James Pethokoukis

Politics and policy from inside Washington

How Obama redefines the ‘Chicago School of Economics’

Jul 22, 2009 18:35 UTC

Joel Kotkin writes a great, great piece for The American on why Red State economies have better long-term prospects than Blue State economies. But this excerpted hunk is especially insightful:

Many in the true blue states greeted Barack Obama’s election like the coming of a Messiah who would redress these serious problems.  … Yet hopes that Obama would emphasize such basic infrastructure now have been dashed. Instead, the stimulus has been largely steered to social service providers, “green” industries, and academic research.

This skewed allocation of resources reflects the administration’s roots in contemporary Chicago. It derives from a pattern of rewarding core constituencies as opposed to lifting up the whole economy.

The financial bailout reflects one part of this. Money lavished on bankers and lawyers, most of them in New York and Chicago, represents relief to what is now a core Obama constituency. Indeed the whole Troubled Asset Relief Program mechanism is being run by what Simon Johnson, a former chief economist at the International Monetary Fund, has described as a “wonderfully closed circle.”

This approach, notes University of Illinois political scientist Dick Simpson, comes naturally for an administration dominated by veterans of the Chicago machine. Politicians in the Windy City do not worry much about opposition—49 out of 50 aldermen are Democrats—and follow policies adopted by the small central cadre.

But machine politics do not necessarily work out so well for the rest of population. “The principle problem is that the machine is not subject to democracy,” notes Simpson, who remains hopeful for the Obama presidency. “There’s massive patronage, a high level of corruption . . . There’s a significant downside to authoritarian rule. The city could do much better.”

To be sure, there has been considerable gentrification in Chicago, as in many cities. Chicago’s “revival” also has been a classic case of blue-state economics, driven largely by a now fading real estate boom, the financial industry, a growing college and university population, and tourism. But overall, from the point of view of most middle and working class residents, Chicago’s political system has proved inefficient and costly. This can be seen in demographic trends that show Chicago as the only one of few large U.S. cities to lose population. At the same time, the middle class, particularly those with children, continue to flee to the suburbs.

Bad economy overwhelming Obama’s agenda

Jul 22, 2009 17:42 UTC

Just how much trouble is President Obama and his economic agenda in?  Allies will point to the president’s still-robust 55 percent approval rating, according to pollster Gallup, but that number has been declining steadily from a high of 65 percent in early March. (He’s actually a point lower than George W. Bush at similar points in their presidencies.) And while the House of Representives has passed historic cap-and-trade legislation, the bill seems to be going nowhere in the Senate and the president may have little to crow about at the December climate change conference in Copenhagen. Even his plan for a consumer financial protection agency looks like it’s in doubt. Then, of course, there’s healthcare reform, which Obama again will be making the case for during a prime-time news conference tonight.

But no matter how cleverly Obama makes his points or how skillfully he wrangles the Washington press corp, his efforts may be futile as long as unemployment continues to rise and sap American economic confidence. Here are the numbers that should worry team Obama: A recent AP-GfK poll found 54 percent of Americans think the country is on the wrong track, the same as in January and up ten points from mid-April. A recent Diageo/Hotline poll found 55 percent of American think the country is on the wrong track, the same as in early March and up 12 points from early June. A CBS poll has the wrong track number at 57 percent, up from 48 percent in early May and the same as in early March.

The trend is clearly not Obama’s friend, particularly with unemployment expected to continue to rise to at least 10 percent and stay elevated for some time. The outlook is dire enough that economist Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, has speculated that Obama might turn to extreme economic measures to juice the economy and his political fortunes: “We are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, that it would make perfect sense, for a country that always operates in its best interest — even if it may not be in everyone’s best interest — to sanction a U.S. dollar devaluation as a means to stimulate the domestic economy.”

That would certainly have the potential for worrying financial markets mightily. But as for now it’s tough to find much investor concern over Obama’s troubles or his bogged down agenda. The Dow has scored seven-straight winning sessions for the first time since April 2007, gaining nearly 10 percent over that span. With fear of a depression subsiding — see Larry Summers new favorite metric, the plummeting number of Google searches on “economic depression”, for evidence — political gridlock may again be good.


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Did the Blue Dogs just rollover on healthcare?

Jul 22, 2009 17:38 UTC

Pelosi seems upbeat, but Arkansas Democrat Mike Ross less so:

The Blue Dogs share the President’s goal of providing the American people with quality, affordable health care reform that’s deficit neutral, and we have put forth a number of substantive policy proposals over the past several months aimed at achieving this goal.

We are making progress; however, we have a long way to go. The Blue Dogs will continue to work constructively with the administration, Chairman Waxman and members of the House and Senate to produce a bill that we can ultimately support.

