Author: James Pethokoukis

President Obama is continuing to push the Volcker Rule to ban prop trading by banks. My sources give me no indication this has a realistic chance of happening. Certainly none of the key members — Dodd, Shelby, Corker, Warner — have warmed to it. So why is Obama pushing it, then? Hey, it is about the only part of his agenda with any popular support. Certainly not healthcare or cap-and-trade or the stimulus. Anti-Wall Street populism works, so more anti-Wall Street populism we will get. This is also why the GOP wants to pass a financial reform bill. It deprives Dems of a political weapon that plays on the stereotype of Republicans as the Party of the Rich.

Forget the polls. Look at what the lobbyists are doing. Not only are campaign contributions to Republicans on the rise, advocacy firms are looking to hire more GOPers. So says CQ:

With dozens of House Democrats looking vulnerable in November, lobbyists are prepping for narrower Democratic majorities on Capitol Hill next year — or a possible Republican takeover. “Democratic control initially caused a pendulum swing to Democratic-leaning firms,” said Drew Maloney, a Republican, who is managing director of Ogilvy Government Relations. “You’ll see a swing back towards the middle, where firms that have a bipartisan balance of strong players will be well-positioned in the new environment.”

Lobbying shops began adding Democrats to their rosters when the party won the House in 2006. The hiring trend crested two years later, when Barack Obama won the White House and Democrats took a filibuster-proof majority in the Senate. Since then, tales of hefty six-figure paydays for even junior Democratic aides have wafted throughout the Capitol, enticing many staffers to depart for once-in-a-lifetime salary offers. But with downtown firms now teeming with Democrats — and GOP party leaders betting big on Election Day 2010 — Maloney and other executives are putting Republican resumes on the top of the stack for the first time in four years. Ogilvy recently hired Republicans Justin Daly and John O’Neill to round out the firm’s practice.

Even the Podesta Group and other Democratic-leaning shops are succumbing to the GOP feeding frenzy. Podesta CEO Kimberley Fritts, a Republican, said she has recently hired three Republicans — Steve Northrup, Molly McKew and Robert Taylor — and is looking to perhaps add more.

Blue Dog Democrats have introduced an amendment to balance the federal budget by 2020. How that might happen, they don’t say. To get an idea just how tough that would be, look at Republican U.S.Representative Paul Ryan’s Roadmap for America’s Future. It gets the budget in balance without raising taxes by huge entitlement spending cuts. In 2020, his plan would produce deficits of close to 4 percent of GDP — and rising. His first balanced budget doesn’t arrive until 2063.

House Republicans Jeb Hensarling and Mike Pence want a constitutional amendment to limit government spending to 20 percent of GDP, its rough historical average. In their Wall Street Journal op-ed, H&P admit, significantly, that America cannot grow its way out of its debt problem:

Can we tax our way out of this problem? No. In order to pay for what we are on track to spend under current law, taxes would have to double. This would crush our economy and condemn future generations to a far lower standard of living. That is not an option. Can we grow our way out? Unfortunately, no. Although pro-growth policies like simplifying the tax code and lowering rates are critical components of any solution, they alone are insufficient. Mr. Walker estimated it would take double-digit economic growth every year for the next 75 years in order to close the fiscal gap.

Me: They don’t say how the government should hit that 20 percent goal, given the expected rise in entitlement spending. But it does provide a marker. They aren’t arguing for small government as much as typical government, at least overall. But hitting that 20 percent would require a radical transformation of US domestic economic policies. Both Social Security and Medicare would be transformed, particularly the latter. Nothing typical about that.

America’s big banks aren’t being broken up. Nor does it appear there will be strict new limits on their activities. And while lenders may have to cope with a new consumer regulator, its power and scope is evanescing daily. If there is any group from Wall Street deserving of fat bonuses this year, it’s the industry’s lobbyists in Washington.

The banks smartly recognized regulatory reform was inevitable after the greatest financial meltdown since the Great Depression. So rather than try to stop it, the industry helped mold and massage any changes into a shape it could tolerate. And early indications from Congress suggest they’ve been successful.

