James Pethokoukis

Politics and policy from inside Washington

Will Obamanomics slow the economy?

Sep 20, 2010 16:15 UTC

These two charts pretty well sum up one version of the economic impact of the White House tax plan — such as raising high-end tax rates — at least according to a computer model run by the conservative Heritage Foundation. You can disagree with the modelling, I suppose. But I am not sure any model would show higher taxes boosting the economy right now.

obamatax2

obamatax

COMMENT

the destruction of the u.s. in the making , he is doing what no al qaida ever could .

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Ryan & Christie, the GOP’s Dynamic Duo

Sep 13, 2010 12:45 UTC

Meet Paul Ryan and Chris Christie, the GOP’s dynamic and dangerous duo. One is the author of “A Roadmap for America’s Future,” a bold blueprint that shows policymakers how they can shrink entitlement spending while also growing the economy. The other is the Garden State’s chief executive and YouTube sensation who’s implementing his own roadmap in a blue state drowning in red ink. Both are fighting back hard against the idea that government spending can’t be cut and thus taxes must be raised in order restore America’s long-term fiscal solvency.

Now this is the worst sort of heresy to the liberal economic intelligentsia — and mainstream media — who all pretty much belong to the cult of Adolph Wagner, a German economist who died in 1917. Wagner’s Law basically says that as a nation gets wealthier, its citizens demand more social services and bigger government. As a result, it’s far easier for government to raise taxes than cut spending. Not surprisingly, Wagnerians are enthusiastic supporters of layering a value-added tax onto the current U.S. income tax system.

Peter Orszag, the just-departed White House budget chief, is an obvious Wagnerian. He told CNN over the weekend that America cannot afford the Bush tax cuts of 2001 and 2003. None of them. Not the ones for the rich (and entrepreneurs and investors). Not the ones for the middle class. They all have to go, every last smidge of them. “We, unfortunately, can’t afford the tax cuts over the medium and long term,” Orszag said on CNN’s “Fareed Zakaria GPS” program. “We face too large a deficit out in 2015, 2018, 2020.”

Really? Really? Now let’s say all the tax cuts were permanently extended — Orszag’s nightmare scenario. According to Orszag’s old pals at the Congressional Budget Office, federal tax revenue would be 18.6 percent of GDP in 2020, 19.2 percent in 2035, 19.8 percent in 2050 and 22 percent in 2080. In other words, even with all the tax cuts extended, government revenue would still rise well above its historical average of roughly 18 percent since World War Two.

Instead, it’s historically unprecedented government spending that’s behind the projected debt explosion. As the CBO itself puts it:

As a result, revenues would grow only slightly faster than the economy, equaling 22 percent of GDP by 2080. Slowly growing revenues combined with sharply rising expenditures would create an explosive fiscal situation. Under the spending and revenue policies incorporated in this scenario, federal debt would surpass 100 percent of GDP in 2023 and exceed 200 percent of GDP by the late 2030s.

And although the Wagnerians think they are marching along with History, they somehow seem to have missed a generation of growing American skepticism about the size and scope of government, beginning with the Reagan Revolution in the 1980s. More recently, there’s been widespread revulsion at the Obama spending orgy and his monstrous deficits, evidenced by tea parties and polls today and perhaps by vote totals in November.

And the political personification of this revolt: Ryan and Christie. But for the Wagner cultists, these heretics just don’t compute. How can they be America’s fastest-rising political stars by preaching such a different truth — a message of smaller government fully in line with America’s deep values of self-reliance, private enterprise and entrepreneurism? For the Wagnerians, however, Ryan and Christie are like a nasty computer virus that threatens to overwrite America’s liberal operating system.

But the two rebels are putting the lie to such dogma. They are lighting a different way forward, one to a more fiscally sustainable and prosperous U.S. economic future.

