Author: James Pethokoukis

David Gitlitz, chief economist at High View Economics, has a thought or two about my “20-year bust” post:

Gordon is very good in his areas of expertise, but you’re right to point out that there’s nothing predetermined about this. Enacting full bore Obanomics would make even Gordon’s outlook look like a day at the beach. On the other hand, adopting a supply-side, free-market growth strategy would put in place the incentives to reinvigorate entrepreneurship and innovation and put us on track to restore at least the historical trend rate of productivity growth.

Me: Markets have a funny way of driving policy. A high-debt, high-tax, high-regulation economy would not be good for the dollar, bonds or stocks. And while we are on the topic, an interesting post from the great Larry Kudlow on where taxes are heading.

It is an alarming, jaw-dropping conclusion. The U.S. standard of living, says superstar Northwestern University economist Robert Gordon in a new paper, is about to experience its slowest growth “over any two-decade interval recorded since the inauguration of George Washington.” That’s right, get ready for twenty years of major-league economic suckage. It is an event that would change America’s material expectations, self-identity and political landscape.  Change in the worst way.

Now it’s not so much that the Great Recession will morph into the Long Recession. More like ease into the Great Stagnation. As Gordon calculates it, the economy will average only 2.4 percent annual real GDP growth over that span vs. 3 percent or so during the previous 20 years. On a per capita basis, the economy will grow at just a 1.5 percent average annual rate vs. 2.17 percent between 1929 and 2007.

That might not seem like much of a difference, but it really is. Over time, the power of compounding would create a huge growth gap measured in the trillions of dollars. To look at it another way, assume you had an annual salary of $100,000. If you received a 1.5 percent raise each year, you would be making $134,000 after 20 years, $153,000 after 40 years. But a 2.17 annual raise would boost your income to $153,000 after 20 years and $236,000 after 40 years.

For Gordon, the culprit is weaker productivity. Productivity, economists like to say, isn’t everything — but in the long run it is almost everything. A nation’s GDP growth is little more than a derivative of how many workers the nation has and how much they produce. And if Gordon  is correct, U.S. productivity is about to weaken. He forecasts that over the next two decades, the metric will grow at just a 1.7 percent annual rate. From 1996-2007, economy-wide productivity averaged just over 2 percent with GDP growing at 3.1 percent.

Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)

All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.

But maybe Gordon is wrong. Productivity has been surprisingly robust during the downturn, helping the overall economy (though not the labor market) weather the storm better than most expected. Maybe nanotechnology or genetic engineering will be the next Internet and ignite further creative destruction. Yet even if Gordon is correct, Americans still control their own economic destiny.

Since the 2008 election, American economic policy has been about wealth preservation (keeping the economy from sliding into a depression) and wealth redistribution (healthcare reform.) Wealth creation? Not so much.  That needs to change. Washington needs to focus on growing the economy and competing with the rest of the G20 nations, including the other member of the G2, China. Every policy — from education to trade to the tax code — needs to be seen through that lens.

America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation — or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

Now they face another choice. Preserve wealth, redistribute wealth or create wealth.  Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century.

An amazing piece of healthcare analysis by the University of Chicago’s Gary Becker. The whole analysis deserves reading, but a few key points:

1) Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. … As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further.

2) Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. … The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.

3) Health savings accounts (HSAs) have been one of the most important innovations in the health care field during the past decade. … There is little mention of HSAs in the new bill, and certainly no encouragement to their expansion.

4) The American health care delivery system needs greater transparency and easier access to medical information by consumers. The bill takes a valuable step in this direction by encouraging the development of online medical records and medical histories for all individuals, no matter how many doctors they have seen, or how often they have moved.

5) Proponents of the bill claim it will save hundreds of billions of dollars during the next ten years from cuts in Medicaid and Medicare, but it is far from obvious how such cuts will materialize. … . I do not see how the bill will lead to Medicare savings since there is no increase in out of pocket payments by Medicare enrollees, and Congress is likely to continue to override any scheduled cuts in payments to Medicare doctors and others.

