Wednesday, March 31, 2010

War on American Business

After the Easter recess, ultra-liberal Los Angeles congressman Henry Waxman will attempt to slam American companies that are trying to obey SEC disclosure laws by properly accounting for the repeal of an important prescription-drug tax credit. What’s new in this bad story? It’s the announcement of Waxman’s Star Chamber hearing that will subpoena internal documents from leading American companies like AT&T, Verizon, Caterpillar, Deere, 3M, and Valero.

According to post-Enron accounting rules, thousands of American companies are required by law to immediately declare these non-cash charges. The American Benefits Council estimates up to $14 billion in corporate profits could be lost. So in other words, Waxman is in effect declaring war on bookkeeping.

The real trouble here is that by removing the tax benefit, these very same companies may reduce or even eliminate retiree drug benefits, and then thrust them on We the Hapless Taxpayer through a big cost-shift to Medicare. Instead of blaming business, Mr. Waxman should blame himself and Obamacare.

Tuesday, March 30, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:


- Richard Socarides, Brady Klein Weissman LLP Democratic Strategist, Attorney; Fmr. Senior Advisor to Bill Clinton
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer


- Andrew Biggs, AEI Resident Scholar; Fmr. Social Security Admin. principal deputy commisioner
- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy


- Dana Telsey, Telsey Advisory Group Chief Research Officer; Retail Analyst
- Derek Thompson, The Atlantic staff editor

- Carl Quintanilla, Cancun, Mexico


- Kevin Kerr, Kerr Trading International President & Chief Trading Officer
- Addison Armstrong, Tradition Energy Dir. of Market Research; CNBC Contributor

- Jon Fortt, Senior Writer Fortune Magazine

Please join us. The Kudlow Report. 7pm ET. CNBC.

Tax Hike Assault

We are facing an across-the-board tax-hike assault from federal, state, and local sources. This, despite a precarious outlook of a return to long-term economic prosperity after an especially deep and painful recession.

Of course, tax hikes drain cash from the private-sector economy. In supply-side terms, they undermine incentives to work, invest, and take risks by reducing the after-tax take-home reward.

After-tax incentives could drop 15 percent or more over the next few years, lifting the top tax rates on ordinary income to 45 percent from 35 percent, and to 25 percent from 15 percent on capital gains. Why in the world would we want to tax those who are most likely to invest, save, and take risks in an economy that desperately needs all three?

And let’s be very clear regarding class-warfare attacks on so-called rich people: A tax on investment is a tax on jobs, wages, and productivity. Without investment and risk-taking, the capitalist machine cannot and will not function efficiently. As Jack Kemp used to say, “You can’t have capitalism without capital. You can’t love the employee and hate the employer.”

Worse, these taxes are designed to finance an ever-growing government-spending share of the economy -- even though government spending is itself the greatest tax of all on private enterprise, as Milton Friedman taught us years ago.

Regrettably, states across the country are looking to tax almost anything that moves. Governors say they have to. (No, they don’t.) It’s a matter of priorities, political will, and economic vision. Do we want to let people keep more of what they earn and invest? Or do we want to grow government to record levels? That’s really the question.

As you know, I believe those economies that grow the most are the ones that spend and tax the least. History bears this out. This is why I fear that the United States is now going in the wrong direction. But political help may be on the way: A spate of Republican businessmen and women are running for high office. That could bring about a very positive turn of events. There’s also the tax-and-spending revolt -- including the tea-party revolt -- which could have a huge impact on the 2010 and 2012elections.

An Interview with Virginia Governor Bob McDonnell

With all these governors raising sales taxes on pole-dancing and everything else in sight, here's a guy with the political will and leadership to cut spending on education, health and union pensions without raising taxes in order to close a $4 billion deficit. Hats off.

Monday, March 29, 2010

High Interest Rates, Not Deficits, Cause Inflation

Treasury rates jumped last week as the 10-year bond moved up to around 3.85 percent, about 20 basis points or so in the last week or two. Former Fed head Alan Greenspan calls this the “canary in the coal mine,” and he blames budget deficits and the huge overhang of the federal debt. Ask almost anybody in the money business, including the bulk of the investor class, and they will tell you that budget deficits drive up interest rates. I’m here to tell you that is wrong. It may seem reasonable, but it’s still wrong.

This “deficit causes high rates” theory embraced by Alan Greenspan, and by David Stockman during the Reagan years, and by Robert Rubin during the Clinton years, has no statistical basis in fact. Actually, one could make the case that higher deficits are consistent with declining interest rates, since the worst deficit numbers typically occur when the economy is in recession and there is no private credit demand. During economic recoveries, deficits shrink as tax revenues come pouring in. But interest rates rise during expansions as real investment returns improve.

The real cause of high interest rates? Inflation.

If prices are rising, investors demand higher interest rates as inflation premiums to compensate for their money-value loss. Basically, long-term interest rates fell from 1980 all the way through 2009 — 30 years as the inflation rate dropped from 14 percent to roughly zero. That’s three decades of deficits going up and down and up and down. Rates continued to fall.

Let me add that a stable King Dollar holds down inflation. That is a much more powerful tool for interest rates than business-cycle swings in the budget deficits.

Oh, by the way, deficit/interest-rate mongers fall into a tax-hike trap. The real issue for holding back deficits over the long run is to curb excessive federal spending and to keep marginal tax rates low enough to spur incentives for economic-growth-producing tax revenues. In other words, the Laffer curve.

Lower tax rates mean a stronger economy. A stronger economy means more tax revenues. More tax revenues mean lower deficits. And keep King Dollar intact to hold back the inflationary tide.

Of course, the real problem here is federal spending, not taxes.

Friday, March 26, 2010

Another Bailout?

So the Obama administration is announcing a big new housing bailout later today. There are a number of details we don’t know yet. A lot remains unclear. Apparently, the White House is going to “encourage” banks to write down the value of loans held by borrowers in modification programs. So while it appears banks will have an opt-out, it’s all very unclear. Incidentally, this homeowner bailout also raises the serious issue of moral hazard.

At first glance, it looks like we’re witnessing more government interference in the private-sector economy, more mandates, and more government economic controls. The government shouldn’t be telling lenders what they must do.

Of course, if private banks like Bank of America want to reduce mortgage-loan balances, fine. So be it. That’s their business decision. But government should not interfere with private contracts between borrowers and lenders. This is a fundamental rule of law, and it lies at the very heart of free-market capitalism. