James Pethokoukis

Politics and policy from inside Washington

U.S. economy still starved for credit

Jun 21, 2010 15:39 UTC

So says Paul Kasriel of Northern Trust: “I consider this financial sector net credit contraction the major headwind for the economy, preventing a more normal robust cyclical recovery.”

And here are some eye-opening charts:


This one, too:



The Fed is filled with bankers, and bankers love austerity in the forms of scarce capital and high interest rates. Clearly, the Fed resents having to lend money at low interest rates, as do banks in general. The most important objectives of the Fed (low inflation and high economic growth) are all well-served by maintaing economic austerity, regardless of how those austerities derail people’s lives. As long as people are not starving, and until interest rates go up sharply, there is no reason or incentive for the Fed to lend money to anyone. Again, the Fed is manned by bankers who love austerity in the forms of scarce capital and high interest rates, and until the Fed gets its way, the Fed mantra will continue to be, “let them eat cake…”

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How to grow the U.S. economy

Jun 21, 2010 15:11 UTC

Andrew Liveris, chairman and CEO of Dow Chemical, has some ideas, which he outlines in a USA Today op-ed. Here is an excerpt followed by my take:

1. New infrastructure that leverages private investment in plant and equipment, and modernizes our nation’s communication networks, electric grids and air, sea and land transportation systems. [Me: I am not sure we need $2 trillion in fixes like civil engineers contend, but this is a proper role for government.]

2. R&D that’s cutting edge. The experiences of competing countries demonstrate that R&D investment leads to greater economic growth, worker productivity and higher standards of living. [Me: Sure, businesses love tax credits and subsidies to do research, but there is very little economic evidence that government can do much to directly affect innovation beyond creating a fertile climate.]

3. Education that leads the world. The U.S. needs to enhance student skills in science, technology, engineering and mathematics, where we widely lag global competition. [Me: I certainly don't think this is a money issue. Here is a great article in the NYTimes about how better classroom management skills have a near-miraculous impact of student achievement.]

4. A “pro-trade” policy that creates a “level playing field” with limited tariffs and barriers to entry. The U.S. should adopt pending trade agreements such as Doha, which ensure that same treatment with key foreign partners — reciprocal market access to enable free and fair American participation.  [Me: Agreed. Subjecting your country to maximum competitive intensity will boost innovation and growth.]

5. An alternative energy strategy that will secure the abundant energy that industry needs to stay competitive. Energy is the lifeblood of U.S. manufacturing, but we have no comprehensive policy to support it. We should become far more efficient in its use, seek lower carbon alternatives and, with proper safeguards, expand traditional supply. [Me: Not sure what this mean in practice.]

•Regulatory reform is required for U.S. manufacturing, especially as concerns the environment. Regulation is necessary, but smart regulation isn’t always practiced. All too often, we see rules that bog down product innovation or that lack a solid scientific basis. [Me: Yes. If  America needs a czar, it should be someone to looks at bad regulations.]

6. U.S. tax policy should support manufacturing, not militate against it. Our corporate taxes rank second highest among countries that belong to the Organization for Economic Cooperation and Development, and are only going up. The House’s jobs bill will raise taxes $80 billion on U.S.-based corporations and small employers. Next year, taxes will rise on capital gains, dividends and small businesses. Also, the U.S., unlike every other major OECD economy, taxes on a worldwide, not territorial, basis. [Me: Agreed.]

7. Reform in civil justice is needed to support advanced manufacturing and end lawsuit abuse. In the U.S., unlike other OECD countries, plaintiffs’ lawyers unduly burden corporations with demands for compensation disproportionate to their client’s injuries, or even when there’s no injury. [Me: Agreed.]

Rahm Emanuel headed back to Chicago?

Jun 21, 2010 14:14 UTC

That is the implication of this UK story about the White House chief of staff. But Marc Ambinder is dubious:

Beware the soothsayers who know the exact day and hour when the trumpets shall sound and Rahm Emanuel, the White House chief of staff, announces his resignation. First, Emanuel has said, repeatedly, that he’s told President Obama that his shelf life is about two years.  …  But Obama has no interest in seeing Emanuel depart, and Emanuel will probably stay at least long enough to oversee other staff departures and additions. Turnover at that point is normal. It’s safe to say that a chunk of the economic policy team will be keen in moving on, as efforts shift from crisis mitigation to building a new economic foundation.

