Entries Tagged as 'economy'

Pawlenty’s Blue-Collar Blues

David Frum June 8th, 2011 at 7:48 am 51 Comments

Tim Pawlenty supporters cite their man’s blue-collar origins as reason to hope that he can reach voters unreachable by say Mitt Romney or Jon Huntsman.

On the evidence of Pawlenty’s big economic speech at the University of Chicago, those hopes are unlikely to be realized.

The problem is not merely the Pawlenty economic plan itself, although it does not help.

The deeper problem is the fundamental view of the economy – of human society really – revealed by this answer to a Chicago student’s question, as recorded by FF‘s Noah Kristula-Green:

There’s about 5% of this country who are our entrepreneurial class … if that 5% becomes 6%, 7%, 8% or 9% then we have a bright future, and if that 5% becomes 4% 3% or 1%, we’re in deep doo doo, we’re in deep crap.

If you imagine that entrepreneurs form a small elite “class” – and that 95% or thereabouts of the human species merely ride along on the wealth created by others – well you may get an “A” in your seminar at the Objectivist Institute. On the other hand, you also probably disqualify yourself from winning much respect or affection (or even much of a hearing) from the voters you dismiss as unthinking order-takers.

Such a view puts the proponent on the wrong side of Adam Smith: “The propensity to truck, barter and exchange one thing for another is common to all men ….”

But maybe more relevantly and urgently, Tim Pawlenty has aligned himself on the wrong side of the first and greatest of Republicans, Abraham Lincoln, who in his 1859 address to the Wisconsin State Agricultural Society delivered a withering retort to those who advance the kind of argument that Tim Pawlenty yesterday advanced:

By some it is assumed that labor is available only in connection with capital – that nobody labors, unless somebody else owning capital, somehow, by the use of it, induces him to do it…. Having proceeded so far, they naturally conclude that all laborers are naturally either hired laborers or slaves. They further assume that whoever is once a hired laborer, is fatally fixed in that condition for life; and thence again, that his condition is as bad as, or worse than, that of a slave. This is the “mud-sill” theory. But another class of reasoners hold the opinion that there is no such relation between capital and labor as assumed; that there is no such thing as a free man being fatally fixed for life in the condition of a hired laborer; that both these assumptions are false, and all inferences from them groundless.

Pawlenty’s Tax Cuts Won’t Boost Jobs

June 7th, 2011 at 4:27 pm 25 Comments

During the Q&A session of Pawlenty’s economic policy speech Tuesday in Chicago, he was asked a simple question: why do we need even more tax cuts? The questioner noted that Pawlenty’s tax proposal would be the third generous tax cut towards the wealthy in recent history, and added: “if there’s a tax war going on, who’s winning that war?”

Pawlenty’s answer was not inspiring. Pawlenty seems to be trapped: he wants his economic policy to generate jobs, and he can articulate what is holding back job creation. However, it’s simply not clear how retaining tax cuts on high income earners solves the problems that Pawlenty identifies.

The crux of Pawlenty’s argument is that there is a small class of entrepreneurs who need to be given the right tax incentives to provide these jobs:

There’s about 5% of this country who are our entrepreneurial class … if that 5% becomes 6%, 7%, 8% or 9% then we have a bright future, and if that 5% becomes 4% 3% or 1%, we’re in deep doo doo, we’re in deep crap.

And what does this entrepreneurial class need to grow and hire people? It seems that Pawlenty has a good list:

it’s about what are those things we need to do make it more likely that businesses are going to start, grow, add employees, buy capital equipment, build buildings, conduct research, and do all the things it takes to keep a private economy going.

And what’s holding them back? Sometimes it’s taxes, other times it’s regulations:

Some of them talk about taxes, some of them talk about regulation, some of them talk about the slowness of permits, some of them talk about energy costs.

This is all very specific stuff, but this goes back to the original question Pawlenty was asked, why will lower taxes on upper-income earners help create jobs? What does that have to do with higher energy costs or slow permits?

Pawlenty rejected the argument that this debate is about income as opposed to job creation: ”I reject the premise that is about nominal measures of who gets wealthy.” If so, then he needs to figure out how his policy proposals deal with job creation.

