James Pethokoukis

The latest Gallup numbers are not good for the White House or congressional Democrats. The overnight tracking has Barack Obama’s approval-disapproval rating at 41 percent-52 percent. Based on the Rahm Emanuel formulation that for every point below 50 percent, the Dems lose five House seats, it looks like the GOP will take the lower chamber. This bit from a Weekly Standard piece I did pretty much explains it:

Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.

Since then, however, the economy has fallen back to earth, and “Recovery Summer” looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. workforce, as measured by the Labor Department, had stayed constant since April—instead of shrinking by a million—the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, GDP advanced by just 2.4 percent from April through June, according to the Commerce Department. And new data show the final second-quarter number may actually be closer to flat, with growth for the rest of the year just 1 to 2 percent at best.

Interesting to see if any politicians pick up on this argument from former Morgan Stanley economist Andy Xie:

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

Wall Street’s conventional wisdom is that markets like political gridlock — but not if inaction means hitting a weak economy with a big tax hike. When Congress returns from vacation, it needs to deal with the expiring tax cuts signed by President George W. Bush. The Obama deficit panel, however, could limit any extension of them.

The Obama administration says it wants to extend only that portion of the 2001 and 2003 tax cuts affecting the middle-class. Doing so would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation, not counting borrowing costs. Allowing upper-income rates to rise on investment and labor income, on the other hand, is predicted to generate about $678 billion over 10 years.

Few in Washington want to let all the cuts disappear at year-end. Doing so could potentially knock between 1 and 3 percentage points off GDP growth next year, according to various estimates. But that will be the undesired outcome if Congress can’t reach agreement. While most Republicans want to keep all the 2001 and 2003 Bush tax cuts, President Barack Obama and most congressional Democrats want to let the ones for the richest expire. Treasury Secretary Timothy Geithner says he’s confident the fledgling economic recovery could withstand the blow.

But news of decelerating U.S. growth is hardly helping his argument. And given voters’ anxiety about the economy, Congress – with the entire House and a third of the Senate up for reelection in less than three months – might not be quite as risk tolerant as Geithner. A new NBC News-Wall Street Journal survey finds 71 percent of respondents would accept extending all the tax cuts until the economy recovers.

The political calculus is complicated. Congressional Democrats trying to follow the Obama plan could hold a pre-election vote. But Republicans would likely reject a permanent middle-class extension if the upper-income tax cuts weren’t also included. If Democrats offered a full, temporary extension, the GOP would probably accept that compromise. Such a deal would run contrary to the White House’s intentions — but Obama hasn’t vowed a veto either.

Muddling matters further is the president’s deficit commission. One recommendation could be to cut future Social Security spending in exchange for expiry of Bush tax cuts for the richest. That means even an agreement on a one- or two-year extension could get partly overwritten soon after. The only thing for sure is that following the messy passage of stimulus, health care and financial reform, the battles aren’t getting easier. And the tax debate isn’t doing anything to help clarify America’s cloudy economic outlook.

I think we can officially declare Recovery Summer dead. Here is today’s tale of the economic tape.
Here is IHS Global:

Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2% rather than the 2.4% originally estimated, placing the economy on even shakier ground than it seemed, and underlining why the Fed has shifted towards an easing bias.

Action Economics:

The market’s might face their biggest downside economic surprise of this recent growth slowdown yet in the form of a downward Q2 GDP revision, which today’s U.S. trade deficit figures suggest will be a whopper. We now expect the 2.4% advance Q2 GDP gain to face a huge downward adjustment to the 1% area, with a hit from trade of as much as $18 bln that we conservatively peg at $12 bln, as the BEA’s seemingly pessimistic $45 bln deficit assumption for June turned out to be excessively optimistic instead. A change in China’s VAT rebate policy in June may explain a part of the surprise, though the GDP gain in Q2 is likely poised for an alarming 1-handle regardless of this distortion.

Barclays Capital:

The nominal US trade deficit widened to $49.9bn in June from $42.3bn in May, greater than we ($43.5bn) and the consensus ($42.1bn) had expected and the largest monthly widening in the deficit on record. In real terms, the trade deficit widened to $54.1bn from $46.0. This reflected both soft exports and a surge in imports: nominal exports were down 1.3% m/m (with a 2.2% drop in goods exports) and imports up 3.0% (with a 3.3% jump in the goods component). Both were fairly broad based, but imports were partly driven by a 53.2% surge in the volatile civilian aircraft component, following a 48.9% drop in May. The deterioration in the trade balance in June was much sharper than had been assumed by the BEA in the advance Q2 GDP report. As such, Q2 GDP growth is now tracking just 0.3% q/q (saar), relative to our previous tracking estimate of 1.6% and the initially reported 2.4%.

More and more, Wall Street seems to be converging on the Goldman Sachs forecast of  a second-half growth slowdown. Hard to see how that helps unemployment or Democrat chances of holding both the House and Senate. Remember, if the labor force had not shrunk by one million workers since April, the unemployment rate would be 10.4 percent. Voters may not know those numbers, but they know the economy is far from healthy.

Great piece by Lawrence Lindsey in The Weekly Standard on the stimulus bill and the recent Blinder-Zandi analysis of it:

This is the economic equivalent of assuming there are 1,000 angels on the head of a pin, observing that we have 10 pins, and therefore calculating that we must have 10,000 angels. The math is fine. But it sheds no light on the key policy issue—were the recently passed acts of government stimulus cost effective? The degree of cost effectiveness was an assumed number, not one calculated using any version of the scientific method.

