James Pethokoukis

Politics and policy from inside Washington

An economic inflection point for Obama?

Jul 8, 2009 21:27 UTC

The current state of Obamanomics, according to former White House economist Keith Hennessey:

For the time being, the Administration and its allies are implicitly wagering that the new jobs report is not an early warning sign of a new downward trend.  They are sticking to their existing policy and message.

I see at least five challenges on the path they have chosen:

  1. It might be wrong.  If the July employment report (to be released August 7th) is worse than the June report, the Obama team will look like they have missed a turning point.  In their preemptive defense, it’s often quite difficult to identify turning points.
  2. The Vice President’s comment that “we misread the economy,” followed by the President’s comment that “we had incomplete information,” undermines confidence in the Administration’s ability to diagnose and address major macroeconomic trends.  Sticking with the current path under potentially changed circumstances risks reinforcing this feeling.
  3. They have to rally nervous allies to echo their message that “the stimulus is working,” while the evidence to prove this is in question.  Just as it’s impossible for opponents to prove that the stimulus did not “save or create” jobs, it’s impossible for the Administration to demonstrate that 467,000 lost jobs is better than it would have been without the stimulus.  On a raw political level, how do you convince people that the stimulus is working when the economy is still in visible decline?
  4. They have to publish the Mid-Session Review of the President’s Budget this month, with a new updated economic forecast.  That forecast was almost certainly locked down weeks ago.  Do they revise it downward based on last week’s bad jobs data?  Either choice has significant downsides.
  5. They have to combat a press trend for a “weakening U.S. economy” storyline to overwhelm their desire to move health care legislation through the Congress in July.  This storyline has exploded today in the Washington-centric press.

Maybe this is why the stimulus isn’t creating tons of jobs yet

Jul 8, 2009 16:53 UTC

Here is what the Government Accounting Office is saying about the progress of stimulus spending:

Across the United States, as of June 19, 2009, Treasury had outlayed about $29 billion of the estimated $49 billion in Recovery Act funds projected for use in states and localities in fiscal year 2009.

And how is that $29 billion being spent? Like this (hint, not on infrastructure projects):


Obama, Congress made the stimulus ineffective as stimulus

Jul 8, 2009 14:17 UTC

Dan Clifton of Strategas Research makes some great points on the choices the Obamacrats made when constructing the stimulus plan:

We believe it’s not a question of the simulus being too small. The real issue is that it was designed very inefficiently, focused on longer term projects with long lags in distribution, and not focused on remedying US economic problems.

At the end of the legislative process, three major provisions were scaled back to ensure the stimulus had very little impact in the near term: 1) Income tax cuts were reduced in size and scope, 2) The housing tax credit conditions made the provision meaningless and 3) The Net Operating Loss impacted very few companies. If these provisions survived in their original form, it would not matter much that the spending won’t really start having an impact by 2010.

But now that spending is the focus of the package, by its very nature it will take time to be spent and then actually impact jobs. Which begs the question, if another stimulus is put forth, is it just additional spending on top of what is approved?

My spin: When people say, “It’s Obama’s economy now,” this is what they mean.


What a waste. Is the government only capable of spending money inefficiently? How can Obama and Co. claim that they are committed to reducing the deficit & debt, when they are so eager to add additional spending that is not guaranteed to accomplish anything? It won’t be a stimulus, it will just be another feeding trough.

This brings up another point, regarding taxes. Obviously, the tax rebate and housing credit were ineffective, and the net-operating loss provision too narrow. So why don’t we take a different tax approach? We need an actively modulated corporate tax policy, that is specifically tailored to an economic climate, and takes into consideration sector strength.

Instead of credits, the IRS should vary corporate tax rates quarterly, based on macroeconomic conditions & net profits. This would then reduce the tax burden on struggling companies, but maintain or increase the rate on successful companies. When times are good the rate goes up, but when times are bad, the rate goes down. Currently, companies have a higher tax burden during recessions versus booms. This makes recovery even more difficult.