Pawlenty Economic Plan: 30 Years Too Late

David Frum June 7th, 2011 at 9:39 am 35 Comments

Kudos to Tim Pawlenty for presenting a full statement of his economic approach. For the past year, the GOP has been offering budget policy as a substitute for economic policy. Pawlenty seems to understand the difference.

In a speech to be delivered today at the University of Chicago, Pawlenty will offer a major statement of his approach to tax, regulation and government spending: big cuts to personal and corporate income taxes, the elimination of capital gains taxes, the rollback of Dodd-Frank and the Affordable Care Act, and large but hazy commitments to cut federal spending. With his prior attacks on “fiat money,” Pawlenty has already made clear his preferences for a higher external value for a US dollar.

Pawlenty has thus cast himself as the latest apostle of the Jack Kemp-Steve Forbes-Wall Street Journal-Club for Growth policy of low taxes and tight money.**

It’s not a bad place to stand, politically. It can yield campaign contributions and generate enthusiasm from important segments of the Republican base.

But as economics, it’s troublesome.

Paul Volcker’s tight money policies of the late 1970s and early 1980s were an answer to the high inflation of those years. They worked too, if at painful cost.

Ronald Reagan’s tax-cut policies responded to another problem of those years: the slowdown in productivity growth after 1973. The supply-side economists hypothesized that productivity growth had slowed because capital investment had faltered. Reduce burdens on capital investment, and more capital investment would flow. Higher investment would translate into higher productivity-per-worker.

Did that policy work? Depends whom you ask. Productivity upticked a little in the 1980s, but the real improvement did not occur until the mid-1990s.

The question for today: to what problems are Pawlenty’s problems the answer?

There’s no inflation to be snuffed, and productivity is improving smartly: up 4.2% in manufacturing in the first quarter of 2011.

What we do suffer from are enormous levels of public and private debt, and lagging domestic demand for goods and services. Tight money will only add to the burden of public and private debt. Nor will a reduction in income taxes for the upper brackets help much with the demand problem: as we saw in the Bush years, rich people use extra income to buy additional capital assets. That’s just what the doctor ordered in the under-invested late 1970s and early 1980s. In the post-1995 era, however, the policy translates into asset bubbles.

Pawlenty has the right instincts. But he has the wrong answers.


** One historic note. Kemp and Forbes often tried to back-date their policy approach as the preferred “supply-side” policy of the 1980s. That’s not exactly true. At the time, the supply-siders were not nearly so enthusiastic about tight money as they would later maintain, because (i) tight money deepened the recession and cut into Reagan’s approval numbers and (ii) Volcker’s more-rapid-than-expected disinflation made nonsense of the Reagan administration’s deficit projections. I remember a cover story in the old American Spectator by WSJ lead editorialist Gregory Fossedal savaging Paul Volcker as a mad sorcerer wreaking havoc on supply-side hopes.

Economy Doomed to Downward Spiral

June 6th, 2011 at 11:09 pm 35 Comments

John Makin’s latest economic outlook letter reads like a preemptive obituary for the economy. The summary of Makin’s letter is that an economic slowdown is expected and it seems predictions that sustained economic growth would return this year will turn out to be wrong. The most disheartening news is that neither the late 2010 fiscal stimulus or the QE2 policy have been able to seriously dent unemployment numbers:

Both QE2 and a substantial additional fiscal stimulus package were enacted late in 2010, causing most growth forecasters, including myself, to raise their projections for first-half growth for 2011 to 4 percent. As we approach midyear, it appears that growth is averaging somewhere around 2.2 percent—too low to reduce the unemployment rate, currently at 9 percent.

Rather than discuss further monetary stimulus or extending and expanding payroll tax holidays, policy makers in Washington have embraced gridlock and austerity. The markets have noticed this and are planning accordingly.

Makin’s paper identifies a disturbing fatalism in the markets. With U.S. monetary authorities effectively neutered by political opposition and other nations expected to mishandle their own economic crisis, the markets are now counting on lower growth:

Markets know that the chance that everything will go right is perhaps not very high. They also know that the instruments available to repair problems, especially additional QE or additional US fiscal easing, are not only unavailable this year, but if anything may be used to move toward a less accommodative stance.

