James Pethokoukis

Politics and policy from inside Washington

A Chimerica stimulus policy?

Jul 13, 2009 19:02 UTC

David Goldman of the great Inner Workings blog loves the Chimerica concept, a furthering of the economic relationship between China and America. He even thinks it would make a great stimulus and long-term economic recovery program:

We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets. The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. … In effect, the world’s two largest economies would establish a full partnership. … The :trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s.  … If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.


The Inner Workings piece is completely backwards. It is China that has a much greater economic risk because of it’s demographics. Between 2008 and 2040 China’s old age dependency ratio skyrockets from 16% to 50%. Also, China’s gender skews are out of whack having 107 males for every 100 women. The problem worsens when you look at the skews in the younger age demos — for under 20 yr. olds it’s 116.5 boys for each (1) girl !!! At the least, this ratio will impede China’s ability to correct it’s ageing pop. skew.

By comparison, the US has the most enviable demographics in the entire world. Along with a demographic advantage we have unparalleled agricutural production & technology. Could wave the flag with a number of other important things. That’s not to say that we don’t have issues — aside from the economic meltdown, rocketing deficits, fragile employment outlook — unfunded liabilities like Medicare & Social Security loom large. But some issues are reversing on the ground floor level — the decade long consumption binge is now being unwound — savings are increasing dramatically.

The US partnership with China is already on a good footing. The best thing the US can do for itself & it’s partners is to exercise fiscal restraint & prudence and seek sensible solutions to our issues.

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The bull case for the economy and Democrats

Jul 13, 2009 16:33 UTC
Brian Wesbury and Bob Stein of First Trust Advisers give the bull case for the economy. If these smart guys are right, 2010 might well be the third consecutive wipeout for Republicans. Some excerpts (bold is mine):
To be more precise, we are forecasting that real GDP grows at a 3.5% rate in the second half of 2009 and 4.5% next year. But, in all truth, we are much more confident about the overall 4%+ figure for the full 18-month period then about the exact growth rate for any particular quarter. …
First, we project business inventories are going to end 2010 about $25 billionlower than they are right now. (But with businesses no longer reducing stockpiles as forcefully as they have been in recent months, inventories will contribute 1.3 points to the real GDP growth rate.)
Second, we expect continued declines in the trade deficit, although not as quickly as in the last two years. The trade deficit was 5.4% of GDP in early 2007 and is now only about 2.2% of GDP. If the trade gap declines to 1.1% by the end of 2010, net exports can contribute 0.9 points to the real GDP growth rate.
Third, we expect home building to bottom later this year and rise in 2010, contributing 0.4 points to the real GDP growth rate. Housing starts are now only one-third of the long-term trend, justifiably so due to excess home inventories. But excess inventories have already dropped from about 4.5 million a few years ago to 2 million today. We think, realistically, it will take another three or four years to fully eliminate the excess.
Fourth, for government, we assume government spending contributes its long-term average of 0.4 points to real GDP growth, despite massive stimulus spending.
Fifth, despite our gut instinct that business investment in plant and equipment is going to turn around much faster, we assume an annualized rate of decline of 3.2%, which subtracts 0.3 points from the real GDP growth rate.
And last, we expect real consumer spending to rise at a relatively modest 2.1% annual pace, adding 1.5 points to the real GDP growth rate. To put this in perspective, we are forecasting that real consumption will be up at only a 0.6% annual rate from the end of 2007 through the end of 2010, the slowest three-year period for real consumer spending since World War II, including the early 1980s, when the jobless rate went up to almost 11%. It also means consumer spending drops to the lowest share of GDP since 2001.

Larry Summers: US not doomed to low-growth future

Jul 11, 2009 12:34 UTC

This interesting bit from an FT chat with Larry Summers,  director of the National Economic Council

This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.


Does Summers see the deficits and entitlement bomb coming our way?

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Does the U.S. need a dose of Viagra economics?

Jul 10, 2009 17:53 UTC

The Obama presidential campaign was one of the all-time great branding efforts, from message to packaging to platform. So how disappointing it must be for the Obama administration that its signature achievement so far, the $787 billion American Recovery and Reinvestment Act, has been utterly misunderstood by the American public.  Listen to what megabillionaire Warren Buffett, an unofficial Obama economic adviser, had to say earlier this week: “Our first stimulus bill, it seemed to me, was sort of like taking a half a tablet of Viagra and then having also a bunch of candy mixed in … It doesn’t have really quite the wallop that might have been anticipated there.”

