James Pethokoukis

Politics and policy from inside Washington

Have Republicans forgotten Reagan?

Mar 10, 2011 15:38 UTC

My pal Charlie Gasparino questions whether the GOP is making a huge mistake by focusing so intently on cutting deficits and spending:

The GOP — where Jack Kemp and Ronald Reagan once saw a limitless future based on a free-market plan for growth — has become the party of green eyeshades, government shutdowns and dour predictions about our future, while the American people continue to suffer. …  In recent weeks, the left-leaning and bailed-out Wall Street firm Goldman Sachs offered what the mainstream media considered a credible take on how GOP efforts to block the president’s spending initiatives will slow our feeble economic recovery and modest reductions in unemployment. … Wisconsin Gov. Scott Walker and New Jersey Gov. Chris Christie have become GOP icons for their courage in taking on public-sector unions — but the broader appeal of their message of cutting budgets before cutting taxes is still questionable.

On the face of it, at least, Charlie may have the politics right. Here are two recent polls (via PollingReport.com) that look at national priorities. Both put jobs ahead of deficits.

polls1

Of course, what Republicans are trying to do is make the case that cutting spending is good for growth because a) it will prevent a debt crisis like Ireland and Greece have experienced, and b) it will shift resources from  low-productivity government to the higher-productivity private sector. And I think there is some evidence that the argument is starting to take hold, such as this recent Bloomberg poll:

bloompoll

That being said, I would like to see a clear and comprehensive plan to reform taxes and reduce regulation. Still waiting, though.

COMMENT

I hope so. Didn’t Ronald Reagan Jr recently confide that his father was suffering from Alzheimer’s during his second term as President. Which would still make him more forward-thinking than the tea-partiers.

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Obama’s hidden budget strategy

Mar 7, 2011 17:09 UTC

The great Jim Capretta reveals all at NRO. Here is a bit, but read the whole thing:

The Congressional Budget Office (CBO) says the total tax hike over the next ten years will exceed $800 billion — a significant sum. But that’s really just the beginning of it. The authors of Obamacare were looking for a “game-changer” that went beyond a near-term tax hike. …  Their solution: Go back to 1970s-style bracket creep. … The Obamacare tax hikes associated with Medicare — 0.9 percent on wages and 3.8 percent on non-wage income — were sold as hitting only individuals with incomes exceeding $200,000 and couples with incomes above $250,000 annually. But those income thresholds are fixed. … . Consequently, as the years go by, more and more Americans will find themselves paying much higher federal taxes for Medicare — even though they are decidedly not the “rich” people the president said he was targeting.

Similarly, the so-called “Cadillac” tax on insurance plans — sold as a way to hold down costs in the most expensive arrangements — will quickly become a tax that nearly everyone in America pays. In 2018, when the tax goes into effect (conveniently after President Obama has exited the scene), insurers and employers offering plans with premiums exceeding $27,500 for family coverage will pay the tax. But in 2019 and beyond, that threshold will not grow with medical inflation. Instead, it will increase only with economy-wide consumer prices, generally a few percentage points below the inflation trend in the health sector. As the years go by, therefore, virtually all health-insurance plans will start bumping up against the “high-cost” tax t

By 2020, the total tax hike associated with Obamacare will already be bad enough — about 0.5 percent of GDP. But by 2035, because of bracket creep, it will have more than doubled — to 1.2 percent of GDP, according to CBO. And it won’t stop there. It will keep going up every year, in perpetuity.

The piece is a good reminder how the center-left consensus is that Americans are wildly undertaxed, and that dramatic tax increases must be part of the fiscal fix.  So transparency is to be avoided at all costs.  Another reason why tax simplification is not just about making it easier for folks to fill out their taxes.