As a result, oil prices have started declining on the assumption that there will be less fuel use and inflation expectations have also been adjusted further downward.

The writing is on the wall. Dean Baker has declared we are entering a second great depression. Earlier on Monday Peter Diamond withdrew his nomination for a seat on the Federal Reserve Board of Governor’s giving the ironically named Club for Growth a skull-cap to hang on their wall as they celebrate his withdrawal.

From a completely cynical perspective, the one person who probably benefits from this is Mitt Romney. I’ve heard many conservatives complain that they just don’t think Romney has the tenacity or fighting spirit to take on Obama in a general election. If monetary and fiscal tightening results in a higher unemployment rate, then concerns that Romney can’t win should evaporate based on the anti-incumbency sentiment alone.

Of course, the disturbing possibility is that voters in November 2012 will be faced with the unhappy decision of having to choose between Democratic incumbents who have presided over a Japanese-style lost decade and Republicans whose solution is to slash Medicaid and radically change Medicare. It’s a depressing thought.

Follow Noah on Twitter: @noahkgreen

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Is GOP’s Default Talk Slowing Recovery?

David Frum June 6th, 2011 at 2:16 pm 44 Comments

Michael Barone is one of the smartest and most even-tempered observers in Washington.

In today’s D.C. Examiner he offers his answer to the important question, why is the economy so weak?

He blames the Obama administration both for bad public and – maybe even more – for dangerous political posturing.

On April 13, Barack Obama delivered a ballyhooed speech at George Washington University. The man who conservatives as well as liberal pundits told us was a combination of Edmund Burke and Reinhold Niebuhr was widely expected to present a serious plan to address the budget deficits and entitlement spending.

Instead, the man who can call on talented career professionals at the Office of Management and Budget to produce detailed blueprints gave us something in the nature of a few numbers scrawled on a paper napkin.

The man depicted as pragmatic and free of ideological cant indulged in cheap political rhetoric, accusing Republicans, including House Budget Committee Chairman Paul Ryan, who was in the audience, of pushing old ladies in wheelchairs down the hill and starving autistic children.

The signal was clear. Obama had already ignored his own deficit reduction commission in preparing his annual budget, which was later rejected 97-0 in the Senate. Now he was signaling that the time for governing was over and that he was entering campaign mode 19 months before the November 2012 election.

People took notice, especially those people who decide whether to hire or not. Goldman Sachs’ Current Activity Indicator stood at 4.2 percent in March. In April — in the middle of which came Obama’s GW speech — it was 1.6 percent. For May, it is 1.0 percent.

“That is a major drop in no time at all,” wrote Business Insider’s Joe Weisenthal.

After April 13, Obama Democrats went into campaign mode. They staged a poll-driven Senate vote to increase taxes on oil companies.

They launched a Mediscare campaign against Ryan’s budget resolution that all but four House Republicans had voted for. That seemed to pay off with a special election victory in the New York 26th congressional district.

The message to job creators was clear. Hire at your own risk. Higher taxes, more burdensome regulation and crony capitalism may be here for some time to come.

Personally, I’m not very convinced of the “business confidence” theory of the weak recovery.

I would myself lay much more emphasis on economic factors like: (i) the continuing destruction of American consumer wealth as housing prices deflate; (ii) the burden of rising oil prices; (iii) the collective decision of American consumers to increase their saving by 6 points of personal income – a laudable decision, but one that subtracts a lot of demand from the economy.

But if I were a believer in the business confidence theory, here’s the counter-question I’d put to Michael Barone:

Which is more likely to subtract from business confidence: a lame speech by the president – or a highly credible and sustained threat by the majority party in the House of Representatives to force a default on the debts, contracts, and other obligations of the United States?

Does Pawlenty Have a Jobs Plan?

June 6th, 2011 at 2:11 pm 10 Comments

On Tuesday, Tim Pawlenty will deliver his big economic policy speech in Chicago, promising a “specific plan for boosting the economy and creating jobs.” Despite unemployment currently being at 9.1%, it’s unlikely his speech will include actual policies for immediate job growth. So far Pawlenty’s messaging has focused on long-term debt concerns.