And apparently the Oracle of Omaha isn’t the only person disappointed by the lack of a priapic jolt. A recent Rasmussen poll found that 45 percent of Americans think so little of the results so far that they want the rest of the new government spending in the plan canceled, compared to 36 percent who disagree and 20 percent who aren’t sure.  Not surprisingly, 60 percent oppose a second stimulus plan, against 27 percent in favor. Been there, done that, didn’t get much out of it.

But the Obama plan was never meant to be Viagra. It was designed so that three-fourths of the spending would occur after 2009.  Now the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan. And while government spending on infrastructure projects may provide more stimulus per dollar spent — at least this is what Team Obama believes — it is slower to come on line.  Even the name of the plan was designed to send a “be patient” message. It could have been called the Get America Moving Act or the American Job Creation Act, but those titles would have been tremendously out of sync with what the ARRA was actually intended to do: boost the economy and jobs over the course of a long recession while also providing a downpayment on Obama’s healthcare, energy and education agenda. A two-for-the-price-of-one sort of deal.

And that political and economic calculus might have worked had the economy not fallen off a cliff. The unemployment rate is already higher than the administration’s worst-case scenario from last January and perhaps headed higher than the worst-case scenario found in its stress test for the banks.

And rising joblessness has joined with the housing crisis to create a vicious economic circle. Given all that, a pure dose of Viagra economics for the economy doesn’t sound like such a bad idea right about now, perhaps in the form a massive payroll tax cut.  “The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now,” argue Morgan Stanley economists Richard Berner and David Greenlaw in a new research note. Instead, American got a program that was “heavily back-loaded and full of spending that is unlikely to be stimulative.”

Or perhaps with business and investor confidence so depressed, we need some Prozac economics, via a cut in corporate and capital gains taxes.  At this point, the White House seems inclined to do none of the above, arguing for a wait-and-see approach, given than only 10 percent of the “stimulus” money has been pushed out the door. Maybe Team Obama fears a nasty bond market reaction at the prospect of even more government spending? Perhaps, though deflation rather than inflation seems in vogue among Wall Street worries.

But if a bond vigilante revolt is a concern — and it probably should be a consideration — why not combine a second stimulus with a plan to fix Social Security by moving back the retirement age and indexing benefits to wages rather than inflation?  Such a move would turn the program’s long-term deficit into a surplus and show the United States is serious about fiscal reform.

In any event, cutting taxes seems to be nowhere on the congressional agenda. For instance, higher taxes on incomes and capital gains are being floated as one way to pay for healthcare reform. But as the jobless rate continues to rise — Buffett thinks 11 percent isn’t out of the question — both the White House and Congress might finally start reaching for the pills.


“the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan”

7 %?

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The all-powerful consumer? Feh. Boost business …

Jul 10, 2009 17:42 UTC

My colleague, confidant and occasional kick-boxing sparring partner, the fantastic Felix Salmon is worried about what comes the Day after Tomorrow:

While previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: if consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.

Well maybe we should quit worrying about the banks and The Consumer and pay attention to a different sector of the economy (via another friend of mine and occasional kick-boxing sparring partner, Larry Kudlow):

So here’s a novel thought for all the geniuses down in Washington. Help businesses for a change. You can begin by stopping the taxing of overseas corporate profits. Do not hike the minimum wage. Back off cap-and-trade. Do not nationalize health care. Stop the anti-trust assault on phone companies, pharmas, Google, airlines, and multi-nationals.

And how about a six-to-twelve-month payroll-tax holiday? That would make it cheaper to hire new workers. What about a corporate tax cut? And immediate cash expensing for business-investment write-offs? In other words, cut the tax cost of hiring, investing, and doing business. Because it’s businesses that create the jobs and the incomes for families all throughout America.

And if you are still worried about the housing story or bank toxic assets, how about a capital-gains tax holiday?

Does anyone in Washington understand the way the world really works? It’s called incentives. That’s what this is all about. And we’re going to need many more of them if businesses, investors, and families are to start prospering once again.

Is Falling America losing out to Rising China?

Jul 10, 2009 17:15 UTC

There was a bit of a kerfuffle about the new Fortune global 500 rankings which showed  that the number of U.S. businesses fell to lowest level ever while more Chinese entries appeared than ever before. A few thoughts:

1) While I realize what the trendlines are, remember that there were still 140 U.S. companies on the list. That is almost as many as China (37), France (40), Germany (39),  and the UK (26) combined (142). And where are the powerful Chinese global brands?

