James Pethokoukis

Politics and policy from inside Washington

The surprises of 2011

Jan 3, 2011 19:24 UTC

Wall Street veteran Byron Wien, now vice chairman of Blackstone Advisory Partners, has issued his annual list of ten surprises as well as ten “also rans” for the next 12 months. Here are a few that I have thoughts on:

1.  The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.

Pushing down the U-3 rate won’t be easy with even hypergrowth (which I define as 5% or more) only knocking it down a half point or so. Yet I wonder about the political impact of a sustained high level of unemployment if the problem is more one of little hiring rather than lots of firing. If people feel secure in their jobs, will they care if their neighbor doesn’t have one?

2. The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Spreads with corporate fixed income securities narrow.

This would be a huge story and certainly add urgency to efforts to cut spending. Spending doves are currently using the lack of bond market vigilance as a reason to argue against spending cuts.

8. Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. The higher price at the pump fails to discourage driving, increase sales of hybrid vehicles or cause Congress to initiate conservation measures.

Will the U.S. economy really be growing at 5% with $115 a barrel oil? Won’t that begin to bite into consumer spending as some point?

14. Sarah Palin announces she will seek the Republican nomination for President amidst the cheers of Tea Party supporters. More moderate Republicans fear her candidacy will diminish the chances of their party winning in 2012 and try to blunt her efforts. Rick Perry, governor of Texas becomes a contender. Mike Bloomberg is mentioned. On the Democratic side, liberals feel Obama has betrayed them and desperately try to find a challenger. With the economy improving the prospect of a second term for Obama becomes more likely.

I am beginning to wonder if the GOP field won’t be smaller than many assume. I still think Palin runs. Romney, too. But I have doubts about the rest of the field.

18. A major state fails to pay interest on a municipal bond issue because of a lack of funds, causing havoc in the municipal bond market.

Indeed! I refer you to this post from earlier last month.


Interesting. I’d add a couple myself.

The flip side of rising bond yields due to the inability of Congress to realistically cut the Federal deficit is a stronger US dollar, as yield-starved investors buy USD in search of, well, higher yields. Eurobonds? JGBs? As if. All that is the first surprise. The second is declining commodity prices in response to a stronger US dollar, oil included. That’ll ensure a strong global recovery.

Posted by Gotthardbahn | Report as abusive

Like the economy, Obama is kind of stuck

Dec 22, 2010 19:54 UTC

Jay Cost thinks Obama, like the economy, is kind of stuck:

The macro trend, I would say, has essentially been flat for the last few months — as Americans have developed fairly stable opinions of the 44th president by this point that probably are not easily dislodged. In the long term, the way the president gets his numbers up will be to convince the country that he is a good steward of the economy, a view most of his fellow citizens do not hold at the moment.  This is why the tax cut deal was such a sensible compromise for President Obama to make, despite the criticism he received from his left flank.



Kyle Ate: Sorry, but its working. Huge financial crisis that barely dodged the bullet in 9/08 isn’t coming back instantly. However, swift, capable gov’t action (by both parties ) averted collapse and we’re on the road back. Fix you character and ditch your instant gratification stuff.

Posted by Inugomontoya | Report as abusive

A brief rundown of the 2012 White House wannabees

Dec 22, 2010 16:30 UTC

Jonah Goldberg sizes up the possible GOP presidential contenders (presented in outline form by me):

1. By my count, 24 people benefit from nontrivial presidential buzz: Sarah Palin, Mitt Romney, Newt Gingrich, John Thune, Tim Pawlenty, Mitch Daniels, Mike Pence, Rick Santorum, Haley Barbour, Mike Huckabee, Bobby Jindal, Paul Ryan, David Petraeus, Ron Paul, Jeb Bush, John Bolton, Bob McDonnell, Jim DeMint, Chris Christie, Herman Cain, Gary Johnson, Judd Gregg, Marco Rubio and Rick Perry.

2. Rubio, Ryan and Jindal … are all wisely sitting out the presidential contest … though the GOP’s three golden boys are ripe vice-presidential picks.

3. Former Florida Gov. Jeb Bush and the governors of New Jersey, Virginia and Texas — Christie, McDonnell and Perry — probably aren’t running. … Also, there’s growing buzz that Huckabee … may not run because he’s got a big new contract with Fox News in the works.

4. DeMint … has said he’s not running but acts like he might be. … Gregg … acts likes he’s not running but hasn’t ruled it out. Pence … definitely wants to run but now may switch to the Indiana governorship.

5. Barbour … could be a front-runner (and a hilarious, adept debate opponent for Obama), but his plans remain murky.

6. In many respects, Thune is the GOP version of John Kerry: a candidate with presidential hair who seems “electable” despite not having done much.