This preference is clear in his new YouTube video where Pawlenty opens up with his face right next to the National Debt Clock:

Pawlenty’s message: It’s going to be painful to bring down the debt but at least I’ll be honest with you about it. He promises to phase out ethanol subsidies, reform entitlements, reduce public employee benefits, and adds that there will be no more bailouts.

While these are laudable goals, they don’t speak to the problems of a weak economy right now; they all are about long term spending imbalances. The video doesn’t even acknowledge the unemployment rate or weak economic climate.

It will only be disappointing if Pawlenty’s speech tomorrow has nothing to say about the current economic pain. It will be worse if discredited fringe ideas are included in his speech as well, such as his ill-advised attack on “fiat money”.

Obama’s Bailout Didn’t Save Detroit

June 6th, 2011 at 1:01 am 48 Comments

As the battle lines for the 2012 presidential election begin to be drawn, it seems the Obama administration, according to recent reports, plans to use the “successful” bailout of the auto-industry as an important plank.

The pitch has already begun, evidenced by Joe Biden’s recent talking point: “When President Obama and I came into office, we faced an auto industry on the brink of extinction. Total collapse. At the time, many people thought the president should just let GM and Chrysler go under… The President disagreed.”

The left has fundamentally misrepresented the resurgence of the auto-industry and the impact of the bailout. Let’s first remember that not too long ago, President Obama told the American people that this was simply an “investment” that, in the long run, would cost taxpayers “not a dime.” Having read GM CEO Ed Whitacre’s April Wall Street Journal piece, “The GM Bailout: Paid Back in Full,” one would think this promise has been fulfilled.

Nevertheless, the GM bailout totaled $49.5 billion dollars – a number Mr. Whitacre’s company has not come close to touching. Instead, GM was referring to the $6.7 billion in loans given by the U.S. government, rather than the 60.8 percent public equity stake. But it’s a solid start, right? Well, one shouldn’t forget that the United States, in the bankruptcy process, also gave GM $13.4 billion in capital to aid the process. All in all, GM is paying back the government with the government’s own money (and at a lower interest rate because it’s paying back the loan). With GM’s projected stock price for next year, Bloomberg estimates losses ranging from $28 to $34 billion.

So once one takes the $75 billion in total funds/tax breaks allocated to GM and then adds the $13 billion given to Chrysler (only valued currently at $5 billion), it’s clear the cost is much more than presented. But what about the benefit? It’s clear, as one would expect, that the injection of tens of billions of dollars has allowed these companies to keep many Americans employed. How long will these jobs last, though?

The underlying structural problems with the auto-industry remain. While labor costs were cut during the bankruptcy period, they are still higher than Asian competitors. Furthermore, UAW President Bob King has been clear that his union will utterly reject any later concessions. As the automobile market moves towards smaller and more gas-efficient cars, a market quickly being seized by Asian companies like Hyundai and Kia, American automakers will again find themselves too inflexible to compete. This is not a new revelation – rather, it is history repeating itself. From the 1979 bailout of Chrysler, to the trade quotas of the 1980s, to today, we have protected domestic automakers from the forces of competition and to their own detriment.

Most importantly, there is the larger issue of principle. The Obama administration is making an attempt to set up political blinders, casting aside the moral hazard of prolonged interventionism. The Obama administration, patting itself on the back, doesn’t even feign a grimace at this state intervention into the private sector. “Extraordinary circumstances” do not contextualize this bailout, unlike those cited as justification for the financial sector. In its celebration comes the normalization of what was not too long ago inconceivable state action. And now this seemingly permanent governmental tool becomes a plank of the 2012 race, only to be rejected or codified by the American people. Our prosperity is contingent on the former.

GOP Brushes Off Default Warnings

June 4th, 2011 at 11:12 pm 61 Comments

The debt disease is catching and now threatens the very fabric of America.

While the media concentrates on the fiscal follies in Washington, D.C., the world of baseball is developing its own version of over-indebtedness.  Yes, even baseball—once truly America’s national pastime.

The Los Angeles Times, using leaked documents from a confidential briefing to baseball owners last month, revealed that nine of the thirty major league teams are now in violation of the leagues’ debt service rules.

