James Pethokoukis

Politics and policy from inside Washington

About that surge in U.S. productivity …

Aug 11, 2009 19:04 UTC

(Lightly microblogging this week from the Great White North)

A bit of analysis (from IHS Global) on the 6.4 percent jump  in second-quarter business productivity from the world’s most competitive economy:

The combined efforts of workers and business to grind out solid productivity gains through the recession is unequivocally good news – an underlying reality of solid fundamentals that has been overlooked by the economic doomsayers and naysayers for many months.

Solid productivity growth provides the basis for a recovery in corporate profits and investment in the second half of 2009, and keeps the lid on prices and inflation. It gives the Fed more room to keep rates lower for longer in order to move the economy as quickly as possible through the recovery phase to an expansion mode.

The fact that American workers are capable of generating these amazing productivity gains ultimately is good news for employment – as the economy moves from recovery in the second half of 2009 and the first half of 2010, to potential expansion in the second half of 2010 and beyond, there is no doubt that businesses will have a strong desire to add more of these high quality workers into their teams.

Me: An alternative to a consumer-led boom? How about one led by business? If the US were to get one, the beginnings would look a lot like this?

U.S. corporate tax rates vs. the world (OECD)

Aug 7, 2009 13:31 UTC

How does the US corporate tax rate stack up against other nations? Take a look (via the Tax Foundation):



The nominal numbers charted are correct. However, you must account for the fact that many US Corporations have avoided paying tax through subsidies, subtractions from income, tax credits and transfer pricing (Delaware Intangible Holding Companies). Thus the US effective tax rate is much lower than many other OECD nations.

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The green jobs mythology, again

Aug 5, 2009 01:31 UTC

Joel Kotkin, whom I have been following for 20 years, continues to hit on all cylinders. This is a bit from an article worth reading in full:

This latest economic fad is supported by an enormous industry comprising nonprofits, investment banks, venture capitalists and their cheerleaders in the media. Their song: that “green” jobs will rescue our still weak economy while saving the planet. Ironically, what they all fail to recognize is that the thing that would spur green jobs most is economic growth. … Ultimately, environmentalists need to realize that the road to a green economy does not lie in promoting hysteria, guilt and self-abnegation while ignoring prohibitive costs and grim economic realities. Green enthusiasts should focus on promoting a growing economy capable of generating both the demand and the ability to pay for more planet-friendly products. After all, the economy needs green jobs less than green jobs need a thriving economy.

Will GDP pop in the third quarter? If so, will Obama smile?

Aug 3, 2009 13:55 UTC

That is the case being made by the always-great Ed Yardeni (bold is mine):

If nothing changes during Q3, real GDP will be up 4.6% during the quarter. This isn’t our forecast. It is arithmetic. If there is no change in final sales to consumers, business, governments, and foreigners, and if nonfarm inventories are unchanged, that’s how much real GDP will increase. This is because nonfarm inventory investment was minus $144.4bn (saar) during Q2. If it is zero during the current quarter, real GDP will surge. The inventory investments component of real GDP has been negative for five consecutive quarters, the longest stretch since Q1-2001 through Q1-2002. … By the way, during the first quarter of the last 10 economic recoveries, real GDP rose 5.8% on average, with a high of 17.2% during Q1-1950 and a low of 1.4% during Q4-2001.

Me: Will the White House then be ready to declare the end of the recession? My guess is that rising joblessness will impel them to keep any smiles on hold. Also, as long as they can say we are in a “recession,” they can keep talking about how they inherited it from Bush. But they will own the recovery for good or ill.

5 quick takes on the 2Q GDP report

Jul 31, 2009 16:13 UTC

Here is a smattering of quick opinion on today’s second quarter GDP report from around the Street:

1) Nariman Behravesh,  IHS Global Insight:

Today’s GDP release is very much in line with IHS Global Insight’s view that the U.S. economy is at—or very near—the bottom of the deepest recession of the postwar period. We expect real GDP growth in Q3 to be a small positive.However, the early phases of the recovery are likely to be quite weak.We expect growth of only 1% to 1.5% in Q4 and Q1.After that, we expect growth to pick up gradually, and exceed 3% by the end of 2010.