7. That leaves us with a top tier of five front-runners: Romney, Palin, Gingrich, Pawlenty and Daniels. Romney is the organizational front-runner; Daniels is the first pick of wonks and DC eggheads; Palin probably has the most devoted following among actual voters; Gingrich will dominate the debates, and Pawlenty (vying with Daniels) is the least disliked.

I am beginning to think the field of legit contenders might actually be quite small in the end. But my dark horse entry is still Jeb Bush.


I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)

Net neutrality rules a blow to free markets

Dec 21, 2010 18:34 UTC

Milton Friedman had it right. Business is no friend of free markets. The Federal Communication Commission’s “net neutrality” ruling is more evidence of this. What the FCC should have done is called it a year, went on holiday and left the Internet alone.

Instead, it found a solution in search of a problem. And that solution was more or less supplied by Verizon and Google last August. To a great extent, the new rules codify that blueprint, which — at least as those companies see things — acknowledged both the inevitability of some government rule-making and the need to better divvy up future costs and revenues between telecoms and content providers.

The FCC’s new rules would ban providers such as Comcast and Verizon Communications from blocking or delaying lawful Internet traffic, such as online services offered by competitors. But the giant telecoms and landline providers would be allowed to sell faster service to content companies such as Google and Amazon. And they could increase rates for subscribers who use the Internet for tasks that gobble bandwidth such as high-definition video.

Certainly, it could have been worse. As I wrote last April:

This regulatory debate has been turned into an unusual David (scrappy web firms) vs. Goliath (entrenched telecoms) morality tale. Despite being three times larger by market capitalization, Google, for example, still has far more cachet than Comcast, which challenged the FCC. But what it all really comes down to is who will pick up the tab for future network upgrades to handle applications such as high-definition video.

In a net neutral world where prices were fixed at, essentially, zero, the telecom operators would pay — before passing costs along to consumers, of course. On the other hand, maybe operators want to charge content providers tolls for putting their traffic into express lanes. Or perhaps another business model is just around the bend. Under net neutrality, the current system would be locked into place.

Government should have high hurdles to clear before setting prices. In the end, net neutrality seems little more than rent-seeking by content providers. It’s akin to a computer maker successfully lobbying for price controls on shippers like FedEx when transporting goods from China. When it bought new planes, the shipper would have to eat the cost or pass it downstream.

Now the fight turns to Capitol Hill, with Republicans especially eager to do battle. The GOP views the ruling as an initial effort by the Obama administration to push its agenda through regulatory agencies now that Democrats no longer completely run Congress. Expect the Republican-controlled House to quickly pass a disapproval resolution under the Congressional Review Act to overturn the ruling. If the measure then gets 51 votes in the Senate, it would be up to President Barack Obama to sign or veto.

Hopefully his recent pivot to the center will continue for at least a little while longer.


Thanks President Obama for another sell-out by your administration. You are now fully engaged in complete double-talk. This is not net neutrality and you know it. This is a complete cave-in- your specialty – to the ATT’s, Verizons, Comcasts and Googles of this world. Along with the tax-cut fiasco you really are racking up quite a record as a Republican. What about a few considerations for the people who fought hard to elect you.

Posted by jefflz | Report as abusive

Obama pivots as liberal dream collapses

Dec 20, 2010 18:58 UTC

Well, that was quick. America’s supposed generational shift toward an embrace of high-tax, high-service Big Government didn’t even make it a full two years. The new public policy consensus — built around favorite liberal issues of the environment and income inequality — promoted by Washington elites has been a flop with the public.

The nation’s ruling class thought for sure the financial crisis and subsequent Great Recession would create so much economic insecurity that it would be easy to pass a broad expansion of the welfare state — all financed by a combination of higher income taxes on the rich and new energy taxes on the middle class.

Instead, concerns about the federal budget deficit and competition with China became paramount. And the liberal agenda of healthcare reform and cap-and-trade suddenly seemed terribly off-point. So within a span of seven weeks, Democrats lost control of the House and then their legislative agenda.

First, the $858 billion tax deal. The near-term economic impact may modest. Some $500 billion of that total is merely the “cost” — as government bean counters look at things — of extending current income tax policy. Consumers will save most of the payroll tax cut, while extending the funding of unemployment insurance will make unemployment a bit higher than it would otherwise be.

But longer-term, the package is extremely bullish. It shows clearly that the “battlespace” of the coming Republican-Democrat fiscal clash will almost entirely be on the spending side of the ledger. There is little appetite among the public for sending more tax dollars to a wasteful and inefficient Washington. And the debate over restructuring the U.S. healthcare system will be between trusting government rationing or trusting market efficiency and choice.