Posted by Greg | Report as abusive

Germany recovering without stimulus

Jul 7, 2009 14:48 UTC

From economist Robert Brusca:

Note as VP Joe Biden is pondering the success of the Obama stimulus plan and Laura D’Andrea Tyson is recommending a course of ‘seconds’ before we finish ‘firsts’ Germany is posting strong orders growth. The WORLD economy is reviving. Germany may not be shot out of a cannon but its message is clear.   … Adding another stimulus program on top of the already in train program would not be a good fit because the attempt to do it would result all the same delays and pork as the last one. … The plan is working as it was supposed to. It’s just the wrong plan and it’s huge.


These people suggesting economic stimulus are thieves plain and simple. It is debasement of the currency and to continue to do it and try to maintain this EMPIRE is futile. Massive inflation is inevitable. And so now they will try and regulate the way people trade commodities. Hey… has anyone ever heard of property rights? Far as I knew my money is mine to use at my own discretion. If government try’s to regulate me I will just find another way to get around their regulation. Here are some links everyone should visit that give a clue as to what is really happening. Throw anyone suggesting stimulus out of office! They are thieves! The world economy is not reviving because governments will continue to intervene in the market and the FED will continue to artificially muck with interest rates. Germany remembers what inflation is like. Remember Weimar?
http://www.kitco.com/ind/fekete/jul06200 9.html
http://www.kitco.com/ind/katz/jul062009. html
Got gold?

Posted by Josh | Report as abusive

Will Obama go for a second stimulus? No …

Jul 7, 2009 14:05 UTC

OK, so Laura Tyson thinks a second stimulus might be a good idea. Will the White House go for it The economic logic of such a package might seem compelling. The original $787 billion spending measure was deemed appropriate by the White House for an economy where the unemployment rate was predicted to approach 9 percent in early 2010 if no new fiscal actions were taken.

Of course, the U.S. jobless rate is already at 9.5 percent and President Obama himself predicts a 10 percent rate by year end. Admitting the obvious, Vice President Joe Biden told ABC News that the administration “misread how bad the economy was.”

No shame there, really. Most of Wall Street and the Federal Reserve also underestimated the depth of the recession. But if the disease is worse than first thought, then shouldn’t the treatment be more aggressive?

Maybe not. Anyone want to predict how those killjoy bond vigilantes would react to a second U.S. stimulus plan — say, $500 billion or so in new federal aid to cash-strapped states and cities? Recall that some analysts interpreted the sharp backup in bond yields from mid-March to mid-June as a sign fixed-income investors were getting spooked about the potential inflationary implications of rising U.S. debt.

Now explaining market movements over a short period of time is a tricky proposition at best. But it’s certainly not a stretch to assume that at some point rising debt will cause bond investors to demand higher yields. Indeed, a 2003 Federal Reserve study found that interest rates “rise by about 25 basis points in response to a percentage point increase in the projected deficit-to-GDP ratio, and by about 4 basis points in response to a percentage point increase in the projected debt-to-GDP ratio.”

Don’t bet much that White House economic adviser Larry Summers and budget chief Peter Orszag aren’t aware of that study or the risk that higher yields could suffocate an embryonic economic recovery. No wonder the administration says it is taking a wait-and-see approach as stimulus spending from the existing package “ramps up” this summer and fall.

And the politics of a second stimulus plan are just as dicey for Team Obama as the economics.

Obama was elected to fix the economy. So calling for a “do-over” on his signature economic initiative might call into question the administration’s economic competence. (Republicans are already touting Biden’s admission as proof of that.) Although the administration’s forecast was similar to the prevailing consensus, there were certainly gloomier voices out there, such as Paul Krugman and Nouriel Roubini.

Some might question why the administration didn’t push for an even bigger stimulus package just in case the bears were right. Sure the politics would have been difficult, maybe even impossible. But the White House almost surely could have passed a similarly sized stimulus package that was more front-loaded to boost growth in 2009. (Probably not a bad idea given the adverse relationship between rising unemployment and mortgage defaults.)