America, what’s gone wrong? I think it’s this

Mar 4, 2011 18:18 UTC

No one chart could sum up everything gone wrong with the U.S. economy, but this one comes close to showing America’s misplaced priorities:

usaincchart

COMMENT

Add education spending and you do just about have the whole story of America’s recent problems. Unproductive government-driven investment in health care, education, and housing is a black hole sucking up money that would otherwise be allocated according to its most productive use. This is the unintended consequence of government intervention played out on an economy-wide scale.

The solution is a full retreat of government from these area. When we will we as nation realize that? Will it even be possible to fix the mess we’ve created when we do?

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Why a top CEO rejects “pro-business” Obama

Mar 1, 2011 16:02 UTC

George Buckley, the boss at manufacturing conglomerate 3M, apparently didn’t get the memo about Obama 3.0 (vs. Campaign Obama and New New Deal Obama) being a “pro-business” president.

This new incarnation, the White House tell us, is evidenced by a) the  hiring of lobbyist/rainmaker Bill Daley as Obama’s chief of staff,  b) bringing in GE boss Jeff Immelt to run his new competitiveness council, and c) temporarily abandoning plans to raise income taxes on small business and entrepreneurs.

But Buckley is having none of it, telling the Financial Times that “we know what [Obama’s} instincts are — they are Robin Hood-esque.  He is anti-business. …  Politicians forget that business has choice. We’re not indentured servants and we will do business where it’s good and friendly. If it’s hostile, incrementally, things will slip away. We’ve got a real choice between manufacturing in Canada and Mexico — which tend to be pro-business — or America.”

Buckley has good reason to wonder aloud about Obama’s pre-election year conversion from nemesis to friend of Corporate America. He surely sees Team Obama failing to make obvious moves to boost U.S. global economic competitiveness. The president still supports the new healthcare and financial reform laws. The president still wants to raise taxes. And the president gave the stiff-arm to his own debt panel. So there you have it, the axis of economic evil – taxes, regulation and government spending.

Now America’s best days may lie ahead, as Warren Buffett suggests in his latest letter to Berkshire Hathaway shareholders. But the United States is becoming a less attractive place for multinationals, like 3M, to do business.

In her recent business analysis of “USA Inc.,” technology analyst Mary Meeker of Kleiner Perkins compared America to 20 competitors on a variety of metrics for economic fundamentals, business climate, human capital and infrastructure. Of the 29 attributes, the United States, relative to other countries, improved on none since 2000, stayed the same on nine and deteriorated on 20 including worker quality, taxes, and transportation.

Of course, America isn’t exactly Chad, which is last on the World Bank’s rankings for ease of doing business. Or even China, which can be found way down at number 79. Uncle Sam is an encouraging fifth, though the institution does identify trouble spots such as a creaky and inefficient tax system. Reducing tax complexity and lowering rates, especially for multinationals, would help address that.

The U.S. must also do a better job at attracting and keeping high-skill immigrants. The current visa cap is far too low for tech industry needs. Indeed, a 2010 Federal Reserve study shows such immigrants boosts native worker productivity and income. (Of course, there might be less need if the union-run education system was doing a better job.) America must also continue to reform healthcare to both reduce some $60 trillion in future unfunded liabilities and provide regulatory certainty for business big and small.

All that, not better messaging, is what’s needed to make America the world’s premier location to start and run a business.

COMMENT

SukieTawdry — It has been a common talking point on the right that Canada’s federal tax rate is 15%. But those who want you to believe this are neglecting to add the Provinicial tax rates, which raise Canada’s total corporate tax rate to 34%, which is roughly equal to that of the United States.
The taxes include the cost of Canada’s national health plan, which costs American business billions more.
As to the other “burdens” of paid vacation, maternity leave, social security, pensions, day care, etc, Canadian business all pay more and offer more than American businesses do.
And while wer’re at it, HOW DARE those little worker bees take a paid vacation, ask for a little time off to have a baby, or expect to retire in any sort of comfort! Back to work, you freeloaders!

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Mary Meeker’s look at USA Inc.

