Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Pethokoukis

And what AEI study was Joe Biden talking about?

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Again, the vice president, last night:

Now, there’s not enough — the reason why the AEI study, the American Enterprise Institute study, the Tax Policy Center study, the reason they all say it’s going — taxes go up on the middle class, the only way you can find $5 trillion in loopholes is cut the mortgage deduction for middle-class people, cut the health care deduction, middle-class people, take away their ability to get a tax break to send their kids to college. That’s why they arrive at it.

Actually, AEI scholar Alex Brill concluded just the opposite:

Some of the specific assumptions that TPC made in its analysis of Romney’s tax plan are also highly questionable. By reconsidering just three components of the TPC’s analysis, the conclusions it draws get turned upside down.

More base-broadeners are on the table. TPC originally claimed that the Romney plan would raise taxes on the middle class by $86 billion. After a critique by AEI colleague Matt Jensen, who pointed out additional opportunities for base-broadening, TPC downgraded its estimate considerably. Specifically, Jensen pointed out that the exclusion of interest on state and local bonds and the exclusion of inside buildup on life-insurance products could yield more revenue. TPC then acknowledged that repeal of these provisions would raise approximately $45 billion from high-income taxpayers, reducing any need to tax the middle class by the same amount. The result: A purported $86 billion tax increase on the middle class shrinks to $41 billion.

The TPC revenue baseline assumption is inflated. TPC assumed that the baseline against which Romney is seeking revenue neutrality includes a 0.9 percent surcharge on “earned” income and an additional 3.8 percent surcharge on “unearned” income of high-income taxpayers that were adopted in the healthcare law. Romney has proposed repealing these taxes, but has not suggested that the cost of repeal would be paid for by tax reform. Instead, the budget effect of repealing these taxes should be analyzed in the context of the repeal of various other healthcare provisions.

Despite TPC’s assertion that adjusting its baseline assumption “does not alter our primary conclusion,” the revenue consequence of repealing this tax in 2015 is a full $29 billion, all of which falls on high-income earners. Correcting the baseline by removing this provision means that more of the revenue raised by broadening the tax base on high-income taxpayers can be used to finance tax reductions for the middle class. The result: A $41 billion tax increase shrinks to $12 billion.

Even modest economic growth makes a difference. And finally, the important factor that I discussed above. Based on Table 3-1 of the “Analytical Perspectives” report by the president’s Office of Management and Budget, I compute that if the economy were to grow just 0.1 percentage point faster per year as a result of the reform, the additional revenue in 2015 would be approximately $13 billion. The result: A $12 billion tax increase on the middle class actually becomes a tax cut.

And just like that, the Democrats’ attacks that Romney wants to raise taxes on the middle class become false.

If Obama and Biden are looking for some interesting AEI tax studies, how about this one showing that their new budget creates a massive middle-class tax liability?

 

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Pethokoukis

Joe Biden’s (and Barack Obama’s) very strange theory on what caused the Great Recession

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Image Credit: White House Flickr Stream

Image Credit: White House Flickr Stream

This is really embarrassing. Joe Biden at last night’s vice presidential debate:

And, by the way, they talk about this Great Recession if it fell out of the sky, like, “Oh, my goodness, where did it come from?” It came from this man voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can’t afford that.

For starters, Joe Biden didn’t fall out of the sky, either. As NBC’s First Read points out:

But looking at Biden’s own Senate votes, he voted for an early version of that Medicare prescription drug coverage. But later, Biden did not support the final Medicare drug benefit that President George W. Bush signed into law.

And the vice president was incorrect when he suggested tonight that he did not support the two wars because the country could “not afford” them. Biden voted for both wars.

But let’s set all that aside for the moment. Is Biden right that Paul Ryan’s and George W. Bush’s deficit spending and tax cuts caused the Great Recession? (Indeed, Obama has said much the same thing.) I’m not aware of an economic theory out there anywhere to support this idea. Keynesian economics, which Obama and Biden seem to support, would say that deficit spending and tax cuts would boost aggregate demand and help economic growth (maybe inflation, too). And how would that cause a financial crisis?

And besides, the Obama administration has added a lot more to the national debt ($5.3 trillion) in four years than the George W. Bush administration ($2 trillion) did in eight. And it wants to add plenty more in a second term.

Also, Obama and Biden supported continuing all the Bush tax cuts in 2010 and still want to keep most of them through at least 2013.

