James Pethokoukis

Politics and policy from inside Washington

Zandi: Unemployment headed to 10.5 percent

Oct 12, 2009 13:44 UTC

Moody’s Economy.com economist Mark Zandi likes the stimulus (via Fox News) but still thinks unemployment is headed higher. In his own words:

10.5 percent is a very reasonable expectation for the peak in unemployment, but I think it would be measurably higher if not for the stimulus package. The stimulus in my view is working. It’s just gotten overwhelmed by the magnitude of the economic crisis.

Which, of course, brings us to the idea of a second stimulus.  Marc Ambinder gives the rundown:

1) Extend the first-time home buyer credit

2) Create a new credit for companies who hire

3) Extend jobless benefits in every state, or just particularly distressed states, or every state but even more in particularly distressed states.

4) Give tax refunds to struggling companies

5) Institute a payroll tax holiday

6) Pass another stimulus but call it something like “State Rescue Plan” and send most of the money to state governments

How Obama can earn that Nobel Peace Prize

Oct 9, 2009 17:51 UTC

The Nobel Committee in Norway says it awarded President Barack Obama the 2009 Peace Prize for “his extraordinary efforts to strengthen international diplomacy and cooperation between peoples.” (Congratulations, Mr. President.) In particular, the committee noted Obama’s multilateral approach on the issues of climate chance and nuclear disarmament.

But where has the president been when it comes to using diplomacy and cooperation to promote global trade, which is essential to global peace and prosperity? Given the infamous role of protectionism in the Great Depression, it’s no surprise that open and expanded trade has been at the core of the post-World War Two economic order, particularly during the past two decades.

The Great Recession, though, has shattered that consensus. An analysis by economists Barry Eichengreen and Kevin O’Rourke has calculated that “world trade is falling much faster now than in 1929-30.” Paul Krugman says trade “has fallen through the floor in a way that it literally never has before, including in the Great Depression.” Global Trade Alert, a trade watchdog group with links to the World Bank, found at least 121 protectionist measures had been implemented by G-20 nations during the past year.

Just of late, the EU imposed anti-dumping duties on steel pipe from China, while Australia may impose ownership limits on foreign buyers of big companies. “So far, traditional trade protectionism has been a low-grade fever,” said World Bank President Robert Zoellick said in a recent speech. “But the temperature is rising.”

And actions by the Obama administration and Congress show that America is hardly immune. Indeed, they have been spreading the disease. Among the protectionist outbreaks: The “Buy American” provisions in the $787 billion stimulus package, the blocking of Mexican trucks from U.S highways, the G.M. and Ford bailouts, inaction on pending free-trade agreements with Colombia, Panama and South Korea, tariffs on Chinese tires.

An American administration that seems disinterested in free trade? “You can drop the word ‘seems,’” says Bruce Josten, head of governmental affairs for the U.S. Chamber of Commerce.

Looking for an explanation? Here’s one: Bad economics makes for convenient politics. Since the Obamacrats might not be able to deliver the top two items on Big Labor’s wish list — reopening the North American Free Trade Agreement and passing rules making it easier to organize workplaces — they’re giving union supporters just about everything else.

Obama’s political advisers may not understand the importance of free trade, but his economic ones do. Obama should listen to them and begin to lead. Give Congress the greenlight to pass the free-trade agreements with Colombia, Panama and South Korea. Commit to getting the Doha trade round concluded within a year. The centrist Democratic Leadership Council also suggests that Obama reconnect trade to national security by asking Congress for a broad long-term waiver of tariffs for low-income countries and large majority-Muslim-majority states. Instead of increasing boosting aid to Pakistan, for instance, why not eliminate $360 million a year in tariffs on its exports?.

If Obama did all that, not only would he actually be worthy of the Peace Prize, but probably the Nobel Prize for Economics as well.


The entire NOBEL PEACE PRIZE COMMITY should resign in shame they have given it to a tyrant,despot and communists liar OBAMA

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A windfall profits tax? Why won’t the 1970s stay dead?

Oct 9, 2009 13:45 UTC

Apparently there is no idea bad enough that it can’t be resurrected by desperate politicians, as veteran Capitol Hill watcher Pete Davis notes at the must-read Capital Gains and Games blog:

This morning at a closed House Democratic caucus, a proposal to impose a windfall profits tax on health insurers to help pay for health reform gained support.  No details were presented, but the politics were right as numerous members emerged to endorse the idea.  Some members said as much as $100 b. could be raised over ten years.  It’s doubtful the Senate could pass it, but this is definitely a shot across the bow of health insurers.

