James Pethokoukis

Politics and policy from inside Washington

CBO paints nightmare scenario for Democrats in 2010

Jan 26, 2010 18:06 UTC

According to the new CBO economic and budget forecast,  the US economy will grow at just 2.2 percent next year, keeping unemployment above  10 percent. In fact, it has the jobless rate averaging 10.1 percent vs. 9.3 percent in 2009. As the CBO puts it:

First and most important, output is expected to grow fairly slowly in this recovery. Following the two previous severe recessions in the postwar period, output rebounded particularly rapidly, as did employment. Real GDP grew by 6.2 percent in the four quarters following the 1973–1975 recession and by 7.7 percent in the same period following the 1981–1982 recession. In both instances, all of the jobs lost during the recession were regained within four quarters. In contrast, GDP rose modestly and employment remained much weaker following the two most recent recessions.

Employment changed little during the four quarters following the 1990–1991 recession, when real GDP rose by 2.6 percent. And employment fell by more than 1 million in the six quarters following the 2001 recession, when real GDP grew at an average annual rate of 2.1 percent.

COMMENT

4 ways to grow GDP close to 6% and to decrease unemployment by 4 pts

1. Capital gains tax cut to effective rate of 10% on all asset classes
2. Incentivize promising job growth industries such as healthcare. Instead of crippling healthcare with burdensome regulation and government control, enable the industry by offering incentives for creation of self funded, self directed medical savings accounts. Other promising sectors are energy – export natural gas and other commodities to developing nations.
3. Dramatically reduce non-critical federal spending. Cut most foreign aid other than spending that is critical to national defense.
4. Across the board sustained coordinated income tax cut

Posted by dutchboyinvestor | Report as abusive

America’s challenge

Jan 22, 2010 19:10 UTC

From the great David Goldman:

When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world’s largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world’s demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.

Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, “We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes.”

COMMENT

Beware of unintended consequences.

Some of the perpetrators of the Loans-to-deadbeats Ponzi scheme were just as well inteded as you two gentlemen are.

Changes this massive are extremely dangerous. Always. Maybe the impact would be super-duper. But who really knows?

Better for the government just to get the hell out of the way.

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My chat on financial reform with Nicole Gelinas, part two

Jan 19, 2010 19:58 UTC

This is the second edition of my chat with the fabulous Nicole Gelinas, author of the phenomenal must-read, must-own After the Fall: Saving Capitalism from Wall Street and Washington.  (Part one is here.)

What was a reasonable alternative to TARP?

We were never going to escape this debacle without pumping massive amounts of taxpayer money into the financial system. By 2008, the erosion of market discipline and prudent regulations (which go together) had left the economy vulnerable to a historic financial disaster. The proverbial black swan would have been if we not gotten the crisis.

Washington could have deployed TARP funds better than it did, though. Bush-era Treasury Secretary Henry Paulson’s first mistake was in thinking that he could use TARP finds to hide financial-industry losses. That is, he wanted TARP to buy up bad securities from banks at higher-than-market prices. As the S&L crisis proved nearly two decades ago, the economy can’t recover until bad assets find their real market price. Yet more government distortion just delayed that process.

What Paulson and, later, Geithner eventually did was better: pumping capital into banks so that they could withstand at least some of their losses on mortgage-related securities and other investments. Still, though, Washington used TARP to shield bondholders to the TARP banks from their losses – meaning that “too big to fail” lives another day.
How would a conservatorship of a TBTF firm work?

No firm should be “too big to fail – so it really would be a conservatorship for failed financial firms.

We learned in the Great Depression that some firms cannot fail through the normal bankruptcy process. Bank failures caused unacceptable economic panic and social harm. The FDIC was the elegant solution. It protected small depositors from losses and from service interruption, muting financial panic in a crisis. But it also allowed markets to discipline bad banks, because uninsured lenders still took their losses.

The task of a conservatorship for failed financial firms should be the same: to enforce market discipline of failed financial firms in an orderly manner – with creditors taking their losses – while protecting the economy from the disordered panic that we saw after Lehman.

A conservatorship could carry on operations at a failed financial firm, just as the FDIC does with failed banks when it cannot find a buyer. But lawmakers must make clear that the conservator’s goal is liquidation: to spin off good assets into more competent hands, with creditors responsible for any shortfall, just as they are in bankruptcy.

