James Pethokoukis

Politics and policy from inside Washington

Romer-Bernstein unemployment chart — updated

Jun 7, 2011 12:58 UTC

The good folks at e21 have updated the wildly optimistic chart from January 2009 prepared by incoming White House economists Jared Bernstein and Christina Romer. You know, the one that show the Obama stimulus plan would keep unemployment from hitting 8 percent.


There’s a missing line on the updated chart – an estimate of where unemployment would be without the recovery plan.

The top line of the chart (actual unemployment with the stimulus) is offset from the bottom line (forecast unemployment without the stimulus) by a margin of error. The additional line (estimated unemployment without the stimulus with the benefit of actual data) should be offset from the middle line (estimated unemployment without the stimulus without the benefit of actual data).

Whether this 4th line should be offset above or below the forecast line is open to debate and much more interesting than discussing how good of a job the forecasters did. Do people believe unemployment today would be higher, lower, or the same if the stimulus had not been implemented?

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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 :(

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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.

Obama 2012 and the May jobs report

Jun 3, 2011 20:26 UTC

I don’t think the terrible May jobs report means the Obama presidency is doomed anymore than I thought the killing of OBL meant re-election was in the bag. But another 18 months of economic muddling through – high unemployment, stagnant wages, dead housing, slow GDP growth – would certainly make the GOP nomination one worth winning. Like REALLY worth winning – let’s put it that way. And the history of economies after bank crises show the “muddling though” scenario is a common one.

But it is also interesting to note that White House economists told me previously that they didn’t think the U.S. economy would fall prey to that trap. No wonder the administration used so much political capital on health and financial reform rather than on job creation in 2009 and 2010. My chats with folks from the White House always showed them to be eternally  optimistic — eternally and overly optimistic is turns out. They were as surprised as anyone that Recovery Summer 2010 was a bust. And Summer 2011 is looking to be about the same. Yet there’s no sign the administration will change course and adopt some common-sense growth policies such as cutting taxes on corporations and capital, slashing regulation and offering a big downpayment on debt reduction.


The lunatics are in charge of asylum here.

The theoreticians living in the White House are working very hard to remake the USA as they think it should be.

They are refusing to accept the widely known economic theory that Government regulations and taxes have direct bearing on the state of economy.

Only a fool would keep driving even after learning that he is going in the wrong direction.

Only a greater fool would believe that we are going in the right direction and it’s just taking little longer.

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Romney makes it official

Jun 2, 2011 18:59 UTC

When Roger Ebert reviews movies, he does not treat them all the same. Serious dramas are not treated the same as superhero films. “X-Men: First Class” is not treated the same as “Tree of Life.”

I am using the same approach, for now, when evaluating GOP presidential candidates. I have high expectations for Mitt Romney, a man of great intelligence and experience in both the public and private sectors. And, of course, he’s run for president before. So I am looking for big ideas and a well-thought out agenda.

Didn’t really get that from his speech today in New Hampshire, though. To take just one bit, Romney talked about capping government spending at 20% of GDP. Sounds good, but that number is only interesting, much less plausible, if Romney sketches out a path to getting there.  I would also have liked to here more about his ideas, if any, for pro-growth tax reform. Or maybe his pledge to cut business taxes is as far as he’ll go. I dunno. Sure hope not.  I mean,  I want details — on entitlements, on the Federal Reserve, on education. The whole shebang. I am sure Romney has deep ideas on all of those things. Love to hear them.

GOP should ignore Moody’s debt ceiling warning

Jun 2, 2011 18:31 UTC

Team Reuters reports:

Moody’s Investors Service said on Thursday there is a very small but rising risk of a short-lived default by the United States if there is no increase in its statutory debt limit in coming weeks.

In a statement, Moody’s said if there is no progress in increasing the debt limit, it would expect to place the Aaa sovereign credit rating on review for a possible downgrade.

“If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction,” Moody’s said.

I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense. Let me again replay what Stanley Druckemiller opined on the topic (via the WSJ):

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”

Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out—”because I’ll guarantee you people like me will buy it immediately.”



Paper Number 3: The debt ceiling is raised, the gov’t, which won’t repair the budget, must print money (quantitative easing) to make its debt-service payments. Inflation rises to 7% while you lent money at 3%. Your “risk-free” T-bond portfolio loses much of its value.

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Touring China!

May 22, 2011 03:16 UTC

My blogging has been particularly light of late. I am visiting several cities in China, including Beijing, Urumqui, Kashgar and Shanghai. I will be back full-force after Memorial Day, though I hope to post from time to time. A few quick thoughts on what has been happening back in the US:

1)  That the Gang of Six is now the Gang of Five is no surprise to me. I just don’t think Democrats have any real interest in reforming Medicare right now. And few Republicans want to raise taxes, even by eliminating so-called tax expenditures.

2) I have been asking the Chinese about the debt ceiling issue. I just don’t sense any panic on their part, even if it mean a brief payment delay. More on this to come.

3) If the Chinese elite had to choose between President Obama and President Jon Huntsman — the former US ambassador to China, I think  Obama is the easy winner there.

4)  And speaking of Huntsman, it seem like is supporting the Ryan Plan, or as least as much as any of the potential presidential candidates has.

Watch this space!




I know you’re out of country
but what is your take on this
Vermont single payer plan?
http://www.reuters.com/article/2011/05/2 6/us-vermont-health-idUSTRE74P8942011052 6
Does this mean that they’ll not be party to any
fix imposed by federal mandates on Medicare and Medicaid
before 2024?

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