The last windfall profits tax on oil, actually an excise tax, was enacted on April 2, 1980 as price controls were phased out.  It was repealed on August 23, 1988.  It was projected to raise $393 b. based upon oil price assumptions that proved so incorrect that it only actually raised $80 b.  On a net basis, after taking into account income tax deductions and lower receipts from the sale of oil from federal properties, the windfall profits tax only raised $38 b.  To say the windfall profits tax failed to achieve its objectives is an understatement.  This Congressional Research Service report provides the evidence.

Stimulus vs. Unemployment

Oct 7, 2009 20:50 UTC

Correlation isn’t necessarily causality. Then again



We’ll have November’s numbers in a few days.

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Why the GOP shouldn’t embrace calls for a VAT

Oct 7, 2009 18:00 UTC

You can add New York Times economics columnist David Leonhardt to the parade of liberals, Democrats, Obama allies and fellow travelers — such as John Podesta, Nancy Pelosi, Paul Volcker, and Robert Rubin — calling for higher taxes, preferably a value-added tax.

But Leonhardt goes those folks one better in his new column. He extensively quotes conservative (and controversial) economic analyst Bruce Bartlett, a VAT proponent, who says Republicans are no longer credible on economic policy. That is, of course, another way of saying Leonhardt no longer thinks the GOP or conservative economics (hardly the same thing) are credible, assuming he ever did. And that seems unlikely given the tone and substance of his column.

Yes, let’s talk about credibility and start with a few howlers by Leonhardt:

1) “Most Democrats now acknowledge the central idea of supply-side economics: tax rates matter.” Have Democrats really conceded this point? Have they accepted the necessity of the Reagan supply-side tax cuts back in the 1980s? Doubtful. President Obama, for instance, has stated that he doesn’t think the high, unindexed-for-inflation tax rates of the 1970s were a disincentive to work, savings and investment. He concedes only that they may have “distorted” investment decisions by encouraging people to seek out tax-shelters. Not surprisingly, the Obama tax cuts were typically Keynesian, short-term and consumer demand focused.  The job tax credit that the White House is considering would be more of the same.

(And I’ve lost count of the number of times I’ve heard Democrats and liberal economists get wistful about the 1950s and its 90 percent top marginal tax rate. These also tend to be the same folks who credit the 1980s economic boom to falling oil prices, Paul Volcker’s inflation fighting, Jimmy Carter’s deregulation and typical cyclical rebound after a deep recession. In short, every possible explanation other than Reagan’s tax cuts.)

2) “Taxes are supposed to rise as a country grows richer.” Ah yes, Wagner’s Law, named after 19th century economist Adolf Wagner. Smart guy. Except that Americans decided to break Wagner’s Law starting in 1978 with the property tax revolt in California and deep cuts in the national capital gains tax rate, followed by the Reagan tax cuts. You might say that Laffer’s Law (as in Arthur Laffer) and the experience of the 1970s superseded Wagner’s Law by demonstrating how high taxes rates can choke economic growth and productivity.

Wagner is probably correct that richer societies demand more services, but who says that government has to provide them? They can be privatized, such as Indiana did with its toll road. And there is scant evidence that American desire higher taxes, as evidenced by recent election results in California (voters rejected higher taxes) and little support for higher energy taxes.

3) “But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.” Or the government could cut spending. Pushing back the retirement age on Social Security and tweaking its benefits formula turns a $5 trillion present-value deficit into a $5 trillion surplus, for instance. That’s just one idea. It is not an unalterable, incontestable reality that government spending cannot be reduced.

Give voters a choice between a) more government programs and a 33-50 percent increase in their tax burden and b) low taxes and free-market approaches to problems like healthcare. Let’s see which they choose.

And as far as the impact of tax increases on economic growth, let me quote a paper co-written by Christina Romer, chair of Obama’s Council of Economic Advisers: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.” There you go.

4) “One of the country’s two political parties has no answer to an enormous economic issue — the fact that the federal government cannot pay for its obligations.” Must have missed the memo on how Democratic healthcare reform solves America’s deficit problems since, at best, the various plans are only roughly deficit neutral over the next decade. Also, Democrats have recoiled at the idea of taxing healthcare plans to pay for expanded coverage, an idea that many economists say also is necessary to reduce overuse of pricey, premium medicine.

