James Pethokoukis

Politics and policy from inside Washington

Will Hurricane Irene be a black swan for the U.S. economy?

Aug 25, 2011 19:01 UTC

The U.S. economy is growing very slowly, just 0.4 percent in the first quarter, 1.3 percent in the second. And it might not do a whole better the rest of the year. That’s a problem. A recent study from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.

So while we may be in a recovery, it’s a fragile one, at best. In short, nothing can go wrong or we’ll end up back in recession. That’s a big reason everyone is so focused on Europe and its ongoing sovereign debt and banking troubles. And why problems at Bank of America cause flashbacks of 2008.

But what about the nasty storm making its way up the East Coast? What’s the potential it causes enough economic damage and disruption to nudge the American economy back into a downturn? Well, I suppose the worst-case scenario would be a direct strike on New York City. That would be pretty bad:

In the city, a hurricane’s storm surge would cause sudden, extensive flooding, submerging much of Lower Manhattan and crippling the subway system and tunnels.

The powerful winds would uproot thousands of trees, down power lines and send debris flying in all corners of the city. And those winds could shatter windows on skyscrapers, especially in the taller buildings that would bear the brunt of powerful gusts that occur at higher elevations. The canyons of Manhattan could magnify the winds, and would be a deadly place for anyone caught beneath the raining glass.

Other comparisons to Hurricane Katrina are hard to ignore. Katrina, the most costly natural disaster in U.S. history, caused insured losses of more than $40 billion in 2005. AIR Worldwide, a firm that models disaster scenarios for insurance companies, has said that a repeat of the Long Island Express would cost $33 billion if it happened today. In the most dire projections, a direct hit on New York City could cost upwards of $100 billion.

The impact would be felt long after flood waters recede. Coch predicts that the salt water in the subway would corrode the switches and cripple the system for months or years, and disable much of the communications infrastructure in Lower Manhattan. “In 1893, Wall Street was cut off from the rest of the country when the telegraph lines went down,” he said. “Imagine what would happen now when the fiber optic cable failed.”

Sounds a lot worse than Hurricane Katrina given the incredible importance of Manhattan to the U.S. and global economy. Tough to quantify, of course. But, for comparison purposes, here is a Congressional Research Service analysis of the economic impact of Katrina in 2005:

Since the storm, a number of economic forecasters have adjusted their predictions to reflect its effects. Most indicate that, as a result of the storm, national economic growth is expected to be 0.5%-1.0% slower than in the second half of 2005. However, as economic activity recovers in the affected region, and rebuilding begins, growth in the first half of 2006 is now expected to be more rapid than was previously forecast.

Back in 2005, the economy was growing at a 3-4 percent clip. Today, it’s less than 2 percent. Maybe even less than 1 percent. It seems pretty clear a devastating hit on the Big Apple might well send the economy back into recession. And given the current fragility of consumer and business confidence, how likely is it that the economy would quickly bounce back into growth in a quarter or two? Here’s how Japan is doing, by the way, after its pair of natural disasters earlier this year:

Five months after a tsunami and nuclear meltdown assailed Japan, the economy has been pummelled by fresh blows. Share prices have followed global stockmarkets down, with the Nikkei 225 index revisiting its nadir in the days after the earthquake in March. As if the fears about a global slowdown that have depressed equity investors were not enough, the yen has been soaring, which will hurt Japanese exporters. Adding to the pain, Moody’s, a credit-rating agency, downgraded Japan’s debt rating one notch to Aa3 on August 24th because of its huge public debt and chaotic politics.


The economy should not be the main concern here, we should be focused on preparing. Our lives, homes, and families are in danger. We always worry about the economy, we know this storm could potentially be a huge downfall, but that’s not the issue right now. We need to make sure we are safe until the hurricane is over. The economy should be the least of our concern. Don’t you just love how people are more worried about money than their lives?

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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.


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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Really, David Stockman?

