James Pethokoukis

Politics and policy from inside Washington

There’s supporting free trade, and then there’s being a sucker

Jun 22, 2011 13:04 UTC

When the country engaging in mercantilist-protectionist policies is also your banker, I guess you tend to look the other way. My fellow CNBC contributor Peter Navarro makes the devastating case:

For starters, we must puncture the myth that China’s main manufacturing edge is solely its cheap labor. Indeed, while low labor costs are a factor, when you carefully research the biggest source of China’s manufacturing advantage, it is actually a complex array of unfair trade practices, all of which are illegal under free-trade rules.

The most potent of China’s “weapons of job destruction” are an elaborate web of export subsidies; the blatant piracy of America’s technologies and trade secrets; the counterfeiting of valuable brand names like Nike and Chevy; a cleverly manipulated and grossly undervalued currency; and the forced transfer of the technology of any American company wishing to operate on Chinese soil or sell into the Chinese market.

Each of these unfair trade practices is expressly prohibited both by World Trade Organization rules as well as rules established by the U.S. government, e.g., the Treasury Department has sanctions against currency manipulation (which, alas, the Obama administration refuses to use against China despite campaign promises to do so).

Make no mistake. All of these real economic weapons have led to the shutdown of thousands of American factories and turned millions of American workers into collateral damage, all under the false flag of so-called free trade.

The second myth we must expose if we are to ever reverse the job-killing trade deficits we now run with China is the idea that free trade always benefits both countries. That doesn’t hold true if one country cheats on the other. Instead, when a mercantilist China uses unfair trade practices to wage war on our manufacturing base, the American economy is the big loser.

I am not sure of the solution here, though more vigorous pursuit of these issues in the World Trade Organization would be part of it, certainly. (And reducing our debt would reduce China’s leverage.) Otherwise, I mean, what is the point having a WTO? Though if you wanted to go further, especially on the currency issue, there is this idea from economist Peter Morici:

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35%. That would neutralize China’s currency subsidies that steal US factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

I am for open trade and subjecting the U.S. economy to maximum competitive intensity. That will spur more innovation, productivity and economic growth.  China should do the same.

COMMENT

easy, restrained and stylish

Not winning the future: more on Obama’s strange ATM comments

Jun 22, 2011 12:30 UTC

My pal Russell Roberts of George Mason University speaks Economic Truth to Political Power as he dismantles Obama’s weird comments that ATM machines and automation kill jobs (via the Wall Street Journal):

Replace workers with machines in the name of lower costs. Profits rise. Repeat. It’s a wonder unemployment is only 9.1%. Shouldn’t the economy put people ahead of profits?

Well, it does. The savings from higher productivity don’t just go to the owners of the textile factory or the mega hen house who now have lower costs of doing business. Lower costs don’t always mean higher profits. Or not for long. Those lower costs lead to lower prices as businesses compete with each other to appeal to consumers.

The result is a higher standard of living for consumers. The average worker has to work fewer and fewer hours to earn enough money to buy a dozen eggs or a pair of shoes or a flat-screen TV or a new car that’s safer and gets better mileage than the cars of yesteryear. That higher standard of living comes from technology. It isn’t just the rich who get cheaper TVs and cars, plus the convenience of using an ATM at midnight.

Somehow, new jobs get created to replace the old ones. Despite losing millions of jobs to technology and to trade, even in a recession we have more total jobs than we did when the steel and auto and telephone and food industries had a lot more workers and a lot fewer machines.

Why do new jobs get created? When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn’t exist before. Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls. So many job descriptions exist today that didn’t even exist 15 or 20 years ago. That’s only possible when technology makes workers more productive.

