James Pethokoukis

Politics and policy from inside Washington

Why growth is good

Aug 10, 2011 19:34 UTC

Today’s WSJ op-ed by Jeb Bush and  Kevin Warsh is hardly startling in its policy recommendations, as wise as those recommendations happen to be.  What I really like about the piece  is that its authors gave us the “why” as well as the “how.” And the “why” is not just about making CBO numbers add up:

Stronger economic growth is not just about economics. Growth unleashes human potential. It turns personal aspirations into positive achievements. And it lays the predicate for a better, stronger, more prosperous and opportunity-filled America. Our weak economic recovery has dashed the hopes and dimmed the prospects of too many of our citizens. And it has put America’s place in the world at risk.

We should resist the temptation to wrangle with the green eyeshade folks who question our prospects. Instead, we must take actions that demonstrate our resolve and resiliency. We must restore our faith in growth economics and reform our policies accordingly. This will bring strength to our markets and reaffirm our place in the world.

 

Kevin Warsh, a pro-growth advocate at the Fed

Nov 8, 2010 16:24 UTC

Great, great stuff from Fed member Kevin Warsh in the WSJ. After giving his perfunctory agreement with QEII, he gets after it with a rousing piece of advocacy:

Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms—financial and otherwise—know the rules, and then succeed or fail. Regulators should be hostile to rent-seeking by the established, and hospitable to the companies whose names we do not know. Finally, the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade.

The deleveraging by our households and businesses is not a pattern to be arrested, but good prudence to be celebrated. Larger, more liquid corporate balance sheets and higher personal saving rates are the reasonable and right responses to massive government dissaving and unpredictable government policies. The steep correction in housing markets, while painful, lays the foundation for recovery, far better than the countless programs that have sought to subsidize and temporize the inevitable repricing. It is these transitions in our market economy—and the adoption of pro-growth fiscal, regulatory and trade policies—that lay the essential groundwork for greater, more sustainable prosperity.

Me: I would say there is as much as a 39 percent chance Kevin Warsh is the next Treasury Secretary of the United States.  First, I think Tim Geithner is staying for Obama’s full term. Second, betting markets currently give  39 percent chance Republicans take the White House in 2012. Warsh is highly respected in GOP policymaking circles and has a gold-plated resume. I could see Warsh at Treasury and eventually Glenn Hubbard/John Taylor at the Fed in a GOP administration.

COMMENT

Someone needs to explain to Sarah Paling that taking a class in high school in home economic doesn’t really prepare one for discussing macroeconomics. Geithner’s plan is brilliant!!! Either way the US wins.
After failing to get accommodations from the Chinese, Geithner is putting the Chinese in a no win situation. He is forcing the hand of every country to compromise or else. After failing to make any real progress, Geithner has adopted a more Israeli style of hardline negotiating! Geithner has masterfully created a situation where he will win on the currency conversion front or inflation or both; regardless of how well or how poorly Geithner does at persuading the G-20 to support his plan.
Currency conversion is not complicated. A strong dollar raises the value of Chinese US holdings, while a weaker dollar decreases the value of those same holdings. The fear of the Chinese walking away from the dollar completely is crazy… they own too many. Overtime the Chinese will decrease their holdings, but this was inevitable with or without Q2. Chinese revenue from sales in the US is on the decline and that decline is not going to be reversed anytime soon. Lower sales in the US means the Chinese simply have few dollars to buy US debt.
LET ME REPEAT… fighting the Federal Reserve and the currency traders would require massive purchases of the same dollars that they fear will go down in value!
Don’t feel sorry for China… China was and still is Fannie Mae’s largest bondholders, so China effectively got almost a half-trillion dollar bailout when the Fed stepped in and rescued Fannie Mae bondholders! China has exploited US policy thru fear and intimidation for far too long!
If the Foreign Central Banks try to fight the US Fed it will require them to buy mountains of dollars. It is not hard to imagine how pissed-off the Russians and Venezuela are about this prospect given their very vocal campaign to reduce their dollar holdings.
It is true that Japan, other Asian economy and developing countries will need to take some protective measures to limit capital inflows, but that seems to be a small price to pay to keep the US from falling into a Japan deflation or worse.
The doomsday scenario that Geithner fears is one where the US employment stumbles further and where the developing nation’s recovery pushes commodity prices to extreme levels. It would be terribly destabilizing!
Screw Germany. The German unemployment rate is half the US because of very shrewd maneuvering and favorable trade agreements. Russia hates anything that helps the US!
Hats off to Geithner!!!

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