Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Pethokoukis, Economics, U.S. Economy

US has 13 million more people since 2007 — and 3.2 million fewer jobs

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Some economic perspective on the labor market from JPMorgan economist James Glassman:

It’s going to be a while, perhaps the balance of this decade for the US economy to recover to its natural, fully-employed state. Businesses have replaced or recovered 63 percent of the nonfarm payroll jobs that were lost during the recession and the job count is only 3,200,000 shy of the December 2007 peak number of jobs. Household employment is even better. It has recovered 79 percent of the losses and is only 1,600,000 shy of the all-time peak employment count. Nonetheless, the US population has increased by 13,700,000 since the December 2007 business cycle peak and the labor force by 3,700,000 even though a massive number of discouraged workers temporarily dropped out. So, another 5 to 7 million new jobs would need to be created at this moment just to return the economy to a fully-employed state. Of course, that is above and beyond the 1,500,000 new jobs needed every year going forward to accommodate new job seekers. From that perspective, the job market is in the fourth inning of recovery.

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Economics, Monetary Policy, Pethokoukis

Japan picks dove Kuroda for new central bank boss. Time for the Fed to escalate

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Asian Development Bank (ADB) President Haruhiko Kuroda speaks during a news conference on the first day of the ADB's 45th Annual Meeting of the Board of Governors in Manila May 2, 2012. REUTERS/Erik De Castro

Asian Development Bank (ADB) President Haruhiko Kuroda speaks during a news conference on the first day of the ADB's 45th Annual Meeting of the Board of Governors in Manila May 2, 2012. REUTERS/Erik De Castro

It looks like Tokyo will be getting its own Ben Bernanke to run Japan’s central bank. Asian Development Bank President Haruhiko Kuroda, likely to be nominated for the post by Prime Minister Shinzo Abe, is described by the WSJ as an “open critic of the Bank of Japan” who has made clear that as BOJ boss he would “ramp up and diversify the BOJ’s program of buying assets like government bonds from private banks.” What’s more, the even-more-dovish Kikuo Iwata is skedded to be one of Kuroda’s two new deputies.

With a new, easy-money leadership team in place, it seems a good bet the BOJ will a) begin open-ended bond buying sooner than planned and b) increase the amounts of monthly asset purchases. Which is just the kind of medicine — though not the only medicine — the Japanese economy needs after suffering years of slow growth and deflation. The picks are certain to raise concerns about a global currency war. But this view seems more on point (again via the WSJ): “This is not a currency war—it’s a growth war,” David Zervos, a fixed-income strategist at Jefferies & Co., said in a recent note.

If there is to be a global growth war, let the Fed escalate. Let it take the next step in its new approach to monetary policy by targeting the level of nominal GDP and not just inflation and unemployment targets. Again, my anti-stagnation formula: easy money + spending austerity + pro-growth tax and regulatory reform.

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Pethokoukis

Some overdue credit to Larry Kudlow

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New York Times columnist Ross Douthat is very generous to me here:

In the last week there have been not one but four impressive pieces on fixing the Republican Party’s policy problem — one by Ramesh Ponnuru in the pages of this newspaper, one by James Pethokoukis in National Review, a lengthy essay by Pete Wehner and Michael Gerson in Commentary, and a sketch of a right-of-center health care reform by Douglas Holtz-Eakin and Avik Roy for Reuters. The proposals vary a bit, but there’s an essential unity to the ideas that they promote. To borrow Gerson and Wehner’s language, they’re all addressed to voters who “now regard the Republican Party as …wholly out of touch with ordinary Americans,” and they all take the obligations of governing more seriously than a lot of recent right-wing rhetoric has done.

The core of the center-right message last year was a) cutting debt and b) promoting heroic entrepreneurs. All good stuff. But too many voters were unable to connect the dots on how that was supposed to help them solve their real-world, real-life, on-the-ground problems. It all seemed sort of off point. And you know who else saw this problem? My pal Larry Kudlow of CNBC. Over and over last year, he pushed the Romney campaign to emphasize the old Reagan “take-home pay” message for middle-income voters who’ve suffered from years of declining or stagnating incomes. But Team Romney just didn’t have the policy agenda to sustain that message beyond a tax cut plan the candidate stopped talking about.