2) Michael Darda, MKM Partners:

Full-year 2008 growth was revised lower, which means the recession is deeper than previously estimated. To wit: GDP has fallen 3.9% from one year ago, the largest annual decline in post-war history. … The  silver lining here is that the largest declines in GDP, including those in the 1930s, all produced robust recoveries, even if they didn’t last long enough to produce full-employment. This is why we continue to believe consensus forecasts for 2010 are far too pessimistic (assuming full-year real growth of just 1.8%). Our credit-based indicators, which captured the depth of this recession nearly perfectly, continue to point to 4% real GDP in 2010. A recession of this magnitude would be expected to produce at least a 6-8% GDP recovery, so our 4% growth outlook could still be considered conservative.

3) Bruce Kasman, JPMorgan:

Today’s GDP report provides considerable new information on the economy’s recent path.  … It is important to express the central point that the report bolsters confidence in both our strong growth and low inflation forecast for the coming quarters. On growth, the composition of demand looks increasing favorable with final sales stronger and inventory drawdowns larger than we had expected in 1H09. As a consequence, we are revising up our forecast for current quarter GDP growth to 3% (from 2.5%). We continue to anticipate GDP growth close to 4% over the course of 2010.

4) Robert Brusca, Fact and Opinion Economics:

The clearest point is that force of the down turn has been muted. The second clearest point is that and true upswing has not yet started. Only government spending among the main domestic components of GDP turned positive and that is on artificial stimulus although that impact should grow as the stimulus package takes hold.

More important than the government sector is that the consumer retrenchment is diminishing. Population growth continues and normal forces should restore positive growth to consumer spending, especially as job losses ease and as the fear of job is eradicated by better economic performance. It could happen in Q3.

5) Andrew Busch, BMO Capital Markets:

It will take very little snap back in either inventories or CAPEX to see a decent rebound in Q3 and Q4 GDP.  I guess where I’ve been incorrect is understanding that the economy fell so far that it has no where to go but up for a bit.  There will be questions of where earnings will come from besides cost cuts going forward, but growth should return with minimal effort.  This shift in expectations has occurred with all the subtlety of a sledge hammer the last two weeks and does draw concerns over additional strength.

A durable goods green shoot?

Jul 29, 2009 13:28 UTC

This chart of the trend in durable goods orders makes me smile.  Although June orders were down, notes Michael Darda of MKM Partners, “the weakness was concentrated in transportation, communications and defense. Non-defensecapital goods orders excluding aircraft, which is a component of the Conference Board’s Index of Leading Economic Indicators, rose 1.4% m/m after a 4.3% m/m rise in May — the first back-to-back gains in a year.”


Are corporate profits about to take off?

Jul 27, 2009 18:42 UTC

Jim Paulsen of Wells Capital Mangement points out that companies have cut to the bone in preparation for near-depression. This could result in some spectacular profit numbers ahead (and check out the chart below) — assuming no near-depression:

Second quarter earnings reports have reflected this new trend where a number of companies have thus far surpassed earnings estimates even though sales remain weak. As economic recovery brings renewed top-line growth, corporate profits may continue to amaze and outpace expectations during this recovery. Chart 4 illustrates a fairly good “leading indicator” (by one year) of profit growth based on profit leverage. The dotted line is the multiplicative sum of the business productivity index, the labor unemployment rate and the factory unemployment rate. Essentially, when businesses focus on “rightsizing” (by improving productivity and purging payrolls and factory capacity), about one year later, corporate profits have tended to rise. The dotted line leads profit growth (solid line) by one year and currently forecasts about a 45 percent advance in nonfinancial profits in the coming year! Did the surge in fears produced by the subprime debt crisis cause U.S. businesses to act in ways
which may now lead to a “profit leveraged” bull market?