For those of a certain turn of mind, here are the nine offenders:  Los Angeles Dodgers (no surprise there), the Mets (also not a surprise), the Orioles, Cubs, Tigers, Marlins, Phillies, Rangers and, of course, the Washington Nationals.  It isn’t enough that the Nationals and Orioles occupy the bottom rung of their respective divisions—now they have to add injury to insult by breaching the league debt ceiling!

What a metaphor.

Greece, Italy, and Portugal (occupants of the bottom rung of Euroland economies) pull down their northern neighbors with huge indebtedness and their past use of phony numbers.

California, Illinois and various other profligate states needed federal help last year to pay their state employees and, thus, pay their indebtedness to holders of their debt.

And now baseball.  Yes, the NFL and the NBA have their own labor-related problems, and the Atlanta Thrashers of the NHL will move to Winnipeg largely for financial reasons.  But, baseball!

All of this is prelude to an explanation of this last week’s discussions on the federal sovereign debt ceiling deadline of August 2.  As expected, nothing has changed.  House Republicans still want large entitlement savings (but not anything too great in Social Security or Medicare) and Democrats still insist on larger tax takes (but only from certain portions of the populace).

President Obama and House Republicans met and afterwards exchanged nasty words.

Vice President Biden’s talks “may” produce a debt down payment of $1 trillion over the next 10 years.  Now, this sized down payment ($1 trillion on what will be a $23 trillion debt) is smaller than the down payment now demanded by the Federal Housing Administration when it helps home purchasers gets mortgages.

Discussions on some form of enforcement mechanism occupy many policymakers.  Such mechanisms basically say, “Well, we cannot find a way to get our national debt under control right now, but we promise we will force ourselves to do it in the future.”

That’s about what Greece promised to the European Central Bank last year.  Is it unfair to note that it hasn’t happened yet and that Greek “restructuring” of its debt seems inevitable to some very smart analysts here and abroad?

Secretary Geithner visited the House Republicans yesterday afternoon.  He told them three things:  he isn’t lying about August 2 being the drop dead date on sovereign debt issuance;  he wants an agreement as soon as possible, just like House Speaker John Boehner;  and, he isn’t about to reveal the exact consequences to government services if the House fails to raise the debt ceiling.

House Republicans reportedly doubt the August 2 deadline, don’t want an agreement until it’s late (so that they can, as House Majority Leader Cantor has said, “get maximum leverage”) and don’t really believe that government services will be severely disrupted if the debt ceiling isn’t raised.

Anyway, the argument goes, other countries are in worse shape, so folks will still buy our debt.  And if 800,000 Americans lose their government jobs, and the military pay due in mid-August doesn’t get sent out, and if most of the federal office buildings throughout the land are shuttered, well, better that short term pain now, than even more painful consequences in the future.

Baseball tried that once—that strike began baseball’s decline as the national sport.

Football now seems ready to try something similar.

Hockey did it, too, and is just now recovering.

If the insanity continues to spread, perhaps the professional soccer and lacrosse leagues can do it, too.

After all, isn’t it just a little pain now to avoid real pain in the future?

Meanwhile, another ratings agency, Moody’s, warned that if it didn’t see real, concrete movement toward a large and believable debt reduction plan out of Washington, D.C., within the next six weeks, then it may really (truly) put America’s debt on watch with negative implications.

It’s all enough to make a man take a couple of days off and go watch the Nationals.  If they can meet payroll.

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Weak Economy May Hurt GOP Worse Than Dems

June 3rd, 2011 at 2:35 pm 83 Comments

Recent signs of an economic slowdown — stock market declines, so-so job numbers, sluggish growth — aren’t a good reason for Republicans to crack open the champagne. In fact, they could well end up being used to hurt Republicans in Congress. All other things being equal, of course, President Obama would be best off politically with a strong recovery but a weakening but still active one (that coincides with Republican House control) may be the next best thing for him.

It’s pretty simple: a strong recovery would help all incumbents and strengthen parties in places where they are naturally strong. In this kind of environment, Republicans would easily retain control of the House and almost certainly take the Senate even if Obama wins reelection. (There are currently eight Democratic seats Republicans can plausibly compete for and only two Republican-held seats where Democrats have a chance.)

