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New Romney tax plan goes the full Reagan

By James Pethokoukis

February 22, 2012, 1:48 pm

Back in January 1983, the Wall Street Journal published an editorial with the headline ”Finally, a Tax Cut,” referring to how the bulk of President Ronald Reagan’s tax reductions didn’t kick in until that year. It was as much an expression of relief as satisfaction.

Well, “finally a tax cut” plan from Mitt Romney. Oh, sure, Romney’s original plan did call for cutting corporate tax rates and capital gains tax rates for middle-incomers. It also called for abolishing the death tax. A nice start, but not nearly bold enough for a nation facing the sorts of economic challenges that America does.

Romney 2.0 goes the full Reagan. The plan’s centerpiece: An across-the-board tax-rate cut of 20 percent, returning the top rate to 28 percent, where it was when Reagan left office in January 1989. In addition, the tax rate for people in the lowest income bracket would drop to 8 percent from 10 percent, and to 20 percent from 25 percent for those Americans in the middle, according to the Wall Street Journal.

And how would Romney pay for the tax cuts? Well, the revenue would come through a combination of faster economic growth and new limits placed on deductions, exemptions, and credits—particularly on higher-income Americans. Indeed, if you are going to cut the corporate rate to 25 percent, as Romney proposes, then you really need to get top marginal rates in that ballpark, too, to avoid avoid creating distortions leading to tax shelter mania. (The Obama White House ignores this in its new corporate tax plan. Team Obama would lower the corporate rate to 28 percent, leaving a huge gap with the 40 percent top marginal individual income tax rate it also wants.)

Is the Romney plan as bold and aggressive as those proposed by Rick Santorum (two individual rates, 28 percent and 10 percent, along with a 17.5 percent corporate rate) and Newt Gingrich (a 15 percent flat income tax, 12.5 percent corporate tax, zero investment taxes)? Certainly not, though it remains to be seen how Romney would alter the vast tangle of tax preferences cluttering up the code. But Romney’s plan would have a much better chance of actually being enacted by the next Congress if he becomes the 45th president of the United States. So Romney should get points for realism.

But part of me wishes Romney would have listened a bit more to economic adviser Glenn Hubbard. In a recent Financial Times op-ed, Hubbard proposed a progressive consumption tax which would “drastically” lower tax rates on dividends and capital gains, along with equalizing the tax treatment of debt and equity. Instead, Romney would leave investment taxes at 15 percent for upper-income taxpayers, while eliminating them for families with an annual income below $200,000. Increasing the child-care tax credit would have been another intriguing option.

(Interestingly, Romney might pay more taxes under his own plan. Hubbard told the WSJ that Romney would direct his Treasury secretary—which might be Hubbard himself—to determine if some part of “carried interest” income from investment funds like Bain Capital should be taxed at regular income tax rates rather than at lower capital gains rates.)

Yet take a step back and consider the following: Romney wants to a) slash income tax rates by 20 percent, b) lower corporate tax rates by 30 percent while slashing corporate welfare, c) reform Social Security by gradually raising the retirement age and indexing benefit growth for higher-income retirees to inflation instead of wages, d) create a premium-support Medicare system for younger workers, and e) cut government spending by $500 billion during his first term. If Romney does become the Republican nominee, he would certainly be running on the boldest GOP agenda since Reagan ’80, maybe ever.

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Here’s the new and improved Romney tax cut plan

By James Pethokoukis

February 22, 2012, 12:36 pm

Here are the details of Mitt Romney’s new tax cut plan. My analysis is coming up:

– Make Permanent, Across-The-Board 20 Percent Cut In Marginal Rates. This bold stroke reduces the tax on the next dollar of income earned for all taxpayers. The new top rate of 28 percent returns to the top rate signed by President Reagan in 1986.

– Promote Savings And Investment For The American People. Mitt Romney will maintain the current 15 percent rate on income from qualified dividends and capital gains. He will cut taxes further on lower- and middle-income Americans by ensuring that families with an annual income below $200,000 will pay no taxes on income from capital gains, interest, and qualified dividends. These low tax rates will create powerful incentives for Americans to save and invest, while spurring business investment and economic growth.

– Abolish The Death Tax. Eliminating the death tax will allow families to pass assets between generations without complicated tax avoidance schemes and without breaking up family businesses.

– Repeal The Alternative Minimum Tax (AMT). The AMT was originally implemented in the 1970s with the purpose of ensuring that the wealthiest of Americans could not artificially reduce their tax burden. But if Congress fails to pass the annual AMT patch, many middle-income Americans will become ensnared in the AMT trap. It should be repealed immediately to eliminate harmful distortions in the tax code, and replaced with a simpler tax system that reduces tax avoidance schemes.

– Cut The Corporate Rate To 25 Percent. It is vital that the U.S. move to quickly reduce the corporate tax rate and put American companies on a level playing field. The high U.S. corporate tax rate handicaps the nation’s overall economy in competition with the rest of the world.

– Strengthen And Make Permanent The R&D Tax Credit. This credit promotes innovation in both manufacturing and non-manufacturing industries, and helps businesses plan their innovation spending. With a strong, permanent credit, companies will now be able to invest for the future with confidence.

– Switch To A Territorial Tax System. The United States taxes income on a worldwide basis, regardless of where it is earned. This worldwide system of taxation sets the U.S. apart from most other OECD countries, which have converted to territorial systems of taxation. Japan and the United Kingdom are two countries that recently traded their worldwide tax systems for territorial systems. This switch will promote U.S. interests in two key ways:

–  Repeal The Corporate Alternative Minimum Tax (AMT). One major drawback of the Corporate AMT is its effect of penalizing companies that invest in capital equipment. A growing economy depends on robust capital investment. Unfortunately, corporations that are subject to the Corporate AMT are unfairly hit by strict depreciation rules. Due to this chilling effect on capital investment, the corporate AMT must be fully repealed. Investment will no longer be penalized, spurring labor productivity, an increase in American incomes, and greater economic prosperity.

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Categories:  Economic Policy, Fiscal Policy and Taxes, U.S. Politics   |   Tags: , ,

Sorry, Kevin Drum, even the effective U.S. corporate tax rate is sky high

By James Pethokoukis

February 22, 2012, 12:15 pm

Over at Mother Jones, the always readable Kevin Drum takes issue with my criticism of President Obama’s new corporate tax plan, which lowers rates but raises corporate taxes by $250 billion:

In this entire thousand-word blast Pethokoukis apparently doesn’t have room to explain the distinction between statutory tax rates and effective rates. But it only takes a sentence or two, so here it is. The statutory rate is the top rate in the tax table. Right now it’s 35% for corporations. The effective rate is what corporations actually pay after their accountants are done combing the tax code for deductions and loopholes. The former is one of the highest in the world. That latter has been falling for years and is now one of the lowest. That’s right! The actual federal income tax paid by corporations is one of the lowest in the world. Even if you think statutory rates are more important, surely this is germane to the conversation?

Thanks, Kevin, for pointing that out! But guess what, the effective average tax rate American corporations pay is also really high, as this 2011 study notes:

We use publicly available financial statement information for 11,602 public corporations from 82 countries from 1988 to 2009 to estimate country-level effective tax rates (ETRs). We find that the location of a multinational and its subsidiaries substantially affects its worldwide ETR. Japanese firms always faced the highest ETRs. U.S. multinationals are among the highest taxed. Multinationals based in tax havens face the lowest taxes. … The findings in this study may hasten the development of U.S. tax reform by showing that U.S. multinational ETRs are among the highest in the world. Moreover, if territorial taxation further lowers the taxes on Japanese and British multinationals, then the U.S. may be forced to provide some tax relief for its multinationals to maintain some level of international tax competitiveness.

