What Pivot?; Spending Stakes Grow; Inflation Fears Grow

Obama Launches 2012 Re-Branding on "Competitiveness"

"I'm happy that the president is pivoting. We all know why. But it is kind of a trust but verify moment. Let's see if he's really willing to do it, and if he is, I think he'll find a lot of help among Republicans in Congress."

-- Senate Minority Leader Mitch McConnell, R-Ky., on "FOX News Sunday."

The White House is leaning hard into the theme of Tuesday’s State of the Union address: "competitiveness."

The administration is dropping hints far and wide that the president will call for new domestic spending on education and infrastructure – "investment" – offset to some degree by reductions in spending and changes to the tax code – "responsibility."

Obama is also expected to restate his plan to increase American exports which involves badgering China to quit devaluing its currency and, of greater interest to capitalists, reducing the sky-high corporate tax rate and double taxation on profits made overseas.

The thinking here is that since American companies go so far to avoid the highest-in-the-developed-world corporate tax, a reduced rate might actually increase revenues as companies give up on some expensive, complicated tax shelters.

While this reflects a change in emphasis for the president, this is all very consistent with his approach throughout his 14-year political career. Obama has not been anti-business, as many have claimed. But there is some substance behind the charge that he is against the idea of free markets.

Obama’s actions and rhetoric have suggested all along that he believes that companies that meet his standards for environmental responsibility, worker compensation and other core principles should be allowed to flourish, while those that run afoul of such standards should wither.

His famous line during the 2008 campaign about bankrupting public utilities that don’t adopt his global warming strategy was perhaps a starker rendering of the philosophy than we have heard of late, but it is still part of the same whole. Tuesday’s speech will focus on the advantages the president believes can be obtained by rewarding companies that reflect his concept of good citizenship.

So, while mainstream media outlets will certainly bark out "pivot" and "centrist" with the enthusiasm of seals that spy a bucket of fish, this is not an ideological shift, this is public relations shift.

As the Wall Street Journal Editorial Page points out today, the president’s call for a regulatory overhaul which won so many barks of approval last week has plenty of trap doors in it. The executive order which calls on bureaucrats to reconsider their rulebooks with an eye toward decreasing the burden on corporations also says that officials must consider "equity, human dignity, fairness, and distributive impacts."

Those four categories are so broad as to render the executive order meaningless if being interpreted by someone who was not interested in seeing regulatory burdens reduced. But they also reflect the Obama theory of "competitiveness" While Obama may be very happy to help a company that meets his standards on "distributive impacts" and "human dignity," the others can take their lumps.

Competitiveness means not that the government sets the rules and then the winners and losers sort themselves out, but that the government picks winners and losers on the grounds of which companies politicians believe are the best investment for the future.

As the Washington Examiner’s Tim Carney points out today, some companies have been glad to participate. Jeffrey Immelt wrote to G.E. shareholders shortly after Obama’s election that Washington would now be "an industry policy champion, a financier, and a key partner." That enthusiasm has made G.E. the ultimate White House blue chip and Immelt the head of a new presidential council on sustainable growth.

When the government is picking winners and losers, it’s no surprise that businesses want to be in the government’s good graces.

Even so, a speech that will call for new domestic spending on government projects will still be widely heralded as some sort of a sweeping pivot for Obama. It would be for the cartoon villain created by some of the president’s detractors, but it is certainly in keeping with his philosophy to this point.

If anything, Obama is doubling down.

Leading liberal columnist Paul Krugman of the New York Times probably has it right when he opines today:

"My guess is that we’re mainly talking about packaging here. And if the president does propose a serious increase in spending on infrastructure and education, I’ll be pleased."

Republicans Pick a Spending Fight

"Every dollar should be on the table."

-- House Majority Leader Eric Cantor, R-Va., on "Meet the Press" discussing spending cuts.

Congressional Republicans are double dog daring each other into deeper and deeper spending cut proposals.

The opening bid from House leaders was to roll back spending to 2008 levels and talk about long-term cuts as part of budget negotiations. On the president’s request to increase the nation’s $14.3 trillion borrowing limit, Speaker John Boehner and others said they would have to increase the debt ceiling, but hoped to get some concessions out of Democrats for their trouble.

Three weeks later, Republicans find themselves talking about much deeper cuts and opening the door to the possibility that they won’t raise the debt limit if Obama won’t embrace deep, deep cuts. The speaker hasn’t spoken on the subject, but the sense among his caucus is that if Republicans don’t make a stand now, they will get rolled for the next two years.

