James Pethokoukis

Politics and policy from inside Washington

GM IPO gives little reason for celebration

Nov 18, 2010 17:25 UTC

Now you too can directly own a piece of Government Motors:

General Motors Co shares gained as much as 9 percent on Thursday as investors bet that the top U.S. automaker can make a lasting recovery after repaying a big chunk of last year’s government bailout with funds raised in a landmark initial public offering. The start of trading in GM shares represents one of the final steps in a blockbuster initial public offering negotiated by the Obama administration that raised $20.1 billion after pricing its common and preferred shares.

Obama administration officials said the strong market debut for GM showed they made the right choice in restructuring the auto maker with $50 billion in financing. “This is a bit better than people had been projecting. As to a year ago,  it’s not even in the same ballpark,” Ron Bloom, the U.S. Treasury official in charge of the GM investment told Reuters Insider. “A year ago, people said ‘you have no exit, you have no strategy. This company is not fixed.’”

The point is not whether government can revive, at least temporarily, a floundering company by sinking into it billions of taxpayer dollars and trampling hundreds of years of contract law. As with TARP, it’s all about opportunity cost and unintended consequences. What else could have been done with that money? How does it incentivize companies to treat risk? What sort of uncertainty does it create among business and bondholders? The answers: Much, recklessly and vast.


Very much agree. And add the trampling of bankruptcy law.

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Why 2011 will be the Year of the Tax Cut

Nov 3, 2010 17:20 UTC

American presidents usually win second terms, even if their parties suffer midterm blowouts. But President Barack Obama better not rely on history for a 2012 victory. To lift his political fortunes after Tuesday’s absolute shellacking — and those of the economy — he needs to work with incoming Republicans to do two big things: cut spending and cut taxes.  Here’s why:

1. Unless Obama actually desires to be a one-termer, he really has no other choice. Ronald Reagan and Bill Clinton both sailed to reelection despite suffering midterm setbacks, thanks to good growth and popular policies. When it’s one-and-done, as was the case with Jimmy Carter in 1980 and George Bush in 1992, it’s the economy that sends them packing. And that’s just the scary scenario emerging for Team Obama. The White House’s own forecasts don’t predict unemployment dipping below an average of 8 percent until 2013. Even worse, some of the hardest hit states — Florida, Michigan and Ohio – are big ones in the Electoral College that Obama needs to win again if he’s going to score another four years in the job. And all three just elected Republican governors.

2. Obama could stay the course. He could battle the GOP newcomers including their sizeable Tea Party contingent, pray for a boom and continue to push his agenda, such as capping carbon emissions, through regulatory agencies. But that’s a dead electoral end unless the economy perks up considerably (and immediately) and Republicans choose some incompetent, unelectable nominee. (As the midterms showed, candidate quality matters.) One of the clear midterm messages is that Americans have rejected the beyond-center-left, big government, redistributionist agenda. Exit polls said that some 60 percent of voters think government is doing too much. And voters in blue-state Washington rejected tax increases on the rich.

3. Voters say they want compromise. And there are deals Obama could potentially reach with Republicans that might generate jobs and reassure markets about America’s fiscal seriousness. Obama has already proposed letting businesses immediately deduct new capital investments. He could add cuts in corporate and payroll taxes and temporarily extend some or all of the expiring Bush tax cuts.  Both parties should also take a look at the Wyden-Gregg tax reform bill. In return, Obama could bargain for more infrastructure spending, especially if he agreed to suspend federal pay rules that raise the cost of government-funded construction projects.

4. But there might be even more opportunity on the spending side. In a bit of fiscal jujitsu, Obama could challenge the Tea Party folks to cut billions in corporate tax breaks and vote for any social insurance cuts recommended by his own deficit panel. And Obama must surely know that when advanced economies have reordered their fiscal houses by cutting spending, it’s often been under center-left governments able to pull a “Nixon to China” moment with interest groups.

It may not feel like it right now to the shell-shocked White House, but the Democratic election throttling might just help the president pivot to a second term.


I don’t understand, forgive me… Spending cuts reduce public treasure and public goods. Tax cuts also reduce public treasure and public goods. With all the negative momentum of global environmental crises on top of our own nation’s burst private-sector bubble, why is it that the republic now calls for reducing public treasure and public goods?