I understand rightsizing leading to an increased bottom line, but so far there is no indication of a top line growth; and the top line growth is the only indicator of a growing economy. We’re far from it and it appears everyday we’re closer to a jobless recovery [jobless stabilization].

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US top tax rate would be 52% with health surtax

Jul 15, 2009 19:52 UTC

Curtis Dubay of the Heritage Foundation emails me:

As calculated by the Tax Foundation, when factoring in the expiration of the 2001 and 2003 tax cuts, average state and local income taxes, Medicare taxes, and the new surtax, the average top marginal income tax rate in the U.S. would be 52 percent!

The top rate in the U.S. would then be higher than countries like France, Canada, Italy, Spain and Germany. Only 3 countries in the 30-member OECD, an association of the most economically developed countries in the world, would have a higher rate. Taxpayers in the 6 highest taxed U.S. states would pay higher rates than every country in the OECD except Denmark. Taxpayers in every state, even the 9 that do not levy a state income tax, would face a higher top marginal rate than taxpayers in 21 out of the 30 OECD countries.

Read the whole paper here: http://www.heritage.org/Research/Taxes/wm2544.cfm


I’m one of the many Americans without healthcare. And yes, I would appreciate having it, but I’m not in need of going to the doctor often because I focus on preventative healthcare and proper diet. I would rather see this money go towards better food quality for low-income people rather than healthcare. I have a friend who, in their mid-30′s, is diabetic because he didn’t eat good food because he’s poor. Let’s cut down on the corn and sugar in our processed foods, make organic fruit and vegetables more affordable and teach people the importance of eating right, with proper proportions. Let’s alleviate stress in American’s lives to make ends meet by lowering the costs of the basics: phone, gas, food and housing. Stress is the leading factor in any kind of sickness, physical or mental. To financially stabilize our society and keep them healthy, let’s try to bring the middle class back….and taxing American’s over 50% won’t solve that.

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9 reasons Pelosi’s healthcare surtax is disastrous

Jul 15, 2009 10:17 UTC

So what explains the crazy, cockeyed optimism of House Democrats? Maybe they still believe Team Obama’s rosy-scenario forecast that shows the stimulus package a) keeping unemployment under 8 percent this year and b) launching an economic boom next year and beyond. For some reason, though, they think the battered U.S. economy is so strong that politicians can pile tax upon tax on it with no fear of further harm. Less than three weeks after passing a costly cap-and-trade carbon emission plan, Pelosi & Co. have giddily unveiled a $1.2 trillion healthcare plan partially funded by a $544 billion surtax on the work and investment income of wealthier Americans, including small business owners.

[See why Obama's economic gamble is failing.]

The ten-year proposal calls for a 1 percent surtax on adjusted gross income — including capital gains — between $350,000 and $500,000; a 1.5% surtax on income between $500,000 and $1 million; and a 5.4% surtax on income exceeding $1 million. (Interestingly, the House fact sheet on the surtax forgets to mention the highest tax rate. Hey, they were in a rush.) How bad an idea is this? Let me count the ways:

It’s not the first Obama tax hike. This tax would be in addition to the $1 trillion in new taxes that Obama called for in his budget released earlier this year. (And then there’s cap and trade, remember.) And if healthcare reform costs more than expected — what are the odds of that, you think? — the surtax would go up.

[See 5 economic stimulus plans better than the one we've got.]

It pushes income tax rates above a key threshhold. Once you take into account state income taxes, the top tax rate would sneak above 50 percent. Research by former White House economist Lawrence Lindsey has found that rates above 40 percent really start to hit economic growth especially hard.

It’s risky in a weak economy. Democrats love the “consensus view” when it comes to climate change, so how about the economy? The consensus view is for unemployment to hit double digits this year and stay high throughout 2010 and beyond as the economy staggers to its feet. Even Treasury Secretary Tim Geithner said “it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.” In a “long recession” environment, do we really want a policy that, according to research that current White House economic adviser Christina Romer conducted at Stanford University, is “highly contractionary.”

