James Pethokoukis

Politics and policy from inside Washington

An economic counter-factual

Nov 4, 2009 21:39 UTC

Scott Grannis, the Calafia Beach Pundit, outlines a different “stimulus path”:

Meanwhile, though, the unemployment rate is going to remain uncomfortably high, especially for all those politicians who argued so fervently early this year that dumping a trillion dollars of tax rebates, transfer payments, make-work projects and general government largess into the economy over a period of years would guarantee a quick economic turnaround. As the evidence accumulates, we see instead that it would have been far better to just let the economy follow its own course. Better still, we could have used the money in a much more intelligent fashion by making permanent cuts in marginal tax rates that would have quickly resulted in more work and more investment.

COMMENT

But the banks needed the money.They NEEDED it! You know: to get money flowing again.or throw down with more Monster Bonuses.6 of 1… It all trickles down, right?

Posted by bryan | Report as abusive

What the polls say about Obama, one year since being elected

Nov 4, 2009 18:21 UTC

Scott Rasmussen crunches the numbers:

As president, Obama lost the support of Republicans in February during the debate over the stimulus package. Over the summer, economic concerns and the health care debate cost the president support among unaffiliated voters. By October, a month-by-month review showed that Obama’s overall job approval had slipped to 48% among Likely Voters.

This morning, on the anniversary of his election, the president’s Approval Index rating is at -13, just one point above the lowest level yet recorded and down 41 points since the Inauguration.

1)  Economic conditions have played a role in dimming Obama’s support. For much of the past year, voters continued to blame George W. Bush for the economy, but the blame is more evenly divided now between Bush and Obama.

2) The core promise made down the stretch to voters by candidate Obama was a pledge to cut taxes for 95% of all Americans. Now, more than 40% expect a tax hike and hardly anybody expects their taxes to go down. Not surprisingly, 74% of voters now view the president as politically liberal.

3) Just 33% believe the stimulus package has helped, and most opposed other economic initiatives including the takeover of General Motors and the cash-for-clunkers program. Among the priorities established by the president, voters consistently see deficit reduction as the most important but least likely to be achieved.

4) The health care plan proposed by the president is struggling and is supported by just 42% of voters nationwide. Confidence in the War on Terror spiked during the first weeks of the Obama administration but has now fallen to the lowest level in nearly three years. On a related topic, one of the president’s earliest initiatives, his promise to close the prison camp at Guantanamo Bay, initially received mixed reviews but is now opposed by most Americans.

Sixty-five percent (65%) of voters now expect politics in Washington to become more partisan over the coming year. That’s up 25 points since Inauguration Day when a plurality believed politics might become more cooperative.

The president himself remains more popular than his policies. That gives him some good will to draw upon. However, as was shown in yesterday’s election results, the president’s ability to help other Democratic politicians may be limited.

‘Permanent Democratic majority’ begins to unravel

Nov 4, 2009 18:10 UTC

America’s “permanent Democratic majority” ran smack into the economy’s apparent “new normal” of high unemployment and big deficits. Score one for the economy — and for Republicans.

Now the Democratic spin on losing the governorships of Virginia and New Jersey is this: All politics are local. A weak candidate in one state, an unpopular governor in the other. Plus voters are cranky about the economy.

No broader conclusions should be drawn. Now let’s move forward and go pass healthcare, OK, America?

But the political reality is not nearly that sunny for Democrats’ political fate or the Obama domestic agenda. Jon Corzine lost in deep-blue New Jersey — a state Candidate Obama won by nearly 15 percentage points — despite outspending Republican opponent Chris Christie by some three to one.

And not only did Republican Bob McDonnell lead a GOP landslide sweep of major offices in swing-state Virginia, his 344,000-vote victory came against an opponent he defeated by just 360 votes in 2005 for attorney general.

And it wasn’t just the bad economy. Yes, exit polls showed great voter anxiety about high unemployment. But also notice huge Republican margins among New Jersey and Virginia independents, voters traditionally suspicious of government spending and budget deficits. These are the sorts of folks who left the GOP in 1992 to vote for Ross Perot and parted ways again in 2006 and 2008 because they felt Republicans had morphed again into big spenders.