And here is a handy table from the study listing statutory and effective corporate tax rates from around the world. Note that the median U.S. effective tax rate is 25 percent for domestic firms and 30 percent for multinational firms vs. 21 percent (DOM) and 22 percent (MNC) for European corporations and 20 percent (DOM) and 19 percent (MNC) for Asian ones.

And a study from last February by AEI’s Kevin Hassett and Aparna Mathur found the following:

The United States is currently underperforming in global tax comparisons. The United States’ top statutory tax rates will soon be the highest in the OECD, and the US effective average and effective marginal tax rates are far above the OECD average. Any effort at corporate tax reform is therefore incomplete without a push toward addressing not only the high statutory rates, but also the relatively high effective average and marginal rates. These rates are the best indicators for capital investors of their true tax liability—much more so than the statutory rates.

By our calculation, the US statutory rate is nearly 10 percentage points higher than the effective average rate and nearly 17 percentage points higher than the effective marginal tax rate. Relative to other OECD countries, the United States is one of the worst performers on this score. The effective average tax rate for all OECD countries excluding the United States is 20.6 percent, while the effective marginal tax rate is 17.3 percent. The corresponding values for the United States are 29 percent and 23.6 percent.

 

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Secret Obama memo wanted the $800 billion stimulus to be—gasp!—$1.8 trillion

By James Pethokoukis

February 22, 2012, 10:09 am

It could have been bigger. Much, much bigger.

Back in late 2008, soon-to-be Obama White House economic adviser Christina Romer prepared a policy memo—the contents a mystery until now—about how the new administration should deal with the collapsing economy. Romer thought to really do the job, the stimulus—later called the American Recovery and Reinvestment Act—should have been $1.8 trillion (highlighting for emphasis):

 

This memo was dug up by Noam Scheiber of The New Republic magazine. Now, Obama never saw that $1.8 trillion number since Larry Summers, who was leading the econ team, thought it was politically impossible:

When Romer showed Summers her $1.7-to-$1.8 trillion figure late the week before the memo was due, he dismissed it as impractical. So Romer spent the next day or two coming up with a reasonable compromise: $1.2 trillion. In a revised document that she sent Summers over the weekend, she included the $1.2 trillion figure, along with two more limited options: about $600 billion and about $850 billion. … But with less than twenty-four hours before the memo needed to be in Obama’s hands, Summers informed her that he was inclined to strike the $1.2 trillion figure. Though Summers, like Romer, believed more stimulus was almost unambiguously better, he also felt that a $1.2 trillion proposal, to say nothing of $1.8 trillion, would be dead on arrival in Congress. Moreover, since Obama’s political operatives were convinced that any stimulus approaching a trillion dollars was hopeless, Summers worried that urging more than this amount would stamp him and Romer as oblivious in their eyes. “$1.2 trillion is nonplanetary,” he told Romer, invoking a Summers-ism for “ludicrous.” “People will think we don’t get it.”

When the economic team finally walked through the contents of the memo with the president-elect on December 16, Romer mentioned her preference for over a trillion dollars. Summers allowed that bigger would be better. But these points were made in passing. “I don’t remember that as part of the discussion,” conceded one member of the economic team in attendance. The final version of the memo had framed the debate around two basic choices—roughly $600 billion and roughly $850 billion—and these were the focus of the conversation. “The option of going well above $800 billion was certainly raised, but it was not discussed extensively,” Romer later recalled in an interview. “We felt the most important thing was to make sure the president-elect was on board with a plan as large as $800 billion.” Neither the memo nor the meeting would have given Obama reason to suspect this amount was arguably $1 trillion too small.

Good heavens. I recently wrote a post about Michael Grabell, a reporter for ProPublica. He documents the many failings of the American Recovery and Reinvestment Act in “Money Well Spent? The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History.”

In reporting on the stimulus over three years, I traveled to 15 states, interviewed hundreds of people and read through tens of thousands of government documents and project reports. What I found is that the stimulus failed to live up to its promise not because it was too small (as those on the left argue) or because Keynesian economics is obsolete (as those on the right argue), but because it was poorly designed. Even advocates for a bigger stimulus need to acknowledge that their argument is really one about design and presentation.

In short, Big Government screwed up the Big Spend. Joe Biden, Grabell notes, said the stimulus would “literally drop kick us out of the recession.” But Grabell concludes that “the stimulus ultimately failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.”

And Team Obama wanted it to be $1 trillion bigger?

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Why Obama’s corporate tax plan is a total bust

By James Pethokoukis

February 22, 2012, 8:33 am

The current U.S. economic recovery is arguably the worst in modern American history. Incomes are flat, housing is moribund, and the past three years have seen the longest stretch of high unemployment in this country since the Great Depression. Yet President Barack Obama—with the backing of Treasury Secretary Timothy Geithner—has the temerity to propose a corporate tax reform plan that would actually raise the tax burden on American business by $250 billion over a decade (and de facto on workers, too) without lowering rates to an internationally competitive level. This is a terrible, terrible plan:

1. The Obama-Geithner plan would lower the statutory corporate tax rate to 28 percent from 35 percent, currently the second-highest among advanced economies. But that would still leave the combined U.S. corporate tax rate—state and federal—at 32.2 percent, far above the OECD combined average of 25 percent. The U.S. combined rate would be a bit below slow-growing Japan and France but above the U.K. and Germany. That’s not nearly good enough. Canada just lowered its corporate tax rate, for instance, to 15 percent. So instead of having the second highest corporate tax rate in the world, the United States would probably be fourth behind Japan, France, and Belgium.

2. The Obama-Geithner plan would establish, according to the New York Times, a minimum tax on multinational corporations’ foreign earnings to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.

So instead of a carrot, Corporate America gets the stick. Instead of lowering the U.S. rate to a competitive level, Obama would raise the penalty on keeping profits overseas. Indeed, the United States is a huge outlier in that it taxes the foreign profits of multinational companies. Here is Obama’s own Jobs Council:

While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the U.S. subjects all worldwide earnings to the corporate income tax when they are brought home to the U.S. This approach actually encourages U.S. companies to keep their earnings abroad rather than investing them here at home. Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the so-called “lock-out” effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S.

Obama’s debt commission made a similar recommendation.

3. To pay for the lower tax rate, Obama would eliminate ”dozens of tax loopholes and subsidies,” according to Politico. But some of the money would be used to “lower the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy,” according to the Times.

First, the effective manufacturing tax rate would be higher than 25 percent once you add back state taxes. Second, the White House is sticking to its clean energy agenda even as other advanced economies like Germany and Spain are abandoning such wasteful subsidies. Again, this is ideology trumping economic reality.

4. Obama and Geithner apparently still don’t understand how harmful corporate taxes are. Here’s the OECD: “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

5. Obama and Geithner apparently still don’t understand who bears the burden of corporate taxes. It’s workers. AEI economists Kevin Hassett and Aparna Mathur have found that “corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

6. Obama and Geithner apparently don’t understand that “corporate income taxes have a highly significant and negative effect on long-term growth,” according to the Tax Foundation:

7. Obama and Geithner apparently don’t understand that U.S. corporate tax rates are so off the map that the best way to maximize revenue would be to flat out cut the top corporate rate 8.6 percentage points to 26.4 percent. You could then eliminate corporate welfare and take the rate even lower.

8. Obama and Geithner would take the top individual tax rate to 40 percent, leaving a 12 percentage-point gap with the corporate tax rate. This creates a huge incentive for tax sheltering.

