James Pethokoukis

Politics and policy from inside Washington

Bill Gross and America’s ‘New Normal’

Sep 3, 2009 12:23 UTC

Pimco’s Bill Gross paints a dreary future is his monthly letter:

We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

Me: The Counter-Reformation is hand. This is probably the economic consensus, especially if you toss in the probability of higher taxes.

How about a $1.4 trillion (a year!) tax increase?

Sep 1, 2009 14:34 UTC

It always amazes me when people act as if raising taxes has no impact on economic growth, like this article from a Financial Post columnist who advocates raising US taxes by $1.4 trillion a year:

1) Washington could raise US$600-billion per year or more if Americans paid a 5% federal sales tax on goods and services if it were identical to Canada’s 5% GST.

2) Another US$280-billion could be generated if Americans paid slightly more than double what they pay now, or US$3.75 a gallon, for gasoline, which is roughly what Canadians pay.

2) Another US$180-billion is available if Americans paid the same taxes on cigarettes as Canadians.

4) Then there’s another US$355-billion for government coffers if Americans had the same liquor taxes as Canadians. The total that could be raised from all four is US$1.415-trillion. That is, by the way, the size of Canada’s or Spain’s economies.


wow, some idiots actually *want* to pay taxes. Well you won’t mind picking up my tab then? No? What’s that? You don’t like me and you don’t want to pay for me? Well, ditto.

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The U.S. debt trap: the odds on seven solutions

Aug 28, 2009 16:08 UTC

How will America escape its debt trap? The indispensable Arnold Kling puts some odds on various scenarios. An excerpt:

1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on

2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance.

3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending.  I give this a 25 percent chance.

4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.

5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.

6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide.

7. Default. The U.S. simply refuses to pay some or all of its debt.  I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).

Me: I think #3 is mostly likely, though I hope #2 happens — and there is a greater chance of that happening than most policymakers realize.


im betting on the gold price. ive taken on many long positions in gold stocks to hedge against the rest of my porfolio. i really beleive that the high level of debt will continue to erode the dollar well into 2020. from this outlook (and the nearly inverse correllation between the gold price and the usdx) i am quite confident. i use http://www.goldalert.com to check the spot gold price. i would definietly recommend gold investment to gain better leverage within the market.

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How fast will the U.S. job market bounce back?

Aug 27, 2009 18:11 UTC

Economist Robert Brusca thinks he knows:

Right now the job losses in this cycle number 6.9mln, a drop of 5.9% from the peak. It has taken 19 months to get these losses in place. The metrics above suggest that the forecast of how long it will take to get them back should be about 19 months as well (we’ll use 20 months since jobs are still falling). And while that is a long time – nearly two years- it is not so long to restore 6.9mln jobs. If we get them back in 20 months it will take job gains averaging 345,000 per month. Right now that seems like an amazing number. Yet, that is what history says happens. So we’ll see.

And here is a table from Brusca showing how long it took to loose jobs in previous downturns and how fast the economy recovered them:




I think we must hope for the better situation.Recession time soon gets over and we would definitely have many jobs in future.

Good 2Q GDP report could mean an even stronger 3Q report

Aug 27, 2009 16:21 UTC

The bullish Brian Wesbury and Bob Stein of First Trust find today’s GDP report (2Q was down an unrevised 1.0 percent) to be, well bullish:

The first reason is that inventories were even leaner than previously reported, meaning companies have more room to re-stock shelves and showrooms in the months ahead. Second, corporate profits jumped at a 24.9% annual rate in Q2 on top of a 22.8% rate of increase in Q1. Notably, all the increase in profits in Q2 was due to domestic operations, not earnings generated abroad. Soon, these profits are going to translate into more business investment and more hiring in the US.  … Given the improved details in the Q2 GDP report and the decline in claims so far this quarter, we are raising our forecast for the Q3 real GDP growth rate to 4%. We had been forecasting a 3% growth rate for Q3 since the start of this year. We maintained this forecast even as many other economists became hysterically pessimistic, claiming zero positive growth until 2010. Now we are finding that even our forecast for the early stages of this V-shaped recovery was not strong enough.

