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Aparna Mathur

Two big problems with Obama’s corporate tax proposal

By Aparna Mathur

February 22, 2012, 4:59 pm

The Obama administration’s plan to cut the corporate rate to 28 percent goes some ways toward improving the competitiveness of the U.S. economy as a destination for investment flows, relative to the other OECD countries. However, the plan also calls for removing loopholes and deductions and doing away with tax credits, etc. While having a simpler, uniform code is certainly desirable from the point of view of economic efficiency, we need to be sure that the base broadening does not raise effective rates for corporations. In other words, the base broadening may more than offset the benefits arising from a reduction in the top rate. As a result, effective tax rates may be higher than what firms face today. In that case, the investment effects would still be negative and there is little chance that the proposal would be a revenue raiser. Even today, effective tax rates in the U.S. are much higher than for the average OECD country, and yet we raise some of the lowest revenues in the OECD from corporate taxes.

The second issue I have is with the imposition of a minimum foreign tax on multinationals. Our current system of international taxation allows firms to be competitive in the global economy by enabling them to defer taxation on foreign profits, until those profits are repatriated to the U.S. parent. As a result, firms can pay taxes at the same rate as other firms operating in that country. With the imposition of the minimum foreign tax, we will end up imposing higher tax rates on U.S. multinationals operating abroad relative to their foreign counterparts, and make them less competitive. This would negatively impact their profitability.

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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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Nick Schulz

An outstanding American

By Nick Schulz

February 22, 2012, 11:49 am

Congratulations to my friend Vivek Wadhwa, who was just named an Outstanding American by Choice:

The Outstanding American by Choice initiative recognizes the outstanding achievements of naturalized U.S. citizens. Through civic participation, professional achievement, and responsible citizenship, recipients of this honor have demonstrated their commitment to this country and to the common civic values that unite us as Americans.

Vivek wrote about America’s other immigration crisis here.

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Categories:  Economic Policy, Entrepreneurship, Law and the Constitution, Politics and Public Opinion, Society and Culture, U.S. Politics   |   Tags:

Ben Bernanke, backed in a corner

By Joe McClintock

February 22, 2012, 10:13 am

Ben Bernanke, the chairman of the Federal Reserve, has been having a rough time lately. He’s received criticism from politicians, pundits, and other central bankers, and has been attacked for doing both too much and too little. The actions of the Federal Reserve have not received this much scrutiny in a long time, undoubtedly due to the rising scope of their actions and the heightened sense of urgency surrounding them.

I don’t wish to discuss the legitimacy of the Fed’s past actions. Instead, I want to discuss the actions they will have to take in the next few years. As the economy begins to tentatively recover, the Fed must walk the thin line between encouraging growth and causing uncontrollable inflation. And as Bernanke’s critics reveal, there are arguments for doing more to address both issues.

For inflation hawks, images like this are seriously frightening:

Such a dramatic increase in money supply would lead to dangerous inflation during any normal economic time. However, these are not normal economic times, and expanding the money supply cannot cause inflation while demand is suppressed. So, while the Fed should keep an eye on inflation as the economy recovers, there has been little evidence that rising inflation will warrant action in the short term.

On the other hand, the weak economy still has far to go before it is fully recovered. Improvements in employment and output are good news, but aren’t enough to bring a rapid recovery. More importantly, the lingering weakness stems from a lack of demand, which the Fed is ill-suited to address. Like the proverbial dehydrated horse, it can’t force the markets to expand growth, and further expansionary policies would only serve to feed inflationary pressures when the markets do recover.

So what can Bernanke and the Fed do? I would suggest the simple task of waiting, and making sure not to make promises they aren’t prepared to keep. While a reasoned resolution of Europe’s debt crisis, or a similar solution to our own debt situation, would be helpful, there is little Bernanke can do other than make speeches. He would be best off to let monetary policy be, and prepare a response to rising inflation or a Europe-related confidence crisis; problems that the Fed is well suited to deal with.

Joe McClintock is an intern with the economics department at AEI.

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Categories:  Economic Policy, Monetary Policy, U.S. Economy   |   Tags: ,

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: , , ,

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

Andrew Biggs

Yet another study shows government workers are overpaid

By Andrew Biggs

February 17, 2012, 1:38 pm

In the wake of CBO’s recent report finding that federal employees are overcompensated by an average of 16 percent, public employee unions and members of Congress who support them had two main reactions.

