Published for www.keithhennessey.com, February 2, 2012
A friend challenged me to respond to this chart and this post by Mr. Ezra Klein in the Washington Post:
Here is my response. You can click on the chart to see a larger version.
For those who care here are the sources I used in building the chart.
Published for www.keithhennessey.com, January 24, 2012
Yesterday The New Yorker’s Ryan Lizza published an analysis of President Obama’s first two years of decision-making on economic policy. Mr. Lizza also released a 57 page memo sent to President-elect Obama by Dr. Larry Summers (later NEC Director) on December 15, 2008. Mr. Lizza reports that the memo contained input from Dr. Christina Romer (later CEA chair) and Dr. Peter Orszag (later OMB Director).
Together the memo and article provide insight into the formerly private thinking of President Obama and his advisors. Their approach to fiscal policy is quite different from my own, most especially the confidence they express in their estimates of the effectiveness of government spending to accelerate economic growth.
Even more interesting is that given this approach to economic policy, the memo and story describe a President who chose to ignore his policy advisors and to waste tens of billions of dollars of taxpayer money so he could have an inspiring talking point and help his partisan Congressional allies get their pork. That’s disturbing even if you accept the pro-stimulus approach to fiscal policy.
Published for www.keithhennessey.com, January 23, 2012
In advance of tomorrow’s State of the Union address I have been rereading President Obama’s major economic speeches. I had hoped to show a progression of argument, but that didn’t pan out. Instead two things jumped out at me: the President’s primary economic problem definition has varied widely over time, and his deficit message has changed even more. I will attempt to summarize each in chronological order.
Here is how President Obama has defined America’s primary economic problem and his policy response. In each case the language is my paraphrase of the President’s message.
[2009-10] I inherited a mess – an economy in freefall. My actions prevented a depression.
[early 2009] We had a bubble-and-bust economy. I am moving the economy from one built on financial bubbles to one built on a “new foundation” of financial reform, education, renewable energy, health care, and deficit reduction.
[2009-10] Health care costs hurt families, businesses and the federal budget. My bill will slow health cost growth and solve the deficit problem while insuring everyone.
[spring 2010-present] For decades the middle class has been squeezed, owing more and making less. My new foundation and tax increases on the rich will fix that.
[fall 2010] The rich don’t pay enough in taxes. Let’s raise their taxes.
[early 2011] International competition: China and India have better new infrastructure than we do. Let’s spend money on infrastructure, education, health care, and green jobs.
[summer 2011] I want to fix the long-term deficit.
[fall 2011-present] Income inequality is a huge problem and has been for decades. The rich are sticking it to the middle class. I’m for the middle class, so let’s raise taxes on the rich.
Published for www.keithhennessey.com, December 19, 2011
The payroll tax cut bill that will soon become law takes a small step in the right direction on policy toward the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac. Congratulations to Congress for this small step; they still have a long way to go.
What the bill does
When Fannie Mae and Freddie Mac guarantee and securitize a bundle of mortgages they charge a guarantee fee or G fee for the service. The bill mandates an increase of 10 basis points (one-tenth of one percentage point) in this guarantee fee.
Since this is a fee charged by Fannie and Freddie to their clients, by itself this provision would increase revenue for the firms. The bill also requires Fannie and Freddie to passthrough that increased revenue to the U.S. Treasury. This would increase federal government revenues and reduce the budget deficit. That’s why the provision is in this bill, because Democrats are insisting that the deficit effects of preventing a tax increase be offset with provisions that reduce the deficit.
These additional 10 basis points of guarantee fee, passed through to the U.S. Treasury, would result in about $3.5 B extra revenue and deficit reduction per year for the federal government over the next decade.
My long run policy goal
I believe the Government Sponsored Enterprises should be replaced with a private market for mortgage securitization.
While in theory one could privatize Fannie and Freddie and sever all their ties to the federal government, as was done with Sallie Mae (student loans) in the late 90s, I fear, because of both the history of housing GSEs and the temptations such an effort would present to policymakers, that the result would be a continuation of the failed hybrid government-private model that has caused so many problems. Even as fully private firms, financial regulators would deem them to be too big to fail and implicitly guarantee them. I am therefore not for reforming the GSEs, but replacing them with a private market.
