James Pethokoukis

Politics and policy from inside Washington

WH adviser Romer: ‘Cringes’ at talk of exit strategy

Sep 25, 2009 18:03 UTC

CEA Chair Christina Romer at the Chicago Fed:

The economic historian in me cringes every time I hear mention of “exit” from fiscal
stimulus and rescue operations in the current situation. “Exit strategy” is one thing—of course
we should be planning for the time when private demand has recovered and governmentstimulated
demand can be withdrawn. But to talk seriously about stopping policy support at a
time when the unemployment rate is nearing 10 percent and still rising is to risk nipping the
nascent recovery in the bud.

More evidence of rising trade protectionism

Sep 24, 2009 13:44 UTC

As Reuters reports it:

The United Steelworkers union, fresh from persuading President Barack Obama to restrict tire imports from China, filed a new case Wednesday asking for duties on coated paper from both China and Indonesia. The action came just one day after Chinese President Hu Jintao complained to Obama about the tires decision in a meeting on the sidelines of a United Nations summit in New York. … The steelworkers union, which represents workers in a number of industries, sees itself in a battle against what it believes are unfair foreign trade practices that have led to the loss of millions of U.S. manufacturing jobs. They are joined in their latest trade case by paper manufacturers NewPage Corp of Miamisburg, Ohio; Appleton Coated LLC of Kimberly, Wisconsin; and Sappi Fine Paper North America of Boston, Massachusetts, which together employ about 6,000 union workers at paper mills in nine states. … Unlike the steelworkers’ petition in the tires case, this complaint will not land on Obama’s desk. Instead, the U.S. International Trade Commission, a U.S. federal agency, will have the final word on whether anti-dumping and anti-subsidy duties will be imposed after an investigation by the U.S. Commerce Department.

Worried about how this sort of thing will affect the economy recovery both in the US and globally? Ed Yardeni is:

But what about Art Laffer’s warning about how rising taxes and protectionism could still cause another Great Depression?” …  He observed: “While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy’s relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.”

I completely agree with Art that the Smoot-Hawley tariff was the major cause of the Great Depression. So it is certainly disturbing to see the Obama Administration pander to the United Steelworkers by slapping a tariff on tires imported from China. This morning’s WSJ reports that three paper companies and the United Steelworkers filed an antidumping case Wednesday against China and Indonesia, making good on the union’s threat to protect other US industries after winning a recent trade decision against China. We’ve seen plenty of similar trade flare-ups in the past even during the Reagan and Bush Administrations. Nevertheless, they can spin out of control. More importantly, now is not a good time to resort to protectionism given that the global economic freefall earlier this year was mostly attributable to a collapse in exports as trade credits froze up.

A bigger and more likely threat to a sustainable recovery is the sun-setting of the Bush tax cuts after 2010. This will amount to a major tax increase that could send the economy back into a recession in 2011. I don’t think this will trip up the bull market any time soon. But it is likely to become a big issue by the second half of next year.

COMMENT

High taxes and restrictions in free trade are good for economic growth. Everybody knows that.

Posted by Tom Nail | Report as abusive

Kudlow: Maybe a V for 2010

Sep 16, 2009 15:34 UTC

Larry Kudlow gives the bull case:

I wonder if Mr. Bernanke isn’t underestimating the very substantial monetary stimulus that he has injected into the economy, going back about nine months. This is the Milton Friedman monetarist experiment. The Fed’s balance sheet has grown by over $1 trillion; various money-supply measures are running about 10 percent on average; the Treasury yield curve is very steep and positively sloped; and of course the target rate is near zero. Add to that $1,000 gold and a weak dollar.

We’re talking easy money here. It started last fall, and with a roughly six-to-twelve-month lag, it’s now beginning to impact the economy in a significant way.

So Mr. Bernanke may be underestimating a V-shaped recovery that will extend through 2010. And don’t forget that marginal tax rates are going up in 2011. That’s likely to mean — in supply-side-incentive terms — that many folks will bring as much income and investment as they can into 2010 to beat the tax hike. And that could add to GDP in a significant way next year.

Me: The second point is a good one, and one that is not being factored in.