The failure to pass a 2011 budget is also tremendously positive. It shows the impact of the Tea Party movement has not waned since the November midterms. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.

Indeed, some GOP insiders believe the president — with a bit of nudging — may be ready to strike a deal to reform the tax system and cut future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama now seems willing to anger some within his own party in order to get legislation passed and win the reelection.

But if Obama does manage to somehow eke out a second term, it will be as president of a country that he may understand a bit better than he did two years ago. His true value and concerns in 2008, it turns out, were not those of most of his countrymen. Most Americans were not itching for government-run healthcare, a vast energy bureaucracy, an expansion of union power or new penalties on success and wealth creation. To a great extent, the term Tea Party America is redundant. The U.S. remains a center-right nation, and prosperity usually ensues when its leaders understand this.


Obama did not pivot-he lost, and Harry Reid caved. They’re not happy. This is not going to help any Dem in 2012.

Posted by pduggan | Report as abusive

US tax deal, budget feud set stage for 2011 cuts

Dec 17, 2010 23:23 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

To nations suffering austerity, it must seem as if Washington has gone mad. First, the U.S. Congress fails to agree on a 2011 budget. Then lawmakers overwhelmingly pass another giant stimulus. But both events actually hint at some chance of more disciplined fiscal action next year.

President Barack Obama will quickly sign the $858 billion stimulus/tax cut bill that funds unemployment benefits for 13 months and extends Bush-era tax cuts for two years. Of course, the bulk of the headline cost — $500 billion — comes simply from keeping tax rates as they have been, so it’s not traditional stimulus. It’s just keeping bad stuff from happening. And government bean counters would not score the renewal of a temporary welfare program as a spending increase. Still, the bill does delay any effort at deficit reduction since it does not pay for funding jobless benefits.

All this makes budget hawks wince, both at home and abroad. But even the International Monetary Fund concedes that America has the capacity to boost its sluggish economy through short-term tax cuts or spending increases — as long as it has in place a credible plan to reduce the longer-term fiscal gap. (And the best deficit strategy is cutting spending while also boosting growth through smart ( meaning low) tax policy.

That plan isn’t drawn up yet, but it could be getting closer. Democrats and Republicans in Congress are gridlocked over the $1.1 trillion budget for 2011. So they will probably pass a temporary spending measure to keep the government running for another month or two. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.

Indeed, some GOP insiders believe the president –  with a bit of nudging — may be ready to strike a deal to reform the tax system and cut future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama now seems willing to anger some within his own party in order to get legislation passed.

The key to any longer-term deal on the deficit is to make it happen before presidential politics starts to intrude by the middle of 2011. That’s not going to be easy — but the flurry of activity at the end of 2010 provides a glimmer of hope.

Congress throws a tea party

Dec 17, 2010 17:07 UTC

Overall, a pretty good day for those who believe in low taxes and less spending. Here is the money graph from my upcoming Reuters Breakingviews column:

Democrats and Republicans in Congress are gridlocked over the $1.1 trillion 2011 budget. So they will likely pass a temporary spending measure to keep the government running for another month or two. This creates a situation next year where incoming Tea Party Republicans can a) combine a threat of government shutdown with b) a refusal to raise the national debt ceiling to c) squeeze deep spending cuts from Obama and congressional Democrats. Indeed, some GOP insiders believe the president —  with a bit of nudging — may be ready to strike a deal on tax reform and cutting future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama is now seems more than willing to anger liberals within his own party and scuttle past campaign promises to get legislation passed.

Of course, the biggie is healthcare and that is going to have to be settle by voters in 2012.  But what a change from January 2009 when Obama’s election was supposed to signify a generational political swing toward more activist government.

The conservative case for a VAT

Dec 16, 2010 16:26 UTC

Over at NRO, Duncan Currie gives it his best shot:

Despite being more efficient than an ordinary sales tax, a VAT carries significant administrative costs, and piling it on top of the present U.S. tax structure would be a mistake. But using the VAT to eliminate a sizable amount of distortionary U.S. income taxes would yield a far more growth-friendly system than the one we have today. Over the long run, America must reorient its economy away from consumption and toward investment while boosting its dangerously low savings rate. A VAT is certainly not the only way to promote those objectives, but it should at least be part of the conversation.

In the piece,  Currie more or less outlines a proposal similar to what Gov. Mitch Daniels suggest a month or so ago: Lower existing taxes rates and add a VAT.  I don’t believe he means for this to be a tax increase. Higher government revenue would come from higher economic growth.  Of course, many liberals see a VAT as an efficient way to dramatically raise taxes. Roger Altman, perhaps the replacement for Larry Summers in the White House, has recommended a $500 billion VAT.