A weakening economy, on the other hand, is likely to hurt anyone in power. With the President’s respectable approval numbers, a weak Republican field, and the near certainty that he’ll be able to put more resources behind a reelection bid than anyone on the Right, a Republican will have a hard time. Yes, a bad economy weakens Obama, but it isn’t necessarily fatal.

Democrats seeking seats in Congress, on the other hand, will have much more to run against in a failing economy particularly if no Republican at the top of the ticket can deliver charisma and resources equal to Obama’s. As the debt ceiling issue seems to be contributing to the slowdown, Democrats may have a plausible case to ask for a return of the House.  With redistricting likely to benefit Democrats in at least a few key states, holding a rather narrow House majority is going to be a challenge anyway.  Bottom line: a slowing economy hurts the President for sure but it could well hurt Republicans in Congress even more.

GOP’s Debt Fight Strategy Backfires

June 2nd, 2011 at 11:29 pm 36 Comments

A very strange thing happened this week—truth appeared in Washington, D.C.

After President Obama met with House Republicans, both sides told the media that the meeting had gone poorly, that no common ground was found, that House Budget Committee Chairman Paul Ryan had expressed anger to the President, and that progress on a deal to get the federal debt ceiling raised never materialized.

Now, in the good old days, even a meeting that involved the direst of enemies (think Israel and Syria) would result in positive boiler plate spin.  Something like this: “We had a frank and open discussion of the issues.  We found some common ground that holds promise for some further discussion in the future.  We continue to believe that we can find a solution to the most vexing of problems.”

In other words, “blah, blah, blah.” But last night, no “blah, blah, blah.” More than any other event of the past four months of talk on the debt extension, last night’s quotes revealed the true state of affairs.

Three things seem obvious.

First, House Republicans have been burnt by the Medicare attack from the White House and other Democrats.

Second, House Republicans don’t believe that the White House intends to have a comprehensive debt reduction plan of any serious magnitude before the 2012 elections.

Third, House Republicans now realize that failure to pass an increase in the debt ceiling (and any attendant consequences) will fall squarely on them.

As the GOP struggles to find some path to reverse these three “facts,” it seems to search further and further into unreality.

Initially, many in the caucus seemed to believe that the President would be blamed for any disruptions that occur if the debt ceiling isn’t increased.  That wishful thinking flies in the face of overwhelming evidence from past events.  The President always wins these kinds of confrontation, whether it is Ronald Reagan or Bill Clinton.  The House has to pass a debt ceiling increase or not.  Not the President.  Not the Senate.  And as the GOP has told, loudly, anyone within in shouting distance, it now controls the House and has the mandate to act from the people.

Some believe that following the “Toomey Plan” is the way out.  Secretary of the Treasury Tim Geithner has enough cash flow each month to pay principal and interest on outstanding debt.  After that, he will have to decide what departments to close down and what bills and salaries go unpaid.  When these folks realize the impact of such a decision on their individual districts, and the economic turmoil that will result, this fanciful idea will evaporate, also.

Finally, several Senators believe they can force President Obama into unveiling a “post debt ceiling failure” budget.  Then, they can attack that kind of budget.  The White House won’t fall for this kind of obvious gambit.

Where does that leave things?

In all likelihood, after delay and debate, the debt ceiling will increase.  The terms of “settlement” will be along these lines:  a meager “down payment” of $1 trillion or so in savings over the next decade and some form of “draconian” enforcement language that will compel savings in the future.

Of course, $1 trillion over the next ten years is little more than a rounding error compared to the size of the debt numbers projected, but it may make enough of a headline back home that Congressmen can survive such an obvious failure.

And, this occurs when the following facts prevail:  slowing economic growth, continued turbulence in European debt markets, recession in Japan, further housing value declines, 9 per cent unemployment, and a huge majority of Americans both losing confidence and saying that they believe that the nation is on the wrong track.

You don’t have to be a dour Scot to be pessimistic about any progress on getting the American fiscal house in order any time soon or any renewal of American voter faith in the federal government.