6) The only truly efficient way to handle the pre-existing condition issue is to try to develop an insurance system in which young adults, who generally have few serious existing medical conditions, can take out long-term healthcare insurance.

7) Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes.

The super-insightful Andrew Biggs looks how the Crist-Rubio debate dealt with Social Security — and finds laughable the former’s comments about restoring the system’s long-term solvency by rooting out waste, fraud and abuse:

As a general rule, when a politician mentions “waste, fraud, and abuse” it should be interpreted the same as if the candidate wore a sign saying “I’m not serious.” That’s not to say that we don’t have problems with fraud, but that the real problem is simply that the government spends too much.

This is particularly so in the case of Social Security, which is one of the most efficient federal government programs. Social Security takes money from young workers, calculates a benefit for retirees based on their earnings and their years in the workforce, and cuts them a check. There’s not a lot of discretion involved, which reduces chances for things to go wrong. Sure, there are problems in the disability program and I’m confident there are folks getting disability benefits who actually could work. But that’s the fault of the eligibility criteria passed by Congress in the 1980s more than any problem of vetting applicants by the Social Security Administration. On this issue, at least, Crist was very unimpressive.

What did impress me, though, was the fact that Rubio—who, after all, is running for the Senate from Florida—was willing to be upfront about the hard choices awaiting us on Social Security. In part this may be due to the character of the candidate, who struck me as a principled conservative.

Here is what you need to know about financial reform. If a bill in any way allows vast amounts taxpayer money to be poured into banks, then the bill does not end Too Big To Fail. Banks will assume this power will be used. Second, any bill that requires prescience by regulators and then the will to act on unpopular forecasts is doomed to fail. Keep that in mind as your read some key insights from the great Nicole Gelinas on fin reform:

1) The biggest financial crises arise from too much debt. Borrowers and lenders, ensconced in a bubble, fail to see the need for cash as a cushion against error. When the bubble bursts, it leaves behind so much debt that it bankrupts the financial industry.

2) Existing regulators should move toward consistency in their borrowing limits–requiring a financial institution to put a consistent level of cash down behind any debt security or derivative instrument, even if the government thinks the investment is perfectly safe, as it did with mortgage securities.

3) Further, existing regulators should wean financial companies off their reliance on the cheap overnight debt that they borrow from global markets to fund their investments.  … Regulators could require firms to put down greater cash cushions proportionate to this borrowing.

4) These rules would encourage the most important regulation of all: market discipline. Individual companies would still fail to meet their obligations, but they would not bring down the entire financial system in the process.

5) Instead of adding to Dodd’s 1,336-page bill, Washington should repeal the 2000 law that forbids existing regulators to set consistent rules for all derivatives instruments.

6) Then, Washington should tweak the bankruptcy code so that, for example, financial firms can go bankrupt without giving their creditors the right to pull their derivatives contracts, destabilizing the financial world.

7) We need politicians and regulators to implement simple rules that don’t require faith in omniscient, micro-managerial government planning.

Me: I would also add that there is a great need for financial transparency by Wall Street so markets can better judge their creditworthiness.

My guy Pete Davis over at Capital Gains and Games unsheathes the katana and slices up the VAT. Not so easy to implement he says. A brief summary of his reasons (though read the whole thing, of course):

1. Like the U.K. when it adopted its VAT in 1973, the U.S. will struggle for at least two years and probably longer to implement a VAT.

2. Compared to our income tax, the VAT is regressive.

3. Tax reformers lambast the complexity of our income tax with good reason, but somehow assume that the same people who legislated that complexity will legislate a clean VAT.

4. I can’t think of a faster way to kill Rust Belt jobs than to impose a VAT.

5. Housing would be hurt by a VAT even if it is zero rated.

6. Exporters would benefit from a VAT, but that benefit would be partially offset to the extent that the dollar appreciated against the currencies of our trading partners.

7. State government sales tax revenues would be directly impacted by a federal VAT.

Get ready for the Long Recession.