It actually makes America’s healthcare problem worse. Entitlements, including Medicare, will eventually bankrupt the economy unless action is taken. Agreed. But lowering the potential U.S. growth rate will only make those problems worse by generating lower tax revenue and making the overall pie smaller than it would be otherwise. Yet many economists think government interventions in finance, housing, autos, energy and now healthcare will do just that. And adding layers of additional new taxes helps how?

It makes the tax code more lopsided and inefficient. As it is, the top 1 percent of Americans in terms of income pay 40 percent of taxes. Not only would this plan exacerbate this imbalance, it adds further complexity to the tax code. Most tax reformers favor a simpler system with fewer brackets and deductions matched by a lower rate. Indeed, Howard Gleckman of the Tax Policy Center points out the following:

Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.

It hurts U.S. competitiveness. America already has the second highest corporate tax rate in the world. Under the House plan, the top U.S. income tax rate would be higher than the OECD (advanced economies) average of 42 percent. France and Germany, by contrast, are looking to keep rates stable or lower them. Pro-growth China doesn’t even tax investment income.

It ignores the lessons of Clinton. Democrats love to point out how the Clinton tax increases didn’t tank the economy back in the 1990s. Oh, you mean the economy that was expanding for more than two years before he signed his tax increases? The economy is far weaker today and may be anemic for some time given the history of economies that suffered a banking crisis.

It ignores the lessons of 1937. The slowly recovering 1930s economy weakened again in 1937 and 1938. Again, Christina Romer tells all:

In this fragile environment, fiscal policy turned sharply contractionary. The one-time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. … GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline.

Except in this the case, Uncle Sam is not taking away a lifeline but tightening the noose.

It pays for a wrong-headed healthcare reform plan. Health exchanges, a public option, subsidies, taxes … well, we could go on and on. Or we could try to create a simpler consumer-driven market. Harvard Business economist Regina Herzlinger recommends reforming the tax system by making the money spent by employers on health insurance available as cash, tax-free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” she wrote in an analysis for consultancy McKinsey. Not even on the Obamacrat radar screen, though.

All in all, it’s another sign from the Obama administration and the Obamacrats in Congress that their top priority is redistributing existing wealth — at least what’s left of it — rather than creating new wealth. That, I guess, explains those ear-to-ear smiles on Capitol Hill.


One difference between publicly and privately run enterprises is that public ones are publicly accountable. They not only have to account for costs, but also account for the way they’re serving their function in the community. It’s not always as simple as calculating shareholder equity. That’s what is at the heart of the injustices in the current insurance system. It’s also the reason people support fire departments as a public enterprise. Even the volunteer ones are supported by the community, in order that they be accountable to the people they serve. It would seem the enterprises protecting the health of people might benefit from the same oversight we give enterprises that protect the buildings they live in.

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A zero percent income tax rate

Jul 14, 2009 13:48 UTC

Think tanker Peter Ferrara talks up an interesting idea in the WSJ:

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners?  … Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue. … Moreover, we should then be free to adopt sound tax policy for the top 40% of earners who make 75% of total income. Suppose we tax all of the income of those top 40% once with a 15% flat tax? That would be close to revenue neutral on a dynamic basis (i.e. counting work incentive effects). … All flat tax proposals effectively try to do the same through generous personal exemptions that are tax neutral for low- and moderate-income workers. But the explicit 0% rate would make the reform more easily understood. This — rather than adopting still more refundable tax credits as some conservatives are advocating — is also the way to eliminate the distorting tax preference for employer-provided health insurance. … The economic distortions caused by every other tax preference in the code would be minimized or eliminated entirely in this same way.

My spin: I would like to see a comparison on a revenue and tax efficiency basis of this plan vs. creating a de facto consumption tax by eliminating all taxes on savings and investment.  But it is fascinating as a political framing device. I assume this would also get rid of education and kiddie tax credits, maybe even the mortgage interest deduction? Those would surely raise political hurdles.


Why not just get rid of income tax altogether and raise consumer taxes? It seems to work for Hong Kong, and that way everyone is taxed the same, they just pay more taxes if they buy more stuff.

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