Bottom line: Real pro-growth corporate tax policy would eliminate tax breaks, dramatically lower tax rates, and only tax profits earned at home. The Obama plan would actually make the corporate tax code and the U.S. economy less competitive and less productive. But the proposal does neatly fit into the president’s Occupy-inspired campaign theme that wealthy Americans and greedy corporations are to blame for the Great Recession and rising income inequality. Besides, how can Democrats ever raise taxes on the middle-class to pay for all their spending ideas without first socking it to the 1 percent and to business?

Obama had no experience in the private sector before becoming president. The free market is a sort of theoretical construct he learned about in college. But Geithner should know better. He’s had lots of contact with all sorts of executives, both at Treasury and when he ran the New York Federal Reserve Bank. If he has any doubts about this plan, he should resign. And if he doesn’t, he never should have gotten the job in the first place.

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Categories:  Economic Policy, Fiscal Policy and Taxes, U.S. Economy   |   Tags: , , ,

What might Romney’s new tax reform plan look like?

By James Pethokoukis

February 21, 2012, 2:07 pm

CNBC’s Larry Kudlow:

Team Romney tells me there will be a bolder tax-cut plan released either at the debate tomorrow night (if Mitt gets it in) or more formally at his Detroit Economic Club speech on Friday. I’m embargoed from releasing details until tomorrow. But I can say that the new plan will be across-the-board with supply-side incentives from rate reduction, and that it will help small-business owners as well as everyone else.

Phase two has finally arrived! What might it look like? Well, Romney’s 59-point jobs plan promises the following:

In the long run, Mitt Romney will pursue a conservative overhaul of the tax system that includes lower and flatter rates on a broader tax base. The approach taken by the Bowles-Simpson Commission is a good starting point for the discussion. The goal should be a simpler, more efficient, user-friendly, and less onerous tax system. Every American would be readily able to ascertain what they owed and why they owed it, and many forms of unproductive tax gamesmanship would be brought to an end. Conversely, tax reform should not be used as an under-the-radar means of raising taxes. Where reforms that simplify the code or encourage growth have the effect of increasing the tax burden, they should be offset by reductions in marginal rates. Washington’s problem is not too little revenue, but rather too much spending.

In addition to those guidelines, I think we can add the following:

– Romney has said he doesn’t want to raise capital gains tax rates, which Simpson-Bowles does.

– Romney wants to lower the corporate rate to at least 25 percent, meaning the top marginal tax rate probably needs to be in that vicinity.

– Romney is unlikely to suggest a net tax increase.

– Romney is unlikely to propose anything that would result in his own taxes directly being cut.

– Romney is unlikely to suggest “paying for” upper-income tax hikes by raising taxes on the middle class.

– Romney economic adviser Glenn Hubbard recently suggested “a progressive consumption tax, equalising the tax treatment of debt and equity, and drastically lowering tax rates on dividends and capital gains.”

A few weeks ago, I suggested two tax plans for Romney, an Entrepreneur First plan and a Family First plan:

There’s the Bowles-Simpson plan, which would get rid of all tax breaks and lower the top rate to 23 percent. Jon Huntsman stole it and then modified it by getting rid of investment taxes. That would be a great option for Romney, too. Call it the Entrepreneur First option and stress how it would boost growth, income, and jobs.

Or Romney could go with the Family First option. Under a plan created by conservative economist Robert Stein, rejiggering tax rates and tax credits would create a system where middle-income families with kids under 18 would pay substantially less in taxes while high-income workers and upper-middle-income taxpayers who do not have children in the home would pay more. Stein would also eliminate the double taxation of corporate income and cut the effective tax rate on capital investment.

In a pair of articles— here and here—the folks over at National Review have, in effect, suggested that Romney combine my two ideas, cutting marginal tax rates plus a fatter child tax credit for parents that can be applied against either income or payroll taxes. Pro-growth. Pro-family.

I like that approach a lot, as long as it also gets rid of corporate welfare and begins to phase out the mortgage interest deduction. The only two individual deductions or credits that I have much use for are the child tax credit and the charitable deduction. Among other things, both the family and civil society are counterweights against the State.

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Categories:  Economic Policy, Fiscal Policy and Taxes, U.S. Politics   |   Tags: , , ,

Santorum is right about U.S. ‘factory schools’

By James Pethokoukis

February 20, 2012, 4:42 pm

Rick Santorum is right on with this:

At another point on Saturday, Mr. Santorum repeated his skepticism about the government’s role in public education. He harked back to a pre-industrial 19th century when many Americans, including presidents, home-schooled their children. The public school, Mr. Santorum said, arose “when people came off the farms where they did home-school or have the little neighborhood school, and into these big factories, so we built equal factories called public schools.”

And it has been thus ever since, thanks in large part to government unions who have an interest in keeping the U.S. education system in a permanent state of suspended animation. Here is a great bit from Walter Russell Mead on factory schools:

Fordism was once a term of abuse hurled at the factory system by Marxist critics who, rightly, deplored the alienation and anomie that mass production for mass consumption entailed. Has the Fordist factory system and the big box consumerism that goes with it now become our ideal, the highest form of social life our minds can conceive? Social critics also denounced our school system, justifiably, as a mediocre, conformity inducing, alienating, time wasting system that trained kids to sit still, follow directions and move with the herd. The blue model built big-box schools where the children of factory workers could get the standardized social and intellectual training necessary to enable most of them to graduate into the big-box Ford plant and shop in the big-box store. Maybe that was a huge social advance at one time, but is that something to aspire to or be proud of today? Don’t we want to teach our children to do something smarter than move in large groups by the clock and the bell, follow directions and always color between the lines.

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Categories:  Economic Policy, Education   |   Tags: , ,

Oh, so this is what the Romney campaign is about (or should be)

By James Pethokoukis

February 20, 2012, 4:04 pm

Why does Mitt Romney want to be president? What is the big problem that President Fix-It would try to fix? Glenn Hubbard, a Romney economic adviser (and AEI visiting scholar) comes quite close to hitting the nail on the head in a recent Financial Times op-ed:

President Barack Obama said in his State of the Union that the US needs an economy “built to last”. Unfortunately, in his populist rhetoric, Mr Obama missed an opportunity to tee up the conversation the US must have during this election season: How do we restart dynamism in our economy, delivering productivity growth and raising living standards?

Hubbard, shorter: Faster, please!

And he’s right. The problem with the U.S. economy over the past decade has been anemic growth. From 2000 through 2010, average GDP growth was just 1.6 percent. Even if you toss out the Great Recession and the collapse of the Internet Bubble, growth was still below 3 percent. By contrast, from 1950-1999 the U.S. economy grew at an average pace of 3.5 percent a year. To the extent that people care about income inequality, it’s because the pie is barely growing. Inequality surged during the late 1990s, but it wasn’t a big issue because of strong income growth across the board. The pie was growing, so no Occupy Silicon Valley.

Hubbard says there are three keys to faster growth: innovation (“the development of entirely new products and business models”), investment (ensuring “that both domestic and foreign capital go to productive use”), and inclusion (supporting “Americans caught in the change that is a byproduct of our dynamism”).

And here are some of his policy ideas:

– strong federal backing for basic research.

– financial sector regulation that considers incentives to lend as well as financial stability.

– low capital gains tax rates make it cheaper to sell assets, thereby helping capital flow more smoothly to its most productive use for the economy.

–  reduction of marginal tax rates on corporate and individual incomes, broadening the tax base.

– cutting back on double taxation of corporate equity returns, which are taxed once at the corporate level and again at the investor level via taxes on dividends and capital gains.

– a progressive consumption tax, equalising the tax treatment of debt and equity, and drastically lowering tax rates on dividends and capital gains.

– replacement of outmoded federal training assistance with personal re-employment accounts.

– tax subsidies and education reforms that increase the affordability of community college, technical training, and university.

– tax and insurance market reforms in healthcare to reduce cost growth and increase take-home pay.

Hubbard was speaking for himself in the op-ed and gets out in front of his candidate, particularly by calling for a progressive consumption tax and slashing investment taxes. But both are great ideas.

More importantly, Hubbard suggests a unifying theme for the Romney campaign: prosperity. The U.S. economy may be growing and adding jobs, but it’s not prosperous—and it hasn’t been for awhile. Consider: According to Gallup, 77 percent of Americans are dissatisfied with “the way things are going” in the United States today. That number hasn’t been consistently above 50 percent in a decade. What we are seeing now in the polls is what stock market strategists would call a “relief rally”—as in relief the economy isn’t headed back into recession.

But that is not the same thing as a bull market. That requires real, sustainable growth. And that’s what 2012 should, in large part, be about.

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Categories:  Economic Policy, Fiscal Policy and Taxes, U.S. Economy   |   Tags: , , ,

Does The Economist really think Obama is a debt cutter like Clinton?

By James Pethokoukis

February 18, 2012, 12:30 pm

In The Economist’s Democracy in America blog, Roger McShane critiques a recent blog post I wrote about both a) Treasury Secretary Tim Geithner’s appearance before the House Budget Committee (where he now infamously told Chairman Paul Ryan “We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”) and b) the following OMB chart, which shows the long-term fiscal impact of President Obama’s new budget:

Here’s RM:

The chart is too obvious to be terrifying. That change in the slope of the debt-to-GDP curve starting in 2022 is caused by America’s increasing number of retirees and the rising cost of health care. There’s nothing original in noting that Medicare, Medicaid and Social Security are the main drivers of America’s long-term debt problem. But there it is in stark relief.

Mr Geithner’s comments suggest that the administration is taking a two-track approach to America’s debt problem. The first track involves whittling down America’s short-term deficit to reasonable levels. … Not bad, but it’s on the second track that the administration really disappoints. That track involves dealing with America’s out-of-control spending on entitlements, and this year’s budget largely avoids the problem. … Which leaves Mr Pethokoukis to conclude that “Obama has no interest in being Clinton 2.0, the Debt Cutting President. He wants to be FDR 2.0, the Expanding Welfare State President.”

Actually, it seems he wants to be both. Mr Pethokoukis forgets that Mr Obama pursued a grand bargain with John Boehner that would’ve raised taxes and cut the safety net. And he forgets that Mr Obama’s largest new programme, health-care reform, was fully paid for (and then some). … I could be wrong, but there seems to be just as much evidence pointing to Mr Obama as being Clinton 2.0 as FDR 2.0.

1. I’m just not impressed with the administration’s medium-term debt reduction efforts, as outlined by its 2012 budget. Even with a $1.7 trillion tax increase, debt as a share of output would be 77 percent of GDP in 2022, 80 percent if the White House used the slightly less optimistic CBO forecast. Recall the hysteria from the left over the Reagan deficits, which maxed out at just shy of 52 percent of GDP. Here is Simon Johnson, former chief economist at the IMF, on how much debt is too much:

Now, there are some people in official circles, including some of my former colleagues here, who use 60 percent of debt to GDP ratio. … Sixty percent is a lot of debt historically speaking for many economies. And depending on what kind of shocks you think you’re going to face, maybe that’s too much.

2. All the smarties at the IMF, World Bank, and OECD have repeatedly said that the magic economic formula for the United States was more economic stimulus now coupled with long-term entitlement reform. Well, we got the first but not the second. From my conversations with administration officials, I don’t get any sense that dealing with long-term debt issues is nearly as high a priority as, say, income inequality. Indeed, Obamacare extends coverage but does not “bend the curve.”

I wonder if RM thinks Geithner’s attitude makes sense with this fiscal future staring America in the face:

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Categories:  U.S. Economy, U.S. Politics, Uncategorized   |   Tags: ,

Because no one asked for it: The entire 2012 Economic Report of the President, as a word cloud

By James Pethokoukis

February 18, 2012, 11:07 am

Draw whatever conclusions you want from this Wordle word cloud I created of the just-out 2012 Economic Report of the President:

You can’ t really tell it from the word cloud, but the report mentions “freedom” once, “prosperity” twice … and “inequality” some 35 times.

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Here’s how the GOP presidential race blows up, and a new candidate comes on the scene

By James Pethokoukis

February 18, 2012, 10:45 am

Politico’s Mike Allen:

THE CONVERSATION: A tippy-top Republican, unprompted, yesterday sketched the germ of a plan for a new candidate if Rick Santorum upsets Mitt Romney in the Michigan primary on Feb. 28. Our friend brought visual aids: chicken-scratched versions of prosaic documents that are circulating among GOP insiders like nuclear-code sheets: In case of mayhem, break glass! …

Our friend handed us a printout of FEC deadlines for ballot access, with five of them circled and starred: California (March 23), Montana (March 12), New Jersey (April 2), New Mexico (March 16) and South Dakota (March 27). The point: Even after Feb. 28, it might be possible to assemble a Hail Mary candidacy that could garner enough delegates to force a CONTESTED convention (a different nuance than BROKERED, which implies that someone is in charge).

Under RNC rules, the delegate count builds slowly: just 15% before Super Tuesday, March 6; 19% through Super Tuesday (brings you to 34%); 17% in the rest of March (brings you to 51%); with 48% in April, May and June (21%, 12%, 15%).

Our friend said: “If somebody came on the scene that week after Super Tuesday with, ‘I’m coming in. I’m taking a look at this,’ there are enough delegates. He would suck all the oxygen out of the race. People wouldn’t even give a shit who won on these other dates in March that are after Super Tuesday. I mean, seriously, who would care? It would all be about a new savior.”

And who would that “new savior” be? Here are the Intrade odds for some GOPers not currently in the presidential race:

– Jeb Bush, 2.0 percent (up from 0.3 percent on Feb. 2)

– Mitch Daniels, 0.9 percent (up from 0.3 percent on Feb. 1)

– Chris Christie, 0.9 percent (up from 0.3 percent on Feb. 8.)

– Paul Ryan, 0.4 percent (up from 0.1 percent on Feb. 5).

So clearly the betting markets are recognizing that the chances of a new entrant have risen a bit. Of that group, Mitch Daniels was easily the closest to actually pulling the trigger last year. EXTREMELY close. Like, he had decided and then undecided. And imagine if Romney does lose Michigan, all these odds are going to skyrocket. Bush might want to turn off his iPhone or Blackberry the day after.

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Is the bloom off Elizabeth Warren (D-Occupy)?

By James Pethokoukis

February 17, 2012, 12:46 pm

The senatorial incarnation of President Obama’s Spread the Wealth reelection effort is Elizabeth Warren, running against Scott Brown in Massachusetts. A new poll has her way behind, though perhaps it is an outlier (via HuffPo):

Recall Warren’s famous class-warfare rant:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there — good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory… Now look. You built a factory and it turned into something terrific or a great idea — God Bless! Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Just saw a great response to this over at FreeEnterprise.com:

Facilities, services, and functions like infrastructure, education, and national defense are what economists call “public goods.” It’s true that they help create a platform upon which individuals can build, create, and achieve. But are they responsible for people’s success? Absolutely not.

If that were true, then why isn’t everyone successful and wealthy? Public goods are available to everyone and benefit everyone. No one can reap an exclusive return from them. So why do some people succeed and others don’t? Did Bill Gates, Steve Jobs, or Mark Zuckerberg succeed because the government maintains roads between their homes and offices, supports public schools with an average 30% dropout rate, or funds scholarships to the universities that these innovators famously dropped out of? I don’t think so.