Aug 2, 2010 19:33 UTC

David Stockman, Ronald Reagan’s budget chief, attacked Republicans in the NYTimes today. Does he really think the U.S. economy would be better today if the top marginal income tax rate was still 70 percent and the tax code left unindexed for inflation? Then there’s this bit:

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s.

Now let’s see, was there anything else happening in 2009 that might have had some impact on tax revenues? I seem to remember something. Now what was it. Oh yeah, it was this:




I hate to say it Mr. Pethokoukis but your nothing more than a Republican corporate hack who is often wrong in his analysis. You must be a charter member of the Glenn Beck/Rush Limbaugh club.

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Zandi and Blinder make a weak case for Big Government

Jul 29, 2010 14:10 UTC

Mark Zandi and Alan Blinder have launched a maximum defense of all the government interventions in the economy since 2008. Without TARP, stimulus, various Fed actions  — the who kit and caboodle – their model estimates the following:

In the scenario that excludes all the extraordinary policies, the downturn con­tinues into 2011. Real GDP falls a stunning 7.4% in 2009 and another 3.7% in 2010 (see Table 3). The peak-to-trough decline in GDP is therefore close to 12%, compared to an actual decline of about 4%. By the time employment hits bottom, some 16.6 million jobs are lost in this scenario—about twice as many as actually were lost. The unemploy­ment rate peaks at 16.5%, and although not determined in this analysis, it would not be surprising if the underemployment rate approached one-fourth of the labor force. The federal budget deficit surges to over $2 trillion in fiscal year 2010, $2.6 trillion in fis­cal year 2011, and $2.25 trillion in FY 2012. Remember, this is with no policy response. With outright deflation in prices and wages in 2009-2011, this dark scenario constitutes a 1930s-like depression.

Here are few counterpoints. First, John Taylor of Stanford:

First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model.  … So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results.  … For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed

And bit from Arnold Kling:

The model assumes a Keynesian world, in which labor is a variable factor of production that responds to incremental increases in aggregate demand. That might be an excellent assumption for 1910, when 73 percent of the work force was blue-collar. By 2000, 73 percent of the work force was white-collar. See Wyatt and Hecker. In today’s Garett Jones economy, labor acts more like a fixed factor. Blinder and Zandi do not know this (they may know it, but I doubt that it is incorporated into the model). So they do not know about jobless recoveries, breakdowns in Okun’s Law, the high ratio of permanent job losses to temporary layoffs, etc. Instead, at best they are living in 1970, with some add factors thrown in to get the model to track recent data. … I know that they think this is for a good cause. They really believe that the stimulus and TARP were good policies that got a bad rap. But in my view that does not justify this unseemly exercise in propaganda dressed up as research.

Me:  And what about the opportunity cost? All those hundreds of billions which could have been “spent” on long-term cuts in corporate and capital gains taxes that would have made America more competitive and boost growth.  Even a tax holiday (as suggested by Art Laffer) would have been a more effective approach. Instead unemployment is headed back to 10 percent and GDP growth is sliding back toward 2 percent.


CDNRebel: Average American corporate tax levels stand at 38%, exceeded only by the Japanese, whose rates are 39% or higher. Canada’s corporate tax rates stand at 29% and are falling quickly. Irish tax rates are 15% (!). America taxes its corporations much too heavily and, believe it or not, America now has to compete with low-tax jurisdictions elsewhere. Chase away the big corporations and all their jobs with confiscatory taxation and you will never, EVER, replace all the jobs lost during the most recent recession. There is a lot going on outside America’s borders, more than just China. Try getting informed about it.

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Back to recession in 2011? (Even kind of rhymes)

Jun 7, 2010 14:43 UTC

Tax-cut guru Arthur Laffer worries about next year. He attributes the economic rebound this year to workers and business pulling forward economic activity into 2010 to avoid more taxes and regulation in 2011. As he puts it in the WSJ today:

In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Me: That is the supply-side version of things. But even Keynesians should worry. Goldman Sachs ran a study awhile back looking at what would happen if all the 2001 and 2003 tax cuts were repealed. As I have written:

Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”


Sub:Appeal to all world citizens.To me world is one country.
Hello Sir/Madam,
Pls do not think its a general recession.Its a tremendous failure of the global administrators(not leaders).They shd not cont. anymore.In global administration only sefless and honest people are required……….and I don’t see any other option.The development and all good things are created by only selfless and honest people,not by those people who are enjoying luxury in unacceptable level.If you pls try to understand what I meant.
thanking you,with kind rgds….Chinmoy Chatterjee from India.

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Who stabilized the U.S. economy, Obama or Bernanke?

Nov 17, 2009 14:15 UTC

Ed Yardeni votes for The Chairman, but now he thinks the Federal Reserve need to change course:

I believe that the Fed did in fact avert a financial meltdown and an economic depression by flooding the financial system with liquidity, and by lowering the federal funds rate to zero. I believe that all the efforts to deal with the financial crisis by the White House and Congress–including TARP, PPIP, and ARRA-were counterproductive and offset some of the effectiveness of the Fed’s responses. On PBS NewsHour last Friday, Sheila Bair, the level-headed head of the FDIC, said that TARP was a huge mistake: “I think at the time it sounded like the right thing to do…but I just see all the problems it’s created.” She implied that had she been consulted by Hank Paulson and Ben Bernanke, she would have tried to dissuade them from pursuing this approach.

I think that the Fed should raise the federal funds rate to 1.0% to demonstrate some confidence in the economic recovery. A zero rate was justified by the effort to avert a financial meltdown and a depression. Now it may be doing more harm than good.


What are you smoking? Our Economy is tubed and Obama and his cronies are throwing it lead weights.. Everything Obama is doing despite what he says is to tank our economy to usher in George Soro’s plans for a new world economy…

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Here’s what happened to cap-and-trade, and why it’s in deep trouble

Nov 17, 2009 14:03 UTC

I am writing a column on this for later today, but I wanted to toss out a few quick thoughts on the state of cap-and-trade. Other than the die-hard greenies, Dems don’t want this bill anymore than Republicans. It is too easy to frame cap-and-trade as both a jobs killer and a distraction from job creation. Actually, some Rs would love for Dems to push this bill since it makes such a great election issue.

But it’s not happening in 2010, which means it not happening during Obama’s term since even under the most optimistic scenario, the Ds will have less control of Congress in 2011 and 2012 than they do now. And under more dire scenarios for the Dems, they lose maybe 4 Senate seats. Do not underestimate the extent to which the Great Recession has affected the issues agenda and political situation in Washington. And an extended period of high unemployment will only exacerbate that. (Bernanke’s speech yesterday was another indication how this is now the new Washington consensus.) The New Normal in economics means a New Normal in politics, too.


Well Obama also sees the writing on the wall in 2012 and will move to use Executive Orders and Agency regulations to circumvent congress on Many issues including Cap and Trade.. The EPA will be used in controlling Carbon without Congressional oversite or approval. Like Muslims, don’t believe a word that comes out of their mouths, watch what they do.. Like Muslims their playbook also tells them to lie to unbelievers

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Obama, trade and the echoes of 1929

Nov 13, 2009 14:04 UTC

This is the most disturbing thing I have read in a while (via AP):

Trade agreements with South Korea, Colombia and Panama won’t be put before Congress until it grapples first with President Barack Obama’s pressing legislative goals, the U.S. commerce secretary said Friday. Commerce Secretary Gary Locke said Obama has an ambitious high-priority legislative agenda focusing on health care, financial regulation and alternative energy. “Trade agreements are going to have to wait,” he said at a luncheon hosted by the American Chamber of Commerce in Singapore. “Right now, the administration is focused on a very aggressive and very tight legislative agenda.”

Me: This sounds like Hillary’s “time out” from free trade during the campaign.


Time for a reality check here. In 1929 the US raised tariffs on over 20,000 imported items, sparking retaliations by all its major trading partners. Can you explain how putting a few minor bilateral free trade agreements on hold equates to that disastrous situation? The situation today is nowhere near as disturbing as you make out.

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Is Washington making unemployment worse?

Nov 11, 2009 16:28 UTC

Yes, says U. of C. prof Casey Mulligan:

Labor market distortions have gotten progressively worse during this recession. The federal minimum wage, for example, was increased once shortly before the recession began, a second time in the summer of 2008, and yet again this summer. The housing collapse has also had multiple harmful effects, such as impeding families who might want to move out of some of the hardest-hit regions toward areas where the economy is doing better.

These types of factors can make a bad labor market much worse. Some of the labor market distortions will stop getting worse over the next couple of months, as housing prices stabilize and the federal minimum wage stays put, but that does not mean that labor market problems will reverse themselves.

According to my measures, labor market distortions have been getting worse at the same rate over the past couple of months as they have throughout the overall recession. Moreover, Congress appears poised to further erode incentives to earn income as an accidental byproduct of its plans reforming health care. Nor do consumers seem to be spending in anticipation of a grand employment recovery.

Thus, my humble prediction for the next several months is that real incomes and spending will continue to grow, although likely at an annual pace less than the 3.5 percent estimated a couple of weeks ago. In other words, as many have feared, this part of the recovery will be “jobless,” in the sense that employment and hours will not rise significantly, and may continue to fall.


It’s hard for employment rate to improve, unless government starts massive hiring exercise.

12 reasons unemployment is going to (at least) 12 percent

Nov 11, 2009 16:04 UTC

Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, thinks the unemployment rate is going to at least 12 percent, maybe even 13 percent. Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn. And even before this downturn, the economy was not generating jobs in huge numbers. If he is right, all political bets are off. I think the Democrats could lose the House and effective control of the Senate.  I think you would also be talking about  the rise of third party and perhaps a challenger to Obama in 2012.

So here is what I gleaned from Rosenberg’s latest report (bold is mine):

1. For the first time in at least six decades, private sector employment is negative on a 10-year basis (first turned negative in August). Hence, the changes are not merely cyclical or short-term in nature. Many of the jobs created between the 2001 and 2008 recessions were related either directly or indirectly to the parabolic extension of credit.

2. During this two-year recession, employment has declined a record 8 million. Even in percent terms, this is a record in the post-WWII experience.

3. Looking at the split, there were 11 million full-time jobs lost (usually we see three million in a garden-variety recession), of which three million were shifted into part-time work.

4.There are now a record 9.3 million Americans working part-time because they have no choice. In past recessions, that number rarely got much above six million.

5. The workweek was sliced this cycle from 33.8 hours to a record low 33.0 hours — the labour input equivalent is another 2.4 million jobs lost. So when you count in hours, it’s as if we lost over 10 million jobs this cycle. Remarkable.

6. The number of permanent job losses this cycle (unemployed but not for temporary purposes) increased by a record 6.2 million. In fact, well over half of the total unemployment pool of 15.7 million was generated just in this past recession alone. A record 5.6 million people have been unemployed for at least six months (this number rarely gets above two million in a normal downturn) which is nearly a 36% share of the jobless ranks (again, this rarely gets above 20%). Both the median (18.7 weeks) and average (26.9 weeks) duration of unemployment have risen to all-time highs.

7. The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labour demand does begin to pick up.

8. Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.

9. The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

10. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

11. So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

12. After all, the recession ended in November 2001 with an unemployment rate at 5.5% and yet the unemployment rate did not peak until June 2003, at 6.3%. The recession ended in March 1991 when the jobless rate was 6.8% and it did not peak until June 1992, at 7.8%. In both cases, the unemployment rate peaked well more than a year after the recession technically ended. The 2001 cycle was a tech capital stock deflation; the 1991 cycle was the Savings & Loan debacle; this past cycle was an asset deflation and credit collapse of epic proportions. And economists think that the unemployment rate is in the process of cresting now? Just remember it is the same consensus community that predicted at the beginning of 2008 that the jobless rate would peak out below 6% this cycle.


According to the latest U6 measure of unemployment, the number already stands at 17.3% and passed the 12% a long time ago.