America’s perilous fiscal future: slow growth, high taxes

Aug 26, 2009 19:18 UTC

Howard Gleckman over at TaxVox does a great job on the new government budget forecasts. This is my favorite bit (bold is mine):

Even once the economy gets back on its feet, the White House projects spending will settle in at about 23 percent of Gross Domestic Product. That is a substantial increase from the average of 19 percent or so in recent decades, and significantly more than estimated tax revenues. We can try to run deficits of 4 percent of GDP as far as the eye can see, but only if the Chinese continue to help out.

Finally, take a look at both CBO and OMB forecasts of long-term trend economic growth: OMB figures it will be roughly 2.5 percent once all the effects of the recession and the stimulus package wash out. CBO is even more pessimistic. These forecasts are not new, but they are worth keeping in mind. Over the next decade and beyond, the economy will grow significantly more slowly than in recent years, in large part because many more Americans will be retiring than joining the workforce. And that will put growing pressure on fiscal policy.

When Budget Director Peter Orszag and others talk about medical costs being unsustainable, this mismatch between health spending and economic growth is exactly what they have in mind. In the decade 1998 to 2007, both Medicare and Medicaid grew at more than 7 percent per year. And you don’t need to be an economist to understand what will happen if medical costs keeping rising at 7 percent while the resources to pay for them grow at only 2.5 percent.


I suggest we put the “Logan’s Run” scenario on the table to fix this issue.

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A VW-shaped economic recovery?

Aug 26, 2009 14:00 UTC

That is the analysis of my pal Rich Karlgaard over at Forbes. (Insert joke about Obama and fahrvergnügen here.) Some sectors of the economy will boom as others muddle through or stay on the mat. Warren Buffett put it best: “When the tide goes out, you discover who’s been swimming naked.” Here’s a bit from the piece:

But here’s the thing. The American recovery may be U-shaped, on balance, but within that U will pockets of Vs and Ws. That’s why I call it the VW recovery.

The V part of the VW economy includes dynamic growth companies and large exporters. Apple is enjoying a V recovery. Salesforce.com just reported a big, booming V quarter on Friday. Mobile broadband is an entire industry that will enjoy sustained V growth. Low-tax states like Texas, Tennessee and North Dakota are experiencing V recoveries.

America’s W economy includes all those companies, industries, states, cities and personal careers where deteriorating value propositions were masked in good times. It always happens that way. Recessions unmask bad business models. … Today’s W economy: newspapers, McMansion builders, inefficient manufacturers, high-tax state and local governments, and workers unable to adapt, relearn and relocate.

Around the horn

Aug 25, 2009 19:17 UTC

Stuff I read today that you should, too!

Bernanke’s out of control! Russell Roberts thinks Bernanke has gone overboard in reacting to the Great Recession. He might be right, though as the man who jumped out of the burning airplane with no parachute said, “First things first!”

Kicking healthcare, Massachusetts style. Kurt Brouwer  finds fault aplenty with RomneyCare.

Words Bernanke wishes he hadn’t said. My pal John Carney of Clusterstock has a must-read (and must-view) photo gallery of some Bernanke misses. But what about his chitchat with Maria Bartiromo!

How to pay for real economic stimulus. Ed Harrison had the same idea I did. Cut entitlements tomorrow create fiscal space today.

Another vote for Bernanke. Right-of-center economist Greg Mankiw likes the Bernanke reappointment.

Trillion dollar stimulus. Donald Marron notices that the Obama’s fiscal stimulus plan may cost $900 billion.


I joked about Obama appointing a Fed Czar, effectively keeping a popular choice – Bernanke, but undercutting him. Basically, no one seems to be talking about the two appointments for the Governors board that have been vacant due to hold ups for confirmantion during the Bush years. This plus other retirements would provide the current administration with a majority on Fed voting decisions. Nifty.