2) While the focus of the past year has been on American economic weakness, let’s not forget China has a wildly inefficient capital allocation system, a quickly aging population, and a repressive political system out  of sync with the 21st century economy it wishes to have.

3) But I think the one amazing advantage China has, in addition to all those engineers it is graduating and its lower business and investment taxes, is a sense of urgency about economic growth. That country’s leaders have to maintain a high-octane economy that will continue to pump out millions new jobs  and increase incomes every year to meet rising expectations. Here in America, the priority seems to be capping carbon emissions and universal health insurance and redistributing wealth from the top 1 or 2 or 3 ( or 4 or 5 …) percent of Americans via higher taxes. China can’t afford zero-sun thinking or policies.

Bill Gross: America’s dark economic future … Happy Independence Day!

Jul 2, 2009 13:50 UTC

Pimco bond guru — and occasional White House economic adviser –  Bill Gross paints a really depressing economic future

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.  … And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%.  … As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model. …

If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.


P.S. Gross was aggressive & determinedly stepped into what would appear to be an extremely illiquid P.P.I.P investment but at the same time is critiqueing Yale’s “illiquid” investments. What’s his basis? How does he validate and measure the investment opportunity? Would he recommend that Yale abandon it’s plan & lobby to buy PPIP’s?

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America, don’t let this happen to you!

Jun 29, 2009 14:46 UTC

Stick with me on this. The WSJ outlines three economic options for Germany, whose trade-based economy has fallen nearly 7 percent during the past four quarters: 1) do nothing and wait for the global economy to pick up; 2) increase domestic consumption via higher union wages; 3) innovate!

This is a choice bit:

The third option would be to foster entrepreneurship in new sectors, to supplement Germany’s traditional strengths in cars and engineering.  …  ”Somebody created a comparative advantage in machinery and BMWs in the 1960s, but nobody has created anything much since,” says Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. German public policy and the country’s state-dominated banking system focus on rewarding existing companies rather than new ones, Mr. Posen says. … But Germany is second last in the number of business start-ups among 18 advanced economies surveyed by the Global Entrepreneurship Monitor, an international research project.  … A recent study by consultants McKinsey & Co. says Germany could double its average economic growth to 3% a year if it got serious about new industries, from research-led sectors to services for the growing number of elderly consumers. Without such an effort, German living standards will decline relative to other advanced economies, the report warns.

My spin: Perhaps the key part of the article was when Posen pointed out that the nation’s state-dominated banking system tends to reward existing players, not startups.  This is why it is so important to get Uncle Sam out of the U.S banking system ASAP.  American economic policies must also be graded as to whether they enterpreneurial innnovation and competitiveness. It’s not just green energy, gang!

Yes, there are still some mustard seeds out there …

Jun 23, 2009 17:58 UTC

Mike Darda of MKM Partners spys some of them:

1) The ratio of leading to coincident indicators is up nearly 5% since bottoming in October, a magnitude not seen outside of economic recoveries going back to 1960.

2) Similarly, the most sensitive credit market indicators (interest-rate swap spreads, LIBOR spreads, etc.) have barely budged in recent weeks despite the sagging equity market. Indeed, the TED spread has now fallen below the historical median. At the same time, corporate bond yields continue to fall, a strong recovery signal.

3) As we’ve pointed out before, the corporate bond market was probably the most powerful leading indicator of recession, depression and recovery during the 1930s.

4) What about the plunging money multiplier and collapsing monetary velocity? The credit markets tend to lead changes in measured velocity, and now suggest the worst of that decline is behind us. In any case, money is a leading indicator while nominal GDP (which is the numerator of the velocity equation) is a coincident indicator.

Economic growth makes the world a whole lot brighter

Jun 22, 2009 17:42 UTC

My pal Larry Kudlow makes a point that shouldn’t need making during a terrible recession. But I guess it does:

On a related note, Washington is spending far too much time focusing on regulations right now. They’re not devoting nearly enough time to figuring out ways to truly grow our economy. It is a statist governmental approach. This great country of ours is thirsting for free-enterprise incentives and solutions. And as the latest polls show, Americans are becoming fed up with the out-of-control spending, borrowing, debt-creation, and tax increases.

What we need is serious economic growth. That is priority number one. What we need is risk-taking and entrepreneurship. Of course, we need transparent markets. But it is the growth message that is being overlooked.

My spin: Weak growth makes every economic problem look worse. Are bond price rising because of inflation fears or perhaps also default fears because of the combo of high debt and forecasts of wimpy U.S. growth going forward?


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