The Japan comparison

Sep 16, 2009 15:18 UTC

David Rosenberg draws an uncomfortable parallel:

Speaking of Japan, and we say this because the U.S. is following a very similar post-credit collapse pattern, we note that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies.  … So actually there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market.  … They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody built more bridges or paved more river beds to skew the economic data than the LDP did in Japan for much of the 1990s. With U.S. T-bill yields close to zero, as they were in Japan, we have at least one market — the money market — that sees what we see, which is an economic outlook fraught with fragility, as is typically the case after a secular credit expansion moves shifts into reverse.

Why the Dems may implode in 2010: 4 scenarios

Sep 9, 2009 10:10 UTC

A Democratic meltdown next year? Washington is abuzz with speculation by prominent political handicappers such as Charlie Cook and Stuart Rothenberg. Republican hopes for a huge congressional comeback in the 2010 midterm elections rest on three pillars:

1) History. Since the start of World War Two, the president’s party has lost an average of 28 House and 4 Senate seats in the midterms. Computer-aided gerrymandering, though, has made incumbents tougher to knock off in the House.

2) Policy. Concerns about ObamaCare — too much government spending scares independents, too little spooks seniors — may help turn 2010 into a 1994 replay. What’s more, cap-and-trade makes Congress appear more interested in imposing new economic costs than creating jobs. Current congressional approval ratings hover around the high 20s, while a new Rasmussen poll shows Republicans hold a 44-37 lead on a generic midterm ballot.

3) The economy. This is the most important of the three. As long as the recession continues, the biggest Obamacrat achievement — the stimulus –- risks looking impotent and a waste of $800 billion. At the same time, healthcare, energy and financial reform almost look like distractions. What’s more, high unemployment – now at 9.7 percent vs. 7.6 percent in January — is driving down President Obama’s approval rating. It’s fallen from 61 percent to 53 percent during the past three months, according to RealClearPolitics. And a president’s approval rating may be the single most important indicator of how his party fares in a midterm election.

But lately some GOPers have been wondering whether the economy might start working against their political fortunes. Economists to whom those on the right pay close attention — Brian Wesbury of First Trust Advisors, Michael Darda of MKM Partners and Lawrence Kudlow of CNBC — have been forecasting a recovery.

And that recovery might look pretty strong initially. During the first quarter of the last 10 economic recoveries, real GDP has risen close to 6 percent on average. And both Wesbury and Darda see the economy growing at least four percent next year. The worry for Republicans is that the Obamacrats will plausibly be able to take credit for both avoiding a depression and igniting the subsequent turnaround. (Ben Bernanke and the Fed kind of get lost in the White House narrative.)

But abstract GDP figures aren’t as important as the unemployment rate. As long as that number is at the highest levels in a generation, Americans are likely to feel anxious about the broad economy and their place in it. Here are four economic scenarios and their political impact:

1) The Double Dip. The worst of all worlds for Dems. The economy slips back into recession next year, pushing the unemployment rate to at least a post-WWII high of 10.8 percent. Economist Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade create a strong risk of just such a “W-shaped” scenario. If so, not only does John Boehner maybe take back the gavel from Nancy Pelosi, but Hillary Clinton and Russ Feingold start looking for reasons to visit Iowa and New Hampshire. Probability: 10 percent

2) The Big Muddle. The economy keeps growing, but only in the 2 to 3 percent range. And that wouldn’t generate many new jobs. IHS Global Insight, for instance, predicts GDP growth of 1.8 percent with unemployment averaging 10 percent next year (and 9.4 percent in 2011). This is also where the Federal Reserve lands. The Fed forecasts growth of between 2.5 and 3 percent with unemployment declining “only gradually.” In this case, expect greater-than-average Dem losses. Harry Reid might get voted out by his fellow Nevadans while Pelosi might get the boot from fellow Dems. Probability: 50 percent.

3) The Big Bounce. A combination of Fed stimulus, government spending and inventory restocking by companies produces growth of 4 percent or more. But even so, unemployment remains twice as high as what Americans have become accustomed to during the past generation. Economists at JPMorgan calculate that 4 percent growth would translate into an average of 200,000 new jobs a month next year. And if the unemployment rate ends this year at close to 10 percent, that level of job creation would only bring it down to 9.5 percent or so. Democratic losses are limited to the historical average give or take. Probability: 35 percent

4) The Obama Boom. It’s 1983-84 all over again. The economy soars as fast as it fell. Unemployment drops below 8 percent by Election Day as formerly terrified employers realize they cut too many workers during the recession. Dems have limited losses. Talk of a third party increases. Probability: 5 percent.