With AIG, the government has never made clear whether it’s trying to save AIG or wind it down. So we have the bizarre situation of AIG executives saying that the company stock is worthless even as it trades on public markets in the double digits. Meanwhile, private-sector insurance companies must compete against a government-guaranteed behemoth.

A conservatorship won’t work, though, unless lawmakers and regulators enact other rules to make the economy better able to withstand financial-industry failure. I talked about some of this in my answers to your other questions. The main goal is to insulate the economy somewhat from the natural excesses of financial-industry optimism and pessimism, without micromanaging finance. Borrowing limits mute optimism, because they prevent investors from bidding assets up with no money down (think housing in 2005, stocks in 1928).

Other regulations can mute pessimism. When the old uptick rule governed “short sales,” stock sellers couldn’t sell a stock down to zero. Pushing financial instruments onto exchanges, too, can mute panic — again, look at AIG.

COMMENT

She is blowing smoke and missing the lesson.

How about a Constitutional amendment that bans all future bailouts of people, entities, corporations, municipalities, and U.S. states?

No other measure would impose the kind of discipline that is required.

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Brown vs. Coakley: The Bay State Brawl!

Jan 19, 2010 18:33 UTC

A few thoughts and observation about  the US Senate race Massachusetts:

1) No exit polls, so we’ll have to wait for the actual vote count as well as turnout in key counties.

2)  Intrade betting market has Scott Brown at 78 percent, up 10 points in the past hour or so.

3) Reporters keep looking for a Coakley surge but have had a tough time finding one .

4) Even a narrow Coakley win will leave lots of Washington Dems wondering if they should retire in what looks like a strong Republican year.

5)  Either way, expect Dems to do a lot more Wall Street bashing since they think the issue stuck to Rs during the race.

More to come …

Ugh! 5 reasons why the Dec. jobs report was worse than it looked

Jan 10, 2010 19:32 UTC

Goldman Sachs thinks 4Q growth could be as a high as 6 percent. But don’t think the firm is as cheery about the labor market despite the “stable” 10 percent unemployment rate in December. Some bullet points:

1. The persistent underperformance of the household survey strongly suggests that the establishment survey’s “birth-death model” is too optimistic and future “benchmark” revisions to payrolls will be negative.

2. Since December 2008, participation has fallen 1.2 percentage points, the biggest drop of the postwar period. If participation had remained constant over the past year, unemployment would now be over 11½%.

3. The combination of inventory-driven GDP strength and employment weakness is not good news because it means that we have “used up” a larger-than-expected share of the inventory boost without having anything to show for it in terms of employment.

4. The ISM composite index (a weighted average of manufacturing and nonmanufacturing) remains barely above 50. This is historically consistent with only about 2% GDP growth, which would not be enough to create jobs on a scale sufficient to push down the unemployment rate.

5. The parallels with the early part of the recovery from the 2001 recession remain substantial. Back then, the initial GDP release for the first quarter of 2002 showed 5.8% growth with a massive contribution from inventories. Meanwhile, payrolls stubbornly refused to show significant growth, and the employment/population ratio continued to drop. The GDP strength ultimately proved unsustainable, the economy slowed to a below-trend growth pace later in the year, and the unemployment rate didn’t peak until more than a year later.

Is Larry Summers on his way out?

Jan 5, 2010 17:55 UTC

The anti-Larry Summers buzz grow louder ( such as here, here and here.) There is a lot going on here. Liberals blogs have been all over him for pushing the $800 billion stimulus plan instead of the $1.2 trillion option presented to Obama by Christina Romer.  Liberals, including Paul Krugman, thought it was too small then and have double-downed on that opinion since.  (Alas, no high speed rail or modern-day WPA program for them.)

And the fact that the WH seems unwilling to propose some sort of massive second stimulus that focuses on jobs only makes matters worse — that even though their original unemployment forecast has proven far too optimistic. Then there was a quote from Summers who said the first stimulus wasn’t even supposed to boost jobs as opposed to output.

Not that liberals have ever loved Summers. He was part of Team Clinton which chucked the left-wing agenda in favor of deficit reduction. There was his stormy tenure at Harvard. And Summers worked at hedge fund DE Shaw, a  big no-no since the financial meltdown.