What healthcare reform might actually look like …

Jul 21, 2009 12:39 UTC

One Capitol Hill watcher sends me this on what a Democratic fallback position on healthcare might look like:

I think that a “compromise” plan looks something like an individual insurance mandate and some further coverage mandates/restrictions (like not allowing denial of coverage based on pre-existing conditions).  If they didn’t want to “fall quite that far back,” so to speak, they could couple such a plan with substantial subsidies for people up to 400-500% of the federal poverty level.  This would mean no “public option,” but it would still represent something the Democrats could call health care reform.

That kind of a plan would probably have some legs, assuming the cost/pay-fors weren’t an enormous problem.  … Many Republicans seem to have already conceded that an individual insurance mandate is acceptable, so I think that’s the route Democrats could use to get closer to their preferred destination.


I really can not understand what is the matter with he fed. they seem to think that by keeping the interest rates low that they are helping people . This ladies and gentleman is the WORST thing that can be done for the building trades and large buys.

who in this country have the most disposal income? I hope you got i right and that is seniors. and what do they spend ?? NOT their capital!!! They spend and give away there interest. so with this in mind WHO is benefiting from low interest?? The people that put us in this situation.
Please do not make us a Third Class Country . We now because of past policies now a Second Class Country.
Please do what is right for the country not Goldman Sachs

Posted by Dan Behan | Report as abusive

Where cap-and-trade and healthcare are heading …

Jul 20, 2009 17:49 UTC

While both healthcare and cap-and-trade look to be in various degrees of trouble, some savvy Capitol Hill watchers make this point to me: Democrats look at failure to do something about healthcare as an Extinction Level Event, with a failure on cap-and-trade also incredibly damaging, particularly with the Dem base.  House Speaker Nancy Pelosi told wavering Dems that a cap-and-trade failure was a dagger in the Obama presidency. She pushed them to the wall. Healthcare even more so.  Expect a full-court press in the Senate on both. At the same, either of those issues slipping into 2010 is fatal to their chances. The next five months may make or break the Obama presidency.


I hope they are both headed for the shredding machine where they deserve to be. Plus, I want the money back that’s been wasted on all of this unconstitutional hogwash!

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Another free-market fix for healthcare

Jul 20, 2009 14:21 UTC

I can tell you the pro-Obamacare Washington wonks I chat with are pretty down right now about the chance of “real reform” getting passed. And as the costs and inadequacies of Obamacare become more apparent, I expect to here more ideas like this one by economic analyst Ed Yardeni:

I think that the problem isn’t that health care costs too much. Rather, we provide it too cheaply. Insurance companies should probably charge higher copayments. Medicare simply gives health care services away to senior citizens without any limits on how many times a patient can go to see a doctor or go to the hospital for the same ailment. Some older folks jump from one doctor to another to get multiple opinions. Perhaps keeping electronic records might help to limit the over usage (and abuse) of our health care system. However, the government shouldn’t have access to our medical records.

We should consider a more radical solution to the Medicare problem. Privatize it! I propose that senior citizens should also be required to have coverage under private plans with the federal government reimbursing them for their premium payments. To insure competition, let them rather than the government select their health care insurance providers. It would be up to individuals to choose the best plan for themselves. The government shouldn’t set the premium fees, but let the market do so. The onus of rationing health care services for the elderly and the rest of us should fall on the insurance companies, which is where it belongs. The government shouldn’t be in the business of monitoring, approving, and allocating the health care needs of Americans.


I respectfully disagree with Rich G. AT&T didn’t decide to break the company into smaller parts, it was broken up for being a monopoly. It is monopolies that destroy free markets. Monopoly capitalism is marked by booms and busts.

I also disagree that free markets don’t keep costs down. They will do that–if the market is truly free. Right now, the health “care” business (more accurately the “health denial industry”) is controlled by two major groups: a handful of insurance companies that make fortunes by denying healthcare, and the AMA, a union that effectually limits the number of physicians available in the market. With limits on where you can get insurance and who provides actual care, there is no free market at all.

But “economic analyst” (I have other descriptions for him) Ed Yardeni provides a total non-solution. Making health care MORE expensive as he proposes and limiting access to health care will result in higher costs (as people put off getting care and end up in far more costly emergency rooms), more illness, less work productivity due to chronic and acute illnesses not receiving treatment, and both more deaths and shorter life spans. One wonders just how much Mr. Yardeni is getting paid by the health denial industry.

