Published for www.keithhennessey.com, March 11, 2012

In his weekly address President Obama said:

But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil. We need an all-of-the-above strategy that relies less on foreign oil and more on American-made energy – solar, wind, natural gas, biofuels, and more.

Solar, wind, and natural gas have almost nothing to do with the price of gasoline.

Policies that affect oil, gasoline, ethanol and biodiesel, hybrid vehicles, battery technology, and vehicle fuel efficiency can all directly and significantly affect the price of transportation fuel (although often quite gradually).

In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses. If you could magically make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Similarly the development of massive shale (natural) gas resources in the U.S. will make electricity more affordable in the U.S. but will have almost no effect on the cost of our transportation fuel.

Yes, there are linkages. There are a few hybrid vehicles on the road, and some commercial vehicle fleets use natural gas as fuel. But these are vanishingly small when compared with the petroleum-based and bio-based fuels we put in our cars, trucks, boats, and planes.

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Published for www.keithhennessey.com, March 9, 2012

The fewest numbers you need to know

This morning the Bureau of Labor Statistics reported that in February the U.S. economy created 227,000 net new jobs and the unemployment rate held steady at 8.3%.

We are still 5.3 million jobs shy of peak employment in December 2007 and 864,000 shy of January 2009 when President Obama took office.

Same data, different views

Different audiences look at employment data in different ways:

People’s lives are most affected by the level of employment: how many people are working and what is the unemployment rate? At 8.3 percent this number is still bad.

As both a policy and political matter, Washington, DC cares about the level, but even more about the direction and rate of change: are we adding or subtracting jobs, is unemployment rising or falling, are we “headed in the right direction?” From this view today’s report offers good news, at least on the jobs created front. I assume the Administration will cite 17 months of continuous job growth. Possibly more significant is that we have had four months of job growth > 150,000/month, which is roughly what you need to keep up with population growth. The trend continues to be positive, although you should want even bigger numbers since the unemployment rate is still high.

Markets and market commentators care even more about how the change compares with expectations before the data was released. Today’s numbers slightly exceeded expectations of about 200,000 net new jobs so the reaction from this perspective should also be positive.

Three data reminders

The unemployment rate does not include those who are discouraged and no longer seeking work. As hiring picks up you could see more of these discouraged workers starting to look for jobs. This could cause the measured unemployment rate to decline more slowly than if the number of people looking for work remained constant.

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Published for www.keithhennessey.com, February 22, 2012

va·por·ware (n): computer slang a product, especially software, that is promoted or marketed while it is still in development and that may never be produced

The President’s Buffett Rule is vaporware.

Here is the President speaking yesterday:

Congress needs to make the Buffett Rule a reality. This is common sense. (Applause.) If you make more than a million dollars a year — make more than a million dollars a year — you should pay a tax rate of at least 30 percent. (Applause.) And if you do that, that means that if you make less than $250,000 a year, like 98 percent of Americans do, you shouldn’t see your taxes go up. And we won’t be adding to the deficit.

These are things we can do today. It shouldn’t be that difficult. Now, whenever Congress refuses to act, Joe and I, we’re going to act. (Applause.)

The President has not actually proposed a tax policy that fits this principle. Neither his budget nor the tax proposals released by Treasury include any policy specifics to establish a new minimum 30% tax rate for those with income > $1M.

Treasury released 200 pages of proposed tax policy changes, including obscure things like repealing the preferential dividend rule for Real Estate Investment Trusts. They did not release specifics to accompany the one tax policy change the President talks about almost every day (and twice yesterday).

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Published for KeithHennessey.com, February 13, 2012

The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases. Here is White House Chief of Staff and former Budget Director Jack Lew on Meet the Press yesterday:

“We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together.”

Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts.

Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

Table S-3 from the newly released President’s Budget starts measuring deficit reduction a year ago, in January 2011. The table shows $5.3 T of deficit reduction over the next ten years resulting from a combination of laws enacted last year and the President’s new proposals released in today’s budget.

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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.

Post published here

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.

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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.

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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.

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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.

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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.

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