And all of this happens alongside healthcare reform, which liberals are angry about since deficit concerns helped deep-six the public option.

Unless the economy double-dips, I don’t seem a major shakeup on the WH econ team before the midterms. If the midterms go badly for Dems, though, Summers might depart. Maybe Geithner, too.  Though who would replace them if Wall Street folks and ex-Clintonites are off limits with an angry base?  Mark Zandi?  Jared Bernstein from the Veep’s office? Leo Hindery? I could see Rahmbo at Treasury, though.

COMMENT

Pretty smart guy, this Summers, much smarter than I. Failed, though, to connect the dots on derivatives and the monstrous distortions caused by the GSEs. Bit of a blind spot, it seems. Like so many at that level of power and intellect, probably too lost gazing at his own reflection to realize his worldview is a narrow as a country cracker like me. Too bad, really, having one’s name remembered as the voice of reason for encouraging an $878 billion stimulus to nowhere instead of one above the $1 trillion mark. But, whether he likes it or not, he is just a Keynesian now, part of our gang sending the dollar to the outhouse, industry to India, and kicking liberty to the curb. If he is on his way out, it just proves that intellect and common sense are mutually exclusive.

Or, maybe he is showing his handlers that he has got some serious buyers remorse with all the spending on political puffery? Nah, probably just too many egos in the room.

Lazy Jack

How does the U.S. economic recovery compare to past ones?

Jan 4, 2010 19:57 UTC

This handy chart comes courtesy of David Rosenberg of Gluskin Sheff:

recovery010410

COMMENT

Mr. Pethokukis,what is your take on your ancestoral place’s debt problems whether it is due to capitalistic or socialistic policies?Is excessive debt necessary for long term growth?

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Black swans, good and bad, for 2010

Jan 4, 2010 19:40 UTC

A classic predictions piece from economic analyst Ed Yardeni crosses my desk. First, excerpts from his bullish Black Swans (70 percent probability, he says):

1. The Old Normal trumps the New Normal. The US economic recovery is par for the course.

2. Unemployment subsides faster than expected. The unemployment rate peaked at 10.2% during November 2009; it falls to 8% by the end of 2010.

3. Consumer spending leads the recovery in 2010.

4. The federal funds rate ends the year at 1%.

5. Inflation remains subdued, with the core CPI inflation rate remaining under 2%. While most commodity prices continue to move higher, the price of oil drops to $60 a barrel on ample supplies. The dollar continues to rally in 2010.

6. Stocks-and profits-are stronger than expected. Stock markets around the world (including the US) rise to record highs by the end of 2010.

7. The federal budget deficit starts to narrow, and stress on state and local budgets starts to lift, as a result of better-than-expected economic growth

8. The Obama administration turns more centrist after Congress passes a token health reform bill that alienates the left wing of the Democratic Party. Nevertheless, the Democrats lose their majorities in both chambers of Congress in November.

9. The Iranian government falls and is replaced by a more democratic regime.

10. The Bush tax cuts are extended, following the congressional elections and before year-end. (Fairy tales can come true and usually have happy endings.)

Now his bearish Black Swans (30 percent probability):

1. The US economic recovery is subpar. After rising 4% during Q4-2009, real GDP grows by only 1%-2% during the four quarters of 2010.

2. The unemployment rate rises to 11% by the end of 2010.

3. Consumer spending is very weak due to rising unemployment. Housing starts and home sales decline as mortgage rates and foreclosures rise. Home prices fall.

4. The Fed keeps the federal funds rate near zero through year-end, and is forced to continue buying Agencies to avert a complete housing collapse.

5. Inflation concerns give way to fears of deflation.

6. Stock markets around the world plummet again, led by bank stocks. Sovereign debt crises in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) spill over into Japan, the UK, and even the US.

7. More bailouts and stimulus programs expand the federal budget deficit on a cyclical basis to another record high.

8.The Obama administration turns more leftist after Congress passes a health reform bill–and pushes for even higher taxes on the rich. The Democrats narrowly hold onto their majorities in both chambers of Congress in November.

9. The Iranians crack down on the pro-democracy movement. Tensions in the Middle East intensify, particularly between Israel and Iran. The price of oil soars over $150 during the summer, but then tumbles.