So if not the tax cuts or spending, then what?I suppose Biden could have blamed Bush’s housing policies, but Democrats starting with Bill Clinton were completely on board. Or maybe Biden could have blamed financial deregulation. But that happened in 1999 and was supported by Clinton, too. Or maybe  Biden could blame the Bernanke Fed since Bush appointed him in 2006. But Biden’s boss reappointed him in 2010.

So what, really, is Biden (and Obama) talking about?

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Pethokoukis

Who do you trust on Medicare? Obama and Biden trust Big Government

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When smirking and laughing Joe Biden talked about Medicare during last night’s vice presidential debate, he used the word “trust.” Biden:

These — look, these guys haven’t been big on Medicare from the beginning. Their party’s not been big on Medicare from the beginning. And they’ve always been about Social Security as little as you can do.

Look, folks, use your common sense. Who do you trust on this?

Kind of reminded me of this Joker bit from 1989′s “Batman”:

And now, folks, it’s time for “Who do you trust!” Hubba, hubba, hubba! Money, money, money! Who do you trust? Me? I’m giving away free money. And where is the Batman? He’s at home washing his tights!

“Hubba, hubba, hubba! Medicare, Medicare, Medicare! Who do you trust?” Good question. Obama and Biden, apparently, would trust government bureaucrats to become efficiency experts. And they would trust medical service providers — doctors, hospitals, researchers — to continue to do what they do for less and less money. Or Washington could pay more — and tax more. There’s no free money.

Mitt Romney and Paul Ryan, on other the hand, believe that choice and competition can provide more value and put the system on a fiscally sustainable path. You know, like in the rest of the U.S. economy .

Hubba, hubba, hubba, who do you trust?

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Economics, Pethokoukis

Here we go again! About that shocking drop in jobless claims …

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Apparently, we have a copycat on the loose! But seriously, a week after the strange drop in the unemployment rate, we have a strange drop in jobless claims. Here are two explanations from two pretty smart and savvy economists. First, Don Rissmiller of Strategas:

We received a number of questions this morning about the -30,000 w/w drop i seasonally adjusted initial jobless claims reported for the week ending October 6th. This change appears to reflect more noise, due to the seasonal factor, than signal.

The seasonal factor was expecting a roughly 18% increase w/w in unadjusted initial claims, so the approximate 8% increase caused the seasonally adjusted number to decline.

One of the driving reasons for the less-than-expected growth was one state, which was expected to report a large increase but instead reported a decline. Unfortunately we wil have to wait until next week’s release to find out which state it was; the state breakdow is always one week delayed. But we have been assured that no state was excluded from the aggregation. Weekly initial jobless claims is a very noisy series, one reason we placed more focus on the 4-week moving average (which has been roughly flat in 2012). There are signs of improvements in the labor market, but for the most part the “muddlethrough remains.

And Daniel Silver of JPMorgan:

Initial jobless claims fell 30,000 to 339,000 during the week ending October 6 from a figure for the prior week that was revised higher. This latest figure was the lowest level of claims in four years, but the Department of Labor cautioned that one state accounted for most of the drop in claims which may have been due to an issue with seasonal adjustment; the substantial 18.3% jump in seasonal factors associated with the week ending October 6 has the potential to create a volatile reading in the seasonally adjusted data. With this in mind, we will likely see some payback in the claims data reported next week. But through this potential volatility, it does look like the trend in the claims data is improving somewhat. We won’t know for sure which state caused the large drop in claims during the week ending October 6 until the state-level data become available next week. It was likely a state with a large population and we suspect that it was California based on the occasional massive swings that have occurred in its claims data in the past.

 

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Pethokoukis

A bridge to the past: The old-fashioned and obsolete economics of Obama and Biden

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Image Credit: Official White House Photo by Pete Souza (Wikimedia Commons)

Image Credit: Official White House Photo by Pete Souza (Wikimedia Commons)

Although the Obama-Biden campaign is arguing otherwise, Romney-Ryan are not proposing to dismantle America’s social insurance system. They want to mend and modernize the Welfare State, not rend it or end it. They want a safety net that is fiscally sustainable, one with incentives that are pro-family, pro-work, and pro-market. They are reformers, not radicals. They accept the existence of Medicare, Medicaid, and Social Security. They are not running to reverse Roosevelt.

But what about Barack Obama and Joe Biden? Are they reformers or are they something else? Do they basically accept the pro-market Reagan Revolution – as Bill Clinton did — or are they trying to reverse it?