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Obamanomics to blame for historic Democratic midterm collapse

Nov 3, 2010 11:37 UTC

It wasn’t just the economy, stupid. The historic losses suffered Tuesday by Democrats in the U.S. midterm elections owe as much to the unpopular and off-point agenda of President Barack Obama as it does to high unemployment. A policy pivot might have limited the damage, but the White House failed to recognize the trouble until too late.

Of course, Democrats will understandably be tempted to blame the debacle almost entirely on the undeniably poisoned chalice George W. Bush handed them. The Great Recession was of a sort Americans hadn’t experienced since the one Franklin Roosevelt encountered. The two previous downturns were brief and job losses minor. Even now, Americans are as gloomy as they were at the downturn’s depths.

But if the American public was blindsided, so was the White House. It recklessly predicted unemployment would never reach 8 percent if Congress passed its $816 billion stimulus plan. The economic team was also dismissive, even through this spring, of the notion that the U.S economy would suffer the slow-growth aftermath that typically follows deep financial crises.

Still, the magnitude of Democratic losses – the worst drubbing in the House since the 1930s — certainly hints more at play than just economic frustration. In the 1982 midterms, for instance, Republicans lost just 26 House and zero Senate seats despite unemployment cresting at 10.8 percent. The damage was much worse in 1994 — Democrats lost 54 House seats and 8 in the Senate — when unhappiness over President Bill Clinton’s healthcare plan offset a growing economy.

Likewise, voters saw the passage of Obama’s healthcare reform, which helped spawn the Tea Party movement, as at best a distraction from job creation. To this day, as many as two thirds of Americans polled think the stimulus was mostly a waste of money. That might be an overly harsh assessment. But even the White House admits the plan’s “shovel-ready” spending took too long to implement. And instead of cuts in marginal tax rates or payroll taxes, Team Obama chose poorly structured tax credits.

Despite plunging polls, business complaints about regulatory uncertainty and populist rhetoric, and the stunning loss Ted Kennedy’s Senate seat last January, there was no major course correction. To the White House, it was all just a bunch of whining. It was only in September that the administration finally proposed a “second stimulus” of business tax cuts that were too little, too late to change the political or economic dynamic. The economy made a Republican win almost inevitable, but Obamanomics made it a wipeout.


shawngrggs – “The American public handed him arguably one of the worst economic situations in American history, and told him “fix it, NOW!””

The American public didn’t hand him anything. The economic situation that we’re in right now was created by the Govt not the public. The fact is, this is a country of booms and bust……it always has been and it always will be. That’s how free market enterprise works. You can’t be in a perpetual boom forever. At some point it has to go the other way. The problem with the Govt is they’re always trying to “fix” the problem by passing some enormous expensive piece of legislation that really does nothing but make doing business harder which results in less jobs being created and longer bust periods. If we would just let the busts happen and stop trying to fix everything with some ridiculous law we’d all be much better off.

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Obama’s Great Miscalculation and the midterms

Nov 2, 2010 18:51 UTC

Republican pollster Steve Lombardo nails it with this piece of analysis (via The Daily Caller):

1)     Democrats are in this situation mainly because of voter dissatisfaction with President Obama. This election is a referendum on Obama and his policies. While the economy is an enormous part of this equation (we will get to that next), people — and by that we mean swing voters: independents and “soft” Republicans and Democrats — voted for Obama because they thought he was a “different” kind of politician who would bring about “change.” As it turns out, he’s pretty much a conventional, big government, left-of-center politician. And he’s governed accordingly. There’s nothing wrong with that, but that’s not what people thought they were getting. According to the latest NBC/WSJ poll, only 32% of self-identified independents approve of the job Obama is doing, and his job approval among moderates is at 49% (this is lower than in past NBC/WSJ polls). A recent New York Times/CBS poll also makes clear the depth of this disillusionment. Among the voting segments that are currently “disappointed” with the Obama presidency: older voters (63% disappointed), college grads (60%), and those earning $30,000 to $50,000 (57%). Even 52% of voters aged 18-29 are disappointed with Obama.