10.  The Bush tax cuts expire. This sets the stage for another recession in 2011. Future historians describe this period as the “Second Great Depression.”

He also gives his “known unknowns”:

1. Will employers expand their payrolls as they normally do at this point in the business cycle? Or will we have a jobless recovery?

2. Will consumers save more? Or will near-zero interest rates discourage thrift? If consumers pour more money into stocks to get better returns, might the resulting positive wealth effect boost their spending on goods and services?

3. Will higher taxes depress consumer and business spending?

4. Is a second wave of foreclosures ahead? Might higher mortgage rates put a lid on the upturn in home sales?

5. Or, will a normal inventory-rebuilding cycle set the stage for self-sustaining economic growth? In the past, fiscal and monetary policy stimulus measures were no longer needed once self-sustaining growth kicked in. Is this time different?

6. If the private sector deleverages, will the government continue to leverage even more? Will mounting concerns about the creditworthiness of sovereign debt stymie the ability of governments to continue to prop up economic growth?

COMMENT

Neither the bull or bear scenario is likely.

Many of the scenarios contradict one another. Example an amazing recovery AND the GOP wins both House of congress. Very unlikely that BOTH those would happen.

Iranian regime will not fall, but that has nothing to do with the economic recovery, at least short term.

The economy can recover AND helicopter Ben will leave the Fed Funds Rate near 0%. With this Fed they can be exclusive.

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Why the Democrats will lose the House in 2010

Dec 30, 2009 02:40 UTC

The trend is not the Democrats’ friend. At least not in 2010. The party of the sitting president almost always suffers losses in midterm congressional elections. To that time-tested dynamic now add voter angst about high unemployment, big deficits and controversial legislation. Expect Senate majority leader Harry Reid to lose his effective 60-seat supermajority and Nancy Pelosi to hand the House back to the Republicans. Here’s why 2010 is looking like 1994 all over again:

1. Virginia and New Jersey. Big GOP wins in the gubernatorial races not only highlighted discontent with incumbents by recession-weary voters, they also greatly helped Republicans with candidate recruiting for 2010.

2. History. More big political change isn’t predicated on America rekindling its love for the Grand Old Party. A recent poll had the Republicans finishing a distant third in popularity behind a fictional Tea Party and the actual Democratic Party. Yet American politics has a regular ebb and flow. In 13 of the past 15 midterm elections going back to 1950, the party in control of the White House has lost an average of 22 seats in the House. In 10 of the past 15 midterms the party running the Senate has lost an average of three seats.

3. Mean Reversion. Democrats have a wide field to defend after huge victories in 2006 and 2008. Particularly in the House, there are lots of Democrats in places with a proven willingness to vote Republican. Currently 47 of them are in districts won by both John McCain in 2008 and George W. Bush in 2004. And voters in those districts may be especially unhappy with a Democratic legislative agenda that causes many Americans mixed feelings.

4. Obama-Reid-Pelosi Agenda. A RealClearPolitics aggregation of polling data shows Americans disapprove of healthcare reform by a 51-38 margin. And only a little more than a third think the $787 billion stimulus plan has done much good, according to pollster Rasmussen. There’s also plenty of worry among the electorate that Washington spending is creating a dangerous level of government debt.

5. Rep. Parker Griffith. Griffith, elected in 2008, could be an electoral harbinger. His district, Alabama’s 5th, gave 60 percent of its votes to Bush in 2004, and 61 percent to McCain. He just switched from Democrat to Republican, saying he couldn’t belong to a party that favors healthcare reform that massively expands the role of government. Even though Griffith voted against the stimulus, cap-and-trade and healthcare plans, he clearly felt that guilt-by-party-association threatened his re-election.

6. Unemployment. Underlying voter unease with Capitol Hill is deep concern about unemployment. And that leads to a simple equation: Joblessness drives presidential approval ratings, and it’s those ratings that drive midterm congressional results. Despite a landslide win in 1980, for instance, unemployment approaching 11 percent drove Ronald Reagan’s approval ratings down to the low 40s in November 1982 when Republicans lost 26 House seats. (And only five narrow GOP victories by fewer than 50,000 votes kept the Senate even.)