First, they say, the Bureau of Labor Statistics—not the CBO—are the real experts on pay. Second, they argue, pay studies should compare jobs, not the education or experience of the people who fill those jobs. Well, they’ve got what they want.

The Journal of Economic Perspectives yesterday published a new study by Brooks Pierce and Maury Gittleman of the Bureau of Labor Statistics which uses BLS estimates of the skills required in different occupations to compare public and private sector pay.

Brooks and Gittleman restrict their analysis to state and local government employees, but their findings are striking: state government workers receive salaries about even with private sector levels, while local government workers receive salaries around 9 percent above private sector levels. Once you include benefits, state employees are overpaid by around 9 percent and local government workers by around 18 percent. Moreover, there’s good reason to believe these estimates are conservative, since they exclude the value of retiree health coverage for public employees and understate the true value of defined benefit pensions.

You can’t say for sure what this implies for federal government employee pay, but they’re generally regarded as better paid than state and local government workers.

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Kenneth P. Green

Who shut down Keystone?

By Kenneth P. Green

February 17, 2012, 1:36 pm

Some analysts (including myself), when pondering the Obama decision to reject Canada’s application to build a pipeline from Alberta to the Gulf coast, have laid the blame at the feet of the environmental movement and political operatives within the Obama administration. I’ve speculated that the decision was purely political, and I presumed it was driven by the intense urge to shove a thumb in the eye of congressional Republicans. Turns out, I was wrong.

Now we know that the decision to reject the Keystone pipeline really came down to the desires of one ultra-wealthy person: Susie Tompkins Buell, a leading donor to Democrats:

Buell, a co-founder of the Esprit clothing company, has donated millions of dollars to Democratic causes and presidential candidates, including Bill Clinton, John Kerry, Al Gore and her good friend, Hillary Rodham Clinton. In the past 10 years, she has given $25 million to progressive political and charitable causes and has raised $10 million for candidates and committees, her office said.

Apparently, Ms. Buell, feeling neglected and unappreciated, decided that she wanted a present from the president:

“I’ve just given so much money away, and I’ve never asked for anything,” she said in an interview at her Pacific Heights home this week. Now, “I’m asking for something: He’s got to be a leader.”

So Ms. Buell took to the streets (very tidy, upscale streets, to be sure) to protest:

In October, Buell made headlines after she led a protest of monied Democrats in San Francisco against the controversial 1,700-mile Keystone XL oil pipeline. Her fellow protesters outside an Obama fundraiser included Michael Kieschnick, co-founder of CREDO Mobile and Working Assets, which has donated $75 million to progressive causes; IT executive David desJardins; and Anna Hawken McKay, wife of Rob McKay, a wealthy philanthropist whose father founded Taco Bell.

The Democrats, who could have easily afforded the $5,000-a-plate Obama fundraiser, stood on the curb outside the W Hotel as Buell delivered a tough assessment of the president: “I don’t know where he stands on anything,” she said.

And, like magic, that was the end of Keystone:

Kieschnick said Buell’s decision to take an aggressive stance was pivotal to the eventual outcome – a White House announcement last month that the application for the pipeline from the Canadian province of Alberta to Texas refineries would be rejected.

“Before her involvement, the powers that be clearly dismissed our concerns” about the long-term environmental impacts of the pipeline, said Kieschnick, who has known Buell for 20 years. People inside the White House “clearly noticed,” he said. “Then they realized this was not only bad policy, this was bad politics.”

California Democratic Lt. Gov. Gavin Newsom, who has also won Buell’s political backing, said that on Keystone, “the White House had no choice but to pay attention” to her.

Some might argue that it’s inappropriate for one wealthy woman to determine the fate of 300 million Americans, but don’t worry, Ms. Buell is sympathetic to that argument also:

Buell said she often wishes that voters without big checkbooks could get the same attention. “They do it because I represent money. And that’s not right,” she said. “Isn’t it sad, that it’s all driven by money?”

“Sad” isn’t exactly the word I’d choose, but it’s certainly more printable.

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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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Nick Schulz

What’s driving rising inequality?