Anyway, I just thought I would point out that while the center-right has to apply timeless principles in a different way than a generation ago, the 1980s supplysiders still know a thing or two about a thing or two. Like free market capitalism is still the best path to prosperity.

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Pethokoukis

Here’s how Washington insiders think the sequester fight is going to go down

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Chris Krueger, the plugged-in political analyst at GS Washington Research Group, gives his best guess on how the sequester will play out:

Once the media begins pumping out human-interest stories on the impact of sequester (imagine USA Today and People Magazine articles on Air Traffic Controllers and meat inspectors being furloughed, etc.), Washington will very likely fold on the sequester fight, find enough change in the government sofa cushions, and patch together something to either replace or dilute some or all of FY13’s ~$85B in sequester cuts.

And here are three possible endgames:

1. Gimmicks (An Obama win):

There are plenty of revenue gimmicks still available, including reviving last summer’s Pension Funding Stabilization, User Fees (TSA fees or fees pertaining to the Inland Waterways Trust Fund), and higher PBGC premiums. In terms of cuts, the ATRA model can be used again or the Senate Democratic spending cuts (defense cuts starting in FY15 and ~$30B in farm subsidy cuts) could come into play. It costs approximately $12B per month to replace sequester, which is not a big number by Washington budget standards – particularly when you have the 10-year budget window.

2. A highly modified continuing resolution (Pick ‘em):

 The lack of an FY13 budget and FY13 appropriations bills makes everything more complicated as the government is being run by the CR. However, the CR expiration gives you a vehicle to tweak sequester. In the new FY13 CR, lawmakers could insert language giving the agencies greater flexibility on sequestered cuts. Senate Appropriations Chair Mikulski (D-MD) is advocating a full omnibus that would fund all the government agencies for the remainder of FY13. They could also pass a “mini bus” of FY13 appropriations bills for the national security agencies (Homeland Security and Department of Defense) that would remove some of the anxiety and downside brewing for the Pentagon. At a bare minimum, the eventual CR (or Omnibus or Minibus) provides a legislative vehicle to attach some sequester tweaks.

 3. Put away the meat ax for defense (A GOP win):

The primary objection to the FY13 sequester is the “meat ax” approach to the cuts and their across-the-board nature. Senate Armed Services Ranking Republican James Inhofe (R-OK) has floated a proposal that would keep the meat-ax in place for the non-defense cuts, but to give the Pentagon flexibility on the ~$42B in FY13 sequester cuts to defense. This proposal – if applied to all the cuts – could be a “fail safe” option if all other solutions fail. The sequester dollar amounts would remain, though instead of applying to every agency program, the agency chiefs would cherry pick the cuts. The Obama Administration opposes this because their agency chiefs would in effect “own” the cuts and the resulting public/media outcry.

The kick-the-can options could create a situation where the sequester continues to hang around, a new version of the AMT Patch and Doc Fix. Krueger: “Our base case remains a series of endless policy cliffs. Short-term extensions of these cliffs could result in an endless game of kick the can — until the can kicks back.”

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Pethokoukis, Economics, Taxes and Spending

The New York Times just wrote one abysmal editorial on raising taxes

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022213taxes

What a misguided yet clarifying editorial on taxes from The New York Times. I think we are going to have to take this one apart sentence by sentence:

1. “To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class.”

First, congrats to the NYT for admitting that Democrats eventually will shift their tax-raising sights from billionaires and millionaires and households making over $450,000. To afford the level of spending Democrats desire, everyone will need to pay more (probably with a VAT). As former White House economist Jared Bernstein told the NYT recently, “We’re not collecting the revenue we need to support the spending we want.”

Second, I doubt the good Keynesians on the NYT editorial board even believe that it’s necessary to reduce the deficit during a weak economy. NYT columnist Paul Krugman sure doesn’t seem to think so. Krugman in today’s paper: “America doesn’t face a deficit crisis, nor will it face such a crisis anytime soon. We should be spending more, not less, until we’re close to full employment.” The NYT editorial is using the excuse of deficit reduction to push through more upper-income tax hikes to make it easier to later argue for middle-class tax hikes.