Well, at least a long period of time where it is going to seem like the US economy is kind of sickly. That is the conclusion of productivity guru Robert Gordon in a new paper. He says US living standards now face their slowest two-decade growth rate “since the inauguration of George Washington.” More:

The statistical trend for growth in total economy [labor productivity] ranged from 2.75 percent in early 1962 down to 1.25 percent in late 1979 and recovered to 2.45 percent in 2002. Our results on productivity trends identify a problem in the interpretation of the 2008-09 recession and conclude that at present statistical trends cannot be extended past 2007.

For the longer stretch of history back to 1891, the paper provides numerous corrections to the growth of labor quality and to capital quantity and quality, leading to significant rearrangements of the growth pattern of MFP, generally lowering the unadjusted MFP growth rates during 1928-50 and raising them after 1950. Nevertheless, by far the most rapid MFP growth in U. S. history occurred in 1928-50, a phenomenon that I have previously dubbed the “one big wave.”

The paper approaches the task of forecasting 20 years into the future by extracting relevant precedents from the growth in labor productivity and in MFP over the last seven years, the last 20 years, and the last 116 years. Its conclusion is that over the next 20 years (2007-2027) growth in real potential GDP will be 2.4 percent (the same as in 2000-07), growth in total economy labor productivity will be 1.7 percent, and growth in the more familiar concept of NFPB sector labor productivity will be 2.05 percent. The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington.

Me: There is no more basic political and economic issue than a nation’s standard of living. If  Gordon is right, this will dominate US politics as another sign of American decline.

Finally, a Wall Street conspiracy theory without Goldman Sachs at its heart. This one posits that bond rater Moody’s wants to ding the U.S. credit rating so panicky politicos will privatize Social Security. That would sent big bucks to the firm’s big bank clients. If only it were true.

This bit of speculation comes from Dean Baker, a respected Washington think-tank economist, albeit with a liberal bent. Baker suggests that Moody’s increased debt warning of late “could be a reflection of the Wall Street agenda to cut” America’s social insurance safety net. Shifting government pensions into the private sector could entail billions, if not trillions, of retirement dollars flowing into personal portfolios managed by investment firms.

Like most conspiracy theories, this one reveals more about the storyteller than about reality. Baker, like other left-of-center economists such as New York Times columnist Paul Krugman, think Washington too concerned with deficits given the anemic economy. And they lump President Barack Obama into that camp, too. They fret this New Frugality — somewhat laughable give trillion dollar deficits — will be further fed by Obama’s new deficit commission. And they especially worry the panel will recommend trimming back Social Security to preserve its solvency. Add in displeasure that financial reform isn’t tougher on the major players in the financial meltdown, and a juicy tale of corporate collusion emerges.

A better theory: Raters have been intentionally insouciant so as not to incur the wrath of Congress as it fashions new regulations for the firms. U.S. debt-to-GDP may hit 90 percent by 2020, according to the Congressional Budget Office. The CBO also says that Social Security, which accounts for 16 percent of the government’s $46 trillion in long-term liabilities, will in 2010 for the first time pay out more in benefits it takes in from taxes.  That is six year earlier than predicted. The slow economy is the near-term cause. But the event marks a key milestone in the program’s long descent toward insolvency. Benefit cuts and tax hikes seem inevitable. But those will lower an already paltry rate of return, especially for younger workers.

Letting Americans shift at least some of their government-directed savings into the real economy would generate a bigger nest egg.  This is done in Chile and Sweden, for instance. Yes, stocks are risky. But the market ultimately reflect the real economy. If it booms, so will portfolios. And if doesn’t, Social Security is in even deeper trouble. If there isn’t a conspiracy, someone should hatch one.

Heartened to hear the words of Google co-founder Sergey Brin in the WSJ:

China has “made great strides against poverty and whatnot,” Mr. Brin said. “But nevertheless, in some aspects of their policy, particularly with respect to censorship, with respect to surveillance of dissidents, I see the same earmarks of totalitarianism, and I find that personally quite troubling.”