In theory, I don’t have a problem with the Currie-Daniels approach, though I would prefer to have the income tax repealed. I also don’t think it would automatically lead to higher and VAT taxes and higher and higher spending — especially not after reading this piece. As Currie notes:

Moreover, while the VAT can lead to higher spending, it does not inevitably have that effect. Consider what happened in Canada, where the Progressive Conservative government of Brian Mulroney implemented a federal VAT in 1991. Since then, as economists William Gale and Benjamin Harris of the Urban-Brookings Tax Policy Center point out, “the size of the Canadian federal government has shrunk significantly.” The VAT rate started at 7 percent, but it has fallen to 5 percent under the Conservative government of Prime Minister Stephen Harper, which has also slashed corporate taxes.

In New Zealand, it was a neoliberal Labour government that embraced the controversial consumption tax. During the mid-1980s, Prime Minister David Lange and his finance chief, Roger Douglas, spearheaded a radical program of fiscal consolidation that included massive income-tax reductions, deep spending cuts, ambitious deregulation, and a 10 percent VAT.


Gale + Harris also mention that there is a sub-national level of VAT in many of the Canadian provinces which is added on to the federal rate, resulting in total VAT rates as high as 13%. Other provinces (the “hold-outs”) who have not harmonized their provincial sales taxes with the federal GST to form the Harmonized Sales Tax “HST”, continue to impose single stage sales taxes, which, unlike the VAT / HST, are not recoverable by way of deduction or input tax credit. This is with the exception of the natural resource rich province of Alberta which has no provincial sales tax. From 2013 Canada intends to impose a Corporate Tax rate of 15%. Certainly a decent model for any US VAT architects to look at.

Posted by CanuckinKL | Report as abusive

Sarah Palin vs. Simon Johnson and Washington wisdom

Dec 16, 2010 15:33 UTC

This is the kind of thing that really burns me. Here is Simon Johnson, former chief economist at the IMF, over the at the NYTimes econ blog:

The weakness in the Palin-Gingrich position is that while they want to balance the budget, they want to do so primarily by cutting spending. This is very difficult to do, as most of the spending issues over the next 30 years are about Social Security (a little) and Medicare (a lot). …

Cutting or limiting nonmilitary discretionary spending may play well with voters, but it is simply not big enough to make much difference. If Ms. Palin and Mr. Gingrich are willing to put military spending on the table, that would help, but this is fast becoming a taboo subject for all Republicans.

Of course, Johnson is being absolutely ridiculous here. Palin has flat out endorsed Paul Ryan’s fiscal Roadmap for America, a blueprint for radically restructuring entitlements. He is also wrong that cutting defense spending is taboo among Republicans. Plenty of conservatives, at least, think there are lots of smart cuts that could be made. But Washington insiders like Johnson —  and most of the people I hear give presentations at symposiums around town —  think just like he does. They assume spending can’t be cut, thus taxes must be raised dramatically. So when Palin  and Ryan and other true budget hawks actually say “Yes, lets revamp entitlements,” it just doesn’t penetrate their noggins. They can’t take “yes’ for an answer.

Then there’s this: Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures as spending cuts and higher taxes. 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.  … [Faster growth] is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt.  And that means keeping taxes low.


Is Mr. Pethokoukis — are you — serious?

Much like this hollow post, the Roadmap for America is big on general talk and completely thin on details or actual plans. Roadmaps are laudatory and constructive when they present a vision, but can also be obfuscatory when used as stall tactics (both the post and the Roadmap for America are of the latter type).

And that’s for the very reason that Mr. Johnson points out — that Republicans aren’t really serious about cutting military spending or any other entitlements that damage their political popularity. Mr. Pethokoukis, you should read Mr. Johnson’s article, entitled “Paul Ryan is Not a Fiscal Conservative,” which is available free of charge: http://baselinescenario.com/2010/11/04/p aul-ryan-is-not-a-fiscal-conservative/. Perhaps a substantive response would serve you readers best.

Also, the notion that Simon Johnson is somehow your standard “Washington insider” is a lazy and transparent way of saying “I don’t like what he says.” Beyond that, it’s also absurd. Johnson has been highly critical of most Washington policies, ranging from Dodd-Frank, the bailouts, Obama’s light posture towards banks and financial institutions, etc. If you’re not willing to do your research, perhaps you could go as far to choose a more appropriate, albeit hollow, dismissive term.

Posted by aeli | Report as abusive