And recall how Democrats harpooned Republican attempts to reform Social Security during the Bush administration, with many also refusing even to acknowledge that the system was in crisis.

Not that Republicans have much to crow about when it comes to spending. The GOP defense of out-of-control Medicare spending is completely political, as was the Bush administration’s decision to expand Medicare without paying for it.

Bottom line: Ultimately what tax-hike proponents fail to persuasively argue is why they believe that once government had access to greater revenue, especially via a VAT, it wouldn’t just spend the additional dough?

Americans know how that game works.

Moderate Democrats like Sen. Mark Warner have made the case that unless spending is cut and government reformed, big tax increases are fantasy policy. That’s right. First cut spending, then raise taxes if absolutely necessary.


Thank you for providing your perspective.

Here is a recent action alert, from Americans for Tax Reform, regarding this issue:

http://www.atr.org/tell-congress-dont-wa nt-vat-tax-a3991

VAT attack! More on Obama, Pelosi and the value-added tax

Oct 7, 2009 11:14 UTC

When you start looking for signs of the VAT virus, you start seeing them everywhere. Here are some excerpts from Howard Gleckman over at TaxVox, the blog of the Tax Policy Center:

I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.. … Urban’s Bob Reischauer and Rudy Penner (both former CBO directors), American Enterprise Institute Congress-watcher Norm Ornstein, TPC co-founder Len Burman, and international economist Mike Mussa agreed that the depths of the medium and long-term problem can’t be overestimated. …

Mussa, who spent a decade at the International Monetary Fund and is currently a senior fellow at the Peterson Institute for International Economics, figures it could be years before overseas investors turn bearish on the U.S. In part, he says, that’s because net foreign lending has actually fallen in the past two years—their huge increases in investments in Treasury paper have been more than offset by shrinking portfolios of private debt.

But that won’t last. Once the economy begins to get back on track, private capital and government will again compete for the same foreign money—bad news for everyone seeking funds.

Is there any way out? Ornstein sees little chance that a hyper-partisan Congress will confront the budget crisis in the absence of a financial market crisis, or even in the face of one. Interestingly, Burman, Mussa, and Penner think that when the fix finally comes, it will include a Value-Added Tax. Penner calls it “almost inevitable.”

Then there is this analysis by Heritage of the costs:

Just a 1 percent VAT on all goods and services in the economy would raise $63 billion for Congress to spend each year. Some suggest the VAT rate should be set as high as 20 percent. At that rate, a VAT that covers all goods and services in the economy – including food, clothing, housing, and health care – would collect an additional $1,260 billion a year and cost every U.S. household $10,680 annually.

Even if Congress passes a VAT that has a rate of just a few percentage points, it would likely lead to higher rates in the future. Evidence from other countries that already have VATs show once it is on the books the rate tends to rise over time.


Question. How does the VAT affect the states Sales Taxes? Is it part of the states sales tax or a different tax all toghether?

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Obama and the VAT: Now it’s Pelosi’s turn

Oct 6, 2009 17:12 UTC

You can add House Speaker Nancy Pelosi to the group of Democrats or Obama allies (John Podesta, Paul Volcker, Roget Altman) calling for a value-added tax. (I predicted all of this days ago.) Here is Pelosi (via The Hill):

Pelosi, appearing on PBS’s “The Charlie Rose Show” asserted that “it’s fair to look at” the VAT as part of an overhaul of the nation’s tax code.

“I would say, Put everything on the table and subject it to the scrutiny that it deserves,” Pelosi told Rose when asked if the VAT has any appeal to her.

The VAT is a tax on manufacturers at each stage of production on the amount of value an additional producer adds to a product.

Pelosi argued that the VAT would level the playing field between U.S. and foreign manufacturers, the latter of which do not have pension and healthcare costs included in the price of their goods because their governments provide those services, financed by similar taxes.

“They get a tax off of that and they use that money to pay the healthcare for their own workers,” Pelosi said, using the example of auto manufacturers. “So their cars coming into our country don’t have a healthcare component cost.

“Somewhere along the way, a value-added tax plays into this. Of course, we want to take down the healthcare cost, that’s one part of it,” the Speaker added. “But in the scheme of things, I think it’s fair look at a value- added tax as well.”


Actually a combination of Soylent Green, Logan’s Run(the old are expendable), Brave New World (social conditioning and population control and 1984 (doublespeak and History if Bunk). I feel like I’m trapped in Room 101.