It’s generous of Warren to permit risk takers to keep “a hunk” of what they’ve earned through their blood, sweat, and tears. In Warren’s world, government makes all success possible and is therefore entitled to reap everything that individuals sow.

And a few factoids that Warren may be unaware of:

– The top 1 percent pay 36.7 percent of federal income taxes and earn 16.9 percent of adjusted gross income (as of 2009).

–  The top 0.1 percent pay 17.1 percent of taxes and earn 7.8 percent of adjusted gross income.

–  The average income tax rate for the top 1 percent is 24 percent. The bottom 50 percent? Just 1.85 percent.

– The bottom 50 percent pay just 2.3 percent of income taxes.

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Who’s engaging in nostalgia economics?

By James Pethokoukis

February 17, 2012, 11:27 am

Are Republican 2012ers offering voters a bridge to the past? Here’s Politico’s headline story today: “Mitt Romney, Rick Santorum sell nostalgia in Michigan.” The gist is that the two presidential candidates are playing on the state’s collective memory of its manufacturing powerhouse past to make the case that the GOP can provide a brighter tomorrow:

For Romney, that means waxing sentimental about his family’s storied Michigan history — reminding voters of an earlier moment when his dad, George Romney, was a titan in the booming auto industry and the governor of a prosperous state. Santorum lacks Romney’s ancestral ties to the Feb. 28 primary battleground but makes up for it by emphasizing his working-class roots and a campaign platform fixed on reviving the depressed U.S. manufacturing sector.

It’s one thing to run a campaign on theme of restoring some economic golden age. That’s Campaigning 101. But it’s quite another to actually make economic policy based on nostalgia economics. And that’s exactly what the Obamacrats are trying to do. Walter Russell Mead calls it the Blue Model – the pre-1980s economy where unions were dominant, and even just a high school education apparently guaranteed a lifetime job with a fat defined benefit pension and ever-expanding benefits. Big Government, Big Labor, and Business forming an Iron Triangle capable of producing an equitable, sustainable prosperity: ”Unionized workers, then a far larger percentage of laborers than is the case today, got steady raises in steady jobs. The government got a steady flow of tax revenues. Shareholders got reasonably steady dividends.”

Of course, that model collapsed in the private sector under the weight of global competition and technological change. The Blue Model has shown greater staying power in government, but even there it’s finally running out of other people’s money to spend. But President Obama is implicitly calling for a return to the Blue Model when he fondly recalls how much more equal society was in the 1970s. And his path back to the Blue Model is higher taxes, higher spending, and more regulation. Not going to happen. Again, here is Mead:

Voters simply will not be taxed to cover the costs of blue government, and in most cases they will vote out of office anyone who suggests otherwise. That, at base, is what the Tea Party movement is all about. Voters with insecure job tenure and, at best, defined-contribution rather than defined-benefit pensions simply refuse to pay higher taxes so that bureaucrats can enjoy lifetime tenure and secure pensions.

Second, voters will not accept the shoddy services that blue government provides. Government must respond to growing consumer demand for more user-friendly, customer-oriented approaches. The arrogant lifetime bureaucrat at the Department of Motor Vehicles is going to have to turn into the Starbucks barista offering service, and options, with a smile.

Third, government must reconcile itself to its declining ability to manage a post-blue economy with regulatory models and instincts rooted in the past. We need to be thinking about structural changes based on properly aligned incentive architecture, not regulatory systems based on command protocols.

The collapse of a social model is a complicated, drawn out and often painful affair. The blue model has been declining for thirty years, and the final bell has not yet tolled. But toll it will, and as the remaining supports of the system erode, slow decline and decay is increasingly likely to give way to headlong crash.

 

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CBO: The U.S. is experiencing ‘longest stretch of high unemployment since the Great Depression’

By James Pethokoukis

February 16, 2012, 6:07 pm

The Congressional Budget Office:

The rate of unemployment in the United States has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. Moreover, the Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014. The official unemployment rate excludes those individuals who would like to work but have not searched for a job in the past four weeks as well as those who are working part-time but would prefer full-time work; if those people were counted among the unemployed, the unemployment rate in January 2012 would have been about 15 percent. Compounding the problem of high unemployment, the share of unemployed people looking for work for more than six months—referred to as the long-term unemployed—topped 40 percent in December 2009 for the first time since 1948, when such data began to be collected; it has remained above that level ever since.

Hey, nothing $1.7 trillion in new tax increases can’t fix, right?

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To infinity and beyond! This is the debt chart Obama and Geithner should be ashamed of

By James Pethokoukis

February 16, 2012, 5:16 pm

Testifying before the House Budget Committee today, U.S. Treasury Secretary Tim Geithner told Chairman Paul Ryan the following: “We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”

Actually, President Obama sort of did have a definitive solution. He created a debt commission, which devised a long-term debt reduction plan. Which the president rejected. And instead, we get this new budget proposal, which makes no effort to deal with Medicare, Medicaid, and Social Security—the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House (!) chart shows. (Yes, the chart comes from the White House’s Office of Management and Budget.) It just goes up and up and up—until the heat death of the universe or the economy is struck by a Greek-style debt crisis.

Here’s what the bipartisan Committee for a Responsible Federal Budget says about the president’s plan:

Over the long-term, the President’s budget would not constrain rising debt, as retirement and health care costs continue growing faster than the economy. According to the Administration’s own estimates, debt would grow as a share of the economy past 2022 exceeding 93 percent by 2035 and nearly 125 percent by 2050. These levels would be both economically constraining and ultimately unsustainable.

Well, the president’s budget at least cuts $4 trillion in debt over ten years, as the White House claims, right? Again, the CRFB:

Well, the answer depends on what savings are compared against, and what is counted as savings – but in no case does the President have comparable deficit reduction to the Fiscal Commission. To reach his $4.3 trillion in savings through 2021, the President’s budget counts $1.6 trillion (excluding interest) of already-enacted savings. In addition, it includes two elements which the Fiscal Commission assumed in its baseline – a drawdown of the wars ($740 billion through 2021) and the expiration of the upper-income tax cuts ($830 billion through 2021). If the Commission’s plan were scored the same way as the President’s $4.3 trillion, we estimate it would save roughly $6.5 trillion through 2021.

Well, at least the president’s budget keeps the debt problem from getting any worse over the next decade, right? Not really. Despite $1.7 trillion in tax increases, debt as a share of GDP—already at a historically high level—actually ticks up a bit to 76.5 percent from 67.7 percent in 2011 and 74.2 percent in 2012.

And even to achieve this, the Obama White House has to assume rosy economic growth. As the CRFB says:

OMB’s economic assumptions are somewhat more optimistic than CBO’s, as well as the Blue Chip consensus ranges. The Administration projects real GDP growth to be 2.7 percent in 2012 and 3.0 percent in 2013, compared to 2.2 percent and 1 percent, respectively, from the CBO. Importantly, much of this difference is due to the fact that CBO assumes a temporary economic contraction in 2013 due to all the tax cuts expiring and the automatic spending sequester going off at the same time in the start of 2013. However, OMB continues to be more optimistic than CBO beyond this contractionary period, with estimated growth rates of 2.5 percent per year by the end of the decade as opposed to 2.4 percent by CBO. On the whole, these faster growth rates likely lead to a more favorable fiscal picture than what CBO would show using its economic projections. By our estimates, if OMB were to employ CBO assumptions debt would stabilize at about 80 percent of GDP as opposed to 76 percent.