Wall Street’s crew on K Street, lobbyists’ answer to advertising’s Madison Avenue, has been formidable. It includes the American Bankers Association, the Financial Services Roundtable, the Financial Services Forum and the U.S. Chamber of Commerce. They set their sights early on a White House proposal to create a powerful and independent Consumer Financial Protection Agency.

The lobbyists have successfully scaled back various iterations of the plan. One would make the regulator part of the Treasury Department, and force it to consult with existing watchdogs before imposing restrictions. Republican alternatives are even weaker, alternately housing a consumer unit either in the Federal Deposit Insurance Corp or the Federal Reserve. Expect a diluted compromise between diluted compromises — just as seems the case for the “Volcker Rule” to limit proprietary trading by banks.

Other lobbying successes abound. The Independent Community Bankers of America, which advocates for smaller lenders, helped force mega-banks to pre-fund any future possible bailouts. The Securities Industry and Financial Markets Association, along with the insurance industry, derailed strict Senate regulation of retail investment brokers.

Though the bankers’ advocates in Washington have done well, their work has been caught out in one regard. The International Monetary Fund recently found that banks that invested more to influence policy over the past decade were more likely to take more securitization risks, have larger loan defaults and sharper stock falls during key points of the crisis. The lobbyists may find much of their upcoming lobbying is focused on next year’s bonus.

Just started reading Mitt Romney’s book “No Apology.” Actually quite a lot of meat in the economics chapters. The former Massachusetts governor and possible Republican presidential contender wants to cut investment and corporate taxes. Doesn’t like the Fair Tax or value-added taxes. Seems willing to consider a carbon tax/payroll tax swap. Wants to spend a lot more on basic research. No apologies for supporting TARP or RomneyCare.

The great Ed Yardeni thinks the POTUS is repeating FDR’s mistakes:

In 2016, I expect that Mr. Geithner will make the following speech: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job … We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot.”

Those words were actually spoken by FDR’s Treasury Secretary Henry Morgenthau before his fellow Democrats on the House Ways and Means Committee. Revisionist conservative-leaning historians are increasingly blaming FDR’s policies for prolonging and deepening the Great Depression. A recent addition to this perspective is “The Forgotten Man: A New History of the Great Depression” (2007) by Amity Shlaes. She followed it up with an interesting article in the WSJ on Feb. 1 this year, “How to Make a Weak Economy Worse.” She observed that FDR’s anti-business policies were bad for business. She notes, “The 1935 Wagner Act was a tiger that makes today’s union law look like a pussycat. It favored unions over companies in nearly every way, including institutionalizing the closed shop. And after Roosevelt’s landslide victory in 1936, the closed shop and the sit-down strike stole thousands of productive workdays from companies, punishing earnings and limiting ability to hire.”

In yesterday’s WSJ, we learned that the Obama administration is considering union-backed proposals to make it easier for government agencies to bypass low bidders and award contracts to higher bidders that pay more wages and benefits. The AFL-CIO labor federation is pushing for a jobs program called “Jobs Now Make Wall Street Pay.” They want a transaction tax on securities trading to pay for yet another infrastructure spending program.

Heavens, a Mort Zuckerman bid for US Senate in New York would be great fun. Not a guy who loves to press the flesh, but supersmart and interested in getting things done. I just wonder if these CEOs who want to go to Washington fully realize how incredibly boring being a senator is.

Of course, he won’t have to spend loads of time raising money. So that helps. (One of the interesting nuggets from Game Change, the 2008 presidential campaign book, is just how much Hillary hated raising money.)  Disclaimer: I worked for Mr. Z  for a dozen years at U.S.News & World Report.

It looks like the Conservatives in Britain are getting worried that their emphasis on deficit reduction is hurting the party with voters. Labour seems to be catching up in the polls:

The prospect of a hung parliament frightens financial markets, which fear a minority or coalition government would shy away from tough action on the deficit, which is set to exceed 12 percent of GDP this year, a level similar to that of crisis-hit Greece.

Labour plans to halve the deficit in four years with cuts starting next year but says turning off economic stimulus taps now could derail a tentative recovery from a deep recession. The Conservatives say this is too little, too late. They pledge to make an “early start” on deficit cutting if they win power, saying delay could cause a crisis of investor confidence and push up interest rates, but they have not given any figures.