What’s more, pushing a second stimulus package would drain energy away from the healthcare and climate change. An administration defeat on one or more of these key issues would certainly leave Democrats weakened heading into the 2010 election. And passing a second stimulus in late 2009 or early 2010 might not provide much of an economic boost before the midterms anyway.

So forget a second stimulus. Boxed in both economically and politically, the administration can do little more than pray those delicate green shoots quickly turn into green stalks.

5 stimulus plans better than Obama’s first one

Jul 7, 2009 09:33 UTC

Vice President Joe Biden now admits the Obama administration “misread” just how bad the economy really was back in January. No apologies necessary. The Federal Reserve and most of Wall Street also blew it. But what Team Obama might want to apologize for is pushing an $800 billion stimulus/recovery/reinvestment/spending package that will do little to either boost the economy in the short run (quite obvious now) or improve America’s long-term global competitiveness (obvious later). Now with unemployment soaring toward double digits (even though the White House said the stimulus plan would keep it under 8 percent), there is talk of a second stimulus plan. More union-friendly infrastructure spending that will take months to implement? A massive aid package that would reward fiscally irresponsible states and cities? Ugh. Here are five intriguing ideas Obama passed on that he might want to reconsider for a second stimulus:

[See why Obama’s big economic gamble Is failing.]

1) An investment stimulus plan. Economists say America needs to consume less and build more. So why not cut capital gains and corporate income taxes? Mark Bloomfield, president of the American Council for Capital Formation suggests a sliding tax rate. The longer an asset is held, the lower the tax rate — with a zero rate for assets held more than five years. This would encourage investors to move from cash back into stocks. A stronger stock market would be a huge boost to business and consumer confidence, as well as to long-term entrepreneurial activity. Corporate taxes are just as harmful. Their existence means earnings are taxed twice, as profit and as dividend income. Moreover, 70 percent of the corporate tax burden is suffered by workers in the form of lower wages. And since the U.S. rate is higher than every other major economy other than Japan, America is at a competitive disadvantage, made worse by the Obama administration’s aim to make foreign profits by American companies get taxed at high U.S. rates.

2) A worker stimulus plan. For the same amount of money as Obama’s original plan, workers could have received a massive tax cut. For $800 billion, combined Social Security and Medicare taxes could have been slashed by 6 percentage points, or 40 percent. That would have put $1,500 in the paycheck of a worker making $50,000 and, according to a study by former White House economist Lawrence Lindsey, increased employment by 4 million jobs in 2009. If you want more of something, tax it less. This plan would lower the taxation of labor, so America would get more of it.

3) A housing stimulus plan. Home prices are still falling and defaults still rising, with rising unemployment creating a vicious negative feedback loop. Since the downturn started with housing, maybe that is where it should end. Glenn Hubbard, dean of the Columbia Business School, and Columbia economics professor Christoper Mayer have suggested that the White House and Congress allow all mortgages on primary residences to be refinanced into 30-year, fixed-rate mortgages at 5.25 percent. In another version, investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management have proposed fully nationalizing Fannie Mae and Freddie Mac. Once that is done, the two entities could borrow at the same low rates as the U.S. Treasury. Then, Fannie and Freddie could offer 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.

4) A deficit hawk stimulus plan. Want to restore investor confidence in America? One way would be to get entitlements under control so bond investors wouldn’t fret about Uncle Sam inflating its way out of its debt woes or even defaulting. In theory, this would bring down real long-term interest rates and boost economic growth. The simplest move would be to do something about Social Security. An analysis run by Andrew Biggs of the American Enterprise Institute found that if a) Social Security benefits were linked to inflation rather than wages as of 2012 and b) the currently legislated retirement age was increased to 67, then allowed to keep increasing to 70 by the 2040s, the program’s long-term, present-value deficit of $5.7 trillion would turn into a $4.3 trillion surplus. That is a $10 trillion swing. Investors would be much impressed both by the move toward fiscal soundness and the evidence that America will not let itself turn into California.