As unemployment has risen this year, Obama’s approval has steadily eroded to around 50 percent currently. The White House says it doesn’t expect employment growth until the spring. And if even the economy begins to create jobs, the actual unemployment rate could still rise as the long-term unemployed begin to actively seek jobs again and thus start being counted by the Labor Department. It would take a year of 4 percent growth generating 200,000 to 250,000 jobs a month to bring the rate down to 9 percent. And even that would be twice as high as what Americans have been used to during the past two decades.

7. Discontent with Democrats. At the same time, the generic congressional ballot has shifted from a high single-digit Democratic lead to a low single-digit Republican lead as independents veer back to the GOP. What’s more, a recent poll by the liberal Daily Kos blog found just 56 percent of Democrats definitely or probably voting in 2010 vs. 81 percent of Republicans. Note that a new Rasmussen poll has Sen. Ben “60th Vote” Nelson, who won reelection in 2006 with 64 percent of the vote, down 61-30 in a hypothetical 2012 matchup vs. Nebraska Gov. Dave Heineman. Dems in both chambers will surely take note of those numbers. Indeed, the prospect of a terrible 2010 environment has already pushed some veteran Democratic legislators in competitive districts into retirement such as John Tanner of Tennessee and Brian Baird of Washington.

8.  Economic Damage. Even if the unemployment rate falls a full percentage point next year,  it may not help Democrats much. Americans only slowly regain their economic confidence after a deep recession. When Democrats lost the House and Senate in 1994, the economy had been growing steadily since the nasty 1990-91 downturn and unemployment had fallen sharply, though not fully to its pre-recession levels. Yet 72 percent of Americans at the time still thought the economy was “fair” or “poor,” according to Gallup.

As political forecaster Charlie Cook has noted, what happens in the House depends a lot on there being more Democrat retirements in competitive seats. The GOP needs a 40-seat pickup. The more Dem members that stick, the less likely a changeover. If the numbers start going north of 12-15, a warning signal should sound for Democrats. (In 1994, Democrat departures created 31 open seats, 22 of which were won by the GOP.)  For now, Cook sees a possible 20-30 seat pickup in the House for the GOP and four to six in the Senate. (Harry Reid, Blanche Lincoln and Chris Dodd look especially vulnerable). But Cook may be underestimating how the dreadful New Normal in the economy will create a New Normal in politics in 2010.

COMMENT

Some of this makes sense and some is the same ignorant, bipartisan ranting we need to get away from. O-BAM-I-GOTCHA and his bunch will lose…but I voted for them because Bush was a radical, war-mongering neo-con – clueless, asleep at the helm…I won’t make the mistake of voting for the dems again, but please, please, please, put someone up there who understands we need to get back to the simplistic beauty of the constitution, abolish the fed and IRS, and stop empire-building.

Posted by jay h. | Report as abusive

Why this may still be the American Century

Dec 29, 2009 18:31 UTC

The always fantastic Joel Kotkin lays out the argument:

Demographics

By 2030, all our major rivals, save India, will be declining, with ever-larger numbers of retirees and a shrinking labor force.  … By then, the U.S. will have 400 million people, which may be more than the entire EU and three times the population of our former archrival Russia.

Energy

In terms of energy resources, the U.S., combined with Canada, is the second richest region in the world after the Middle East. The country possesses vast resources of natural gas, about 90 years’ worth, as well as strong areas for wind power.

Food

America remains the world’s agricultural superpower, with the most arable land on the planet. With another 3 billion people expected on the planet by 2050, the U.S. should enjoy a continuing boom in food exports.

Military

The U.S. leads in military technology and, yes, our martial spirit remains a positive factor … Europe and Japan have taken themselves out of the military game, and it will be decades before China will be ready for a head-to-head challenge.

Innovation

There is no large country that comes close to the U.S. as an entrepreneurial hotbed (Taiwan, Israel and Hong Kong come close but are far smaller). The recent Legatum Prosperity Index showed the U.S. remains by far the largest generator of new ideas and companies on the planet.

Diversity

Over the past decade America has produced two African-American Secretaries of State and one President. America remains unique in its ability to absorb different races, religions and cultures, an increasingly critical factor in maintaining global preeminence.

COMMENT

The mantra that ethnic “diversity” is a factor in US global predominance has no basis in reality.

By 2050 at the latest, America will be majority non-white. Can anyone imagine Brazil as a superpower? Enough said.

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