My baseline case has been that Obama has no interest in being Clinton 2.0, the Debt Cutting President. He wants to be FDR 2.0, the Expanding Welfare State President. He wants that to be his legacy. Let Ryan or Chris Christie or Marco Rubio be the Austerity President in 2017. And what does Geithner care? He’s on his way out this year. At one point during the hearing, Ryan brought out this chart illustrating the impact of the Ryan debt plan, the one Geithner said “we don’t like”:

And here was the exchange between Geithner and Ryan, after Ryan pointed out the terrifying budget baseline (in red):

GEITHNER: You could have taken [the chart] out [to the year] 3000 or to 4000. [Laughs]

RYAN: Yeah, right. We cut it off at the end of the century because the economy, according to the CBO, shuts down in 2027 on this path.

And that’s no joke, Mr. Geithner.

James Pethokoukis is a columnist and blogger for the American Enterprise Institute. He is also an official contributor on CNBC television, a global business and financial channel. He can be reached at james.pethokoukis@aei.org or on Twitter: @JimPethokoukis

Previously, Pethokoukis was Washington columnist for Reuters Breakingviews, as well as business editor and economics columnist for U.S. News & World Report.

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If Obama wins, he should thank Bernanke

By James Pethokoukis

February 16, 2012, 2:59 pm

In a speech to community bankers today, Fed Chairman Ben Bernanke addressed a complaint that superlow interest rates are hurting bank profitability by squeezing net interest margins. Bernanke’s response was interesting:

The purpose of the Federal Reserve’s policy of low interest rates is to speed the economic recovery, which will increase loan demand and opportunities for profitable lending, among many other benefits, and thus, ultimately, lead to higher net interest margins. In short, it is necessary to set the negative effects on net interest margins against the positive effects of a strengthening economic and lending environment. Moreover, the benefits of a stronger economy for the performance of existing assets should also be taken into account; as you know, delinquencies decline as the economy improves. Putting all these considerations together, in the longer term the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive.

In short, Bernanke was saying the economy would be much worse today without various Fed actions, including asset buying. In fact, Fed models suggest the current unemployment rate would around 10 percent. I’m guessing White House economists wouldn’t disagree.

I wonder what the political chatter would be about Obama’s reelection chances if unemployment were still around 10 percent?

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Here’s what Romney’s friends at Bain think could be as ‘transformative as electricity’

By James Pethokoukis

February 16, 2012, 2:18 pm

Before Mitt Romney started turning around troubled companies at Bain Capital, he worked at management consultant Bain & Company. (Later on, he returned to run Bain & Company when the firm was undergoing a financial crisis.)

Anyway, a few months back the company put out a list,  “eight trillion-dollar macro trends are at work in the global economy“:

1. The next billion consumers: Big demand is coming on line, but the emerging market “middle class” will be poorer overall.

2. Old infrastructure, new investments: Urbanization in developing nations and obsolescence in developed nations will spur infrastructure spending.

3. Militarization following industrialization: A transient opportunity for defense contractors.

4. Growing output of primary inputs: Increased demand for basic commodities.

5. Developing human capital: Investments in workforce training will be required to lift skill levels in new markets and to remain competitive in developed ones.

6. Keeping the wealthy healthy: Healthcare spending will continue to grow, but at slower rates.

7. Everything the same, but nicer: For the affluent, the search for quality improvement rather than quantity will drive consumption trends.

8. Prepping for the next big thing: The next platform breakthrough isn’t here yet, but the seeds are beginning to sprout.

It’s that last one that I find particularly interesting. What’s the Next Big Thing? What technological breakthrough does Bain think is “most analogous to electricity in terms of its fundamental transformative potential”? This:

In addition to nanotech, Bain also likes the potential of biotech/genomics, artificial intelligence, robots and ubiquitous connectivity:

Critical breakthroughs, like railroads, electricity and the Internet, have outsized impact by triggering changes far beyond their immediate uses. For example, the railroad network laid the foundation for the telegraph network, in addition to creating faster and more reliable transport. These breakthroughs free up resources and replace labor by automating physical functions, mental functions or both. Developments currently underway hint at upcoming breakthroughs, but are at least two steps away from commercialization. Examples include personal robots to perform household functions, 3D printers to create at-home prototyping and nanotechnology innovations across a wide range of applications including manufacturing and healthcare.

Hey, doesn’t Romney ever talk to anybody over there? If not, he should give them a call. This is just the sort of stuff he should be talking about. Give voters a taste of what an innovative and productive U.S. economy can produce if doesn’t collapse under a mountain of debt.

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Yes, there’s still a reason for Romney to exist

By James Pethokoukis

February 16, 2012, 1:32 pm

Does the weakest economic recovery since the Great Depression mean the U.S. economy is a) no longer in need of major transformation and b) suddenly a major plus for President Obama’s reelection? Here is my pal Tim Carney from the Washington Examiner:

The notion of Romney as the most electable Republican has always been contingent on the economy being in the dumps. If unemployment is bad this fall and getting worse, history suggests that the incumbent is nearly a dead duck. In that case, the best GOP play is a safe, inoffensive Republican — and nobody fits that bill better than Willard Mitt Romney. Also, Romney can make the argument (however tenuous) that his private-sector experience will translate into job-creating success as president. But what if unemployment continues to drop? What if it’s below 8 percent come October and the payroll numbers published Friday, Nov. 2 — four days before Election Day — show things getting better?

And a similar theory is offered by Business Insider’s Michael Brendan Dougherty:

There might not be any reason for Mitt Romney to exist anymore, as a Republican candidate anyway. The entire rationale for Mitt Romney’s candidacy was that he is a “turnaround artist.” As a private-equity guy he helped make dying companies profitable again. He’s the one who saved the Salt Lake City Olympic Games from financial disaster. He helped to balance an out-of-control Massachusetts budget without a tax-raise (he did raise fees).

But it looks like the economy is already turning around. Unemployment keeps going down. Jobless claims are doing better than they have in decades. Investors are happy. At the campaign stops we’ve been at, Romney has been saying that the American economy was always going to recover, but Obama made the recession longer and more painful than it had to be. But no one will care if the recession is ending.

OK, there are two issues here. First, will the economy be strong enough in 2012 to persuade voters that America is back on track (or at least enough to give Obama another four years to complete the job)? Perhaps. A slew of positive economic news has pushed Obama’s approval rating back near 50 percent, and Intrade has his reelection odds at an even 60 percent.

But given that incumbents win some 70 percent of the time, the economy is still obviously a drag on Obama, though becoming less so of late. Moreover, voter expectations are probably running way ahead of what the reality of the 2012 economy will turn out to be. And both rising gasoline prices and the EU debt crisis could still depress economic growth.

The great Jay Cost of The Weekly Standard emails me with two great observations:

1. FWIW, the only POTUS ever to get reelected with growth as weak as the WSJ forecast is estimating was Eisenhower in 1956. Incumbent parties lost in 1948, 1960, 1968, 1976, 1992, and 2000 when the economy was as weak or stronger. And 1980 is the only postwar election where the economy was actually weaker than what the WSJ is projecting it to be, at least measuring by GDP (using real disposable income per capita, 2012 is shaping up to be the weakest).

2. My feeling at this point is that he has consolidated the Democratic vote, which over the last 25 years has had a pretty rock solid floor of 46 percent. But if you look at the RCP average and especially the Gallup poll, he isn’t doing much more than that. And this is after (a) ending the Iraq War, (b) getting some drops in the unemployment rate, (c) quiet-time vis-a-vis battles with congressional Republicans, (d) a bloody internecene GOP contest that’s damaged his likely opponent.

Color me unimpressed. And I think this summer when gas prices are up to $4, the GOP has a nominee who starts hammering him on unemployment, wages, taxes, deficits, health care, he’ll be in trouble. There is a lot of stuff to pick from — and I think the Dems have fundamentally miscalculated in terms of their economic pitch, this budget is going to kill them when the GOPers stop fighting each other. Tax hikes on millionaires and billionaires = tax hikes on small businesses. Transportation spending = pork barrel spending = crony capitalism payoffs to unions, etc.