Bottom line: Unlike the Reagan boom, neither taxes nor interest rates look to be going lower anytime soon. And economies after financial crises tend to be slow growers. So it’s hard to envision a likely economic scenario without a jobless recovery in 2010. And as economic analyst Ed Yardeni points out, “The industries that have cut back the most (durable goods manufacturing, construction, and retail) are inherently labor intensive, and they are likely to remain in intensive care for quite a while.”

Passing a popular healthcare bill would certainly boost Democratic fortunes. But history and the economy would suggest that 2010 will be a big Republican year.

COMMENT

Very thoughtfull post on achievements. It should be very much helpfull

Thanks,
Karim – Positive thinking

Posted by Karim | Report as abusive

More on the weak U.S. labor market

Sep 8, 2009 14:14 UTC

This analysis from Ed Yardeni:

Based on the previous two cycles, the unemployment rate should peak in 15-19 months, or sometime between September 2010 and January 2011! When might employment recover? The previous two experiences suggest this might occur within the next 11-21 months after June, or between May 2010 and March 2011.

Is that too pessimistic? The optimists argue that companies may have fired too many workers, and will have to scramble to rehire once the economy improves. So far, during the first 20 months of this recession, payroll employment is down a whopping 6.93mn vs. total losses in employment of 2.71mn and 1.57mn during the downturns at the beginning of this decade and the previous one. Debbie and I expect that this recovery will be much more “jobless” than the previous two. The industries that have cut back the most (durable goods manufacturing, construction, and retail) are inherently labor intensive, and they are likely to remain in intensive care for quite a while.

COMMENT

I think that the fate of the economy still comes down to jobs and the consumer, and since there is no catalyst for employment growth in the US, and so many people will be using up their unemployment benefits soon, the Fed is going to choose to print more money to try to avoid deflation. And one of the few ways for the average person to maintain his or her wealth, in my opinion, is to invest in the area that should benefit most from the money printing, which is gold. There are some articles at http://www.goldalert.com that further discuss the employment picture, the Fed’s policies and its potential effects on the gold price.

Posted by jturner | Report as abusive

America’s battered labor market

Sep 8, 2009 13:32 UTC

David Rosenberg of Gluskin Sheff analyzes thusly:

1) Jobless claims stuck at 570k — basically in line with a sustained 200k-300k payroll losses.

2) Temp agency job losses are continuing even if at a slower pace — this is not good news.

3) Downward revisions to the prior data — these tend to feed on themselves.

4) No change in the record-low workweek.

5) The Challenger and JOLTS data reveal an ongoing decline in hiring intentions.

After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.

Me: Maybe jobs will snap back. But given structural/longer-term changes in housing, finance and autos, that just seems unlikely to me.  Lots of entrepreneurial effort needed. But is the stage being set for less innovation rather than more?

What does 9.7 percent unemployment mean for Democrats?

Sep 4, 2009 17:09 UTC

Marc Ambinder looks at this question and concludes a) that anything under 10 percent is better than expected, b) 0.3 percent makes a big difference politically, and c) Team Obama will be able to more or less successfully blame Bush. His bottom line:

The economy is expected to play a big role in the 2010 elections, with Democrats bearing the brunt of a worsening situation. That’ll depend a lot on the duration of the decline, just how bad things get, and what direction they’re heading as November 2010 approaches. Right now, 9.7 percent doesn’t tell us a whole lot about how that will play out.

Me: How about this instead: Unemployment is killing the White House, and it doesn’t need to get a 0.1 percent worse to continue to suck the life out of this administration. Obama’s approval ratings are down 8 points in three months. People have become accustomed to very low rates of unemployment and short recessions. Those expectations are politically devastating to Democrats.

The worrisome fiscal situation of states

Sep 4, 2009 13:36 UTC

A fun factoid from Gov. Mitch Daniels of Indiana shows just how much trouble states are in (via WSJ):

From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

August unemployment at 9.7 percent; 216,000 jobs lost

Sep 4, 2009 12:42 UTC

The unemployment rate in August jumped to 9.7 percent from 9.4 percent. The economy lost another 216,000 jobs. While the economy may be shifting into recovery mode, the labor market clearly still needs lots of work. The best-case scenario I can find (4 percent GDP growth next year) still would have the jobless rate at 8.5 percent or so a year from now. Also note that the labor force participation rate remained steady last month. So the blip up in unemployment was not caused by discouraged workers returning to the workforce. Also the broader U6 rate surged to 16.8 percent.

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