Feb 25, 2011 18:17 UTC

Mary Meeker, the famed technology stock analyst now at venture firm Kleiner Perkins, has produced a ginormous report/PowerPoint presentation that looks at the United States as if it were a corporation. Now there’s little factually in the report that couldn’t be found by perusing the Congressional Budget Office website or the recent report put out by President Barack Obama’s debt commission. And I think her menu of policy recommendations isn’t particularly novel either. I wish, for instance, she had looked at Rep. Paul Ryan’s plan to reform healthcare:

meeker3

But Meeker and her team sure put together some 400 pages of pretty — and pretty informative — charts.

A look at unfunded obligations:

meeker1

And a look at where the money is coming from and where it is going to:

meeker2

COMMENT

I feel that Ms. Meeker’s presentation is a unique way to understand America’s financial situation. I began an independent project to read the 400-plus pages and write an 8 page summary and analysis on the presentation. Please read the full summary here: http://easollars.wordpress.com/2011/06/2 7/summary-of-mary-meekers-usa-inc-financ ial-statement/

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5 questions for CNBC’s Michelle Caruso-Cabrera

Oct 29, 2010 14:05 UTC

I’m a big fan of Michelle Caruso-Cabrera’s analysis and insight on CNBC, so I was delighted to hear she was writing a book. And “You Know I’m Right: More Prosperity, Less Government” doesn’t disappoint. It’s a straightforward, highly readable argument in favor of fiscal conservatism and limited government. Like me, she spent her childhood in the 1970s and 1980s and experienced firsthand the impact of economic policy gone awry and economic policy done right. During Ronald Reagan’s presidency, she writes:

In the simple way a child views the world, my family’s life got a lot better. Happier. Once my parents felt they had control of their money – and their lives and livelihood – they were so much more relaxed. I wasn’t conscious of it at the time, but I learned implicitly how much economic policy matters to our everyday lives. Ronald Reagan taught me that.

Well put. Here is a bit more on how she views the world:

1. Do Americans need to pay higher taxes to deal with the budget deficit?

Nope. Americans do not need to pay higher taxes. What we “need” is for the government to spend less money. There are entire departments that can be eliminated, like the Department of Energy. It was created under the Carter administration to end our dependence on foreign oil. Obviously, it has failed. I have an entire chapter about every department that can be completely erased.

But the big blob eating the federal budget is Medicare, and to a lesser extent Social Security, In my book I spend a lot of time about what should be done on those fronts. We face some tough choices, but they are easier to deal with now, rather than putting them off into the future. First and foremost: personal accounts. I am tired of the federal government spending social security taxes on everything but.

2. Do you think there is a difference between being pro-market and pro-business?

In theory there shouldn’t be a difference between being pro free-markets and pro-business, but increasingly there is. I find that many in the business community think we ought to gum up the tax code with all kinds of special breaks and credits and blah blah blah. That is the government picking winners and losers. One low corporate tax level is all we need. You need a government subsidy to survive? Than you shouldn’t exist. I have a lot of fun in the book pointing out the silly things that happen when government decides to pick winners, such as alternative energy. I explain how the federal government passed an alternative energy tax subsidy that actually INCREASED the use of fossil fuels? Only Congress is capable of such a thing.

3. How do you deal philosophically with the TARP bank bailout since it was government coming to the rescue of the private sector?

This is a tough one. In the end I come down to the payments and settlements system, which appeared to be under threat at the worst moments of 2008. I was reporting from Europe when some merchants there started to decline credit cards. The modern-day version of money supply was shrinking fast. As Milton Friedman showed us all, it was the decline in the supply of money that dramatically worsened the depression in the 1930s. (I dedicate my book to him by the way, because he viewed economics through the prism of liberty.)

4. What do you make of America’s tilt toward protectionism such as the China currency bill?

Our tilt toward protectionism is sadly consistent with weak economic periods in history. It is self-defeating.