Funky thing about Obama is that he’s never really had to face a full-blown GOP attack. He was basically unchallenged in 2004 and the disheveled McCain campaign was too incompetent to really go after him. All of that is why I think he doesn’t understand that his budget is like the exact same thing that Clinton promoted in 1993, only with a $1 trillion+ deficit.

And as to whether the U.S. economy is still in need of a “turnaround” or not, I am going answer that in a separate post.

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The plunging labor force participation rate is now officially ‘a thing’ in U.S. politics

By James Pethokoukis

February 16, 2012, 11:07 am

You can now add the labor force participation rate to a) the unemployment rate, b) net new payrolls, c) GDP growth, and d) gasoline prices as economic statistics politicians will often cite as proof the economy is getting better or worse. I just got this chart from the office of Representative Jim Jordan:

Is this chart fair? Well, it is true the labor force participation rate has collapsed. Now, some of that is due to the aging of the baby boomers and some is due to the economic downturn and anemic recovery. Here is the Congressional Budget Office:

The unemployment rate would be even higher than it is now had participation in the labor force not declined as much as it has over the past few years. The rate of participation in the labor force fell from 66 percent in 2007 to an average of 64 percent in the second half of 2011, an unusually large decline over so short a time. About a third of that decline reflects factors other than the downturn, such as the aging of the baby-boom generation.

But even with those factors removed, the estimated decline in that rate during the past four years is larger than has been typical of past downturns, even after accounting for the greater severity of this downturn. Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent.

An even simpler way of measuring the collapse of the U.S. labor market is to simply look at how many people are working as a share of the population:

Simply put, America isn’t working, at least not as much as it should.

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Things are getting better, but the U.S. labor market is still a mega-disaster

By James Pethokoukis

February 16, 2012, 10:28 am

My pal Joltin’ Joe Weisenthal over at Business Insider keeps trying to make the case that the Obama Recovery is, well, if not stronger than the Reagan Recovery, at least more impressive. It’s not an easy case to make, no matter what qualifiers you add. Consider that in the first ten quarters of the OR, real GDP is up a total of 6 percent vs. 16 percent in the RR. Or to put it another way, after 10 quarters of recovery, the Reagan growth rate was 6 percent vs. Obama’s 2.4 percent vs. 4.6 percent for the average post-World War II expansion. Another factoid: In the 31 months of the OR, the economy added 1.8 million net nonfarm payrolls vs. 8.9 million during the RR.

Now Weisenthal is trying another tact. This is from a post today over at BI, referring to the above chart: “A little perspective on how good the latest jobless claims data is. On a population adjusted basis — which only makes sense, since naturally there will be more initial jobless claims each week in a bigger population — the current level of claims is better than at any point in the Reagan administration.”

Indeed, today’s jobless claims report does signal more recovery in the labor market. Initial claims for the week ending Feb. 11 fell 13,000 to 348,000, bringing the level of claims down to a new cycle low, according to JPMorgan. But let me add a bit of additional context. The jobless claims report tracks how many new people have filed for unemployment benefits in the previous week. But the hallmark of this recovery is the vast number of people who have dropped out of the labor force, a phenomenon reflected in both the collapse of the labor force participation rate and the employment-population ratio. During the RR, both measures rose as the expansion proceeded.

Another way to look at things is by how long people have been without a job. I think this chart makes a powerful case that the U.S. labor market is still a shambles:

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Actually, Obama is proposing raising taxes on the middle class

By James Pethokoukis

February 15, 2012, 3:13 pm

President Obama says he only wants to raise taxes on American households making over $250,000. But his new budget plan would hit middle-income folks pretty hard. See, the White House wants to raise the corporate tax burden by some $350 billion over ten years: a) $148 billion from reforming the U.S. international tax system, b) $19 billion from new financial taxes, c) $30 billion from ending fossil fuel tax breaks, and d) $142 billion from other “revenue changes and loophole closers” like changing how investment managers are taxed.

But corporations don’t pay taxes. Their shareholders and workers do. As AEI’s Aparna Mathur explains:

Simply put, when taxes are imposed on a corporation, wages are lowered not only for the workers in that firm, but for all workers in the economy since otherwise competition would drive workers away from the low-wage firms. As a result, a $1 corporate income tax on a firm could lead to a $1 loss in wages for workers in that firm, but could also lead to more than a $1 loss overall when we look at the lower wages across all workers.

Following our paper, several academic economists substantiated our results, using different data sets and applying varied econometric modeling and techniques. … A recent Tax Notes article that I co-authored summarizes these various studies and also the lessons from the theoretical literature on the topic. The general consensus from theory and empirical work is that while we may argue academically about the size of the effect, there is no disagreement among economists that a sizeable burden of the corporate income tax is disproportionately felt by working Americans. On average, a $1 increase in corporate tax revenues could lead to a dollar or more decline in the wage bill.

Mitt Romney was dead on when he said “everything corporations earn ultimately goes to people.” And if Obama should get his way, those people, including workers, will be getting a lot less.

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How Republicans can win even if the economy keeps improving

By James Pethokoukis

February 15, 2012, 2:02 pm

It’s not just the economic numbers that are looking up for President Obama. A new New York Times/CBS News poll puts his approval rating at 50 percent, his highest mark since May 2010 (except for a brief bump after Navy Seals killed Osama bin Laden in May). That’s a couple of points better than the RealClearPolitics average as displayed in the above chart, but the uptrend is clear.

Now, let’s assume the economy continues to grow—not gangbusters, but something along the lines predicted by economists in the recent Wall Street Journal survey. We’re talking slow-but-steady 2.5 percent GDP growth and a slowly falling unemployment rate of 8.0 percent by year’s end. That level of unemployment, by the way, is about what White House economists are predicting, along with average monthly job growth of about 167,000. Subpar numbers, but a lot better than what we saw in 2011: 1.7 percent GDP growth, average unemployment of 9 percent, and average monthly job growth of about 150,000.

With the recovery ever-so gently accelerating, what would be the Republican argument—fair or not—that Obama doesn’t deserve reelection? Maybe something along these lines:

1. Better but not nearly good enough. The pace of the Obama Recovery has been only about half that of other post-WWII recoveries. Sure, the unemployment rate has fallen to its lowest level since Obama took office. But that’s in good part due to a massive collapse in the size of the labor force, not rapid job growth. Income growth is still tepid at best. And just look at the housing market! You call this a recovery!? It’s still mourning in America, at least the part outside of Washington and Wall Street. Obama’s stagnant, declinist New Normal is unacceptable for the Last, Best Hope on Earth.

And many voters might agree. A recent survey of consumer sentiment found expectations about the job market at the highest levels in the history of the survey. There’s lots of room for disappointment here.

2. The Big Spend was a Big Bust. Obama’s policies don’t deserve much, if any, credit for the weakest economic recovery since the Great Depression. Obama’s signature economic achievement is the trillion dollar stimulus. In Money Well Spent? — The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History, journalist Michael Grabbel notes that Vice President Joe Biden said the stimulus would “literally drop kick us out of the recession.” But Grabell concludes that the “poorly designed” stimulus “ultimately failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.” Indeed, it was only after stimulus money dried up that the economy began to perk up. And economies eventually will recover on their own, and recover more quickly, if government empowers the private sector rather than trying to usurp it. See: Reagan Recovery.