The Conservatives’ uncompromising message on the need for belt-tightening may have turned off some voters, who fear public spending cuts could lead to job losses and poorer services. “The ‘age of austerity’ is a sound bite too far,” said Tim Bale, senior lecturer in politics at Sussex University and author of a recent book on the Conservatives.

Me: A Cameron loss would surely be noted in Washington as another lesson that root-canal economics doesn’t sell. Rather than a Deficit Commission, someone should suggest a Growth Commission to recommend ways to boost long-term economic growth in a fiscally responsible way.

Rightly or wrongly, Wall Street is given blame for the Great Financial Meltdown — at least far more so than the Fed, US housing policy and government Too Big To Fail policy. So looking at how financial reform is coalescing in Congress, the big banks have to feel relieved. No one is being broken up, no return of Glass Steagall, the new consumer protection regulator is being continually whittled down, no super regulator. Things may have gone much differently had financial reform been more of a priority than healthcare. Wall Street’s execs may not deserve bonuses, but its lobbyists sure do.

Charlie Cook has it exactly correct in this piece of analysis:

I’ve spent the last couple of days talking to some of the brightest Democrats in the party that are not in the White House. And it’s very hard to come up with a scenario where Democrats don’t lose the House. It’s very hard. Are the seats there right this second? No. But we’re on a trajectory on the House turning over….
There are nine months, certainly things could happen, but the odds of unemployment being below 9 percent are minimal by the time of this election. We’re probably going to have a year of basically, more or less, 10 percent unemployment, which hasn’t happened since the Great Depression. I mean, in fact, in an even-numbered year there’s only been one month of double-digit unemployment in the post-War era. One month. And now we’re going to have probably about a year.

Me: Unemployment is The Variable. Anything other than a sharp drop is terrible news for Democrats. And there seems little chance the US economy will generate the level of economic growth this year necessary to generate hundreds of thousands of job per month.

Well, let’s see: It costs $75 billion more than the Senate plan. It delays the one sure-fire cost-control measure, the tax on high-end plans. And it gives the federal government new authority to block insurers from increasing premiums. That last one is particularly wrong-headed. The policy thrust of ObamaCare was supposed to be to reduce costs by changing how healthcare was delivered, not through rationing. But price caps are nothing more than rationing. As Cato’s Mike Cannon puts it:

As I have written elsewhere, artificially limiting premium growth allows the government to curtail spending while leaving the dirty work of withholding medical care to private insurers: “Premium caps, which Massachusetts governor Deval Patrick is currently threatening to impose, force private insurers to manage care more tightly — i.e., to deny coverage for more services.” No doubt the Obama administration would lay the blame for coverage denials on private insurers and claim that such denials demonstrate the need for a so-called “public option.

First, here is a bit from my Reuters Breakingviews column:

President Barack Obama might have stumbled upon a three-step path to financial crisis: 1) admit nation is dangerously in debt; 2) create high-profile deficit commission to find solution; 3) have commission fail. Subsequent market tumult could, of course, force a sudden, dramatic and harsh fix to America’s fiscal ills. But a rush job would be a poor way to solve the country’s long-term financial problems.

The immediate casualty of failure, however, would be the markets. Recall the House’s first vote against the $700 billion bank bailout in September 2008. The Dow industrials fell an unlucky 777 points in a flash. The bill passed two days later when panic set in on the Hill. Failure of the commission would send a frightful message to investors globally who have continued to buy trillions in Treasuries under the assumption hard budget choices would eventually be made.

True, a market jolt would again focus Congress’s attention. But that risks a hasty, ill-considered budget fix such as hiking taxes without a structural reform of America’s social insurance system. That would really be no solution at all.

Me: It’s like there arent’t all kinds of plans to cut spending. But Americans need to decide if they want to close the long-term budget gap through lower spending or higher taxes.

So, like, this thing isn’t going to work. You all know that, right? Rs pretty much have zero interest in higher taxes. Zero. And Ds pretty much have zero interest in cutting spending anywhere unless the money is shifted to some new program, as with healthcare. I read Greg Mankiw’s list of what Rs should get into turn for higher taxes

1) Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare.

2) Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.

3) Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives.

4) Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.

5) Permanent elimination of the estate tax. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

Rs aren’t going for a VAT, unless maybe it replaces income, investment and corporate taxes. So the commission will fail, followed by perhaps a debt/currency market freakout. And that will be followed by calls for emergency tax increases.

A few points:

1) The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. But Paul Volcker himself probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op” even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. More evidence that the moment for sweeping reform has probably passed.

2) The hope for any reform at all rests with the U.S. Senate’s new negotiating tag-team of Democrat Chris Dodd, chairman of the Banking committee, and Republican freshman Bob Corker. But Corker says the Volcker Rule isn’t going to be a “major topic” for discussion. And that is probably OK with much of the committee. As one banking industry lobbyist told me, “There is just not a lot of appetite among members of the minority or the majority to add [bank trading limits]. So I just don’t think you’re going to see it.”

3) Increasingly, the Volcker Rule looks more stunt than viable solution. Though Volcker had been pushing it for months, White House advocacy surprised both the Banking committee and banking industry. A poor way to introduce serious legislation in Washington. Lame-duck Dodd, who sees reform as his legacy, hears the clock ticking. A bill not passed by early summer is probably dead for the rest of this election year. His view: The Volcker Rule is a sudden and unwelcome complication.

4) Cynics saw it as a populist, knee-jerk response to the loss of a Massachusetts U.S. Senate seat held by Democrats for more than a half century. Even some Volcker Rule advocates admitted the plan didn’t directly address the regulatory failures that contributed to America’s financial meltdown. And although the proposal was introduced in January with great fanfare by Obama – Volcker standing prominently at his side – Senate Democrats say the creation of a new consumer finance regulator is actually the issue the White House is spending political capital on.

5) It is a reality that highlights the Obama administration’s scant interest in more extreme measures to limit the size of the banking sector or its activities. And if Volcker did harbor any small doubts about that, he shouldn’t any more.

Give the POTUS some credit for proposing something, anything on domestic policy that is certain to irk his base. Reuters:

President Barack Obama announced $8.3 billion in loan guarantees on Tuesday to build the first U.S. nuclear power plant in nearly three decades in a move designed to help advance climate legislation in Congress. … The loan guarantee will go to help Southern Co. build two reactors at a plant in the state of Georgia. “Even though we’ve not broken ground on a … new nuclear power plant in thirty years, nuclear energy remains our largest source of fuel that produces no carbon emissions,” Obama said after touring a union education center in Lanham, Maryland. “To meet our growing energy needs and prevent the worst consequences of climate change, we’ll need to increase our supply of nuclear power. It’s that simple,” he said.

Yet how viable is Big Nuclear without the help of Big Government? An interesting analysis from Cato’s Jerry Taylor:

Tufts economist Gilbert Metcalf, for instance, has calculated that, under current law, the levelized cost of nuclear power in the United States is 4.31 cents per kilowatt hour (kWh). Coal-fired electricity, on the other hand, cost 3.53 cents per kWh and “clean” coal cost 3.55 cents. But even these nuclear estimates are almost certainly too low. That’s because Metcalf uses an “overnight cost” (construction costs minus financing costs) figure of $2,014 per installed kilowatt (kW) which is much too low. The Energy Information Administration (EIA) puts this cost at $2,475 per kW at present-although even this figure is suspicious because it relies on a worldwide average for nuclear power plant construction-including the grossly unreliable estimates from state-managed economies. The Standard & Poor’s overnight cost estimate of $4,000 is likely the most reliable because it is based on nuclear plant construction costs in economies where labor and material costs are very similar to those found in the United States. Industry analyst Jim Harding, who uses overnight cost figures similar to Standard & Poor’s, puts the levelized costs for new nuclear power generation at 12-15 cents per kWh right now.

Will conservatives who complain about government debt guarantees to Wall Street complain about guarantees to energy companies?

A few thoughts on Evan Bayh’s stunning retirement announcement:

1) It helps move the prospect of a GOP Senate takeover from a fringe idea to consensus. Not there yet, but getting there.

2) Why does that matter? It could help nudge more Democrats to retire, particularly in the House and help Republicans recruit better candidates. (George Pataki in NY for US Senate?) And a big plus for Republican fundraising.