Increasing the guarantee fee is a step in the right direction
Long before 2008 the government bestowed many policy and legal advantages to Fannie and Freddie, creating an implicit government guarantee for the firms. As a result lenders were willing to loan funds to these firms at a lower interest rate than to their private sector counterparts.
The 2008 crisis turned that implicit guarantee explicit. Fannie and Freddie continue to operate with a borrowing advantage. This is a principal cause of their continued overwhelming dominance of the mortgage securitization market.
Increasing the guarantee fee reduces that borrowing advantage and weakens this government-created oligopoly. A 10 bps increase is a small step in the right direction, no matter what is done with the increased revenues.
Published for www.keithhennessey.com, December 12, 2011
I find I can learn a lot by graphically examining legislative voting patterns. The recent enactment of implementing legislation for three Free Trade Agreements gives us a wonderful opportunity to compare the two political parties and the House and Senate on free trade.
Background
The Bush Administration negotiated free trade agreements (FTAs) with Korea, Colombia, and Panama. South Korea’s economy is big enough that the Korea FTA was economically important not just for South Korea, but also for the U.S. FTAs with smaller Colombia and Panama are important to the U.S. for several non-economic reasons:
These countries are our friends and allies (so is South Korea).
There is a long run philosophical battle for the shape of Central America, with Venezuela’s Chavez and Cuba’s Castro brothers on the other side. Helping Central American countries that want to expand freedom, democracy, capitalism, and free trade helps our side in that broader struggle.
It is important for the U.S. to send a signal to smaller nations of the world that we will pursue free trade with countries whose economies are quite small relative to ours.
We also want to promote the idea of free trade generally.
Upon taking office President Obama said all three FTAs were flawed and sent his trade representative to renegotiate each one. Even after renegotiations concluded in late 2010, the President sat on them for many months. He sent implementing legislation for all three agreements to Congress in October of this year. All three were ratified by Congress in less than three weeks.
The two years of renegotiations were politically convenient for President Obama, as they allowed him to avoid asking Speaker Pelosi to bring up legislation that most of her caucus opposed. The following vote analysis will show this.
Published for www.keithhennessey.com on December 7, 2011
This post is for Americans who know nothing about the debt crisis in Europe. I am going to try to provide a big picture framework and draw attention to what I think should matter most to Americans. If you have expertise in this topic I hope you’ll help me improve my analysis. This topic is somewhat new for me.
I think of the European debt crisis in three layers:
national debt crises in several European countries;
a structural crisis of the Eurozone; and
potential banking crises in Europe and the U.S.
Most current press coverage is about the middle layer: can European leaders prevent the Eurozone from dissolving? The top and bottom layers deserve more attention than they are receiving. American policymakers need to think hard about and plan for the possibility that a really bad outcome in Europe leads to another American banking crisis.
On the top layer we have national budget crises in several countries. For weeks and in some case months, Portugal, Ireland, Italy, Greece, and Spain (the so-called PIIGS) have each had trouble issuing government bonds at a sustainably affordable interest rate. Each of the PIIGS has some combination of unsustainably high budget deficits, high government debt, and weak economic growth. As a result investors worry that if they loan money to these governments they won’t get it back in full and on time. They therefore insist on a high interest rate to compensate for this risk. In the case of Greece those fears were well-founded, as private investors “voluntarily” (yeah right) took about a 50% haircut on the value of their Greek bonds.
Published for www.keithhennessey.com on November 22, 2011
For months a common story line in the budget debate has been that a bipartisan deficit reduction deal was impossible as long as Republicans refused to raise taxes. President Obama, Congressional Democrats, and many observers asserted that it would be impossible to solve the deficit problem until and unless Republicans agreed to raise taxes. They further argued that if a deficit reduction deal did not come together, Republican intransigence on this point would be the reason why.
The specific argument was that the deficit could only be reduced through a combination of spending cuts and tax increases. This logic was applied to the Super Committee’s $1.2 – $1.5 T deficit reduction target.
The argument that tax increases are necessary for deficit reduction is not arithmetically true – it is quite possible to completely and permanently reduce, or even eliminate, the budget deficit only by cutting spending. In fact it’s not all that hard to do.
It may, however, be legislatively true that in a politically balanced Washington like we have now, a bipartisan deal with Democrats that does not raise taxes is impossible because Democrats will not agree to deep spending cuts as long as Republicans refuse to raise taxes.