COMMENT

I find it funny how those who obviously LOATHE Republicans, and for the most part conservative America, never think that the majority of the mainstream media is not obviously seen as biased towards the Democrat and the agenda of the left. I guess that’s why they are doing so well these days.
First point : BOTH PARTIES ARE HISTORICALLY AT FAULT!!! So get off your high horses. Unfortunately every huge entitlement program we have has been initiated by one party, and that would be the Democrats, and THAT is what this article is discussing. The difference is conservatives are advocating a serious change, and the left is advocating more of the same.
What we have here is just a stark contrast of opinions on the best way to get this nation back on track financially.
YOU believe that the more people make, the more government should take in order to fund a massive amount of entitlements to give to other people. That, simply defined, is what the writer was talking about with Wagner’s theory. You all seem to believe this because somewhere along the road you have convinced yourselves that successful people are bad people who live like Scrooge McDuck, and sleep on pillows of money. You also seem to hold some silly notion that poor people exist because rich people have sucked up all the money before other people have gotten a chance to get their shot at it. If the creation of wealth creates poor people, then you also have to believe that the destruction of wealth would make less poor people.
WE (conservatives) believe in the same things the founders believed in, and what the country used to stand for. We believe it is the responsibility of the INDIVIDUAL to pursue their own ambitions to better their lives. Not to have an over powering government distribute the opportunity. Government cannot distribute the “American Dream”, it can only be earned through hard work, risk, and sacrifice! We do not HATE successful people. We do not believe in class warfare, pitting one group against another. We do not believe in a “class system” to keep people in their place. We believe that every person who was born, or legally immigrated to this country, has the same level of opportunity to succeed, and they have the same level of opportunity to be useless bump on a log. It’s their own decision. The only thing that REALLY stands in the way of person’s success is the intrusive overbearing weight of a huge government.

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7 things you need to know about Austan Goolsbee as CEA chair

Sep 10, 2010 18:31 UTC

Here is what I know, or what I think I know, about President Obama’s pick of Austan Goolsbee to be the new head of his Council of Economic Advisers:

1.  Don’t expect him to recommend any big tax cuts. Goolsbee is extremely skeptical of supply-side tax arguments, calling the Laffer Curve a “fleeting figment of economic imagination.” Indeed, he may have influenced Obama himself, who in his 2008 book, “The Audacity of Hope,” says he doesn’t buy the theory that the Reagan tax cuts changed investment or labor incentives. He does, however, think it would not be a bad idea to lower corporate tax rates if there were also fewer credits and deductions.

2. Unions won’t like the pick. Recall that during the 2008 campaign, Goolsbee was rumored to have whispered to Canadian officials that Candidate Obama had no intention of reopening the North American Free Trade Agreement.  In fact, Goolsbee will likely be another pro-trade voice in the administration. He was also against the Chrysler bailout, to the displeasure of the UAW.

3. He thinks “creative destruction” is generally good for America. As he wrote in 2007:

Perhaps the greater amount of uncertainty and churn in the world economy in the 1990s is the new norm. Perhaps the 21st century will continually favor those who adjust best to changes.  … ‘But that is, of course, the paradox of the American position. We hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

4.  Wall Street probably isn’t a fan, either. When Goolsbee won the 2009 “DC’s Funniest Celebrity” contest, he got a big laugh when he called the big banks “ingrateful bastards” who “bankrupted your gradma.”

5. His promotion is one more reason for Larry Summers to leave at year end. The  famed Goolsbee wit may be lost on Summers, the director of National Economic Council. The two notoriously clashed over whether to bail out Chrysler (Summers pro, Goolsbee con), with Summers eventually trying to block Goolsbee’s access to the president — as he also did with Goolsbee’s now-predecessor, Christina Romer.

6. His selection could be a sign of Obama moving to the center in 2011. Resignations are allowing Obama to gradually reshape his economic team. In addition to Goolsbee, he will have a new budget chief in deficit hawk Jack Lew, assuming U.S. Senate confirmation. If Obama plans on spending the rest of his term seeking deals with a likely more heavily Republican Congress, these two picks make a good start.

7. He will say at least one thing that will make Robert Gibbs wince. During Goolsbee’s famous comedy bit, he joked that the White House took its ideas from the “old textbooks, Karl Marx and Trotsky.” Or maybe Goolsbee’s old research will accomplish the trick, such as this paper which says R&D tax credits, like the one Obama wants to permanently extend, mostly just raises the wages of scientists.

Me: All that being said, the personable Goolsbee is about the best pick Obama could have made from the job given the center-left pool of potential candidates.