Obamanomics is a bridge to the past. A backward movement rather than a forward one. Obama has directly dismissed Washington’s pro-market shift – including deregulation and lower marginal tax rates – of the past generation as an economic error that produced greater inequality but not much else. The president, last year, in Osawatomie, Kansas:

There is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes—especially for the wealthy—our economy will grow stronger. … But here’s the problem: It doesn’t work. It has never worked. … Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.

Then there’s Biden, who was a legislator throughout the Long Boom from 1983-2007. This is what Biden said when he announced his presidential bid in June 1987, as reported by The New York Times:

Pledging that he would challenge Americans to rise above ”the mere accumulation of material things,” Senator Joseph R. Biden Jr. today announced his candidacy for the Democratic nomination for President. ”For too long in this society, we have celebrated unrestrained individualism over common community,” Mr. Biden declared in this city where he made his political start as a county councilman.

”For too long as a nation, we have been lulled by the anthem of self-interest,” he continued. ”For a decade, led by Ronald Reagan, self-aggrandizement has been the full-throated cry of this society: ‘I’ve got mine so why don’t you get yours’ and ‘What’s in it for me?’ ” Kennedy Oratory Recalled

”We must rekindle the fire of idealism in our society,” he said in language that recalled the speeches of John F. Kennedy, ”for nothing suffocates the promise of America more than unbounded cynicism and indifference.”

Like his boss, Obama, Biden sees pro-market policies as having ushered in nothing more than a Decade of Greed — rather than a Decade of Growth that put quick end to America’s global decline.

Obamanomics is a bridge to the past, but a fantasy past where high taxes rates, widespread unionization, and a heavily regulated economy produced “shared prosperity” in the 1950s and 1960s. Former Bain Capital exec Ed Conard, however, dispelled the myth in his book Unintended Consequences:

The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.

Obamanomics is stuck in the 1970s as Obama and Biden today talk up public television, high-speed rail, and Keynesian economic tinkering. Take the idea of those superfast bullet trains, something both Obama and Biden are fascinated with. They are eager to spend billions in promoting what may soon become an obsolete mode of transportation:

Boyhood memories of trains and fascination with steam locomotives bind much of the railfan community together and nostalgia brings everyone out for photo shoots when a classic train makes an appearance, but that very same nostalgia should make us cautious when planners propose massive high speed rail projects to reduce travel time between cities and eliminate congestion on our roads. Although those goals are admirable, the rail projects are rooted in the past and ignore the various technologies already appearing in intelligent cars and the rapidly approaching autonomous cars, like those being tested by Google, as potentially far better solutions than trains could ever be. Intelligent and autonomous cars make high speed rail seem outdated before the project is even under way.

To be the dominant global economy in the 21st century and ensure a rising standard of living, America’s Welfare State must be modernized. And the nurturing the Innovation State must be prioritized. Looking wistfully backward to a past that never really was will accomplish neither.

 

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Pethokoukis

The unemployment rate has dropped by 0.3% or more 9 times since 1990. But none looked anything like last month’s decline

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Sam Ro over at Business Insider notes that a 0.3% or greater decline in the unemployment rate in a single month has occurred nine times since 1990 and four times since 2000, including last month.

I decided to go back and look at those instances. Here are the five during the 1990s:

1. 7.6% to 7.3% in October 1992. Economic backdrop:

– GDP growth was 4.2% in 3Q

– Household employment fell by 92,000

– Net new payrolls increased by 178,000

– The labor force participation rate fell to 66.2% from 66.5%

2. 6.4% to 6.1% in May 1994. Economic backdrop

– GDP growth was 5.6% in 2Q

– Household employment rose 574,000

– Net new payrolls increased 333,000

– The LFP rate rose to 66.6% from 66.5%

3.  5.6% to 5.3% in June 1996. Economic backdrop:

– GDP growth was 7.1%

– Household employment rose 358,000

– Net new payrolls rose by 279,000

– The LFP rate stayed flat at 66.7%

 4. 5.5% to 5.1% in August 1996. Economic backdrop:

– GDP growth was 3.5%

– Household employment rose by 225,000

– Net new payrolls rose by 197,000

– The LFP rate fell to 66.7% from 66.9%

5. 4.7% to 4.3%  April 1998. Economic backdrop:

– GDP growth was 3.6%

– Household employment rose by 395,000

– Net new payrolls rose by 278,000

– The LFP rate fell to 67.0% from 67.1%

What we see in these five 1990s examples is that they occurred during periods of strong growth, with GDP growth averaging 4.8%. That strong growth usually generated, in turn, strong job gains in both Labor Department job surveys. October 1992 was a bit of an exception because of the decline in jobs as measured by the household survey (the one they use to calculate the unemployment rate). But that drop was offset by a huge decline in the LFP rate.

