James Pethokoukis

Politics and policy from inside Washington

Goldman Sachs: Economy needs fiscal, monetary boost

Jul 6, 2010 17:04 UTC

The econ team at Goldman Sachs is sounding worried. Here are a few snippets from a new report:

1.   Friday’s jobs numbers were disturbing.  At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%.  At worst, they suggest that the labor market is once again turning down.

2. With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy.

3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation.

4. So what is to be done?  On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed.

5. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010.

6. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011.

COMMENT

Regretfully, Goldman’s recommendations are too little, too late — the US is headed straight into deflation and depression from this point forward…

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Kudlow: Time for a tax cut

Jul 6, 2010 16:44 UTC

Larry Kudlow thinks it’s time for Team Obama to consider a different path:

Fred Smith, the CEO of FedEx, does not have a Nobel Prize in economics. But he founded from scratch a gigantic global transportation and delivery company that has employed tens and tens of thousands of workers, something the Nobelists have never done. And Smith argues that the best job-creating measure would be a significant reduction in the corporate tax rate and a move to full expensing for business-investment tax write-offs. He’s exactly right.

Japan intends to cut its corporate tax rate. So does Great Britain. But the U.S. corporate tax rate of 35 percent, or 40 percent when states are included, is not even remotely competitive anymore. So why aren’t people talking about the economic benefits of unleashing business power? The rapidly growing Asian economies treat capital and business better than they’re treated in the United States. Same for Europe. What are we waiting for?

Me:  Even Krugman-ite Democrats — folks more worried about jobs than deficits — should support this. Lowering taxes is the one form of  ”stimulus” that might get GOP support.  Might this mean a bigger deficit in the short run? Perhaps, but I see little evidence that markets are too concerned right now about red ink.

COMMENT

Not for nothing is Larry Kudlow known as the great one! A corporate tax cut is a great idea. Here in Canada business tax rates are tumbling.

Nonetheless, given the dismal electoral prospects faced by Team Obama as outlined in your later article above, it’s quite doubtful Mr. Obama will do anything smacking of doing a favour for American business in the near term. Quite the contrary; this fall election will likely see the Democrats bashing big business, big oil, big banks &c in a last-ditch attempt to shore up their electoral base. With luck, Mr. Obama will lose his super-majority in congress and then, and only then, after being sharply upbraided by the voters, will he look at something like a corporate tax cut. The unemployed will have to wait some while longer, sadly.

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Recovery Summer and the big fade

Jul 1, 2010 17:24 UTC

So how goes the economic news today? The job market?

The jobless claims data remain the weakest indicator of labor market activity. On the face of it, the rise in the four-week average to the highest level since the beginning of March points to a weakening in the labor market and a potential decline in private payrolls. … we find the level and direction in jobless claims somewhat troubling and the increase is likely to feed double-dip fears.  (RDQ Economics)

How about on the factory floor?

Forward momentum is slowing down in the manufacturing sector … price pressures have virtually vanished in the short space of a month.” (IHS Global)

How about overall economic growth?

Incoming data have led us to lower our tracking of second quarter GDP from 4.0% to 3.2%. In addition, the ongoing tightening in financial conditions is leading us to mark down our projection for third quarter GDP from 4.0% to 3.0%. Since the intensification of the European crisis in late April, the risks to US economic growth have been tilting to the downside. The latest round of data confirm that the sovereign crisis transmission channels have been operative and weighing on the economy: export orders tanked, confidence has stumbled, and the hit to households’ equity wealth is becoming a considerable impediment to consumer spending (JPMorgan Chase)

Me: More and more arrows seems to be tilting the wrong way. I don’t know if there will be a double-dip recession, but the cake is rapidly being baked for a weak economy on election day in November.

COMMENT

And this:
http://money.cnn.com/2010/07/02/news/eco nomy/bankruptcy_filings/index.htm?source =cnn_bin&hpt=Sbin

With bankruptcy filings on the rise, how is it even possible to claim that an economic recovery ever took place here?

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Growth only way to avoid U.S. economic collapse

Jun 30, 2010 20:43 UTC

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.

Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less.  Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path.

COMMENT

Finally we are seeing Collapse in the mainstream media. What does this mean? It’s only being said in places like tiny Vermont, but Collapse is the breakdown of the unsustainable U.S. Empire: the largest, most brutal, most environmentally destructive empire of all time.