Indeed, American needs to focus more on increasing productivity through innovation. And then means better tax, regulatory, education and immigration policy. And as this chart from McKinsey shows, we are headed in the wrong direction in many areas:

COMMENT

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Jon Huntsman’s pitch perfect presidential speech

Jun 21, 2011 17:36 UTC

When was the last time someone announced for U.S. president with a barn-burner of a speech? I can’t think of one recently, not even Barack Obama in 2007.  And Jon Huntsman’s speech was certainly no worse than Mitt Romney’s or Tim Pawlenty’s. But style aside, what did he say? He seems to want to deal with entitlements sooner rather than later:

We must make hard decisions that are necessary to avert disaster. If we don’t, in less than a decade, every dollar of federal revenue will go to covering the costs of Medicare, Social Security and interest payments on our debt. Meanwhile, we’ll sink deeper into debt for everything else – from national security to disaster relief.

And there is nothing wrong with this chunk:

We must make broad and bold changes to our tax code and regulatory policies; seize the lost opportunity of energy independence and reestablish what it means to be a teacher in society. We must reignite the powerful job creating engine of our economy – the industry, innovation, reliability, and trailblazing genius of Americans and their enterprises — and restore confidence in our people.

Now, we did many of these things in the great state of Utah when I was governor. We cut taxes. We flattened rates. We balanced our budget. We worked very hard to maintain our AAA bond rating status, something few states can claim. And when the economic crisis hit, we were prepared. And by many accounts we became the best state in America for business. We also were named the best managed state in America. You see, we proved that government doesn’t have to choose between fiscal responsibility and economic growth.

Perhaps the most important part:

It’s not that we wish to disengage from the world, don’t get me wrong, but rather that we believe the best long- term national security strategy is rebuilding our core here at home.

And this is the core, I think, of the Huntsman campaign: Rebuilding and retooling America’s economic strength from which our global power flows. Hey, I am dying to hear the technocratic details on this, and hopefully Huntsman will go far beyond keeping the Bush tax cuts and repealing Obamacare. I think he has to. Timidity is not an option for a dark horse candidate. The bolder the better.  But he shouldn’t forget to also make the moral case as to why entrepreneurial capitalism is best for America vs. Obama’s state-managed variety, of which he should be quite familiar from his time in China.

 

Did Obama save U.S. from a depression? Not so much

Jun 21, 2011 13:10 UTC

My old boss John Merline of Investor’s Business Daily eviscerates  President Obama’s recent claim that back in 2009 “we had to hit the ground running and do everything we could to prevent a second Great Depression.”

White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.

The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in “the second half of 2009.” The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.

The data weren’t showing it, either.

The argument is often made that the recession turned out to be far worse than anyone knew at the time. But various indicators show that the economy had pretty much hit bottom at the end of 2008 — a month before President Obama took office.

Monthly GDP, for example, stopped free-falling in December 2008, long before the stimulus kicked in, according to the National Bureau of Economic Research. (See nearby chart.) Monthly job losses bottomed out in early 2009 while the Index of Leading Economic Indicators started to rise in April.

The stimulus timing is off.

When the recession officially ended in June 2009, just 15% of the stimulus money had gone out the door. And that figure’s likely inflated, since almost a third of the money was in the form of grants to states, which some studies suggest they didn’t spend, but used to pay down debt.

It’s an interesting strategy. Since the White House can’t sell whatever this is as any sort of recovery, they are trying to buy time with voters by inflating the risks the U.S. economy faced when Obama took office.  Of course, there is a rival meme: He made it worse.

COMMENT

The so-called stimulus served the interests of the District of Columbia and state capitals across the country, delaying necessary budget cuts. Texas recently had to close a $27 billion gap, which it would have done earlier had not Gov. Perry accepted billions in stimulus money. Basically all those government workers got an extension of their cushy benefits while the private sector tightened its belt and shed real jobs. Obama has said twice there were no shovel-ready jobs.

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Which GOP 2012er has the best jobs record?