Third, here is how you do deficit reduction, courtesy of economists Alberto Alesina and Francesco Giavazzi: “The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear … adjustments achieved through spending cuts are less recessionary than those achieved through tax increases … spending-based consolidations accompanied by the right polices tend to be less recessionary … only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilisation – if not the reduction – of debt-to-GDP ratios.”

2. “Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes.”

Wait, what? The Congressional Budget Office says publicly-held debt will increase by $7 trillion over the next decade even though revenue as a share of GDP will average a percentage point more than its post-WWII average. 19% vs. 18%. Tax revenue isn’t historically low, spending is historically high.

3. “And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.”

Again, we don’t need to raise taxes now. But that point aside, the NYTimes is wrong that upper-income tax hikes don’t hurt growth. Even the CBO and its static tax scoring said that the recent upper-income tax hikes will likely cost 200,000 jobs and knock a quarter percentage point off GDP in 2013.

4. As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

This is just bad economics. First, raising investment taxes by 60% means less investment and less growth from a tax code already biased against investment. Second, the 39.6% top rate (actually more like 41%) is high by the standards of the past quarter century. Third, the actual tax burden is headed to an historically high level, 19.1% of GDP by 2023 vs. 18%. Fourth, if the NYT editorial board wants to argue taxes should return to pre-Reagan levels of 70% or higher, I urge it to first read this.

5. Raising taxes at the top is neither punitive nor gratuitous. It is a needed step, both to achieve near-term budget goals and to lay the foundation for a healthy budget in the future. As the economy strengthens and the population ages, more taxes will be needed from further down the income scale, both to meet foreseeable commitments, especially health care, as well as unforeseeable developments, from wars to technological challenges. But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time.

As I have written, I doubt the US tax burden can stay at its historical average. But the next steps — along with entitlement reform — should be to raise revenue though higher economic growth, not by cranking up marginal rates and further penalizing savings and investment. Tax and spending reform should come first to show Americans their taxes are being collected and then spent in a relatively efficient manner. But with visions of VATs and surtaxes dancing in its collective head, the New York Times wants tax hikes in the worst possible way. And if it gets its way, taxes will go up in the worst possible way.

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Pethokoukis

A brief defense of school vouchers

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AEI’s Michael McShane ably defends vouchers from ill-informed attacks by Ember Reichgott Junge, the Democrat-Farm-Labor representative in the Minnesota State Legislature who authored  America’s first charter school bill:

For someone who spent so much time excoriating her opponents for giving short shrift to the complexities of the arguments that she was making for charter schools, I was quite surprised to see such a glib denunciation of vouchers. It read like a politician trying to score points.

Moreover, her criticisms of voucher programs are often off the mark. Her claim that, “private schools neither abide by state regulations nor are required to commit to performance standards or outcomes” (pg. 201) is not true. The three largest non-special needs school voucher programs (Milwaukee, Indiana, and Louisiana) all require participating schools to take the same standardized tests as the public schools.

Similarly, when she says that charter schools are more “inclusive” because private school tuition is higher than most voucher amounts and “families receiving vouchers must still raise the remainder of the tuition” (pg. 202) she incorrectly characterizes almost every voucher program in America. Only the Milwaukee, Cleveland, and Ohio EdChoice scholarships require parents to meet the difference between the voucher amount and tuition, and that only applies to families with incomes more than 200% higher than the federal poverty line.

But beyond that, McShane recommends Reichgott Junge’s new book Zero Chance of Passage: The Pioneering Charter School Story.

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Pethokoukis, Economics, Taxes and Spending

A quick reminder of the Democrats’ endgame on taxes

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Image Credit: Leader Nancy Pelosi (Flickr) (CC BY 2.0)

Image Credit: Leader Nancy Pelosi (Flickr) (CC BY 2.0)

Former US Deputy Treasury Secretary Roger Altman offers a sequester escape route (via the FT):

Unblocking the impasse should follow three principles. First, further deficit reductions are necessary. Second, they must incorporate both reductions in entitlement spending, which is growing too quickly, and increases in tax revenue, which is growing too slowly. Third, they should be phased in to protect the still fragile economy.

