Published for The Roosevelt Room and CNBC.com, September 3rd, 2010:

The White House is looking ahead to the end game on the coming legislative battle on tax policy and is moving toward setting a “tax trap” to get its way.

Republicans believe no tax rates should be allowed to be hiked in the fragile economy — including rates on higher incomes, capital gains, and dividends.  Democrats and the Obama Administration want the low Bush Administration tax rates for low- and middle-income Americans to remain, but want raise taxes on the highest income earners and on capital gains and dividends.

With the economy in a sideways stall this summer and mid-term congressional elections approaching, Democrats are facing the possibility of a “wave” election bringing Republican control of the House in its wake, and maybe the Senate, too.  The biggest factor in this election — generating the most intensity among likely voters, especially independent swing voters — is the economy, particularly ballooning spending and the lack of job creation.

Voters have deemed any new spending programs toxic.  Barring a significant, dramatic downturn in the economy, the probability of getting new spending through Congress is zero.  And the Fed, despite anticipation that quantitative easing is coming, has said expressly and repeatedly it sees modest growth and relatively healthy inflation coming. No one should expect more action (again, barring a significant change in its outlook).

So what’s left?  Tax policy.  And because of the looming deadline of the expiration of current tax policy resulting in huge tax increases, it’s an issue that has to be dealt with.

The White House tried to make a class-warfare argument to win support for raising taxes on higher income earners, but with the economy skidding, economists are arguing that any tax increase could be risky.  Even some Democrats are now joining in opposition to any new tax increases. The White House isn’t willing abandon its intent to raise tax rates on higher incomes, so it will try to get its way by making the cost of voting against a tax increase a lot more expensive.

Reports emerged this week that the White House is considering a raft of new tax cut measures — including a permanent reduction in the research and development tax credit, a payroll tax holiday, additional targeted tax cuts for small businesses and other measures.

By loading up the popular tax cut side of the ledger, Democrats and the White House will hope to put Republicans in a box, trying to ”win” either way: if Republicans split and join Democrats, the White House wins; if Republicans oppose the package, they’ll be  branded as obstructionist and willing to hold up middle-class tax cuts to “protect” the wealthy.

The tax trap is an old, tried and true strategy, but it won’t work in this political environment for two reasons:

1. The simple message that Democrats are increasing taxes  (even as they propose other tax cuts) is far more salient with voters.   Unless Democrats abandon any tax increases, they cannot carry voters  with this message.  The perception that Democrats want  to tax more  in order to spend more is firmly entrenched in the minds of likely voters.
2. Americans have had it with Washington fights.   Another hot legislative battle with shrill rhetoric will be offensive to  voters, and deepens their disgust with Washington.  The  pox-on-all-their-houses reaction hurts Democrats far more than Republicans as  they have many more rickety congressional seats to defend in mid-term  elections.

The White House would do best to make a deal with Republicans extending current tax policy on all income brackets, maintaining (or lowering) low pro-growth rates on capital and investment, and making permanent the R&D tax credit.

Businesses will respond positively to certainty in tax policy, markets will cheer — instilling much-needed confidence, and Americans will appreciate a rare moment of bipartisan comity.

Post published here

Published for The Roosevelt Room and CNBC.com, August 31st, 2010:

The U.S economy today is desperately running in place – it’s neither in the economic freefall of late 2008 and early 2009, nor finding the footing for the rapid acceleration of growth predicted.  It’s merely racing to keep from getting worse, held and fed by an addiction to Washington policy.

The drugs of choice to keep the U.S. economy going is long: the financial rescue; bailouts of an insurance giant and two auto companies; two rounds of fiscal stimulus – one large, one small; too many rounds of housing programs to count, with two more housing initiatives coming this week; rescues of Fannie Mae and Freddie Mac; cash for clunkers, cash for houses, cash for states, cash for food, cash for education, cash for students, cash for families with children, cash for small businesses, cash for work, cash for not working, cash for energy conservation, cash for counting energy conservation, and cash for counting all the cash that’s being doled out.  The Fed has sold cash, lent cash, and created cash.  The Fed has promised to keep cash available for a long, long time, and outlined new ways to create more cash in the future, if needed.

But it’s more than just spending programs.  Washington has also successfully or unsuccessfully put forth an expansive array of new policies with implications for every household and business in the country, predominantly, health care reform and financial regulatory reform that will each result in a bewildering round of new regulations.  Add to those proposals for new energy and climate legislation, and even the information on the window when you buy a car.

