James Pethokoukis

Politics and policy from inside Washington

The Obama stimulus reconsidered

Sep 3, 2009 17:23 UTC

I listened to VP Joe Biden today talking abut the Obama stimulus package, aka, the American Recovery and Reinvestment Act. A few thoughts:

– Biden credited the stimulus plan for preventing the recession from turning into a depression. I would certainly place the $140 billion or so in stimulus spending behind the Fed’s action and the natural rebound in the economy after a period of intense fear and retrenchment.

– Even though “reinvestment” is part of the name of the plan, at least two-thirds of the plan has nothing to do with long-term growth.

– If the economy was much worse than the White House expected, why wasn’t a) the stimulus bigger, and b) more front loaded toward 2009?  That was a huge misjudgment.

– Clearing some fiscal space with entitlement reform would allow the WH the ability to do a second stimulus for infrastructure or reducing taxes on company and capital.

– Perhaps the smartest thing the WH has done so far is resist calls for raising taxes (like from Pelosi) or to focus on near-term deficit reduction. Those are exactly the sorts of policies that helped retard America’s recovery during the Great Depression and Japan’s during the Lose Dedade.

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.

Is the stock market splitting open like a boiled peanut?

Sep 1, 2009 18:58 UTC

Fellow Reuters columnist Agnes Crane see trouble ahead:

Turn the calendar to September and markets are fixated about potential problems at the banks again. The obsession with September being a bad month for stocks and for the world in general has nothing to do with it, I’m sure.

I’m certainly the last person to downplay the still tough road ahead given the state of the U.S. consumer, commercial real estate and the excesses that still need to be wrung out of the system, but the fickle trading, especially in the stock market this summer, has made it difficult to read too much into the daily moves.


The problems we uncovered with the leveraging residential real estate are going to be even more frightening for commercial real estate.Do not forget,the same formula and mentatlity were applied.”Bundling good with not so good” still applies.

Posted by The TAX payer | Report as abusive

Stealing economic growth from the future

Sep 1, 2009 18:53 UTC

Fellow Reuters columnist Rolfe Winkler has it. Exactly. Right:

What Cash 4 Clunkers did for cars, the first time home buyer credit is doing for housing — pulling future demand into the present. Count on home sales to head back down after this tax credit disappears.


Cars are fungible, houses, in the greater view, are not.

As a Realtor, I see the desire of 1st Time Buyers wanting to enter the market to take advantage of the Tax Credit, but they are restricted severely by the very poor inventory, and competition from Investors.

I know that in So. California & the Las Vegas Metro area, there is a shortage of inventory that is keeping those buyers from the American Dream. Until the Banks begin releasing the “Hidden Inventory” of properties on their books, we will not see any improvement in the real estate market. Although, we may even experience a greater decline in values if dumping takes place.

The Tax Credit should be extended to allow absorption of the inventory once the investors have exhausted their funds or met their porfolio needs.

Posted by Jack in San Diego | Report as abusive

The Great Recession or the Pretty Bad Recession?

Sep 1, 2009 13:46 UTC

Allan Meltzer (WSJ) pleads for people to stop comparing this downturn to the Great Depression. It is more like the 1973-75 period, he argues. He also opines that it has been in the Obama administration’s self interest to overstate the severity of the recession so it could hype its own achievements in “saving” the US economy.

I would also add that it was in the WH interest to maximize economic concern to maximize the chances of successfully pushing through its economic agenda. But the WH made the mistake of a) thinking that concerns about economic security would dwarf concerns about the sustainability of massive government spending and budget deficits, and b) underestimating how concerns about economic growth would undercut cap-and-trade  and the attempts to pay for healthcare reform by raising taxes.


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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.

Study: U.S. budget deficit could average $1.4 trillion a year for a decade

Aug 26, 2009 19:44 UTC

Change a few assumptions and those government budget forecasts start to look scary. The Concord Coalition makes a few tweaks to the Congressional Budget Office model:

1) The Concord Coalition takes the CBO baseline and adjusts it to assume appropriations increase at the same rate as the economy (GDP growth). This increase is closer to the historical average rate of increase.

2) We also assume that supplemental appropriations do not continue indefinitely. For recent appropriations for the wars in Iraq and Afghanistan, we include realistic estimates from CBO about how much will be spent under a scenario where troop levels slowly decrease to about one-third of their level at the time of the estimate.

3) For taxes, we assume that all of the major tax cuts will be extended beyond 2010.

4) We also assume the one-year patches to the Alternative Minimum Tax will continue to be enacted, holding the level of taxpayers hit by the tax roughly constant throughout the baseline period.

5) Finally, we include a calculation for the increased debt service (interest payments) that these policies would cause by their increasing the deficit. We do not make any changes to CBO’s economic assumptions.

And here is what all that looks like as a pretty picture:



Maybe, the deficits could be raised from 1.4 to 14 trillion a decade, so that the Americans sustain their living standards without any need to work. This path is also suggested by the fact that the year 2010 in the graph has been upgraded to 20010. :-)

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.

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.