I’m a litttle disappointed that nobody has brought up this permutation.

http://www.bloomberg.com/apps/news?pid=2 0601087&sid=aO3Cyu_.OHD4

“…….Federal Reserve Chairman Ben S. Bernanke, nominated today for a second four-year term at the helm of the central bank, will be working with a reshaped team.

President Barack Obama, who nominated Bernanke for a second term beginning in February, still must fill two other vacancies on the Fed’s Board of Governors, which has operated without its full seven-member complement since April 2006. On top of that, Vice Chairman Donald Kohn’s term expires in June, and Gary Stern, the longest-serving policy maker, will retire when a replacement is named.

The turnover means Obama will be able to appoint a majority of governors in his first year. Bernanke will have to convince the Fed’s new members to concentrate on maintaining the economic recovery and put aside concerns about a revival of inflation, said former Fed Governor Lyle Gramley…….”

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More on the big W

Aug 24, 2009 18:39 UTC

Having talked to a number of former White House economists/center-right economists in recent weeks, this analysis by Tony Fratto almost perfectly echoes what they told me:

Given the precarious state of household balance sheets and the continued uncertain outlook for the financial sector, an economic recovery with dips back to negative growth is already likely over the next two years. If the Fed gets wrong the sequencing, magnitude, or coordination (in the U.S., and across borders) of policy – or sends the wrong signals about its intentions — even that likely expectation would prove optimistic.

How Obama could prevent a second recession

Aug 24, 2009 13:41 UTC

Is the light at the end of the tunnel an oncoming train? That’s the worry of many economists who fret that after a couple of quarters of moderate growth, the U.S. economy will either lapse into a state of torpor or relapse into recession. In a new Financial Times op-ed, Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade creates a strong risk of just such a “W-shaped” economic scenario.

If so, unemployment would remain really high. And, given that prospect, you just know incumbent Democrats facing re-election in 2010 would love to vote for Son of Stimulus. The big drawback: Doing so would risk the wrath of budget-conscious independents, as well as bond investors who share Warren Buffett’s stated concerns that all this red ink could sink the dollar.  Plus, a backup in interest rates would negate any positive effects from more stimulus.

But Olivier Blanchard, chief economist at the International Monetary Fund, may have cracked the code on to boost the economy and not spook bond investors and budget hawks. Blanchard’s grand bargain, one I have been suggesting for months, is for government to spend more money in the short term to boost growth while simultaneously taking strong action to reduce the long-term budget deficit. “The trade-off is fairly attractive,” Blanchard said in a report this week. “IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.”

Fiscal space is good! When you’re dealing with gobsmacking budget numbers, small cuts (or even just nicks in the rate of growth) can make a huge, real-world difference. As the Peterson Foundation figures it, Uncle Sam has run up some $55 trillion in long-term liabilities. Minor tweaks that make that number a bit more manageable in the future would create huge fiscal opportunities for more pro-growth measures today.

One example: the Dartmouth Institute for Health Policy and Clinical Practice calculates that if Medicare spending across America “grew at the San Francisco rate of 2.4 percent per year instead of the current national average (3.5 percent), Medicare would achieve a cumulative savings of $1.42 trillion between now and 2023.” That’s a nice chunk of change. Or, as an analysis I commissioned from the American Enterprise Institute revealed, extending the Social Security retirement age while at the same time indexing benefits to inflation rather than wages would turn a $5 trillion present value deficit into a $5 trillion surplus.

Can America afford to upgrade its rotting transportation infrastructure and electrical grid while also, say, lowering corporate and investment tax rates to a more internationally competitive level? Yes and yes. If entitlement liabilities are downscaled, the U.S economy can generate more than enough future economic growth and excess tax revenue tomorrow to “pay for” smart investments today. That would create jobs and strengthen America’s economic foundation -– and keep the bond vigilantes at bay.



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