Vermont secessionists utterly reject the infinite growth paradigm as a key to the future, just as we led the opposition to the 1803 Louisiana Purchase, the national embargo of 1807, and the War of 1812. New England secessionists also expressed their opposition to a military draft at the Hartford Convention of 1814. Abolitionists in New England urged northern states to disengage from the Union.

What we have in common is a commitment to sustainable economic development, local food & energy production, to bring home the Vermont Guard troops from Afghanistan and Iraq, and to return Vermont to our status as an independent republic as we were until 1791.

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The Dirty Shirt Theory and the Keynesian Endpoint

Jun 14, 2010 18:34 UTC

From Ed Yardeni:

The bears are mostly, and rightly, concerned that many economies around the world are overly leveraged. They claim that both private and public debt burdens are so great now that they are depressing economic growth. This has the potential to cause a deleveraging death spiral for the global economy according to the most bearish of the bears. The bulls believe that the global economic recovery has plenty of forward momentum and is self-sustaining even if many governments are forced to implement austerity measures to placate the Bond Gods.

Speaking of the Bond Gods, I was surprised that the clever folks at Pimco weren’t mentioned in the Businessweek article on the leading stock market bears. They are the ones who coined the phrase “The New Normal,” describing an economic outlook of structurally weak economic growth and persistently high unemployment. They argued that the stock market rally over the past year was a “sugar high.” Last week, they rolled out the “Keynesian Endpoint.” The gist of this concept is that many governments have maxed out their credit lines. As a result, they can no longer borrow as much as they need to prop up their flagging debt-burdened economies. So their only remaining policy options are to devalue their currencies and to restructure their debt, i.e., default. Pimco apparently likes the dollar and U.S. Treasuries because the U.S. is the “least dirty shirt,” according to Pimco’s Bill Gross in a June 4 radio interview on Bloomberg Surveillance with Tom Keene.

Me: Of course, this was the obvious flaw with all the Return to Big Government talk. Such a return is fiscally unsustainable. Markets will prevail.

Obama budget cuts only a start

Jun 9, 2010 19:39 UTC

Cutting 5 percent of optional government spending won’t plug America’s fiscal hole. Still, President Barack Obama’s proposal may buy a bit more time with nervous financial markets. It could even kick-start a needed rationalization of government outlays. Every little helps — but Obama needs to go further.

The tweaks that Obama seems to be calling for land well short of the big cost-cuts eventually needed to get the U.S. budget in order. They would affect only discretionary spending unrelated to security, and only starting in 2012. In that year, the projection for such expenses (outside defense and homeland security) is roughly $600 billion. So a 5 percent cut would be $30 billion, or 0.2 percent of GDP. The budget deficit that year is expected to be $915 billion, or 5.8 percent of GDP, according to the Congressional Budget Office. The cuts, in other words, would easily disappear in the overall deficit forecast’s margin of error.

Entitlements are where the real money is. A 5 percent cut in health and pension programs, for instance, would amount to $105 billion. And such “mandatory” spending will increasingly dominate. Currently, this category of spending is half as large again as all discretionary spending. By 2020, that ratio could expand to 120 percent unless Obama’s deficit commission is able fashion a set of entitlement reductions acceptable to Congress.

Then again, even small cuts in wasteful or inefficient discretionary spending are good news. Obama also wants federal agencies to identify their poorly performing programs, an effort to force them to measure and critique performance — and cut expenditure that doesn’t get results.

And Obama has plenty more scope. Defense spending is half of the total discretionary category. Some Republican budget hawks might even applaud well-chosen cuts. And reducing the federal workforce by 25 percent would save $650 billion by 2018, according to simulations run by the Committee for a Responsible Federal Budget. Eliminating earmarks — self-serving pork slipped into spending bills by members of Congress — would save another $160 billion by that year. It would also show the public that Congress takes austerity seriously.

The 5 percent cuts may be at least 50 percent PR. But if they make voters more willing to accept future fiscal pain, they are 100 percent a good start.



Where Barry Ritholtz questions my tax analysis

Jun 3, 2010 18:42 UTC

Superblogger Barry Ritholtz of The Big Picture takes issue with my claim that America’s wealthy have a high tax burden since they pay such a huge share of U.S. taxes. A bit from his email to me (in his own inimitable style):

All you have proven is that the Rich pay most of the taxes. Duh. But you have failed to demonstrate the rich have a “high tax burden” — indeed, you actually say ABSOLUTELY NOTHING ABOUT THEIR TAX BURDEN. Paying a lot of taxes — even most of the taxes — is not the same as a high tax burden.
You have mentioned that 2010 taxes are higher than 2004 taxes. You stated 1% pay alot of taxes. Again, probably true, but fails to demonstrate your claim.