Me: I especially like the “whatnot” part. Prosperity is important. But so is freedom. And the West waits for China to make as much progress with political freedom as it has with economic freedom — though even the latter has a long way to go. More change will come, especially as this generation of leadership passes

We now know the makeup of President Obama’s bipartisan deficit commission. There are 10 Ds and 8 Rs with 14 votes needed to approve a recommendation As I go down the membership list, I see a lot of folks who are likely believers in the new Washington Consensus — significant spending cuts won’t help so big tax hikes are necessary. Of course, study after study shows big tax hikes are a terrible way to bring deficits under control. They kill growth which makes balancing the budget even harder since revenues are deflated.

A new poll shows Americans hate Wall Street. Of course, bankers are never popular. But maybe never less so than right now. Yet polls also show Americans cynical about Big Anything — Big Money, Big Business, Big Government. As Sen. John McCain likes to say, the approval ratings of Congress are so low, its only supporters must be paid staffers and blood relatives.

That helps explains why the nation has not been flocking to government-created solutions such as the stimulus plan and healthcare reform. This isn’t a time when Americans are shifting from believing in markets to believing in government. It’s a time when the last remaining shred of faith in the country’s elite is quickly eroding.

Washington will have difficulty producing a stranger bit of public policy than raising investment taxes to pay for healthcare reform. Remember, the consensus critique of the U.S economy is that it’s been plagued by too much consumption and debt. O.K., fine. So the answer is penalizing savings and investment? Really? Pure Bizarro economics for that and a number of other reasons:

1) It will hit the middle-class eventually. Wealthier Americans — families making over $250,000, individuals $200,000 — are the supposed targets here. Add in the new 3.8 percent Medicare tax to the year-end expiration of the 2003 Bush tax cuts, and they will see their capital gains and dividend rates will soar from 15 percent currently to 23.8 percent and 43.4 percent in 2013, respectively. But the income levels aren’t indexed for inflation. So the taxes will reach further down the income ladder each year. Assuming steady inflation, the tax in 2013 will actually affect households making over $226,000 and individuals $183,000. Another crack in the Obama tax pledge.

2) It is an expensive way to raise government revenue. Most studies show that raising the cost of capital lowers business investment and productivity. That translated into a lower standard of living. Hardly surprising, really. Taxes matter. Tax something and you tend get less of it. That’s a principle embedded, for instance, in calls to put a price on carbon, something the White House supports. Or in this, less economic growth.
3) It creates an accidental industrial policy. People should make economic decisions based on economic merit and efficiency, not because the tax code puts its thumb on the scale. For instance: Companies are financed either by issuing debt or selling shares. By raising taxes on equity, you further bias the tax code toward debt since interest can already be deducted from taxes. This imbalance was something an Obama tax commission, led by Paul Volcker, thought needed remedy. Instead, it will be worsened. The differing cap gains and dividend rates also tilt the tax code in favor of profit-poor companies (but with bright prospects and high stock price appreciation) over those throwing off cash.

4) It moves the tax code in the wrong direction. Economists favor paying for healthcare, as well as cutting the U.S. budget gap, with consumption taxes. (That would include eliminating the mortgage interest deduction to reduce housing consumption.) That could be a straight value-add tax. Or, better, a Hall Rabushka flat consumption tax. Actually, taking investment taxes to zero is a quick and dirty way to create a consumption tax since all you can do with income is save it or spend it. Of course, cutting spending should be the first order of business. Create a better tax system, reduce expenditure and then see where you are at as far as the deficit goes.

5) It puts politics over sound policy. For an administration that tries to follow economic consensus, this is an odd deviation. Politics explains it. Consumption taxes are broad taxes. The only taxes Washington finds palatable are those on upper incomes, such as found on Wall Street. But taxing the capital they provide to pay for healthcare will only sicken the American economy.