Jun 21, 2011 12:22 UTC

Katrina Trinko at National Review Online puts them through their paces:

According to a National Review Online analysis of seasonally adjusted employment data (looking at the total number of those employed) from the Bureau of Labor website, Gary Johnson has the best record of the official candidates, with a job-growth rate of 11.6 percent during his tenure. … Among the crowd who governed primarily during the 2000s, Huntsman has the best record. During his 2005 to 2009 tenure as governor of Utah, the number of jobs grew by 5.9 percent.

Mitt Romney and Tim Pawlenty have much weaker records. Romney, who governed Massachusetts from 2003 to 2007, had an overall job-growth rate of 1.6 percent. During Pawlenty’s time as governor of Minnesota (2003 to 2011), the number of jobs grew by an anemic 0.5 percent.

Rick Perry, who is flirting with a presidential run but has not yet announced his candidacy, had an overall job-growth rate of 12.5 percent from January 2001 (he was inaugurated as governor of Texas in late December 2000) to April of this year, the most recent month for which finalized numbers were available.

Of course, some of these comparisons are apples to oranges; Pawlenty, Huntsman, and Perry, for instance, all were governors during the recession, while Romney and Johnson were not. State population changes could also play a role in determining whether a state’s employment numbers surge or decline.

So, what happens if you compare the governors over the same time period? Well, looking at Romney’s tenure from January 2003 to January 2007 shows that he achieved growth of 1.6 percent. Pawlenty had the same overall rate (1.6 percent) in Minnesota. In Texas, Perry achieved 7.2 percent growth.

During Huntsman’s tenure, January 2005 to August 2009, Utah had the best overall job-growth rate of any state in the nation. In that same time frame, Perry’s job-growth rate was 4.9 percent. Pawlenty’s job-growth rate was negative: The number of jobs in Minnesota decreased by 1.8 percent.

During Pawlenty’s tenure, January 2003 to January 2011, the overall job-growth rate was 0.5 percent. In that period, Perry (the only other governor to fully overlap with the two-term Pawlenty) hiked the number of jobs by 7.2 percent.

 

 

 

COMMENT

Gary Johnson is a breath of fresh air compared to the other republican candidates. I believe Governor Gary Johnson is Obamas biggest threat. Its really hard for Obummers re-election team to paint a pro-choice, pro-gay rights, anti war GOP candidate who wants to legalize marijuana as a right wing extremist. His socially liberal stances will be attractive to democrat and independent voters. Not to mention he was a very successful two term(that’s one more term than mitt romney) republican Governor in new mexico a state that is 2 to 1 democrat. He left office with a billion dollar surplus and was arguably the most fiscally conservative governor ever. He is a true Statesman and practices good stewardship of your tax dollars.

He also will not engage in mud slinging or name calling. He ran two campaigns in NM where he never mentioned his opponent. He will stick to the issues and not try to blame obama. I met Gary Johnson twice last year in my state of MO.. Once when he spoke at UMKC and another event he spoke at Missouri Southern State University. in Joplin Mo. He took the time to answer all my questions and sincerely listened to my concerns.. He is obviously working harder than the other candidates! For this he has earned my vote and support! If you have not heard of Governor Gary Johnson, Google him!

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Another look at the Growth Gap

Jun 20, 2011 20:45 UTC

I just ran across this great chart from Jim Glassman over at JPMorgan that illustrates the Growth Gap and how it is imperative we grow this economy faster.

It’s not just McKinsey suggesting Obamacare is a mess

Jun 20, 2011 20:34 UTC

Editor’s Note: This piece has been updated. Please see the update below.

Consulting firm McKinsey kicked up a hornet’s nest with these recent findings:

The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response.

· Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.

· Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

· At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

· Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.

As I have written, there was pressure on McKinsey to release its methodology, which it finally has.

Yet missed in all this was another consulting firm which also found some worrisome Obamacare trends (as explained by the Heritage Foundation):

PricewaterhouseCoopers (PWC) recently released its annual report on medical cost trends for 2012, and it is revealing.