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The chances of a US debt default

Jul 17, 2009 18:00 UTC

This is one way of showing the change in America’s fiscal situation — what it costs to ensure against a debt default (via Brookings) using credit default swaps:


Two years into the credit crunch: a status report

Jul 17, 2009 14:30 UTC

Where is the US economy, some two years into the credit crunch (numbers gathered by David Rosenberg of Gluskin Sheff)?:


Ouch! CBO says Dem healthcare plan worsens budget picture

Jul 16, 2009 17:28 UTC

Is history repeating itself?  High-cost estimates by the Congressional Budget Office helped kill Clintoncare back in the 1990s. Now here is what Doug Elmendorf of the CBO said today about Obamacare:

In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.  And on the contrary, the legislation significantly expands the federal responsibility for health care costs. …  the creation of a new subsidy for health insurance, which is a critical part of expanding health insurance coverage in our judgement, would by itself increase the federal responsibility for health care that raises federal spending on health care.  It raises the amount of activity that is growing at this unsustainable rate and to offset that there has to be very substantial reductions in other parts of the federal commitment to health care, either on the tax revenue side through changes in the tax exclusion or on the spending side through reforms in Medicare and Medicaid.  Certainly reforms of that sort are included in some of the packages, and we are still analyzing the reforms in the House package.  Legislation was only released as you know two days ago.  But changes we have looked at so far do not represent the fundamental change on the order of magnitude that would be necessary to offset the direct increase in federal health costs from the insurance coverage proposals.

Obama’s self-defeating war on the wealthy

Jul 16, 2009 14:02 UTC

The push by the Justice Department, along with the Internal Revenue Service, to compel UBS  to fork over the names of some 52,000 American taxpayers with banking accounts in Switzerland may produce an important benefit for the Obama administration — or so it might think. How so? Those presumably wealthy 52,000 taxpayers, along with some two million other upper-income Americans, can be drafted to help pay for U.S. healthcare reform.

Under the $1.2 trillion plan passed by the Democratic-controlled House of Representatives, the wealthiest 1.2 percent of U.S. households would have to pay an additional $540 billion in taxes over the next 10 years via an income surtax of between 1 and 5.4 percent.

For the super-elite, those in the top 10th of 1 percent (and presumably the type of taxpayers who have Swiss bank accounts), that works out to an additional $280,000 a year in taxes on an average annual income of $2.3 million a year, according to the Tax Policy Center. If it wasn’t for those record earnings, office corridors inside Goldman Sachs would surely be overflowing with tears today.

Then again, maybe not. The wealthy have the means to manipulate tax laws to their advantage through various — sometimes outlandish — tax sheltering strategies. As Howard Gleckman of the Tax Policy Center puts it, ‘The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.’

And just as the ‘financial innovation’ of recent years took a terrible economic toll, so might this next wave. Not only is Uncle Sam unlikely to raise as much money as he expects — thereby forcing the government to push surtax rates even higher — but more and more capital allocation decisions are likely to be driven by tax considerations as opposed to economic return.

This is why tax reformers prefer lower rates with fewer deductions as a way of raising revenue. There is far less economic distortion that way. The Tax Reform Act of 1986, for instance, slashed the number of tax brackets from 14 to 2, winnowed the top marginal rate from 50 percent to 28 percent and eliminated many tax sheltering strategies. The House bill would increase the number of brackets to a post-1986 high of nine while raising the top rate to 45 percent.

Surely the Obama administration must know this sort of thing makes for terrible tax policy, though it would create more jobs for certified tax planners. As Obama himself wrote in the “Audacity of Hope”: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions — and did lead to the wasteful industry of setting up tax shelters.”

Faced with huge and growing budget deficits, the White House and congressional Democrats needed to pay for healthcare reform in the worst way. And that’s just how they did it.


Lets look at this another way. The government raises cigarette taxes. That’s good right?

Well, a funny thing happens. People decide they are going to smoke less or quit all together. Revenue drops. Yes, cigarette taxes pay for social programs.

Then what? Well you can’t raise taxes more, you can’t raise taxes on the company, so what next?

Nothing.. it ceases to be a profitable tax to pay for those social programs.

Same thing happens when you raise taxes on the wealthy, sure they will still continue to remain wealthy. They will simply find ways around the taxes, they will move to other countries, or decide to invest less. They can still be filthy stinking rich they just lose their incentive to spend more and get even richer!

And those making 2 million or more per year. Well, they simply make less than that. Does the wealth go somewhere else? Do the middle class benefit?


It goes to the lower classes that rely on social welfare. They simply remain consumers..they do not create jobs they maintain jobs.

Raise taxes on the rich, it trickles down to the middle class because the government eventually needs to find more sources of revenue.

Enjoy your money and freedoms while they last. I’m already poor by most peoples standards with no kids, and no real debt. But I fear for those who make it possible for me to make as much money as I do.