When you discuss “A high tax burden” you are making a qualitative statement. The tax burden is onerous, difficult, challenging. Its painful, disruptive, counter-productive.

OK, I am intrigued by your claim. So prove it to me.
I think you have raised a very fascinating and fundamental issue — but have not created a convincing case for it.
(It’s easy to sway innumerate nitwits, but I assure that is not what my driver’s license states). My question ultimate boils down to this: Is the tax burden on the rich that high?

Me: The post referenced earlier states a few things: 1) there is research that shows combined taxes on the rich are at the point when higher rates will bring in lower tax revenues; 2) to balance the budget, tax rates on the rich would have to skyrocket; and 3) the top 1 percent of tax returns pay 40 percent of all income taxes (as of 2007.)

Certainly I think if you put all that together it makes the case that forcing the rich pay higher taxes is a self defeating way to restore fiscal solvency. Indeed, there is also research that shows cutting spending is a better way to balance the  budget than raising taxes. (It is less harmful to economic growth.) Moreover, the track record of countries cutting debt though austerity is not good.

COMMENT

HBC…

I’m not sure how you inferred only 1% of Americans are rich, that’s just the group being used to make the point of income percentage vs. tax percentage. The poorest 10% of Americans are actually quite wealthy compared to much of the population of the world. That is the fruit of a free market capitalism – it’s the only system in the history of the world ever to lift masses of people out of poverty and destitution.

Barry…

Why even argue burden? It’s semantics. Either you believe it is morally right for the government to use the threat of force to take private property from some citizens in order to give it to other citizens or you believe it is morally wrong. It’s certainly not in keeping with the values of the founders of this country and it will certainly do serious harm to the system of incentives that made this country wealthy and powerful in the first place.

You obviously think the benefit to our society of more equal wealth distribution outweighs the reduction of freedom and liberty that comes along with very high taxes. Your approach is unconstitutional and will destroy the system of incentives that drives innovation and wealth creation. Don’t hide behind the word burden, I don’t think you care if it’s a burden on these folks or not, you simply think it’s unfair they finished with more than others.

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Hillary’s revealing tax gaffe

Jun 2, 2010 19:56 UTC

Who really cares what Hillary Clinton thinks about taxes, right? She’s Secretary of State in the Obama administration, not Treasury. It’s not as if Timothy Geithner said the following, as Clinton did last week:

Brazil has the highest tax-to-G.D.P. rate in the Western hemisphere. And guess what? It’s growing like crazy. The rich are getting richer, but they are pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it — to our regret, in my opinion. My view is that you have to get many countries to increase their public revenues.

The actual cross-country comparison doesn’t interest me much. Brazil has a very different tax structure and an economy that’s one-seventh the size of America’s. And I am not even sure, really, what Clinton is talking about. Brazil’s aggregate tax burden, as Dan Mitchell of Cato notes, of about 24 percent of GDP “is slightly below the aggregate tax burden in the United States.” And its top marginal income tax rate is a third lower than America’s.

But here is what I am interested in: Clinton’s tax analysis is perfectly reflective of the counter-reformation against the global tax revolution launched in the 1980s. According to this economic cosmology, tax burden is really a secondary or tertiary economic factor. Bill Clinton raised income taxes in the early 1990s, after all, and the U.S economy roared. (Here is a different economic narrative of that decade.) Of course, liberal Democrats are talking about increasing taxes far beyond what Clinton did– such as imposing a value-added tax — to deal with the exploding budget deficit. At the very least, as Clinton’s comments indicate, Democrats believe America’s wealthy still aren’t paying their fair share. But that is just wrong-headed for several reasons:

1) Top tax rates are already at dangerous levels where ever-higher rates bring in less money. Take a look at “The Elasticity of Taxable Income with Respect to Marginal Tax Rates” by Emmanuel Saez, Joel Slemrod and Seth Giertz:

Following the supply-side debates of the early 1980s, much attention has been focused on the revenue-maximizing tax rate. A top tax rate above [X] is inefficient because decreasing the tax rate would both increase the utility of the affected taxpayers with income above [Y] and increase government revenue, which can in principle be used to benefit other taxpayers. Using our previous example … the revenue maximizing tax rate would be 55.6%, not much higher than the combined maximum federal, state, Medicare, and typical sales tax rate in the United States of 2008.

