they would leave that money right where it is and continue to pay 0% like they’ve always done?

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