David Leonhardt of the NYT just noticed that tax rates are going up  and wealth is being redistributed. This makes him happy. But right now American faces a wealth creation problem. And if that isn’t working, every other problem facing America looks a lot worse. He also assumes that wealthier Americans won’t change their behavior, reducing the government’s take. Again, here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

Wow (from the Boston Globe):

Iraq is now considered a safer bet than Argentina, Venezuela, Pakistan, and Dubai — and is nearly on par with the State of California, according to Bloomberg statistics on credit default swaps, which are considered a raw indicator of default risk.

“Compared to California, I’d rather bet on Iraq,’’ Daher said. “Iraq is a country where there are still bombs going off and people getting murdered, but they are less indebted than the United States. California is likely to have more demands on its resources, and there is no miracle where California is going to have more revenue coming out of the sky. Iraq has prospects for tremendously higher revenues, if they can manage to get their act halfway together, which they seem to be doing.’’

Great post with oodles of charts from Mike Mandel. I did want to highlight one chart, though:

The wise and wonderful Ed Yardeni gives bullish and bearish Money & Politics scenarios:

Here’s the bullish scenario for stocks: The economy could continue to grow, especially now that the uncertainty is over about how the healthcare system will be overhauled. The resilience of the economy would be attributable to the Profits Cycle. If profits continue to grow solidly this year, as I expect, companies are likely to increase their payrolls and capital spending. Stock prices would continue to rally. A regime change in November would fuel a powerful yearend rally. This is the scenario that I believe is still the most likely to unfold.

Here’s the bearish scenario: The widely expected upturn in employment won’t happen. Instead, job losses could mount again if the Obama administration now pushes ahead with more of its divisive agenda. Much of it is just as controversial as healthcare has been. The President has suggested that he won’t mind if his party loses in November and if he is a one-term president as long as his agenda prevails. On January 25, in an interview with Diane Sawyer on ABC’s “World News,” Obama said, “I’d rather be a really good one-term president than a mediocre two-term president.” He added, “You know, there is a tendency in Washington to believe our job description, of elected officials, is to get re-elected. That’s not our job description. Our job description is to solve problems and to help people.” Spoken like a true community organizer.

Me: In political terms, this is the difference between Democrats a) losing 15-25 House seats and 3 or 4 Senate seats and b) 35+ House seats and 5-Senate seats.

Healthcare reformers in Washington are asking America’s creditors to take a leap of faith. The plan is supposed to cut future budget shortfalls. But it depends on politicians following through on cuts and taxes, a deficit commission imposing additional discipline, and untested reforms working as expected. Owners of U.S. government debt shouldn’t bank on it.

The numbers add up on paper, at least according to the nonpartisan Congressional Budget Office. Its estimate for the 10-year cost of reform is $940 billion, with cost cuts elsewhere and new taxes turning that into a $138 billion net reduction in the projected federal deficit over a decade. Go out another 10 years, and the plan racks up another trillion or so in projected savings.

One problem is that despite being nonpartisan, the CBO’s methods are still dictated by Congress. That means Capitol Hill can get away with financial chicanery such as front-loading some tax increases and delaying spending plans — something that can help the numbers work because, in a fixed 10-year period, the tax income is counted for more years than the spending.

And then there are the promised but politically unpalatable fiscal fixes that fall to a future president and Congress. Proposed cuts in federal payments to hospitals, for instance, are delayed a decade. If today’s lawmakers are punting such measures, it’s hard to have any confidence their successors will show any more mettle.

The reformers hope more can be saved if the healthcare plan’s cost-control pilot projects bear fruit and are then widely implemented. But the CBO doesn’t give these projects much credit. And even the White House admits that rising healthcare costs could still threaten America’s finances. That’s one reason why President Barack Obama is keen on a bipartisan, deficit-cutting panel. But its potential efficacy is widely derided by veteran budgeteers.

At least with healthcare an effort is being made to do no fiscal harm. That was not the case with major spending initiatives of the past decade for which balancing cost cuts or tax increases weren’t attempted. But with the U.S. ratio of debt to GDP still on track to double in a decade, it will take a leap of faith for America’s creditors to retain their enthusiasm for Treasury bonds.