5) A do-nothing stimulus plan. No $500 billion pricey second stimulus/recovery/reinvestment/spending plan. No $1.3 trillion healthcare plan. No competitiveness-killing cap-and-trade plan. No tax hikes at the end of 2010. Economy heal thyself (with some help from the Fed). And no spending the other 90 percent of the $800 billion first stimulus package. Hey, you’ve got to admire its simplicity. It would also show stock/debt/currency investors that Americans aren’t going to totally freak out over a recession by putting in place spending programs and patterns that will be hard to remove.

[See Pelosi is a vision in white — but not green.]

As for me, I would prefer doing both #1 and #4. They would help the economy’s long-term competitiveness and growth potential while restoring confidence today. That is a winning formula Team Obama might want to take a look at it.


Who is this James Pethokoukis guy anyway? He has NO BUSINESS BACKGROUND. He’s a talking head. He might as well be writing for Reader’s Digest.

Posted by Schvenzlerman | Report as abusive

The politics and economics of a second stimulus plan

Jul 6, 2009 17:47 UTC

I would doubt whether the WH thinks a second stimulus works for them politically or economically:

1) It’s clear they are closely watching interest rates to see if the”bond vigilantes” are getting spooked by all the debt. The surge in yields from mid-March to mid-June forced Team Obama to start talking about deficit reduction. Would they want to risk a further backup in rates by announcing a $500 billion package to aid cash-strapped  cities and states? Higher rates would be recovery killer.

2) It’s one thing to admit that you, like pretty much everyone else, underestimated the depth of the recession. But why didn’t the WH push for a package that was more front-loaded or had more tax cuts or, as liberals wanted, just much bigger in case the bears were right? Those questions go to the heart of the administration’s economic competence.

3) What if the WH pushed for a second stimulus package and lost? Or what if the effort drained energy away from getting healthcare and climate change passed? Those are big risks for a plan that might not help much before the 2010 midterms anyway.

4) With 90 percent of the dough yet to be spent, the whole thing makes the WH look panicky.


Leadership counts — it’s key in a crisis and we are certainly not thru this yet. The realities of California having to issue warrants and the dysfunction in the NYS legislature hampering normal debt issue amongst other very important & critical tasks will further highlight the divide between feckless political manuveurs & sound governmental stewardship.

The floodgates opened with Federal interference/take-over in private industry. No one can be surprised that some willing States ( and lobbies & industries – etc.) would be far behind in lining up at the Fed trough.

Nifty opinion – http://www.bloomberg.com/apps/news?pid=n ewsarchive&sid=abPswcmJHZVA

I really believe that the administration does not understand their policy consequences, and so many of their positions are having/will generate an inverse out come. So like the Bloomberg opinion piece says, they wanted to limit and decrease Lobbyist influence — instead they create a hot bed of Lobbyist activity in the place you would want it least., Their JOBS, JOBS, JOBS is a JOB KILLER.

Both Carter & Wilson were better men than they were Presidents. Let’s hope this isn’t some kind of redux.

Posted by Siobhan Sack | Report as abusive

Obama will do ‘whatever it takes’ to boost the economy? Really?

Jul 2, 2009 19:56 UTC

On CNBC today, WH economist Christina Romer said the president is committed to “doing whatever it takes” to turn around the economy. And she did not rule out a second stimulus plan. Yet the president will not cut corporate taxes or investment taxes —  even temporarily much less in a permanent way that would boost confidence and certainty. I think the WH believes it can pretty much ride this out, 2012 being a long way a way and Dems have structural advantages in 2010.


So people REALLY want the Republicans back? Are they insane or simply unconscious? The best thing for this country would be for Bush to have been the last Replublican President and a new, non-religious alternative Party formed that is not dedicated to selecting the next country to invade. And one that cares about the people who put them in office.