Later in the piece, Altman says he would raise more tax revenue by reducing the value of tax deductions for high earners. The Obama White House is pushing for about $500 billion in such tax hikes.

But the tax hikes won’t stop there. I think it is a good time to remind ourselves of the Democrat/liberal/progressive endgame. Here is Altman back in 2009:

We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama’s pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.

How much money would Altman like to raise from a VAT? Well, back in 2009 — Democrats were VAT-crazy that year — I heard him at a Center for American Progress event recommend a $400 billion VAT. Correction: A $400 billion a year VAT. (BTW, that would be a massive middle-class tax hike.) If we did the Altman plan this year — and assuming no further tax hikes — tax revenue would jump from $2.7 trillion, or 16.9% of GDP to $3.1 trillion, or 19.3% of GDP. And assuming no economic damage, tax revenue would easily be over 22% of GDP by 2023 vs 18% historically.

The US tax burden likely does need to rise above its historic average in coming years. But it needs to be done in a pro-growth way — not layering a VAT on the existing tax code — and combined with entitlement reform.

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Pethokoukis

Charles Murray on universal prekindergarten

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Charles Murray on the feasibility and potential benefits of President Obama’s call for universal prekindergarten (via Bloomberg):

The take-away from the story of early childhood education is that the very best programs probably do a modest amount of good in the long run, while the early education program that can feasibly be deployed on a national scale, Head Start, has never proved long-term results in half a century of existence. In the most rigorous evaluation ever conducted, Head Start doesn’t show results that persist even until the third grade.

Let me rephrase this more starkly: As of 2013, no one knows how to use government programs to provide large numbers of small children who are not flourishing with what they need. It’s not a matter of money. We just don’t know how.

Is there anything that money can buy for these children? I am sure that Head Start buys some of them a few hours a day in a safer, warmer and more nurturing environment than the one they have at home. Whenever that’s true, I don’t care about long-term outcomes. Accomplishing just that much is a good in itself. But how often is it true? To what extent does Head Start systematically fail to serve the children who need those few hours of refuge the most?

Asking those questions forces us to confront a reality that politicians and other opinion leaders have ducked for decades: America has far too many children born to men and women who do not provide safe, warm and nurturing environments for their offspring — not because there’s no money to be found for food, clothing and shelter, but because they are not committed to fulfilling the obligations that child-bearing brings with it.

This head-in-the-sand attitude has to change. If we don’t know how to substitute for absent, uncaring or incompetent parenting with outside interventions, then we have to think about how we increase the odds that children are born to present, caring and competent parents.

So a targeted, not universal, pre-K plan for poor kids might do some good, that’s my takeaway. No guarantees, as Murray explains. Certainly the data has yet to catch up to the expansive $100 billion plan from the Center for American Progress. But as Murray suggests at the end of this piece, there’s more to this story than money ….

6
Economics, Pethokoukis

Should Republicans keep pushing for a 25% top tax rate?

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Image Credit: Susan E Adams (Flickr) (CC BY-SA 2.0)

Image Credit: Susan E Adams (Flickr) (CC BY-SA 2.0)

What would be a sensible top marginal income tax rate? It was 28% (kind of) when Ronald Reagan left the White House. After rising to 40% under George Bush and Bill Clinton, it fell back to 35% under George W. Bush’s 2001 tax cuts (now reversed). Mitt Romney’s across-the-board tax cut plan would have pegged it at 28%. Finally, Paul Ryan’s Path to Prosperity set the top rate at 25% — and that seems more or less to be where Washington Republicans are right now.

Ramesh Ponnuru, in his (excellent) call for a post-Reagan economic agenda, says the following:

A Republican Party attentive to today’s problems rather than yesterday’s would work to lighten the burden of the payroll tax, not just the income tax. An expanded child tax credit that offset the burden of both taxes would be the kind of broad-based middle-class tax relief that Reagan delivered. Republicans should make room for this idea in their budgets, even if it means giving up on the idea of a 25 percent top tax rate.

Bloomberg’s Josh Barro, a tax expert, thinks for the fiscal math to work, conservatives and Republicans need to accept a top rate of around 40%. Reihan Salam counters that advocates of the expanded child tax credit, including Ponnuru and economist Bob Stein, probably aren’t too far from that view.