2)     Our sense is that the administration and the president dramatically misread the economic downturn and its effect on the electorate. It is not just that the economy is bad, it is that Obama and his team gave little impression that they were trying to fix it. Look, we know they faced a huge challenge and were trying to cushion the downturn, but the focus on health care reform —combined with the poor reaction to the Gulf oil spill and other ambitious policy initiatives (the stimulus package, cap and trade, etc.) — created a muddled narrative. While the economy is what it is, perception is reality, and by focusing on other things the president looked out of touch and arrogant. At this point, “hope and change” is to Obama what “Mission Accomplished” was to George W. Bush. If you promise “hope and change” — the implication being that things will get better — and things, in fact, get worse, you get punished, and that is what will happen today.  The problem for the president is that the economic situation is abysmal and no amount of saying that things are “improving” can change that.

Me: I would also add that it is not just the perception of Obama’s policies that is hurting Democrats, but the policies themselves: a) the stimulus was poorly designed; b) healthcare, FinReg and the fate of the Bush tax cuts created vast uncertainty; and c) all the badmouthing of business created a bad vibe about where Obama’s head was at.


High expectations, thats the killer that will take Obama, all he had was communication skills, his charm and charisma, when it comes to economics, its not easy even though you know sociology, political science and if you can make econometric models, how robust is your soultion, where are your spends? where are you injecting stimulus money.
it was easy to punish republicans by not voting for them for loosing your job, does that mean someone can create jobs? the choice is between the devil and the dead sea now.

Why is American government responsible for all oil spills in the whole world, cleaning up is international responsibility, why is’nt China spending enough money on its spills then? why can’t the international community question China?

Arvind Pereira

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Could Obama’s re-election plan be to devalue the dollar?

Oct 28, 2010 15:02 UTC

Will President Obama get re-elected in 2012 if his party suffers a crushing midterm defeat? His political team likes to point to the example of Ronald Reagan. Congressional Republicans were crushed in the 1982 midterms, but the Gipper cruised to victory two years later.

Of course, the “Morning in America II” scenario depends on a fast economic recovery. Unemployment fell from 10.8 percent in November 1982 to 7.2 percent in November 1984. GDP growth was 4.5 percent in 1983 and 7.2 percent in 1984.

But most economic forecasts don’t anticipate such a boom in America’s near future. More likely is trend growth — about 3 percent or so — with unemployment still over 8 percent by the end of 2012. At best, those numbers suggest a very close presidential contest. And current polls show the president will have a tough time again winning such electoral-vote rich states as Ohio, Michigan, Florida, Indiana, Pennsylvania, Wisconsin and North Carolina.

Obama could try to emulate Reagan by proposing a massive tax cut, but that seems unlikely given the administration’s belief that America is under-taxed right now.

But there is another way, although it is amazingly risky. A Bloomberg story, using a simulation run by Macroeconomic Advisers predicts a 10 percent decline in the dollar in the first six months of next year would do the following:

1. Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent.

2. In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points.

3. Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast.

There you go, Morning in America II, thanks to the weak dollar — unless of course the dollar starts plunging out of control, boosting inflation and creating a panic.

Treasury Secretary Timothy Geithner says he supports a strong dollar — although he wants it to weaken vs. the yuan — but does the White House political team share that view? And what about Ben Bernanke? Here is an interesting bit from a recent Reuters story:

While U.S. Treasury Secretary Timothy Geithner reiterated that the United States supports a strong dollar at the G20 meeting, there were few takers for that. “It is one thing for the Treasury to say that, but then the Fed holds all the ammunition and when it is set to print more money, the dollar will remain a weakened currency,” said Jane Foley, senior currency strategist at Rabobank.


Of corse Obama is trying to devalue the dollar, he said he wanted too before he was elected. He wants to bring us down to third world level, so that the world is more fair. It doesn’t matter to him, that we the people are paying for every cent he devalues the dollar by. It is the great hidden sales tax in the world, and Obama will try to ake credit for any phoney statistical improvements caused by what he and the fed are doing, while we all have and will suffer for it.

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Obama deficit panel partying like it’s 1986

Oct 25, 2010 14:19 UTC

The WSJ says President Obama’s deficit panel is looking at cutting various tax breaks — also known as “tax expenditures” — as a way of reducing the budget deficit:

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.