3) Forget talk about Bayh challenging Obama in 2012. Now, if Bayh was president with a lousy economy, then a challenge from the left (like Obama) might be a possibility. Intra-party centrist insurgencies are stuff of reporters’ imaginations.

4) A year ago, Dems thought they would gain seats in 2010. A few months ago, they thought they would hold the 60-seat supermajority or maybe lose a couple. Now a loss of seven seems quite reasonable.

5) Again, keep watching the unemployment rate and Obama’s approval rating. Washington insiders certainly are.

With healthcare on ice, financial reform is the hottest game in town. Now Dodd is trying to bypass Shelby to somehow gin up a bipartisan bill with Corker –  who takes the issue extremely seriously. A few thoughts:

1) A CFPA is still the stickler. GOP, including Corker probably, will only accept a non stand-alone regulator will narrow rule-writing and enforcement powers. But  CFPA is dominant issue for Obama WH.

2) Corker is more easily undercut by McConnell than old bull Shelby. If McConnell doesn’t want a bill, there will not  be a bill.  At this point, the smart betting is that GOP views denying Dems a victory more important than anti-populist backlash for opposing reform. They will label it a bailout bill if there is even a hint at giving Treasury TARP 2.0 powers. But if it is watered-down enough, it can pass.

3) If a Dodd-Corker bill gets to the floor, both Left and Right will push a flurry of amendments that they would’t try with Dodd-Shelby. Should be a chaotic mess.

4) Looks like the Volcker rule isn’t going anywhere.

1) Obama administration economists reckon the jobless rate will hover around 10 percent this year, and now say the U.S. economy will generate an average of just 95,000 jobs a month. That tallies with Team Obama’s forecast of anemic 3.0 percent GDP growth. Monthly job growth of 125,000 to 150,000 is needed to start bringing the unemployment rate down from its current 9.7 percent. That’s what would normally be expected more than two years after the onset of a recession. It’s not happening — at least not yet.

2) Enter the U.S. Senate. The centerpiece jobs proposal would spare businesses from paying payroll taxes on some new hires for the rest of 2010. Based on a Congressional Budget Office analysis, this measure might create a feeble 50,000 to 90,000 jobs.

3) Aside from the bill’s limited potential effects, short-term fixes are not what’s needed. America’s job machine didn’t suddenly break down in 2008. It has been sputtering since the Internet bubble burst. Some economists now think a decline in education, innovation and other former U.S. advantages means the realistic minimum unemployment rate has gone up from 4-5 percent to as much as 7 percent.

4) That suggests legislative efforts at improving the employment picture should focus on long-term measures to improve education and help innovative businesses. Options in the latter category include a reduction in the U.S. corporate tax rate, targeted infrastructure spending and long-term tax credits for research and development. It’s a shame Washington seems able to set politics aside to accommodate special interests, but not for what’s really needed.

What I think about what the blogosphere is thinking about.

No Pain Here: At the Enterprise blog, Mark Perry rounds up some great factoids about the boom in public sector wages. (”The number of federal workers making $150,000 or more has more than doubled since the recession started.”) As it happens, just read a great City Journal article on the role of the public employee unions on California’s economic problem. This is an issue with momentum.

Dubious Defender: The fabulous Fausta takes issue with the POTUS claiming he is a fierce advocate of free markets.

Growth Solution: Larry Kudlow has a great thought on the EU debt crisis: “Look, the problem here isn’t just debt. The problem also lies underneath the debt. In other words, there are no tax-rate incentives to promote economic growth. That, of course, would help dissolve the debt.”  American doesn’t need a Deficit Commission. It needs a Growth Commission.

VAT Valentine: Another MSM story singing the praises of value-added tax. Key bit: “The smart money says the VAT is America’s destiny, a destiny that comes closer with each passing budget.”

Credit Crisis: Like me, my pal John Tamny doesn’t think it would be such a bad thing for US debt to get a downgrade. This why Geithner should not have been so dismissive of the AAA rating threat.

White House Woes: Mike Barone gets its exactly right. The WH misread the election and electorate. And it started with the wrong-track stimulus plan.