1) The report shows health care costs and premiums continuing to rise—and uncertainty increasing for employers who offer insurance to their workers. Health care spending increased by 7.5 percent in 2010 and will grow by 8 percent this year.

2) In 2012, it will rise again by 8.5 percent. This is exactly the opposite of the President’s promise that his health care plan would reduce premiums by $2,500 per person.

3) Perhaps most concerning are the findings of a survey also released by PWC divulging how employers are likely to react to Obamacare.  The survey showed that nearly half of employers will drop their coverage, dumping employees into the government-run exchanges. Individuals who qualify would then receive generous federal subsidies to purchase insurance. If more employers than expected dump coverage, as other experts have predicted, the cost of the subsidy program will explode deficit spending. The results of the PWC survey indicate this is likely to be reality.

4) Even if employers do not dump coverage entirely under the new law, according to the survey, five out of six employers will completely re-evaluate their benefits strategy. Four out of five employers will make changes to help cover new costs under Obamacare, including raising premiums, deductibles, and co-payments.

5) Employers who offer coverage to their workers face growing uncertainty regarding costs under the new law. The negative consequences of Obamacare’s changes will be threefold: higher costs for those with employer-sponsored coverage; a greater debt burden on current and future taxpayers; and slower growth in job creation and the overall economy.

Update:

The folks at PricewaterhouseCoopers disagree with Heritage’s interpretation of its report:

As you will see, the Heritage Foundation’s statement that PwC’s survey found that nearly half of employers will drop their coverage and dump employees into government-run exchanges is false.

In fact, PwC asked about “employer subsidies” not “coverage.” These are different. Employers can decrease the level at which they subsidize employees premiums and still retain health insurance coverage. Furthermore, PwC found that employers’ subsidy level has not changed. The question PwC asked was: “As a result of the new healthcare reform PPACA provisions, how likely is it that your company will significantly change or eliminate company subsidies for employee medical coverage? “

Very likely: 11%

Somewhat likely: 34%

Unlikely 55%

It would be inappropriate and inaccurate to interpret that employers who answered “very likely” or “somewhat likely” would eliminate coverage, and it is impossible to allocate which employers are consider which option to take. Furthermore, PwC found that fewer than 7 percent of employers (not half) said they were very likely to cover employees through state-run health insurance exchange pools. Interestingly, the primary approach that employers intend to take in the future is to increase health and wellness programs to improve the health and productivity of their workforce.

Furthermore, PwC clearly clarified in both its report and news release dated May 18, 2011 that “The health reform law will have minimal effect on the medical cost trend in 2012. Provisions of the Patient Protection and Affordable Care Act that took place prior to 2012 were small changes that employers already have fully accounted for.”

 

 

COMMENT

when the “worlds greatest” nation fails to provide medical care for its most needy and they are forced to something similar to this: www DOT guardian.co.uk/world/2011/jun/21/verone- one-dollar-robbery-healthcare, just to get basic medical care. you really need to consider what is wrong with your country.

This heathbill can only spell good for America and should be heralded as a genuine change for the better, advancing medical care and taking money away from Corporations who aren’t looking out for your interests (ie health), only their profits.

The right wing media (read Bill O’Reilly, FOX etc) would like to make you believe this is bad, but really, open your damn eyes… Countries in Europe have a healthy balance of State and Private medical care, why doesnt the US?

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The Growth Gap

Jun 20, 2011 19:49 UTC

The main reason we have a big budget deficit right now is that the U.S. economy has been growing too slowly for a decade, including the Great Recession and Terrible Recovery. That means less tax revenue and more government services like unemployment insurance and Medicaid. So perhaps the real way Obamanomics has worsened our debt situation is by contributing to this extended period of weak growth.

By my back of the envelope calculations, the CBO forecasts a roughly 10% of GDP budget deficit this year. If revenues were at their historical average, that number would be more like 6%. And if the economy way rebounding as it should, the automatic stabilizers would be more like 3% of GDP, instead of 6%. So that would bring the budget deficit down to around 3% of GDP. The rest you can blame on Obama-”investment” spending.  Of course, one big problem is that Obama’s future budget plans would never bring spending down to historic levels — it stays right around 24% of GDP for a decade —  even as its assumes a growth splurge that would supposedly reduce annual deficits.