(And the unemployment rate isn’t even that terrible in Virginia: 6.7 percent versus 9.8 nationally.)

Voter revulsion at trillion-dollar deficits and impatience about unemployment is creating a toxic environment for the Obama White House and congressional Democrats. Major legislative items like healthcare, energy and financial reform are already slipping into next year.

History suggests that incumbent parties who get big things done, get them done in the first year of a presidential term, such as the Reagan tax cuts or Clinton’s successful push for NAFTA. Midterm election years are where big policy dreams turn into nightmares, such ashealthcare reform in 1994.

It’s hard to imagine that the 84 House Democrats from districts won by either John McCain in 2008 or President Bush in 2004 are now more inclined to support either an expensive health plan or a cap-and-trade energy plan. Already Democrats are hinting at shrinking the former and putting the latter on the backburner. (One policy that might get more attention is a second stimulus package to create more jobs.)

Tuesday’s election results are a roadmap for political gridlock in Washington and a possible Democratic electoral disaster in 2010.

A respected political forecasting model by Ray Fair Yale University calculates that Democrats and Republicans should split the 2010 vote because of the economy. If that scenario unfolds, then David Wasserman of the Cook Political Report, according to an interview with The Hill, thinks “Republicans will probably be winning back the House.”

Did Candidate Obama really transform the American electorate a year ago? Perhaps. (Though, then again, having the economy collapse right before Election Day may have helped artificially inflate his vote totals just a bit.)

But dissatisfaction at the policies of President Obama looks to have quickly transformed it right back.

COMMENT

Can you say – “REAGANOMICS”?

Posted by Jim | Report as abusive

Elections in Virginia, New York and New Jersey show shift in political landscape

Nov 3, 2009 23:24 UTC

First, a few obsevations:

1. Democrats are getting hammered in swing state Virginia. It’s not just Bob McDonnell, down ticket, too.

2. Independents (very deficit-phobic) look like they are flocking to VA GOP.

3. Economy isnt that bad in VA, just 6.7 percent unemployment. So more than just anxiety about job loss.

4. Blue Dogs will look at VA and fear for their seats, especially if McCain in ’08 or Bush in ’04 won their districts.

5. #4 is is bad news for Obama agenda. Already it looks like healthcare will slip into 2010.

6. Spending, spending, spending is freaking Americans out. “Trilion” has a powerful, visceral impact.

7. All the candidates in NY, NJ and VA ran as low-tax, control spending types. But McDonnell in VA was able to successfully paint Dem Creigh Deeds as a taxer and spender.

8. NY a sign that me-too, moderate Republicanism is a non-stater in party. Hofffman will encourage more primary challengers and boost folks like Rubio in FL and DeVore in CA.

9.  Will Blue Dogs revolting and GOP emboldened, Obama agenda as currently constituted is in bad shape.

10. Blaming Bush for economy is done as a political weapon. New polls show 49% blame Bush, 45% blame Obama. Give that number another year of high unemployment. This was Jon Corzine’s strategy vs. Chris Christie. Good thing for Corzine that he had Dem machine in his corner, plus outspent Christie by 3-to-1.

Bottom Line: While there were local factors as play, this election day is looking like a rejection of  big-spending Washington that seems to be doing little to fix the economy. And certainly using the weak economy as crisis to be exploited is at an end. Sorry, Rahm Emanuel. Just another data point, of course. But a significant one.

COMMENT

You make some interesting points, but it seems like we hear the same lines after each election. like the above commenter, whatever the results it seems like the conservative and liberal media just trade scripts. this blog from georgetown does a good job of explaining why this election may not really say that much about the results of 2010. http://gnovisjournal.org/blog/crunching- numbers-media-polling-spin-zone-meets-el ection-2009

Posted by trish | Report as abusive

A tale of two economic recoveries

Nov 3, 2009 18:38 UTC

Which one do you believe? John Hussman sketches them out:

1) One possibility, which is clearly the one that Wall Street has subscribed to, is that the recent downturn was a standard, if somewhat more severe than normal, post-war recession; that the market’s recent strength is an indication that it is looking forward to a full “V-shaped” recovery, and that the positive print for third-quarter GDP is a signal that the recession is officially over. Applying the post-war norms for stock market performance following the end of a recession, the implications are for further market strength and the elongation of the recent advance into a multi-year bull market.