And if that wasn’t enough, there are also far-reaching tax policy changes, too – and not just the current debate over top tax rates.  Washington has instituted or proposed new taxes on health care, on tanning and tobacco, on capital and dividends, on corporate profits earned here and corporate profits earned abroad, on banks, on digital goods and services, and more.

However necessary any or all of this might have been when the economy was teetering on the brink of collapse – and most Americans polled don’t believe it was – it hasn’t created a strong, self-sustaining recovery.  Instead, it has created an unhealthy psychological addiction to every utterance from Washington – what Washington will do for you, and what Washington might do to you.

Never before in our economic history have we been so dependent on the potential largess and authority of Washington, DC.

Where markets once moved based on the news in economic data reports, today they move in anticipation of what government will do or say in response to those economic data releases. In the past few days alone we saw financial markets rise based on a speech in Wyoming by the Federal Reserve chairman, and fall after the Rose Garden remarks by the President.

The plunge in recent housing data – itself the direct result of the expiration of the housing tax credit – this week spurred market rumors of a resumption of the credit.  And while the tax credit rumors were knocked down, the Administration announced that two more housing foreclosure mitigation programs were on the way.  Every time banks and mortgage service companies figure out how to implement the previous reform, Washington comes forward with another tweak or another new program.

While Washington debates whether we’re headed for a double-dip recession or whether President Obama’s stimulus plan was enough, for most Americans – struggling to find or keep a job, unable to keep or sell their homes – the recession never ended.

To the economic elite, stopping seems irrational. They believe they have to do something…anything.  But, Americans just want this all to stop.  They will not invest their hopes in the next “fix”, the next spending program, the next policy “reform”.  They’re not interested in finger-pointing.  They want stability and certainty.  They’re ready for the national economic equivalent of a twelve-step group.

They’re tired of the running and just want the room to stop spinning.

Post published here

Published for The Roosevelt Room, August 30th, 2010:

The last week of August 2010 has been targeted on the White House calendar for a long time as the moment President Obama could focus on foreign policy — commemorating the removal of combat troops from the war in Iraq, and refocusing the country on the ongoing military operations in Afghanistan.

It wasn’t supposed to be this way.

This was not supposed to be the week the President would take to the podium in the Rose Garden to discuss weakness in the U.S. economy.  If anything, at the end of what was supposed to be “Recovery Summer”, the White House would only have expected to take a victory lap this week.  Earlier this year the President’s economic team was proclaiming the end of the recession and predicting strong, sustained job creation.  Whether the recession is technically over remains an open question to economists (if not to the American people), and strong, sustained job creation hasn’t yet materialized.

So, at the risk of distracting from his carefully-crafted foreign policy message, President Obama scrambled to squeeze in a statement today explaining why the U.S. economy has come to a sudden stop this summer — despite trillions of dollars in fiscal and monetary stimulus to date.  The White House understands it doesn’t have the luxury to talk about foreign policy when the overwhelming concern of American voters heading into November’s mid-term elections is domestic policy: government spending, jobs, housing and the overall economy.

Lacking a positive economic story to tell, President Obama said his Administration is focused and hard at work.  And then he took the opportunity to make a partisan attack on Republicans in Congress.  That’s not going to cut it for voters this fall. They’re looking for answers, not finger-pointing.

The President avoided repeating the Administration’s rosier economic predictions, not even repeating Fed Chairman Bernanke’s prediction that growth will pick up next year.  And while advocating for legislation promising some marginal benefits for small businesses, the President failed to address the two biggest issues small businesses themselves cite as reasons for not hiring: the prospect of income tax hikes (in fact, the President repeated his intent to raise marginal income taxes on the top income categories); and questions about regulatory reform — in particular health care reform and new financial rules.

It was a somber message from the President, and his speech presents a troubling bookend for the White House week: it comes following last week’s report revising GDP down to an anemic 1.6% for the second quarter; and ahead of this Friday’s payroll report, expected to bring more evidence of a weak labor market.

What is clear from the President’s statement is that the economy as we see it today is the economy we’re going to have for awhile.  That won’t bring comfort to financial markets, to Americans, and to members of Congress campaigning for election this fall.