Now let’s look at the four instances when the unemployment rate fell sharply during a period of weak economic growth:

1. 9.9% to 9.6% in May 2010. Economic backdrop:

– GDP growth was 2.2%

– Household employment rose by 34,000

– Net new payrolls rose by 516,000

– The LFP rate fell to 64.9% from 65.1%

2.  9.8% to 9.4% in December 2010. Economic backdrop:

– GDP growth was 2.4%

– Household employment rose by 283,000

– Net new payrolls rose by 120,000

– The LFP rate fell to 64.3% from 64.5%

3. 9.4% to 9.1% in January 2011. Economic backdrop:

– GDP growth was 0.1%

– Household  employment rose by 110,000

– Net new payrolls rose by 110,000

– The LFP rate fell to 64.2% from 64.3%

4. 8.1% to 7.8% in September 2012. Economic backdrop:

– GDP growth is probably between 1% and 2%

– Household employment rose by 873,000

– New new payrolls rose by 114,000

– The LFP rose to 63.6% from 63.5%.

What we see here is that modest growth generated modest jobs gains, and the drops in the unemployment rate were helped along by declines in the labor force participation rate.

Except for last month. In September, we got a weird combination of weak growth, a rising labor force participation rate and otherworldly job gains as measured by the household survey.

It is a puzzler and suggests we may see a reversion or correction when the next job report comes out the first week of November.

 

 

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Pethokoukis

Chuck Schumer’s tax reform plan made a ‘grand bargain’ less likely and a plunge over the fiscal cliff more likely

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Image Credit: Senator Charles Schumer Flickr stream

Image Credit: Senator Charles Schumer Flickr stream

I don’t see how Sen. Chuck Schumer’s speech on tax reform yesterday helped anything — other than providing further clarity on how Democrats are going to try and deal with the exploding national debt: taxes, taxes, and more taxes.

The speech certainly didn’t make striking a deal on avoiding the fiscal cliff — much less getting a “grand bargain” on tax and entitlement reform — more likely. Here is the core of Schumernomics:

These three principles–curtailing tax expenditures, returning to a Clinton-era top rate, and reducing but not eliminating the tax preference for investment income–provide a foundation for a tax reform plan that would reduce the deficit without hurting the middle class.

A few observations:

1. Schumer totally mischaracterized his opponents arguments. Schumer:

The lesson here is that contrary to the view of the supply-siders, the level of the top rate does not, by itself, dictate what happens to GDP.

Supply-siders certainly think income tax rates matter — a lot — but they do not think tax rate levels are the only thing that matters. (Immigration, regulation, monetary policy are all pretty important, too, just to name a few.) Many liberals these days, by contrast, seem to think that tax rates don’t matter much at all, unless top rates are in the 70% to 90% range.

2. He offers Republicans and conservatives nothing. Schumer:

Now, you may ask, “Hey, what’s in this for Republicans? Why would they come to the table around a proposal that doesn’t cut rates?”

For one thing, they get serious deficit reduction–which will matter to the true budget hawks left within the Republican Party. That is no small achievement.

What else besides deficit reduction would Republicans quote-unquote “get” out of tax reform? Well, that’s the wrong way to think about it. The lure for Republicans to come to the table around a grand bargain should be the potential for serious entitlement reform, not the promise of a lower top rate in tax reform.

Democrats will never sign on to a shredding of the safety net because it isn’t necessary to change the fundamental way Medicare works. But we can find ways to reduce Medicare costs by hundreds of billions of dollars. That is tough medicine but still preserves the safety net.

That is how a grand bargain can be had: Republicans get entitlement reform, while Democrats get revenue.

That might be the way to a big deal, except that Democrats, including President Obama, have spent the past two years attacking the GOP’s big idea on entitlement reform, premium support. In fact, Schumer clearly rejects it in his speech: ” … it isn’t necessary to change the fundamental way Medicare works.”

3. Schumer tries to make the tax hikes seem pro-growth because they would reduce the deficit. This is EXACTLY the path being taken by Europe right with its heavy emphasis on tax hike-driven austerity. How’s that working out for them? Deficit reduction does the least amount of harm in the short term if it is light on tax hikes. But Schumer goes heavy on tax hikes.