By Nick Schulz

February 17, 2012, 10:56 am

Russ Roberts has an important post here that ties together a lot of different debates of late—Peter Thiel/Tyler Cowen’s Great Stagnation thesis, the Occupy/inequality complaints, and Charles Murray’s Coming Apart. Read it.

 

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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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The Fed: The new Supreme Court?

By Joe McClintock

February 16, 2012, 5:43 pm

The Supreme Court was designed to be politically independent, with justices appointed to life terms and removed only in cases of great indiscretion. However, since the Senate’s rejection of Robert Bork, Reagan’s nominee for the Supreme Court in 1982, scholars of political science have recognized that the Supreme Court is far more politicized than its independent nature implies. Confirmation battles are fought on party lines, citizens protest rulings with the same furor as they protest bills from Congress, and justices and the decisions they hand down are more politicized than ever.

This divisiveness has developed over a quarter century, yet we can see similar developments in another semi-independent agency whose decisions have large impacts on Americans: The Federal Reserve. The comparisons between these two institutions reveal both similarities and differences. Like the Supreme Court, the Federal Open Market Committee (FOMC) is a small group of elites whose decisions have a great impact on the United States. Though FOMC members do not enjoy lifetime appointments, they are largely independent, with seven of the twelve members appointed, similarly to the Supreme Court, and five of the twelve chosen by banks, with no citizen input.

The Fed had its Bork moment last summer with Peter Diamond, a decorated economist whose nomination to the FOMC was blocked by Republicans for ideological reasons. This came amidst many calls to audit, or even eliminate, the Fed, led initially by Texas Congressman Ron Paul but later adopted by many Republicans. Strong criticism of the Fed’s Chairman, Ben Bernanke, have also featured prominently in the 2012 Republican primaries, with most candidates calling for his resignation or arguing for changes to the Fed’s statutory mandate.

So, how does this bode for the Federal Reserve? It is unclear. Criticism of the Fed will likely wane as the economy recovers and its expansionary policies are scaled back and forgotten. In the meantime, attacks on the Fed’s independence are dangerous, since, like the Supreme Court, independence is crucial to its operations. Calls for audits and greater transparency are less concerning, and the Fed has already adopted many of these programs; changes to the statutory mandate are very concerning.

So, yes, the Fed will doubtlessly face greater scrutiny and criticism in the future, but Bernanke seems to have addressed these attacks well. On the small things, he has made concessions; on the big things, he has defended the Fed’s independence. Hopefully his inevitable replacement will be similarly dedicated to keeping the Fed independent.

Joe McClintock is an intern with the economics department at AEI.

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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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Cut out the middle man in federal property sales

By Luke Porter

February 16, 2012, 2:29 pm

In 2009, underutilized buildings cost taxpayers between $250 and $830 million dollars in maintenance costs alone. Last October, AEI’s Chad Hill and Matthew Jensen highlighted the inefficient property management of U.S. government agencies. They pointed out how the regulatory process that is used to sell government properties means it is often not worth the effort, but owning unused property still imposes huge costs on taxpayers. As they note:

For many agencies, there is no real incentive to sell unused property. Only six of the 10 largest property-holding agencies receive any of the proceeds from the sale of their buildings. The other agencies have almost no incentive to raise revenue from the sale of a property. What’s more, while private landowners might sell property to reduce their tax burden, the federal government is exempt from property taxation and has no such incentive.

Last Tuesday, the House finally passed the Civilian Property Realignment Act, which aims to “decrease the deficit by realigning, consolidating, selling, disposing, and improving the efficiency of Federal buildings and other civilian real property, and for other purposes.”

This bill is yet another example of a cosmetic fix that ignores underlying problems. Current regulations require all federal buildings to be offered to other federal agencies, homeless organizations, states, and local governments at discounts of up to 100 percent before a sale to a private organization can occur. The bill creates a Civilian Property Realignment Commission to provide recommendations on property sales to reduce inventory and operating costs and to incentivize agencies to sell by:

1.     Providing funding to help the preparation of an asset for disposal.

2.    Providing agencies with the ability to retain proceeds.

3.    Providing the opportunity to expedite the sale of properties.

These are all admirable goals, but they could be achieved much more simply. Rather than establishing another commission, a reform of existing regulations could yield a more efficient outcome by removing or reworking the existing barriers that limit federal property sales to the market. Liberalizing this process would reduce sale time and eliminate the need for extra funding to help prepare an asset for sale.