2) Taxing the wealthy to solve the budget deficit would require confiscatory rates. As the Tax Policy Center found:

Washington would have to raise taxes by almost 40 percent to reduce — not eliminate, just reduce — the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.

What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP. Such dramatic tax increases are politically untenable and still wouldn’t come close to eliminating the deficit.

3) The rich already have a high tax burden. Here at the latest numbers from the Tax Foundation:

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes. The 2007 numbers show that the top 1 percent’s income and tax shares reached all-time highs for the third year in a row. That is likely to reverse direction when data from recessionary 2008 is published a year from now.

Dramatic tax increases on the wealthy — much less the broad middle class  – are  neither the ticket to higher economic growth nor a path to fiscal solvency.

COMMENT

Here’s the deal Mr. Pethokoukis; We are going to raise the taxes on the wealthy…Hopefully,aggresivly on extreme wealth. We are going to set up some rules to improve our markets and reward true productivity rather then monopoly and casino finance. The economy will improve. The deficit will improve. Income inequality will lessen. The middle class will be stronger and the rich will still be very rich…. and you will be wrong again. THAT’S GOING TO HAPPEN.

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The coming fiscal war between the old and the young

Jun 2, 2010 18:13 UTC

In the London Times, Anatole Kaletsky outlines a soon-to-escalate generational conflict between seniors and younger voters :

The politics of the next decade will be dominated by a battle over public spending and taxes between the generations. Young people will realise that different categories of public spending are in direct conflict — if they want more spending on schools, universities and environmental improvements they must vote for cuts in health and pensions.

Schools and universities are more important for a society’s future than pensions. Yet every democracy around the world has made the opposite judgment. While many politicians claim to be obsessed with education — recall Tony Blair’s three priorities were “education, education and education” — in reality they support health and pensions to the point of national bankruptcy, while squeezing universities. The same applies to the many fiscal benefits heaped on pensioners over the years. Is it, for example, better for society to offer free bus travel to wealthy 80-year olds rather than students or impoverished youngsters looking for their first job?

He half-seriously tosses out this interesting solution:

Here is a modest proposal to avert this awful outcome. Since children under 18 are not allowed to vote, perhaps pensioners could be deprived of the right to vote after 75 or 80. An equally effective alternative would be to give mothers an extra vote for every child under voting age.

Me: I dunno. Every entitlement reform plan I have seen basically excludes cuts on seniors currently getting benefits. And healthcare reform was passed despite projected cuts in Medicare. So it can happen. And changes can linked to income so they don’t bite middle-class folks. Here is a bit of insight from Andrew Biggs of AEI:

Social Security reform involves raising taxes or cutting benefits in ways that people can easily understand, and dislike. But a sensible Social Security program is easy to imagine: solid protections for the truly old and the truly poor, coupled with universal retirement savings accounts for everyone else. There’s no free lunch, but neither is it an impossible task.

Does the BP oil spill mean the West should get poorer?

Jun 2, 2010 16:56 UTC

Economist Kenneth Rogoff sees a comparison between the Gulf oil spill and the financial meltdown:

The accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them. The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency (scientists estimate that we know only a very small fraction of what goes on at the oceans’ depths.) Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures. … The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters. Suddenly, instead of a world of “peak oil” with ever-depleting resources, technology offered the promise of extending supplies for another generation.

That is fine as far as it goes, but then he adds this:

If ever there were a wake-up call for Western society to rethink its dependence on ever-accelerating technological innovation for ever-expanding fuel consumption, surely the BP oil spill should be it. … The advanced countries, which can best afford to restrain long-term growth, must lead by example. The balance of technology, complexity, and regulation is without doubt one of the greatest challenges that the world must face in twenty-first century. We can ill afford to keep getting it wrong.

Me: All the more reason, then, to look beyond oil for next-generation power sources. But the oil spill is no reason to go wobbly on pursuing technology — nanotechnology, genetic engineering — that would help allow living standards in America, and the rest of the world, to continue to rise. This sounds like Rogoff, a fine economist, is veering dangerously close to advocating the neo-Luddite Precautionary Principle. As Rogoff well knows, the world faces a huge debt problem and will need snappy growth to get out of the trap. Technological innovation will need to be a big part of that.

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