Taxes, shmaxes. If they want to take from you, they will. You can do NOTHING about it other than to limit interests hostile to you from power. They call it “democracy” and we do not have it. Less every year.

Posted by Texas Mike | Report as abusive

Why was Obama so wrongly optimistic on the economy?

Jul 1, 2009 14:11 UTC

So David Leonhardt of the NYT attempts to explain why the Obama administration was overly optimistic about the economy in its now-infamous “unemployment will not go above 8 percent” forecast:

Here are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions. The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference. The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it. To me, the evidence is fairly compelling that the second answer is the right one.

Henry Blodget sees it this way:

We suspect Obama, Summers, Geithner & Co. just decided that they had to issue rose-colored projections about the unemployment rate and recovery or they would never have a hope in hell of ramming such huge spending increases through.  And if the forecasts proved optimistic?  Well, by then, maybe everyone would have forgotten.

My spin:  It’s not so much that a more negative forecast would have prevented Obama from spending large amounts of money, it’s that he would have been forced to tilt the stimulus more in favor of tax cuts which work a lot of faster  than government spending (though both are pretty inefficient as “stimulus”).

And Obama wanted to spend billions on his “investment agenda (healthcare, education, infrastructure), not tax cuts.  (And if he had spent the $2 trillion that some liberals wanted on stimulus, it surely would have crowded out the rest of his agenda, plus rattled the bond markets.) So he gambled that monetary policy would keep the economy from getting as bad as it has. And he lost. Did Team Obama purposely give a bad forecast, or did its old fashioned Keynesian approach merely lead it astray? Good question. Either way, it’s the Obamacrats’ economy now.


OMG did you really use Henry Blodget to back-up your point? Henry Blodget!?!?! That son-of-a-bitch lacky who has a life-time ban from the SEC for stock manipulation, mail-fraud, insider trading, and wire-fraud while a top director at a major (and now defunct) trading house? A guy who has such an enormous mouth and grating attitude that he makes Jim Cramer look like a Buddhist monk!! How can I take anything you say seriously again? Maybe you should join Rush Limbaugh’s radio show and be his side-kick…

Posted by the Shah | Report as abusive

Stimulus? Any day now …

Jun 29, 2009 19:07 UTC

White House economist Christina Romer says government stimulus is “going to ramp up strongly through the summer and the fall.”  This implies that a lack of stimulus explains the poor economy — not that the Obama stimulus plan is simply not working. Yet what stimulus is flowing into the economy isn’t working, as many predicted — including me and Milton Friedman. Listen to Gluskin Sheff economist David Rosenberg (bold is mine):

In April, total stimulus from the federal government to the personal sector, in the form of tax reduction and increased benefits, came to $121 billion at an annual rate. But that month, in nominal terms, consumer spending rose the grand total of $1 billion. Then we found out on Friday that in May, the total stimulus from the Obama economics team came to $163 billion at an annual rate, and consumer spending increased by a measly $25 billion (again at an annual rate). The big story is that the personal savings rate surged again to a new 16-year high of 6.9% from 5.6% in April and 4.3% in March. This is a repeat of the fiscal impact from the tax relief a year ago when the savings rate jumped from 0.2% in March 2008 to 4.8% in May 2008. This is what economists refer to as “Ricardian equivalence” — the money from Uncle Sam goes into the coffee can instead of being used to buy more coffee.

So let’s get this straight, the future taxpayer is being asked to contribute to a policy today that is aimed at perpetuating a consumer cycle — and yet for every dollar that is coming out of Washington to support a 70% consumption/GDP ratio, it is getting barely more than 8 cents worth of new spending activity. In real terms, as was the case with the tax rebates of just over a year ago, the real impact is on the savings rate, and it is very clear that not even the most aggressive monetary and fiscal policy since the 1930s is going to stop consumer spending in volume terms from rolling over in the second quarter.


This is a very good insight why the the government and business does not get the now consumer economics.

Posted by Alan Maddox | Report as abusive