4. Schumer negates the corporate income tax cut he endorses by embracing big hikes in capital gains and dividend taxes. Schumer:

For the third and final element of this tax reform model, we turn to investment income. It’s time to reduce the sizable differential in the tax treatment of earned and unearned income.
The reduction in the capital gains rate to 15 percent under President Bush tax was a major contributor to the growth in wealth disparity we see today.  … The extremely low 15 percent rate in effect today is an outlier. It is the lowest rate on investment income since the Great Depression.

Republicans have understood the need to raise it before. As part of the 1986 reform, Reagan raised it to 28 percent. Simpson-Bowles–which was supported by good Republicans like Tom Coburn–endorsed raising it too, all the way to the same level as ordinary income.

Now, if you are returning the top income rate to Clinton-era levels, as I have proposed, I do think it is too much to treat capital gains the same as ordinary income. We don’t need a 39.6 percent rate on capital gains.

This is anti-growth. See, capital gains are partly due to reinvested corporate earnings that have already been taxed and dividends represent earnings that have already been taxed. So what you have here is a double tax. And the U.S double tax is really high right now, as this chart shows:

Right now the combined corporate-cap gains tax is 50%, a 35% corporate tax  plus a 15% cap gains tax. Under a plausible Schumer scenario, the corporate tax rate would drop to 28% while the capital gains tax rate would rise to 28%. So under Schumer, the integrated or combined tax rate would actually rise. Why would any pro-growth politician on the right — or left for that matter — vote for such a plan?

In short, the Schumer plan would raise marginal rates, raise rates on capital, and reject real entitlement reform. Other than that, it’s a real winner.

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Pethokoukis

New government report casts even more doubt on the September jobs data

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According to the Labor Department’s just-released Job Openings and Labor Turnover survey, there were 3.6 million job openings on the last business day of August, “essentially unchanged from July.” The hires rate (3.3 percent) and separations rate (3.3 percent) “were little changed in August.”

JPMorgan puts those numbers in perspective:

There was not much change in the JOLTS data between July and August (the JOLTS data are reported with a longer lag than most other employment indicators we track). In general, the latest JOLTS data show that the labor market has lost some momentum in recent months and conditions still look soft.

Now maybe we saw a massive surge in economic growth and business confidence last month, causing a sharp deviation from the weak labor market conditions in August. Maybe the labor market exploded higher in September after a weak summer. That’s what the controversial household survey seemed to show, causing the big drop in the unemployment rate.

Maybe.

But that seems doubtful. By all measures, economic growth continues to slug along at just above stall speed. And business confidence as measured by the National Federation of Independent Business showed an unexpected drop last month.

The JOLTS data points to the September unemployment drop as being a statistical aberration.

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Pethokoukis

This video shows why the Ryan-Biden debate might not go as expected

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Sometimes debating a lightly informed or less informed opponent can be tougher than squaring off against an extremely knowledgeable one.

This is something Paul Ryan and Joe Biden might want to keep in mind before their debate tomorrow. As proof, let me point to a recent CNBC debate I had with Howard Dean, the former governor of Vermont. The news hook was a Congressional Research Service study which concluded tax cuts don’t boost economic growth. Here’s a clip of Dean and me:

I think I demolished both the study and the argument. But I am not sure I won this debate. Dean’s combo of ad hominem attack, misunderstanding of economic history and folksiness might have carried the day.

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Pethokoukis

Want a recession — or worse? Go back to the gold standard right now

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100912goldstandard

In a new research note, AEI’s John Makin examines the feasibility of an idea gaining some renewed popularity: returning to the gold standard. (I, of course, prefer the New Gold Standard.) Makin:

We are in a world still struggling with the aftermath of a financial crisis, where Europe has entered a bitter recession, the United States is experiencing sluggish economic growth and persistent high unemployment, and Chinese growth is slowing. It would be difficult for the United States to unilaterally engineer a return to a gold standard. Such a gold standard in a modern era of huge international capital flows would require an international agreement to fix exchange rates, something that seems highly unlikely—not to mention undesirable—in today’s world of volatile markets and weak demand, where most policymakers would prefer a weaker currency to help them shift a larger share of tepid global spending growth onto their own exports of goods and services.

Consider for a moment a thought experiment wherein the US government unilaterally decides to fix the dollar price of gold at a level that implies lower inflation. Under the rules of the gold standard, that would imply setting the dollar price of gold at a level below the current world market price. But that would not work. At such a level, private gold buyers would purchase their gold from the United States and experience a windfall gain. The US gold stock would fall, and the US money supply would fall as well, given a rigid gold standard rule. That kind of a deflationary shock would be disastrous in the current environment, where the Fed and other central banks have promised highly accommodative monetary policies aimed at increasing their holdings of government securities.

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