5. How would you boost the economy right now? Austerity, tax cuts, infrastructure spending, something else?

Best way to improve the economy: A clean tax code, with low marginal rates. And a Congress that stops making new regulations.

Goldman Sachs: Economy needs fiscal, monetary boost

Jul 6, 2010 17:04 UTC

The econ team at Goldman Sachs is sounding worried. Here are a few snippets from a new report:

1.   Friday’s jobs numbers were disturbing.  At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%.  At worst, they suggest that the labor market is once again turning down.

2. With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy.

3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation.

4. So what is to be done?  On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed.

5. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010.

6. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011.

COMMENT

Regretfully, Goldman’s recommendations are too little, too late — the US is headed straight into deflation and depression from this point forward…

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Recovery Summer and the big fade

Jul 1, 2010 17:24 UTC

So how goes the economic news today? The job market?

The jobless claims data remain the weakest indicator of labor market activity. On the face of it, the rise in the four-week average to the highest level since the beginning of March points to a weakening in the labor market and a potential decline in private payrolls. … we find the level and direction in jobless claims somewhat troubling and the increase is likely to feed double-dip fears.  (RDQ Economics)

How about on the factory floor?

Forward momentum is slowing down in the manufacturing sector … price pressures have virtually vanished in the short space of a month.” (IHS Global)

How about overall economic growth?

Incoming data have led us to lower our tracking of second quarter GDP from 4.0% to 3.2%. In addition, the ongoing tightening in financial conditions is leading us to mark down our projection for third quarter GDP from 4.0% to 3.0%. Since the intensification of the European crisis in late April, the risks to US economic growth have been tilting to the downside. The latest round of data confirm that the sovereign crisis transmission channels have been operative and weighing on the economy: export orders tanked, confidence has stumbled, and the hit to households’ equity wealth is becoming a considerable impediment to consumer spending (JPMorgan Chase)

Me: More and more arrows seems to be tilting the wrong way. I don’t know if there will be a double-dip recession, but the cake is rapidly being baked for a weak economy on election day in November.

COMMENT

And this:
http://money.cnn.com/2010/07/02/news/eco nomy/bankruptcy_filings/index.htm?source =cnn_bin&hpt=Sbin

With bankruptcy filings on the rise, how is it even possible to claim that an economic recovery ever took place here?

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Growth only way to avoid U.S. economic collapse

Jun 30, 2010 20:43 UTC

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.

Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less.  Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path.

COMMENT

Finally we are seeing Collapse in the mainstream media. What does this mean? It’s only being said in places like tiny Vermont, but Collapse is the breakdown of the unsustainable U.S. Empire: the largest, most brutal, most environmentally destructive empire of all time.

Vermont secessionists utterly reject the infinite growth paradigm as a key to the future, just as we led the opposition to the 1803 Louisiana Purchase, the national embargo of 1807, and the War of 1812. New England secessionists also expressed their opposition to a military draft at the Hartford Convention of 1814. Abolitionists in New England urged northern states to disengage from the Union.

What we have in common is a commitment to sustainable economic development, local food & energy production, to bring home the Vermont Guard troops from Afghanistan and Iraq, and to return Vermont to our status as an independent republic as we were until 1791.

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Dems push middle-class tax hike

Jun 23, 2010 16:05 UTC

The U.S. is pushing its G20 counterparts to focus  more on growth than deficits right now. Too bad America — or at least Congress — seems to be doing neither. Not only is Uncle Sam on pace to rack up another $10 trillion (at least) in debt over the next decade, but little is being down to boost growth and jobs. The latest: Democrats are now openly talking about extending the middle-class Bush tax for only a couple of years until, you know, when the economy is booming. Of course, we may still have unemployment at 8 percent then. I could see letting the Bush tax cuts expire and then replacing them with a more pro-growth tax policy.  But a $3 trillion tax hike? Nothing pro-growth about that.

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