From a macroeconomic perspective, a targeted bill would have injected money directly into the cash flow of American households and small businesses where it was needed. Many of us who supported the administration’s call for a stimulus in early 2009 recommended the reduction of the payroll tax for both employers and employees, something with the same net revenue effect as what was passed. Such a payroll tax cut would have provided an incentive at the margin for continued work and employment for more than 90 percent of the labor force. The tax provision in the actual stimulus that passed did so for less than 15 percent of the labor force, and the spending provisions impacted only 2 percent of the labor force even under the administration’s assumptions. That is bad targeting.

Superpollster Scott Rasmussen apparently noticed my recent column:

A new Rasmussen Reports national telephone survey finds that:

1. 58% oppose a proposal to have the federal government forgive a portion of the mortgage debt owned by troubled homeowners.

2. 63% of voters think a government mortgage forgiveness program is unfair to those who have been regularly paying their mortgages …  vs. 23% who disagree and believe such a program is fair.

3. 48% of homeowners think government-ordered mortgage forgiveness for some homeowners would be bad for the economy … 30% say it would be good for the economy, and 15% believe it would have no impact.

4. Nearly half (49%) of Democrats say government-ordered mortgage forgiveness for some homeowners would be good for the economy. Sixty-seven percent (67%) of GOP voters disagree and say the plan would be bad for the economy. Among unaffiliated voters, 33% say good, but 47% say bad.

5. Sixty-eight percent (68%) of the Political Class say a mortgage forgiveness plan would be good for the economy. Fifty-five percent (55%) of Mainstream voters feel otherwise and think it would hurt the economy.

It worries me when I hear folks, mostly liberals, speak fondly of the 1950s economy and its 90 percent marginal tax rates. In this piece, James Surowiecki advocates soaking the super-rich:

A better tax system would have more brackets, so that the super-rich pay higher rates. (The most obvious bracket to add would be a higher rate at a million dollars a year, but there’s no reason to stop there.) This would make the system fairer, since it would reflect the real stratification among high-income earners. A few extra brackets at the top could also bring in tens of billions of dollars in additional revenue.

There would be political advantages, too: the reform could actually make tax hikes on top earners more popular. Critics like to describe tax hikes as hurting small business, because small-business owners make up a sizable percentage of people in the top two brackets and because small-business owners, unlike Wall Street traders, are popular on Main Street. It would be harder to mount a defense of millionaires, which may be why this year a Quinnipiac poll found overwhelming support, even among Republicans, for a millionaire tax.

And the economic reason would be what, again? You’re not going  to balance the budget that way, and you only feed the mistaken view that taxing “somebody else” will bring fiscal solvency.

WaPo blogger Ezra Klein yet again comes rushing to the defense of the Obama administration by making the case that the economy is pretty much as good as can be expected given the nature of the financial meltdown and recession.

A look at the history of financial crises shows that our slow, halting recovery is right on schedule and the business community’s caution is predictable.Not all recessions are created equal. Recessions caused by financial crises take a lot longer to dig out of than their more common cousins. One is like the flu. The other, a car crash. When the flu goes away, you’re good. When a collision spins to a stop, that’s when the long, slow process of healing begins.

In “This Time is Different: Eight Centuries of Financial Folly,” Carmen Reinhart and Kenneth Rogoff study every financial crisis of the past 800 years. It’s an exhaustive study, and its conclusions are depressing for a country that believes itself exceptional even in its suffering: We’re not special. If you consider unemployment, housing prices, government debt and the stock market, Rogoff says, “the U.S. is just driving down the tracks of a typical post-WWII deep financial crisis.” In some areas, we’re even a bit ahead of the game: Economic output usually falls by 9 percent. We held the drop to 4 percent.

A few thoughts here:

1) Team Obama itself is dismissive of the R&R argument. The U.S. is so unique an economy (the dollar as the global reserve currency, for instance), they argue, such historical and cross-economy comparisons are not applicable.

2) I would like to see a counterfactual simulation run on this plan: a $400 billion payroll tax holiday in 2009, a permanent 10-percentage point cut in corporate taxes,  a five-year extension of all the Bush tax cuts (giving time to totally revamp the code), and a regulatory freeze.

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.

The Treasury Department has officially denied it is planning the mother of all mortgage bailouts. And I have no reason to doubt Team Geithner. But of course that assumes that the whole idea was not being cooked up by the White House political team (Rahm and Ax) and not the good folks at Treasury. During the financial reform debate, banking lobbyists continually complained that Geither and Summers had been usurped by R&A in policymaking. And I have gotten zero pushback from the WH. Food for thought. More to come.

But here are some of the reactions to my piece:

1. A New $800 Billion Stimulus Through Fannie and Freddie? (Dan Indiviglio of The Atlantic)

2. Is Obama about to forgive billions in  mortgage principal? (Ed Morrissey of Hot Air)

3. An August Surprise from Obama (The Daily Caller)

4.  Help coming for homeowners (Kevin Drum of Mother Jones)

5. An August Surprise from Obama? (Glenn Reynolds at Instapundit)

6. White House to bail out underwater mortgages? (Moe Lane at Red State)