Goldman Sachs on Stimulus 2.0

Sep 8, 2010 13:58 UTC

The Goldman Sachs econ team gives a rousing “meh” to the new Obama economic plan:

The White House has announced three new measures to stimulate growth: 100% up-front depreciation of capital investments; a permanent and slightly expanded research and experimentation (R&E) tax credit; and $50bn in infrastructure spending. While potentially helpful, we do not expect these proposals to have a large effect on growth for three reasons:

(1) we are skeptical that temporary expensing of capital investments will alter corporate behavior, particularly in 2010 or early 2011; (2) the expanded R&E tax credit, while positive, is too small to have much effect on growth; and (3) additional infrastructure spending, which could have a more significant growth effect, seems the least likely to become law. To the extent that these proposals become law and do have an effect on growth, we would expect the effect to be concentrated later in 2011.

GOP to Obama: Freeze taxes for two years

Sep 8, 2010 13:49 UTC

The Republican reply to the POTUS tax plan:

Speaking ahead of an economic address set for later in the day by President Barack Obama, Boehner also proposed that the U.S. government cut spending for next year to 2008 levels — before federal corporate bailouts and Obama’s $814 billion economic stimulus plan.

Boehner’s call for a freeze on tax rates amounts to a compromise with Obama in advance of November 2 congressional elections, which are expected to result in big Republican gains in the Democratic-controlled House and Senate.

Boehner made his pitch for the two-year freeze on all rates in an appearance on ABC’s “Good Morning America,” just hours before Obama was to speak in the lawmaker’s home state of Ohio.

Me: This would be a cagey compromise, one I am in favor of. Keep rates where they are for two years and during that time push hard for sweeping, pro-growth  tax reform

The 9.6 percent unemployment rate and the 2010 midterms

Sep 3, 2010 15:26 UTC

Today’s dismal unemployment report fully locks in the autumn political narrative:

1) Democrats will a) say the job numbers show a slowly recovering economy back from the brink, b) ask for voter patience, c) blame Bush and d) charge Republicans want to kill Social Security.

2) The GOP will say the report shows Obamanomics has failed,  surely (again) highlighting the infamous Romer-Bernstein unemployment prediction.

3) President Obama also seems unlikely to propose any new ideas that would be economic gamechangers. (The WH pushed back hard on media reports that it is considering a $300 billion payroll tax cut.)

4) More likely is a smattering of smaller ideas that Democrats can use to depict Republicans as obstructionists.

5) I would also guess nothing gets done on the expiring Bush tax cuts until at least after the election.

COMMENT

Yes it is true that US came out of recession and unemployment rate is coming down, but the rate is still slow. Barack Obama is thinking of new ideas to work upon to come out of this disastrous situation of unemployment rate. Sooner or later it’ll be possible to come out of it. From the last 4-5 months stock market is fluctuating and the rate of interest is also low.
http://www.mikeastrachan.com/

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Obama’s Immaculate Concession?

Sep 2, 2010 17:25 UTC

The White House may be warming to the idea of using tax cuts to boost the U.S. economy. It’s a possible plan that could have scored loads of Republican votes had it been proposed in early 2009. But with the president’s popularity falling and congressional elections looming, support won’t be so easy to coalesce.

The Democrats must contend with a political crisis along with the possibility of another economic one. The November midterms could cost them losses on a scale of the 1994 defeats when Republicans took both the House and Senate. A Reuters-Ipsos survey shows more people now disapprove than approve of President Barack Obama’s job performance by 52 percent to 45 percent. And the GOP leads on issues such as the economy, spending and jobs in a new Gallup poll.

Not surprisingly, the administration would like to make a bold move on the economy. GDP growth has been decelerating, and unemployment seems stuck at close to 10 percent. But with Republicans blocking even a $30 billion small business lending proposal on Capitol Hill, more grandiose ideas seem like nonstarters.

On the surface, at least, tax breaks seem like potential logjam-breakers. Republicans already wants to extend all the 2001 and 2003 Bush cuts without paying for them. And cutting payroll taxes, an idea favored by many conservatives 18 months ago, may be one of the options the White House is examining. The approach makes some economic sense. The Congressional Budget Office ranks payroll tax cuts as one of the top ways to create jobs.

But the opposing philosophies haven’t yet gelled. The White House is still insisting on higher taxes for wealthier Americans, even though many Democrats are willing to extend those rate reductions. And Republicans are unlikely to go along with any plan that raises any taxes in 2010 – and they’re in position to just stall until 2011.