2) The alternate possibility, which is the one that I personally subscribe to, is that the recent downturn was the initial phase of a more prolonged deleveraging cycle; that the advance we’ve observed in recent months most likely represents mean-reversion – qualitatively and quantitatively similar to the large and often abruptly terminated “clearing rallies” of past post-crash markets; that major credit losses are continuing quietly but are going unreported thanks to changes in accounting rules by the FASB this past spring, which allowed for “substantial discretion” in accounting for loan losses and deterioration in the value of securitized mortgages; that a huge second-wave of mortgage losses can be expected from a reset schedule on Alt-A and Option-ARMs that has just started (following a lull in the reset schedule since March) and will continue into 2010 and 2011; that intrinsiceconomic activity remains abysmal; that recent GDP growth is an artifact of massive fiscal stimulus that is unlikely to have sustained follow-through; and that recent market valuations are not representative of those observed at the end of most post-war recessions, but are instead similar to those observed at major market peaks prior to the mid-1990′s.

COMMENT

How about a middle ground? My take is the 3.5% GDP number took the v-shaped recovery off the table. As you pointed out in a previous blog entry, that number is quite low compared to the first quarter of recovery after previous downturns and therefore should have been interpreted as a disappointment.

Having said that, I’m not sure I can buy off on an overly gloomy picture going forward. I’ll take Hoffman at his word regarding the credit problems he listed, but does all of that translate into an economy that has only one place to go — down? I’d say it translates into an economy that still faces some headwinds. But headwinds or not, it’s usually been foolish to bet against the American economy. And oh yeah, don’t fight the Fed.

So my vote is for a modest recovery going forward, but recovery nonetheless.

Posted by Bill, Fairfax, VA | Report as abusive

Economic fears drive Pelosi’s healthcare push

Oct 30, 2009 14:17 UTC

First you have to realize that Mark Zandi has become the de facto chief economist for congressional Democrats. Here is a bit from his testimony yesterday to the Joint Economic Committee:

The Great Recession is over, but the recovery will be a difficult slog through much of next year. The risks are also uncomfortably high that the economy will backtrack into recession. This would be an especially dark scenario, as the economy would almost certainly be engulfed in a deflationary cycle of falling wages and prices. The Federal Reserve and fiscal policymakers would also have fewer options and resources with which to respond.
A range of problems suggest that such a scenario cannot be easily dismissed. Most obvious are the very high and rising unemployment and increasingly weak wage growth, the mounting foreclosure crisis, rising commercial mortgage loan defaults and resulting small bank failures, budget problems at state and local governments, and dysfunctional structured-finance markets that are restricting credit to consumers and businesses.

Me: So if you are Speaker Pelosi and Harry Reid, here is how you interpret this: The economy will still stink on Election Day 2012. Voter disapproval of Dems will continue rise.  Better pass healthcare as soon as possible or you won’t be able to pass it all.

COMMENT

Good point. Another problem is that the benefits to any bill that passes won’t start until 2013, but the taxes will start earlier, which won’t go over well, especially in a bad economy. Obama told people their premiums would fall if he passed his bill, but this seems unlikely to happen. That is when we’ll hear that you just can’t trust the insurance industry and it’s time for single-payer.

Obama’s bad economic bet may ruin Democrats

Oct 29, 2009 18:19 UTC

The anemic third-quarter U.S. GDP report is another indication that President Barack Obama’s economic gamble may yet fail to pay off. And that could be terrible news for Democrats heading into the 2010 midterm elections.

While the new report showed the economy shifting into recovery mode, it looks like a pretty anemic expansion. As the economics team at IHS Global Insight see things, temporary factors such as cash for clunkers (accounting for nearly half of the past quarter’s growth) and the homebuyers tax credit artificially inflated growth during the past three months. The firm puts underlying growth in the economy at closer to 2 percent than the 3.5 percent.

See, back at the start of 2009, the new White House team wagered that it could construct a stimulus plan that would both boost the economy, helping Democrats in the 2010 midterms, and serve as a significant down-payment on its long-term policy agenda in areas like clean energy and education. That would help Obama in 2012.