Published for www.keithhennessey.com on November 22, 2011
For months a common story line in the budget debate has been that a bipartisan deficit reduction deal was impossible as long as Republicans refused to raise taxes. President Obama, Congressional Democrats, and many observers asserted that it would be impossible to solve the deficit problem until and unless Republicans agreed to raise taxes. They further argued that if a deficit reduction deal did not come together, Republican intransigence on this point would be the reason why.
The specific argument was that the deficit could only be reduced through a combination of spending cuts and tax increases. This logic was applied to the Super Committee’s $1.2 – $1.5 T deficit reduction target.
The argument that tax increases are necessary for deficit reduction is not arithmetically true – it is quite possible to completely and permanently reduce, or even eliminate, the budget deficit only by cutting spending. In fact it’s not all that hard to do.
It may, however, be legislatively true that in a politically balanced Washington like we have now, a bipartisan deal with Democrats that does not raise taxes is impossible because Democrats will not agree to deep spending cuts as long as Republicans refuse to raise taxes.
The stalking horse for this argument is Grover Norquist, head of the antitax group Americans for Tax Reform (ATR). ATR’s position is that total federal income tax revenues should not be increased. A deficit reduction package consistent with ATR’s position could increase taxes, it just couldn’t increase income taxes. It could eliminate income tax deductions and credits, but to be consistent with ATR’s view, the higher income tax revenues that result would need to be used in full to cut income tax rates, so that the total income tax burden did not increase. (I use the phrases “total income taxes” and “net income taxes” interchangeably.)
Published for www.keithhennessey.com on November 22, 2011
For months a common story line in the budget debate has been that a bipartisan deficit reduction deal was impossible as long as Republicans refused to raise taxes. President Obama, Congressional Democrats, and many observers asserted that it would be impossible to solve the deficit problem until and unless Republicans agreed to raise taxes. They further argued that if a deficit reduction deal did not come together, Republican intransigence on this point would be the reason why.
The specific argument was that the deficit could only be reduced through a combination of spending cuts and tax increases. This logic was applied to the Super Committee’s $1.2 – $1.5 T deficit reduction target.
The argument that tax increases are necessary for deficit reduction is not arithmetically true – it is quite possible to completely and permanently reduce, or even eliminate, the budget deficit only by cutting spending. In fact it’s not all that hard to do.
It may, however, be legislatively true that in a politically balanced Washington like we have now, a bipartisan deal with Democrats that does not raise taxes is impossible because Democrats will not agree to deep spending cuts as long as Republicans refuse to raise taxes.
The stalking horse for this argument is Grover Norquist, head of the antitax group Americans for Tax Reform (ATR). ATR’s position is that total federal income tax revenues should not be increased. A deficit reduction package consistent with ATR’s position could increase taxes, it just couldn’t increase income taxes. It could eliminate income tax deductions and credits, but to be consistent with ATR’s view, the higher income tax revenues that result would need to be used in full to cut income tax rates, so that the total income tax burden did not increase. (I use the phrases “total income taxes” and “net income taxes” interchangeably.)
Published for www.KeithHennessey.com, November 21, 2011
In today’s press briefing White House Press Secretary Jay Carney discussed the Administration’s efforts to encourage Europe to address their ongoing debt crisis:
As you know, Matt, with the President and Tim Geithner — Secretary of Treasury — and others have been very engaged with their European counterparts on this issue, offering advice because we have a certain amount of experience in dealing with this kind of crisis. And we urge them to move forward rapidly.
In the same briefing Mr. Carney discussed the President’s role in the Super Committee:
The President, at the beginning of the process, at the beginning of the super committee process, a committee established by an act of Congress, put forward a comprehensive proposal that went well beyond the $1.2 trillion mandated by that act and was a balanced approach to deficit reduction and getting our long-term debt under control.
Mr. Carney then turned to the failure of the Super Committee:
This committee was established by an act of Congress. It was comprised of members of Congress. Instead of pointing fingers and playing the blame game, Congress should act, fulfill its responsibility. As for the sequester, it was designed, again, in this act of Congress, voted on by members of both parties and signed into law by this President, specifically to be onerous, to hold Congress’s feet to the fire. It was designed so that it never came to pass, because Congress, understanding the consequences of failure, understanding the consequences of inaction, the consequences of being unwilling to take a balanced approach, were so dire.