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Is America stuck with high unemployment?

Oct 5, 2009 20:02 UTC

Is there a “new normal” for the American labor market? Are the days of an unemployment rate of just 4 to 5 percent a thing of the past?

That is the contention of some economists who see the sharp rise in joblessness during this recession as a warning sign of structural changes in the job market.

Yes, the U.S. unemployment rate of 9.8 percent is as high as it’s been since June 1983. And if you add in discouraged workers and those working part-time who would prefer a full-time job, the unemployment rate is 17 percent.

But it’s not just that unemployment is high. It’s that it’s far higher than what economists would have expected given the depth of the downturn.

The current unemployment rate is 5.4 percentage points above the nadir of the previous expansion. (During the terrible 1981-82 recession, by contrast, unemployment rose just 3.6 percentage points, although the peak was higher at 10.8 percent.)

According to an economic rule of thumb called Okun’s Law, which analyzes the relationship between unemployment and economic growth, peak unemployment should have been more like 8 percent. Indeed, that was the White House forecast at the start of the year. If Okun’s Law no longer works, that would be a sign of a tectonic shift in the labor market.

As would the findings of Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics. After a sector-by-sector analysis of the U.S. economy, he concluded that such industries as finance, retail trade, publishing and broadcasting are suffering from structural job losses that won’t likely turn around with an expanding economy.  What’s more, the employment share of industries seeing net structural employment losses during the current cycle is 36.2 percent, the highest level since the early 1950s.

And the special skills of workers from those sectors may be mismatched for higher-potential industries like healthcare and education. Once fiscal and monetary stimulus abates, Kirkegaard concludes, “the U.S. labor market is in for a long, hard slog.”

America’s new natural rate of unemployment may be more like 7 percent rather than roughly 4.5 percent. If so, then Kirkegaard’s policy recommendation of new spending on worker retraining is probably a smart one.

Then again, the U.S. economy and its marvelously flexible labor market have shown a knack for dealing with structural change without the government. Until the financial meltdown, the unemployment rate was below 5 percent despite the disappearance of 3.5 million manufacturing jobs during the decade to offshoring and

To JPMorgan Chase economist Jim Glassman, that performance “demonstrates that permanent job losses don’t have to stand in the way of bringing unemployment back down.”

Moreover, the high U.S productivity rate is a long-term plus for the labor market because it shows America’s innovative capabilities remain robust.

Not that government investment in job training, as well as infrastructure and basic research aren’t important as well. Reducing an onerous corporate income tax is also critical.

The deep resilience of the American economy may surprise the pessimists.  But we won’t know for some time. The unemployment rate typically peaks around 18 months after a recession concludes. So if the current downturn ended in June, we will be well into 2010 before we have a firmer feel on whether the “new normal” is here to stay.



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Obama, the Un-Reagan when it comes to the dollar and stocks

Oct 2, 2009 19:12 UTC
David Goldman notices the tight relationship of the dollar and the stock market, comparing it to the Reagan years.
We have only had one period in which the dollar and the stock market were so correlated, and that is in 1983-1984, the beginning of the great Reagan stock market rally. The world bought the dollar and sold the US economy, before the Mundell twist (tight money and lower marginal tax rates) kicked in and the Reagan recovery began. Now we have the opposite: The dollar is selling off in tight correlation with rising stock prices, again with rising stock prices.
Think of Obama as the un-Reagan: rather than a monetary squeeze hurting stocks, monetary easy is helping stocks, as the world goes to the great American fire sale assets. We’ve had an un-rally, and now it’s going undone. … This is a unique situation: never before has the US stock market traded as if it were a banana-republic equity market reprices to the dollar. Now the stock market is repricing to a basket of alternatives to the dollar. That doesn’t spell the end of the dollar as a reserve currency, at least not for the foreseeable future. As former Fed chairman Paul Volcker told Charlie Rose last night, there’s no alternative to the dollar. Bt that’s for now. Keep it up, and the world will eventually find a substitute for the dollar.

Wake up America,

your president is doing a photo op with DAVID LETTERMAN,

and EVERY NEWS CHANNEL for another photo op,

and now hes in Copenhagen to run for the Olympics with OPRAH WINFREY.

Lost the Olympic bid, spent 3 million of YOUR MONEY.


Not for me thank you very much!

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How’s the private sector doing?

Oct 1, 2009 17:32 UTC

Not so good. As this GDP chart from my pal Donald Marron shows:



Unemployment is rising.

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