Certainly the politics don’t seem to be there right now for a one-third cut in top tax rates. Moreover, if forced I would guess the revenue-maximization inflection point of the Laffer Curve is considerably above 25% in the US today. Of course, the Laffer Curve only addresses short-term economic impacts. Given those the optimal revenue-maximizing rate is likely considerably below the laughable 70% (or higher) level some liberal economists advocate. (The version of the progressive consumption tax that I like, produced by AEI’s Alan Viard, has a top rate of 35%.)

At its current level, the top marginal rate isn’t a pressing problem compared to a) high corporate tax rates, b) high (and rising) investment taxes, and c) a tax code that should be much friendlier to parents. That’s where GOPers should spend their political capital. I also agree with this suggestion from Reihan:

I’ve been suggesting that Republicans ought to counter the president’s call for eliminating various tax expenditures to increase tax revenues beyond the levels reached under ATRA, AKA the fiscal cliff deal, by suggesting that we apply the revenue from the elimination of tax expenditures to an expanded child credit that could be used to offset payroll taxes, a la the Stein plan. This would leave the top rate under ATRA untouched while shifting the terms of the tax debate to friendlier terrain. Granted, this isn’t a consensus view among Republicans, but I think realism demands that conservatives recognize that for now at least, the political case for reducing the top marginal tax rate is relatively weak.

 

 

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Economics, Pethokoukis, U.S. Economy

Will the sequester really knock almost a point from GDP and cost 700,000 jobs?

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Image Credit: Macroeconomic Advisers LLC

Image Credit: Macroeconomic Advisers LLC

“The macroeconomic impact of the sequestration is not catastrophic.” That’s the bottom line conclusion of Macroeconomic Advisers, the highly regarded consulting firm. The US economy would grow 2.0% this year instead of 2.6% without the sequester, according to the MA economic model. This forecast is featured in a New York Times piece about the sequester, “Budget Cuts Seen a Risk to Growth of U.S. Economy.”

In addition, the across-the-board spending cuts would nudge up the unemployment rate by a quarter point, reflecting a loss of roughly 700,000 jobs by the end of 2014. But GDP growth bounces back to slightly above trend next year as the previous slowdown and rising unemployment leads “financial markets to expect a later  tightening of monetary policy. This lowers long-term yields roughly enough to just offset additional fiscal drag in 2014.” Bernanke and expectations to the rescue.

1. You know what else was supposed to kill 700,000 jobs? The Obama tax hikes on small business and wealthier Americans. Just sayin’.

2. By definition, lower government spending will lower GDP in the short-term since government spending is itself a component — along with consumption, investment, and net exports — of GDP. Interestingly, the MA forecast assumes an actual spending reduction — budget outlays rather than budget authority — of just $44 billion this year, then increasing to $89 billion in 2014 and then to $102 to $110 billion after.

So how will $44 billion produce such a large — though not “catastrophic” — drop in GDP? MA uses a model with a fiscal multiplier. It assumes a change in government spending, either an increase or decrease, will produce a change in output that is some multiple or other of the initial change. These Keynesian multipliers are tricky business. Back in 2009, MA’s model predicted GDP would rise 3.7% in 2010, thanks to the stimulus-led recovery (versus the White House forecast of 3.2%). In actually, GDP rose by 2.4%. Maybe the MA multiplier is overly sensitive to changes in government spending.

Not to pick on the firm, but taking these forecasts with a grain of salt is recommended. So too the negative link between spending cuts and economic growth. As I pointed out the other day:

The U.S. fiscal deficit has fallen to about 6.5% of GDP from a peak of 10.4% in late 2009. Now how has the private-sector economy been faring during this period of government retrenchment? Not bad, all else equal. Nominal private-sector GDP has risen by 5% each of the past two years. Of course, the “all else equal” ignores the need for some catch-up years of higher-than-average growth to close the output gap. But that will require some pro-growth tax and regulatory policies not on Washington’s agenda right now. … What we are seeing is a slow reformulation of GDP, less government, more business. That’s a good thing — and the sequester will accelerate that transition.

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