Me: When I was on The McLaughlin Group a couple of weeks back, I was asked to come up with a prediction ahead of time. But the segment went a different direction, and I didn’t get to use it. My prediction was going to concern a coming shakeup in the WH economic team. But really, that is not hard to predict.  There is the burnout factor, of course. And neither Christie Romer nor Austan Goolsbee — to take two names — are creatures of Washington and sure don’t seem like they would become DC lifers. It would be a bit early for Tim Geithner to leave — Treasury secretaries usually stick for at least two years — but who knows? There are also plenty of rumors about budget chief Peter Orszag being  a short timer, perhaps to be replaced by Gene Sperling, currently at Treasury. And Larry Summers — well, he deserves a blog post of his own.

Did Goldmans Sachs just douse Dems 2010 election hopes?

Jun 18, 2010 15:25 UTC

Liberal pundits and economists such as Paul Krugman have no use for the White House “Summer Recovery” PR tour. (Note that it isn’t called the “Prosperity Tour.”) They continue to attack the Obama administration for worrying too much about the budget deficit and too little about high unemployment. The White House response has been three-fold.

1) We’re not obsessed with the deficit. “That’s obvious,” Republicans would undoubtedly and snarkily reply, pointing out that under President Barack Obama budget’s plan, deficits would average $1.2 trillion a year for the rest of his term. But the serious White House point is that deficits are only an economic problem in the intermediate and long run. Certainly, both Obama administration and Federal Reserve officials argue, financial markets don’t seem too concerned at the moment given the continued low level of U.S. bond yields. That is why Obama hasn’t rushed to propose some immediate austerity program such as deep cuts in entitlements or a broad-based tax increase. America isn’t Greece. At least not yet.

2) There is no appetite in Congress to pass a pricey jobs bill. As the difficulty in getting the Senate to pass the deficit-expanding “jobs bill” reveals, debt fears are starting to take hold on Capitol Hill. (Or at least fears that voters are starting to worry about all the red ink.) Consider these failed Senate votes a reality check for liberal groups clamoring for a “New New Deal.” The union-backed Economic Policy Institute, for example, wants to spend $400 billion to create nearly 5 million jobs this year. The think tank would try and pay for it with a tax on stock, bond and currency trading. But there is little support for that in Congress, and even the Treasury Department thinks it a bad idea.

3) The labor market may just surprise you — and in a good way! There is a statistical relationship called Okun’s Law (really more of a rule of thumb) between GDP growth and job growth. A simple Okun analysis leads to the conclusion that the unemployment rate rose higher than was warranted given the severity of the Great Recession Why? Perhaps businesses, fearing another Great Depression, panicked and just hacked their workforces to bits. Okun’s Law was suspended, but only temporarily perhaps.

If one buys this theory, then eventually there should be some payback for that psychological overreaction. At some point soon, unemployment should fall way faster than what the rate of economic growth would indicate according to Okun’s Law. At least this is what the White House —  and congressional Democrats hope. And if they are right, the job market might well unexpectedly strengthen right into the November midterm elections, helping avert the worst for Democratic House and Senate incumbents. No Republican tsunami.

But a brand new study from the economics team at Goldman Sachs throws cold water on all this. Their analysis is that the deviations from Okun’s Law were within the historical norm, so no sharp rebound (bold is mine):

It is a common belief that employment and hours worked fell more sharply during and after the 2007-2009 recession than can be explained by moves in real GDP, or in more technical terms, that “Okun’s law”—the empirical relationship between jobs and GDP—broke down during and after the recession. Many forecasters believe that this implies a large amount of pent-up hiring, as the “error” in Okun’s law proves temporary and firms hire aggressively in order to return staffing levels to more normal levels relative to production.

In contrast, we have argued that the relationship between employment and GDP remains quite similar to past cyclical norms, and that employment growth will therefore follow GDP growth without a “special hiring dividend.” … The bottom line is that there is no convincing evidence for a breakdown in Okun’s law, and hence no particular reason to expect a large amount of pent-up hiring during the recovery. … Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.”

And here is a chart to help visualize the point:


Bottom Line: Unemployment of 9.5 percent or so for the rest of the year seems baked into the cake (this is what the Fed and the economic consensus see) unless GDP growth starts to boom. And good luck finding forecasters who believe that. So far, this recovery has fit into the slow-growth, New Normal paradigm. Although it was a deep recession just like in 1981-82, the recovery has only been half as robust. Voters may not blame Democrats for the Great Recession, but they will likely hold them accountable for the Not-So-Great Recovery.


Goldman Sachs has doused a lot of people’s hopes. Why would they leave out the Democratic Party?

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