A chart from Forbes.com give a few for the growth gap:

 

 

COMMENT

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Why we need a tax holiday for overseas earnings

Jun 20, 2011 16:05 UTC

U.S. companies have huge profits sitting offshore, and some in Congress want to give them a tax break as incentive to bring nearly $1 trillion back to America. The New York Times describes the plan this way:

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

But the story — reflecting the agenda of the Obama White House and liberal think tanks —  is skeptical about the whole idea. It highlights research that shows when companies got tax amnesty in 2005, 92% of the $312 billion brought back was used for dividends and share buybacks — not directly hiring workers, boosting salaries or purchasing equipment.

Economist Douglas Holtz-Eakin is working on a study for the U.S. Chamber of Commerce that supports a tax holiday. I chatted with him briefly this morning and here is the thrust of what he told me:

I am strong believer in a territorial tax system period, and this is a step toward fundamental tax reform. Now it’s short of fundamental tax reform in two ways: Number one, the rate’s not zero and, number two, it’s not permanent.

I would go for zero and permanent in a heartbeat if that was on the legislative agenda, but it’s not. I also think it would have substantial near-term beneficial economic impacts.

If you think of it this way: There’s over a $1 trillion out there, so let’s suppose something like $830 billion came back, which I chose specifically to match exactly what [President Obama's American Recovery and Reinvestment Act] was. Like the [ARRA], this would flow into the economy and go into corporations first, but they would then either make real purchases with it – salaries, payroll, capital investment, R&D and that would would further flow into the economy – or they would change their financial structure: share repurchases, debt reduction, dividends.

And in each case, that would flow to someone else. So on a cash-flow basis, it’s the same model. … And those balance-sheet effects would drive consumption further because of the wealth effects. That’s got to be at the heart of any response to any wealth-destroying bubble. We need pro-wealth creation policies. This is one of them.

Holtz-Eakin says his study will highlight these broader macroeconomic impacts. But his major point echoes what I wrote last March:

Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.

COMMENT

That’s one of the reasons I like Cain. He is a businessman nor a politician.

Posted by Texan4Cain | Report as abusive

Digging down into America’s weak labor market

Jun 20, 2011 14:49 UTC

The main reason the unemployment rate is so high is that the recession was so deep and the economic “recovery” is so anemic. But part of the problem may be a mismatch between job opening and the skills of unemployed workers. Here is WaPo’s Robert Samuelson:

Economist Harry Holzer of Georgetown University thinks the unemployment rate might be closer to 8 percent than today’s 9.1 percent if most of these jobs were filled. That implies up to 1.5 million more jobs. Economist Prakash Loungani of the International Monetary Fund estimates that 25 percent of unemployment is structural; that’s more than 3 million jobs. A recent survey of 2,000 firms by the McKinsey Global Institute, a research group, found that 40 percent had positions open at least six months because they couldn’t find suitable candidates.

Samuelson partly finds fault in high schools and businesses offering less training, while community colleges aren’t in sync with local job markets. I also suspect that college graduates are majoring in the wrong subjects. Too many history and business majors, two few engineers. More from Samuelson:

In any dynamic economy, constant changes in technologies, products and companies naturally create gaps between skills available and skills wanted. But today’s gaps seem to transcend this. A survey for the National Association of Manufacturers in 2009, near the recession’s nadir, found that a third of companies still faced shortages. These were largest for engineers and scientists and among aerospace, defense and biotechnology firms.

This may also be a huge problem going forward: Here is the McKinsey Global Institute:

For example, MGI estimates that the United States may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60 percent of the workforce is aged over 45 years old compared with 40 percent in the overall economy.

COMMENT

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