“The Labor Market in the Great Recession” is an interesting new paper that looks at where the job market may be heading, as well as how it has fared the past few years. The latter points first:

Unemployment rose from a pre-recession minimum of 4.4 percent to reach 10.1 percent in October 2009. This increase—5.7 percentage points—is the largest postwar upswing in the unemployment rate. It dwarfs the rise in joblessness in the two most recent recessions in 1990 and 2001, when in each case unemployment rose by approximately 2.5 percentage points. It dominates even the severe recession of 1973/4 (4.25 percentage points) as well as the combined effects of the double recession of the early 1980s (5 percentage points). There is little doubt that the present downturn is the deepest postwar recession from the perspective of the labor market.

But will the deep downturn be followed by a rapid rise? Don’t count on it, the authors say:

The resemblance of these trends to the similar breakdown in match efficiency that accompanied the European unemployment problem of the 1980s raises the concern of persistent unemployment, or hysteresis, in U.S. unemployment going forward. We consider a range of possible sources that might lead to hysteresis, including sectoral mismatch, extension of unemployment insurance (UI) benefits, duration dependence in unemployment outflow rates, and persistence in unemployment brought about by reductions in the rate of worker flows, what Blanchard (2000) has termed sclerosis.

Recent data point to two warning signs going forward. First, the historic decline in unemployment outflow rates has been accompanied by a record rise in long-term unemployment. We show that this is likely to result in a persistent residue of long-term unemployed workers with relatively weak search effectiveness, depressing the strength of the recovery. Second, conventional estimates of the impact of UI duration on the length of unemployment spells suggest that the extension of Emergency Unemployment Compensation starting in June 2008 is likely to have led to a modest increase in long-term unemployment in the recession. Nonetheless, we conclude that, despite these adverse forces, they have not yet reached a magnitude that would augur a European-style hysteresis problem in the U.S. economy in the long run.

1. Obama the Democrat. Achievement of 50-year Dem goal means no 2012 nomination challenge. W

2. Obama the Centrist. Not with an all-Dem bill that has upside-down approval ratings.L

3. Big Pharma. No Canadian drugs, plus they get more generic biotech protection. W

4. Big Insurance. Loads of new regulations plus wimpy mandate that means new customers might not show. L

5. Treasury holders. Tax hikes and spending cuts for coverage expansion rather than Medicare solvency. L

6. 2010 GOP. Loss ensures motivated base for midterms. W

7.Supreme Court. May have to decide constitutionality of politically explosive individual mandate. L

8. Rep. Paul Ryan. Confrontation with Obama cranks up profile. W

9. Majority Leader Steny Hoyer.Speaker Nancy Pelosi not going anywhere, even if a big November loss. L

10. Mitt Romney. Anger over Obamacare could seep into RomneyCare. L

11. Mitt Romney. Expertise in healthcare could boost him in 2012. W

12. Investors. Overall, cap gains taxrates are rising 60 percent. L

13. Government workers. Uncle Sam is going to lots need more to administer this. W

14. Federalism. Top-down health mandate that some states may not be able to afford. L

15. China. More pressure to enhance its own safety net to boost consumption. W (for US, at least)

Larry Kudlow isn’t thrilled with the Janet Yellen Fed pick. This is the crux of his beef:

There is no evidence in Ms. Yellen’s public opinions or speeches that she might use a market-price rule — targeting commodities, gold, bond rates, or the dollar — as a forward-looking inflation (or deflation) signal. So the absence of a commodity- or dollar-price rule will continue at the Fed. Ben Bernanke doesn’t use a market-price rule, and Obama’s additional Fed appointees — whoever they are — will undoubtedly come from the same Phillips-curve camp.

Supply-siders like myself who believe that only market prices can provide accurate signals of the supply and demand for money are going to be very disappointed. If the Fed supplies more cash than markets want, the inflation rate can go up whether unemployment is high or low. We learned this painfully in the 1970s, when high unemployment was accompanied by high inflation.