It’s a lot to ask of one plan, even a $787 billion one.

Of course, the task would have been easier had the administration gone with a $1.2 trillion stimulus option suggested by White House adviser Christina Romer. But worried that the deluxe option would stall in Congress while also spooking global bond vigilantes, Team Obama went with the mid-sized approach.

The administration didn’t count on the recession being far worse than it anticipated, driving the unemployment rate toward double digits. So while the stimulus plan was effective enough to help nudge the economy away from depression in the second quarter — it’s tough to spend a trillion dollars with absolutely zero short-term impact — and into mild recovery mode during the third, it wasn’t nearly powerful enough to ignite a V-shaped recovery.

Indeed, during the first quarter of the last 10 economic recoveries, real GDP rose a far more impressive 5.8 percent on average. For instance, the first five quarters of the Reagan Boom coming out of the 1981-82 recession showed GDP growth of 8.1 percent, 9.3 percent, 8.1 percent, 8.5 percent,  and 8.0 percent.

There was another, better path Obama could have taken. In a new study, Harvard economists Alberto Alesina and Silvia Ardagna conclude that fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. The Obama stimulus was two-thirds spending and one-third tax cuts or credits. And of course tax cuts thought more permanent by Americans could have produced a large impact on working, savings and investing – and powerful economic growth.

Romer herself has conducted research showing the economic oomph that tax cuts produce. And there’s research from economist Robert Barro who found that “a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6 percent per year.”

As it is, Democrats are saddled with an economy that may not grow fast enough over the next year to substantially bring down the unemployment rate, if at all. So now there is a new wager in Washington: Just how bad will Democrat losses be next year?

COMMENT

Another Kudlow idiot-supply side has ruined this country

Posted by paul nelson | Report as abusive

Scary unemployment in metro areas

Oct 26, 2009 14:50 UTC

An analysis by IHS Global Insight looks at unemployment in major metro areas:

Looking ahead, payrolls will be rising in most metros for consecutive quarters a year from now, but the unemployment rate will have shown little improvement, as employment gains will not be sufficient to absorb enough job seekers.  A third of metro areas will have jobless rates in double digits in the fourth quarter of 2010, with 16 exceeding 15%.  … By the end of 2012, the jobless rate will still be above historic norms, but it will finally slip below 8% in more than half of metro areas.

102609ubranunemployment

U.S. unemployment, state by state

Oct 22, 2009 18:13 UTC

A great map by NPR. Notice the high rates in swing states like Florida, Ohio and Michigan.

statemap

COMMENT

I live approximately 30 miles west of Cleveland in a town called Lorain. I spent 30 years in the United States Army, and each trip home on leave, I saw more and more deterioration.

I have watched my town go from a reasonably employed and populated flourishing place, to a virtual ghost town. The Steel Mill and the Ford Plant are barely existing. Many of the businesses in the downtown area have been boarded up and long gone. The Lakefront area, prime for development and recreation, is languishing. The sad fact is that many of the residents are complacent to the point of being comatose.

The once thriving industrial base was wiped out, in part, by unions. Businesses and corporations have no incentive to invest in this area, and who can blame them? The Lorain City government throws up so many roadblocks in the form of high taxes, red tape, and bureaucratic stupidity, that unless we throw all of them out and start over, they’ll be no resurgence for this town. The zombies in this area keep voting the same party back into office.

Oh, I forgot to mention: Northeast Ohio is a democratic stronghold.

Congratulations, swing states….how’s that “change” working out for ya?

Posted by SFC MAC | Report as abusive

Romer: Unemployment likely to remain “severely elevated”

Oct 22, 2009 17:04 UTC

Watch CEA chair Christina Romer manage voter expectations:

Consistent with the recent cyclical pattern, the unemployment rate is predicted to continue rising for two quarters following the resumption of GDP growth. Whether this happens and how high the unemployment rate eventually rises will obviously depend on the strength of the GDP rebound. …  With predicted growth right around two and a half percent for most of the next year and a half, movements in the unemployment rate either up or down are likely to be small. As a result, unemployment is likely to remain at its severely elevated level.

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