The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

A few thoughts here:

1.  Lots of this stuff distorts markets, particularly in housing and healthcare. We get too many resources devoted to building McMansions and giving workers gold-plated health plans.

2.  So I am all for reducing/phasing out hundreds of billions in these tax breaks in a 1986-style tax reform bill.

3. But at the same time, we should be reducing marginal tax rates. The code should be simpler, broader and flatter.

4. And only by reducing marginal rates, at least somewhat, would such a plan ever pass.

5. In fact, it took a deep cut in marginal rates to get the 1986 reform done. Individual taxes went down, business taxes went up, though many CEOs didn’t mind so much since the system was simpler.

6. Take another look at the Wyden-Gregg plan for tax reform, since it may be a model for the panel.

Maybe Obama should have pulled a Christie on infrastructure stimulus

Oct 22, 2010 19:30 UTC

Cause it really hasn’t worked out so well, as The Economist outlines.  The magazine criticisms are as follows:

First, and most important, a relatively small share of the bill was actually devoted to infrastructure. But even on the broadest definition of the term, infrastructure got $150 billion, under a fifth of the total. …Just $64 billion, or 8% of the total, went to roads, public transport, rail, bridges, aviation and wastewater systems.

Second, hopes for an immediate jolt of activity were misplaced. … By October 2009 even the fastest programs—those under the highway and transit headings—had seen work begin on just $14.3 billion-worth of projects.

Meanwhile the bill’s most notable project, high-speed passenger rail, threatens to become a debacle.  … Freight companies worry that new passenger services will simply increase congestion. Any new rail service, meanwhile, is unlikely to be particularly fast. The Recovery Act dedicated $8 billion for high-speed trains, a sizeable sum but not enough for any train that is actually high-speed.

Me:  OK, so the infrastructure plan wasn’t the greatest. Also, the tax “cut” portion of the plan was poorly structured. Is is any surprise that the US is looking at a continuation of the New Normal slow-growth, high unemployment scenario?

Is the Democratic comeback fizzling?

Oct 19, 2010 17:09 UTC

Numbers from Gallup seem to say it is.

Gallup’s tracking of the generic ballot for Congress finds Republicans leading Democrats by 5 percentage points among registered voters, 48% to 43%, and by 11- and 17-point margins among likely voters, depending on turnout. This is the third consecutive week the Republicans have led on the measure among registered voters, after two weeks in September when the parties were about tied.

For Republicans to lead, or even be at parity with Democrats, on the generic congressional ballot indicates they are in a good position to win a majority of House seats in the upcoming elections. This is because of Republicans’ typical advantage in voter turnout, which in recent years has given that party an average five-point boost in support on Election Day.

If the elections were held today and roughly 40% of voters turned out — a rate typical in recent years — Gallup’s Oct. 7-17 polling suggests Republicans would win 56% of the vote — 8 points greater than their support from registered voters, and 17 points ahead of Democrats, at 39%. If turnout is significantly higher, Republicans would receive 53% of the vote (a 5-point improvement over their registered-voter figure), and the Democrats, 42%.


A decade-long dollar disaster

Oct 19, 2010 15:46 UTC

They’re calling The Oughts a Lost Decade. Yet how could that possibly be? The experts keep telling me a weak dollar brings prosperity. But look at this chart from Carpe Diem:


A bank tax? Really?

Oct 18, 2010 16:36 UTC

I just did a CNBC  spot debating whether robust banks profits should spur new efforts to tax them. Here were my talking points:

1. My Hill sources tell me the bank tax is not going to happen, at least not the Geithner version.

2. That being said, Dems will surely raise it again both as a way of paying for high-end tax cuts and a way of making banks less reliant on short-term funding. The whole idea might also be coupled with a transaction tax.

3. The TARP rationale for the bank tax has collapsed with banks paying back their bailout funds.

4.  What banks do need to worry about is a future bank tax that would pay for Fannie and Freddie losses. There are Republicans who would vote for that.

5.  Is is a good idea? Given all the uncertainty raised by Dodd-Frank, do we really want to add a punitive bank tax? To begin with, this idea came from David Axelrod, not Tim  Geithner or the Obama econ team. And how would it add one decimal point to GDP or create one job?