As it is, some critics are already calling Obama’s potential tax-cut embrace the “Immaculate Concession.” A really bad jobs report or a market plunge could help the two parties find common ground. But absent that, even tax cuts probably stand little chance in a hopelessly gridlocked Congress.

Obama’s September surprise?

Sep 1, 2010 14:12 UTC

A few initial thoughts on Obama considering tax cuts to boost economy (via WSJ story):

1) WH already has broad plans on drawing board for a $200-$300b stimulus plan, half tax cut, half infrastructure. I reported this a month ago.

2)  Payroll tax cut is not a bad idea for stimulus, but U.S. has longer-term job and growth problem that needs to be addressed.

3) Payroll tax cut for $400 billion in early 2009 would have been better than Obama’s $862 billion plan.

4) Any short-term tax cut should be coupled with long-term deficit reduction plan.

5) A really bad payroll number on Friday could change political dynamic on this.

6) How would this square with WH’s new focus on deficit reduction, the supposed reason why Bush tax cuts on rich should not be extended? Indeed, WH has doubled down on this with adviser Jason Furman making this point yesterday.

7) Here is how one smart Washington observer framed things for me:

If it’s a one-year extension of all expiring tax provisions (including extenders), it would be a very smart political move for him.  He would triangulate his base and appeal to swing indies.  It also undercuts one of the main GOP arguments.  The stock market would surge.  It’s a total no-brainer, unless you are just that ideologically-addled not to do it.

If it’s “tax relief” for non income taxpayers, or tax cuts that are so difficult to qualify for no one bothers (see: small business health insurance credit), it won’t go anywhere and he’ll get no bounce from proposing it. If he wants to use taxes to change the dynamic (or at least blunt the wave), it needs to be bold and he needs to piss off the Congressional leadership.

A one-year extension of all expiring tax relief would probably get 230 votes in the House and 55 in the Senate.  Ask a vulnerable House Dem off the record if he would vote for that, and see how quickly he says, “you bet.”

Update: This from the WH press office: “The President and his economic team are discussing several options to continue on the path to recovery, but any reporting on decisions made or timing is premature.”

Are tax cuts on the Obama autumn agenda?

Aug 31, 2010 18:27 UTC

I would love to think so. And I know some folks on Wall Street would love to believe. But there are few signs that Obama will change course on taxes.  Here is White House economic adviser Jason Furman:

Jason Furman, an economic adviser to President Barack Obama, told a meeting on Tuesday there was a concern that even a temporary extension of the Bush-era tax cuts for the wealthy would be a “foot in the door” to permanent extension.

America’s Optimist-in-Chief

Aug 19, 2010 19:12 UTC

Economist Robert Brusca sums up today’s terrible economic news pretty well:

The day that optimism died. It has a time. It is sort of official: August 19, 2010. … The weak LEI is only bad news of the sort we have been getting. The rise in the jobless claims number posts a 500K number and makes the backtracking official and really bad.  …  But the report that disturbs me most is the Philly MFG index. The Philly index is actually a very good business cycle index. It does this job better than the ISM for some reason I can’t explain. … Optimism has died and there is a reason.  Things are not getting better at even the same rate. Those seeing the economy as getting better are in a distinct and shrinking minority.  … Brace yourself. I’m sorry to be the bearer of this bad news. This is not what I had expected.  I don’t know how much it will shake markets but I’d eventually expect something that can be measured on the Richter scale.

And a bit from JPMorgan:

In light of the recent string of weak economic data including today’s further rise in initial jobless claims, the forecast for US real GDP growth is being revised down to 1.5% for 3Q10 (from 2.5%) and 2.0% for 4Q10 (from 3.0%). This is the second downward revision to growth in 2H10 and the most important one. The new forecast looks for subpar growth through the second half of this year and for a rise in the unemployment rate towards 10%.

The Recovery Summer has turned into the Summer Bummer.  Is the superoptimistic White House taking notice? Perhaps not, given their track record. Brad DeLong and I may disagree on solutions, but he has also noticed the president’s weakness for the sunnyside of things:

Back in December 2008 I thought that prudent macroeconomic policy–policy geared to deal with a 20%-percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look–involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets.

We got a real number of $600 billion in effective fiscal stimulus. We really needed more. And we could still have more–(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table.

Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80th-percentile forecast?

COMMENT

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