To get an idea of what is going on in Republican circles, Rep. Paul Ryan, R-Wisc., the Budget Committee chairman tapped to rebut Obama’s State of the Union, was once considered one of the fiercest fiscal hawks in town. With the arrival of so many more conservatives in 2010, Ryan is now considered quite mainstream. Like the old Rangefinder game on "The Price is Right," the 2010 elections moved the middle to the right.

With Obama preparing to call for new spending and a long-term approach to dealing with deficits on Tuesday, the battle between Congress and the president is shaping up to be an epochal one.

In the next six weeks, Congress will be forced to extend funding for the government after the current continuing resolution expires, address the debt ceiling and start work on a budget for the next fiscal year. Add to that the fight over key components of Obama’s national health-care law, and you have the makings for some serious late winter fireworks in Washington.

Inflation Fears Mount

"All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects."

-- Jean Claude Trichet, head of the European central bank, explaining to the Wall Street Journal why his institution may move to raise interest rates.

Prices are way up and core commodities like oil and grain are zooming higher and higher. Combined with an abundance of currency printed by the Federal Reserve in a bid to keep lending up, the dollar is looking like it’s been stretched to the breaking point.

In Europe, though, their currency doesn’t have a century of solidity and the status as the global reserve currency behind it. And in the shadow of the debt disaster still shaking the continent, the future of the euro looks very much in doubt. Rapid inflation would mean doom for a currency already seen as funny money by many.

In the U.S., President Obama and Fed Chairman Ben Bernanke have been on the same page that a double dip recession is a greater concern than inflation. By keeping the presses running at the Fed and holding interest rates as low as possible, the central bank has caused concern, though, that whatever recovery does materialize will be crushed by inflation.

The administration’s position, though, is that the new, sustainable, competitive economy that will emerge from the interventions will be able to weather the storm.

But just as Obama was unable to convince his European counterparts to stick with stimulus and bailouts during the second and third rounds of government intervention here, now he seems unable to get the euros to delay taking action on inflation.

Remember, the cure for inflation is to increase interest rates. And with the most glaring problem in the U.S. economy still the anemic housing sector, higher interest rates could be a killer.

If Europe, which is less dependent on housing, opts to start tightening the money supply, it will make already hard-to-get credit even more difficult to obtain in the U.S.

In China, where prices are screaming past all inflationary benchmarks, the government has opted for growth at any cost. In Europe, they will soon begin tapping the brakes.

The day of reckoning is approaching for America on the subject. On one hand, inflation could deliver a knockout blow to all sectors of the economy. On the other hand, preventing inflation could keep growth on the back burner.

Taxpayers Stuck for Politically Connected Execs’ Legal Fees

"$132 million"

-- Cost to taxpayers for legal defense of former executives of mortgage lender Fannie Mae since September 2008, estimated by the New York Times.

Back when Fannie Mae and Freddie Mac were fat and sassy, the mortgage firms were the favorite corporate friends of Congress.

Former members of Congress, like former Rep. Rahm Emanuel, got sweet jobs as board members or consultants and the big executives at the firms gave their money and counsel to prominent politicians, mostly Democrats.

And because the firms were backed by the taxpayers but allowed to seek profits like real companies, there was lots and lots of money to be had. Fannie Mae and Freddie Mac, in fact, helped inflate the mortgage bubble by agreeing to underwrite sketchy loans in pursuit of the quick cash that was raining down on Wall Street. That risk assumption by government-backed entities further encouraged private bankers to take bigger and bigger risks, until the whole thing went kablooey in 2008.

Now, taxpayers are on the hook for untold billions and there is no obvious path to winding down the firms’ involvement in the mortgage market. As lending remains scarce, foreclosures pile up and home prices plummet, few in Washington have the appetite for knocking over the failed lenders at Fannie and Freddie.

But, now comes the news that tax payers are getting stuck with the bill for defending the former leaders of the companies in court. The sultans of the Democratic Raj at Fannie and Freddie, like former Obama adviser Franklin Raines, are facing huge lawsuits from investors for allegedly mismanaging Fannie into the ground.

The bills have come to light as Republicans have begun their excavations on the ruins of the once great mortgage empire in an effort to come up with a long-term plan for folding up the lenders. And outrage over the relatively small sums will help fuel outrage over the larger problems at Fannie and Freddie.

Raines, the former budget boss for Bill Clinton and an Obama economic advisor, was paid more than $90 million for his work as head of Fannie Mae from 1999 to 2004.

Raines agreed to pay a $25 million penalty for his role in questionable accounting practices that took place during his tenure. But surely has lots of money left over. The idea that taxpayers are on the hook for more than $24 million to defend Raines and his executive team will rankle already angry members of Congress.