3. The recovery isn’t “built to last,” not with all that debt. Obama added $5.3 trillion to the federal debt to juice the economy—and this is the best his old-fashioned Keynesian policies could do? You could call it a “sugar high,” but it doesn’t even qualify as a sugar buzz, really. And now Obama wants to add another $7 trillion in a second term, according to his new budget, just to keep the wheels grinding along. The “built to last” economy is a “built on debt” economy and thus unsustainable. Just ask the Europeans.

4. Obama is President (Didn’t) Fix It. When Obama came into office, healthcare and other social insurance spending were on a trajectory to bankrupt America, banks were too big to fail, and the tax code was stifling American competitiveness. And which of these problems has been solved or substantially dealt with? None. The healthcare cost curve wasn’t bent, banks are bigger than ever, and Obama’s investment and corporate tax hikes are about manufacturing fairness rather than growth or jobs.

5. Obama wants to “win the future”—with crony capitalism. It was government meddling in the private sector that created the housing bubble and financial crisis. But rather than learn that lesson, Team Obama wants to double down on “state capitalism,” whether through new policies to try and reinflate the housing market or venture socialism/industrial policy in the “clean energy” sector.

The primary purpose of state capitalism, whether in Beijing or Washington, is to cement political power, not produce economic growth. What did Obama do after passing the stimulus in 2009? Next up was massive regulation of healthcare and Wall Street. State capitalists fear Schumpeterian creative destruction because they cannot control it or squeeze campaign contributions from it.

Economic freedom, on the other hand, creates prosperity by unleashing the imagination of the individual and rewarding his or her effort. As analyst Ian Bremmer puts it, “Creative destruction invests liberal capitalism with a self-regenerating dynamism. … Human beings value opportunities to create prosperity for themselves and their families, and free markets have proven time and again that they can empower virtually anyone.” Crony capitalism only empowers politicians, bureaucrats, and entrenched interests.

Would voters find these arguments persuasive? With the economy humming along at 4 percent growth and unemployment under 6 percent—both White House 2012 predictions back in 2009—maybe not. But in Stagnation Nation? They just might.

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Categories:  Economic Policy, U.S. Politics   |   Tags: ,

My bright idea of the day: Take the payroll tax cut and use it to fund personal retirement accounts

By James Pethokoukis

February 15, 2012, 10:21 am

It now looks like the 2-percentage-point payroll tax cut will be extended until the end of the year and not paid for. The $100 billion cost will simply be added to the already huge budget deficit. So what happens in 2013? Well, Washington could simply let the supposedly temporary tax cut expire—except that anyone supporting that idea this year will get slammed as  a “tax hiker.” And on middle-income voters, no less! Now, at a Senate Finance Committee hearing on Tuesday, Senator Jeff Bingaman, a New Mexico Democrat, raised the idea of a permanent reduction in the payroll tax. But Treasury Secretary Tim Geithner put the kibosh on it. “I don’t think that’s realistic,” Geithner said.

But whatever the economics of a permanent payroll tax cut extension, the politics are favorable. Howard Gleckman of the Tax Policy Center says he “can imagine the payroll tax extension becoming another version of the Alternative Minimum Tax patch–extended year after year with borrowed money.”

I have a better idea. Why not take the payroll tax cut and use the dough to create new personal retirement accounts? If we are going to be shifting more than $100 billion every year from Social Security anyway, why do it just to boost consumer spending? What this country needs is more investment, less consumption. Personal retirement accounts would help supply that investment. Social Security is not real wealth. It’s just a claim on taxpayers, both now and in the future. Why not create real wealth for Americans by giving them this new opportunity to save and invest? And that would boost economic growth. Back in 1997, economist Martin Feldstein calculated that completely privatizing Social Security would “increase the economic well-being of future generations by an amount equal to 5 percent of GDP each year … [with a] net present value of the gain of as much as $10-20 trillion.”

Now, what I’m talking about wouldn’t be nearly so bold. But it would be a solid start to reorienting the economy toward one that is built on investment-led growth, not just debt-fueled consumption. Of course, personal accounts wouldn’t obviate the need to fix Social Security’s long-term financing by raising the retirement age, altering how benefits are calculated vs. inflation, and instituting other modifications. Here’s AEI’s Andrew Biggs:

If workers invest part of their Social Security taxes in personal accounts, they could indeed earn higher returns and generate higher benefits without taking more risk. But diverting taxes to accounts leaves the program short of what is needed to pay benefits to today’s retirees. To cover these “transition costs,” we would need to generate new revenues for the program, either by raising taxes, cutting other programs, or borrowing.

So it’s no magic bullet. I don’t believe in those anyway, though. But my idea would a) create another option to boost economic growth, and b) reinvigorate the Social Security debate. And for Republicans, the natural base of support for this idea, it would give them another way to talk about the payroll tax issue.

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Categories:  Economic Policy, Retirement and Social Security   |   Tags: , ,

A load of economic nonsense from Geithner

By James Pethokoukis

February 15, 2012, 7:09 am

Treasury Secretary Tim Geithner told the Senate Finance Committee many amazing things yesterday.

1. Geithner said that higher taxes are a must. “I do not see how you get there if you are unable … to contemplate and to embrace modest increases in revenue through tax reform,” Geithner said. “I just don’t think it’s possible.”

Wrong! President Obama is not proposing “modest” tax increases. His $1.7 trillion tax hike would take federal tax revenue (as a share of output) to its second highest level since World War Two. Only once, outside of WWII, was revenue higher. And that was in 2000, when money was flooding into federal coffers due to capital gains from the final days of the Internet stock bubble.

What’s more, the double tax on corporate profits (including dividends) would increase to 64 percent based on the statutory corporate tax rate (58 percent using the effective tax rate), easily the highest among advanced economies. The double tax on corporate profits (including capital gains) would increase to 51 percent (44 percent using the effective tax rate), also among the highest among advanced economies.

Nor did Geithner seem aware that you can actually boost tax revenue by growing the economy through smart tax reform and other pro-growth policies.

2. Geithner said the Obama administration “does not believe there is a feasible way or a fair way to restore fiscal sustainability without asking a very small fraction of the most fortunate Americans to bear a modestly higher burden for the privilege of being Americans.”

Wrong! Actually, there’s no way to restore fiscal sustainability without cutting spending. Even with $1.7 trillion in tax increases, the Obama budget would still be unable to lower the U.S. debt burden over ten years. Indeed, it would actually rise a couple of percentage points to a sky-high 75 percent, not including money owed to the Social Security trust fund. Maybe that’s because Obama, if reelected, would be the first U.S. president to ever spend 22 percent or more of GDP every year in office vs. a historical annual average of 20 percent.

3. Asked about drastically cutting spending, Geithner said, “That would damage economic growth.”

Wrong! Spending cuts and pro-growth tax reform would shift resources from the unproductive public sector to the quite productive private sector. Washington should be doing everything it can to accelerate that shift. In the fourth quarter, for instance, the overall economy grew 2.8 percent, but the private sector grew 4.5 percent. More of that, please!

Not sure if Geithner has ever seen this, but he might want to take a look:

 

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Categories:  Economic Policy, Fiscal Policy and Taxes   |   Tags: , , , ,

When economies go bad…

By James Pethokoukis

February 15, 2012, 5:22 am

America’s Great Recession was pretty bad. GDP fell by 5.1 percent. The narrowest measure of unemployment more than doubled to 10 percent. Real disposable personal income fell 7.3 percent. This table from Reuters allows you to compare what happened here to what happened over there—and in the past:

And the pain is far from over for Greece, according to the Reuters piece:

“On the current path – which is not sustainable in my view – we may very well see Greek GDP go down 25-30 percent, which would be historically unprecedented. It’s a disastrous crisis for them,” Dadush, a former senior World Bank official, said.

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Categories:  U.S. Economy   |   Tags: , ,

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