Published for The Roosevelt Room, August 25th, 2010:

The state of the consumer is probably the single most important factor for the U.S. economic outlook, but with the big stick wielded by Washington in recent years, market watchers are also becoming election watchers.

The consensus: if Republicans make significant gains in November — even if the party fails to take control of either house of Congress — expect both a market rally and a small surge of business investment.

Market participants I talk to are playing a waiting game as we head into the fall mid-term elections, with rising expectations that the GOP will make significant gains in the House and Senate.  While the mood can change between now and November, investors believe a strong showing by Republicans will lift confidence going forward.

They don’t believe Republicans will be able to reverse President Obama’s economic policies, but that shrinking Democratic margins will at least ensure the business environment won’t get worse.  The most repeated mantra on Wall Street today: “Gridlock is good”.

Washington economic policymakers have been baffled by the huge balance sheets corporations have been carrying as profits returned over the past year.  There is some hope that the same confidence investors expect from a status quo government will be shared by corporations and free up some expansionary — job creating — business investments.

I sympathize with market participants, but they would be wise to temper expectations.  Whatever happens in the mid-term elections, the outlook for the economy isn’t inspiring.  Because of sustained unemployment, the consumer remains weak, housing doesn’t appear to have bottomed, tax increases in one form or another are coming, and household delevering is a multi-year process.  At the end of the day, an economy needs final demand — people buying stuff — to succeed, and only time, not short-term government programs, will restore final demand.

As for corporate balance sheets, the outlook is more uncertain.  Corporations see the same weak domestic consumer we see, and they know that a lot of their profit margins were a function of massive productivity gains from shedding costs in the aftermath of the economic downturn, and simply bouncing off that bottom.  Much of business investment to date has been in the form of replacing old equipment and technology, not in expansionary activity.  It’s hard to see how these returns can be repeated.

But if market sentiment means anything, a Republican mid-term surge in Congress — acting as a check on activist Democrats and the Obama Administration — can be expected to be met with market enthusiasm.

House Minority Leader Boehner is set to give a speech today in Cleveland on the state of the U.S. economy.

White House Communications Director Dan Pfeiffer — employing a tactic sure to garner Boehner’s speech greater attention — posted a blog item this morning “pre-butting” the remarks.  And to make sure the speech gets extra attention, he leaked an excerpt of his blog post to Politico’s Morning Money email report.  Here’s an excerpt of the excerpt:

Pfeiffer: “…Ohioans will hear an argument for a return to the economic policies that turned a surplus into record deficits and helped create the worst economic downturn since the Great Depression…

“While the rhetoric today may be new, the ideas remain the same: out-of-control deficits, decreased oversight of the big Wall Street banks that helped create the financial crisis and putting special interests first by maintaining tax loopholes for corporations that ship American jobs overseas.”

It’s comical to hear Pfieffer talk about “out-of-control deficits” when President Obama’s own budgets predict deficits that will average a trillion dollars a year — long after TARP and the financial crisis, long after the recession, years after the withdrawal from Iraq and the expected conclusion of combat in Afghanistan, and the bailouts of auto-makers.  And even those trillion dollar deficits incorporate rosy “savings” from a health care reform everyone not employed by a Democratic official knows will further explode the budget.  Good luck pre-butting with a deficits and spending argument.

And “going back” to previous policies?  To borrow a well-worn phrase, let’s be clear: even if the Obama White House gets its way, 98% of Americans will be living with President Bush’s tax cuts — including tax cuts not just for the middle class, but for the poorest working Americans.  It took ten years of blind-eyed hyperbolic rhetoric, but Democrats have finally noticed those tax cuts — and now they’re desperate to keep them.  So “going back” is exactly what the Obama Administration’s policy is for the overwhelming majority of the American people. Even President Obama now seems to believe that was sound policy.

Those tax policies also led to 52 consecutive months of job creation — an all-time record the Obama Administration, 20 months in, remains…well…52 months shy of matching.

As for the other two percent?  Every economist agrees that raising taxes on this group of Americans — in this economic environment — will only lower economic growth and dampen job creation.  The White House, in a fit of class-warfare-inspired vengeance, apparently believes increasing unemployment from the current lofty 9.5% rate, and decreasing economic growth from the now rapidly sliding trend toward zero, is worth a populist attack in an election year.

Spending…deficits…taxes…jobs… The American people are looking for answers and results on these issues — not more taxpayer funded finger-pointing from a thin-skinned White House.