The decentralization of power from a commission to agencies themselves also ensures a more efficient outcome as agencies are significantly better placed to decide on their property requirements. The bill correctly realizes that allowing agencies to retain some of the proceeds from the sale of property will incentivize agencies to sell at a fair market value rather than a steep discount. Given that the commission is meant to streamline sales, presumably to the private sector, why not cut out the middle man?

Luke Porter is an intern with the economics department of AEI.

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Steven F. Hayward

Energy fact of the week: What’s up with gasoline prices?

By Steven F. Hayward

February 16, 2012, 2:22 pm

The network TV news broadcasts this week are in a lather about the rising pump price of gasoline, which has been creeping up steadily for the last few weeks ahead of the usual seasonal surge. Already it appears we’re heading for record pump prices this summer—maybe reaching $5 a gallon in some high cost states. All of the usual reasons are in play: the price of oil stuck stubbornly around $100 a barrel or higher, uncertainty in the Middle East, sustained demand from China, and the recovering U.S. economy. But there is one aspect of this story that is still incongruous: gasoline consumption in the United States appears to be sharply lower over the last few months—at least if you go by the Energy Department figures on retail gasoline deliveries (a close proxy for overall gasoline consumption) shown in Figure 1. In fact, the trend of the last couple of years shows a sharp break with the relatively stable trend of the last 25 years. What’s going on?

You might think if demand is dropping the price would be flat or falling. Or perhaps the falling deliveries of gas is why prices are rising, except there’s no indication that gasoline supplies are tight right now, unless you buy one of the always-discredited conspiracy theories that the fossil fuel industry is manipulating the market. Higher fuel economy of the surface fleet (hybrids, Chevy Volts, etc) probably can’t explain the magnitude of this trend. A number of observers think it is possible that this sharply declining trend is another indicator that the economy is heading down again. (Charles Hugh Smith offers still more interesting analysis here.)

Figure 1: Retail Gasoline Deliveries, 1983 – Nov. 2011

Source: Energy Information Administration

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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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Ratings agencies acknowledge the obvious

By Daniel Hanson

February 16, 2012, 12:04 pm

The eurozone crisis is taking a toll on the financial crisis as it continues to pull down European growth prospects. To this point, the ratings agencies—S&P, Fitch, and Moody’s—have been  walking a fine line between keeping sovereign credit ratings higher than warranted and appeasing their government critics who are desperately trying to avoid a downgrade.

Now, in the aftermath of the MF Global collapse, ratings agencies are taking a closer look at banks that have large holdings of embattled sovereign debt—some with similar leverage positions to MF Global—and it appears that some substantial downgrades may be looming. Morgan Stanley, UBS, and Credit Suisse may see their ratings drop as much as three levels by Moody’s, while other mega-banks such as Goldman Sachs, JPMorgan Chase, Citigroup, and Deutsche Bank will likely see a two point downgrade. Other major downgrades, such as a one point drop in Bank of America’s rating, will probably follow suit.

Credit downgrades can be hugely damaging to securities firms because they will generally be obligated to put up more collateral for trades. As investor confidence continues to slip and the prospect of hard default comes more clearly to the fore, banks could be facing massive systemic risk.

Increased bank regulation also poses a risk to funding prospects, especially as the Basel requirements continue to be implemented more fully. Banks have thus far made the best of the situation, but the leverage positions of many banks on laughably classified “riskless” European debt make the prospect of cheap funding less likely over the coming months, absent massive (and likely) central bank intervention.

This is part of the reason that banks in Europe have been parking funds at the European Central Bank over the past few weeks. Despite unprecedented liquidity flowing from President Mario Draghi’s coffers, European banks have been loath to take on more risk, opting instead to shore up their balance sheets for the impending implosion of the eurozone. The result has been an expansion of the ECB’s deposit facility that looks remarkably similar to the 2008 U.S. crash’s effect on Fed deposits. Observe:

Clearly, the ratings agencies are willing to realize that the MF Global collapse might just be the tip of the iceberg.

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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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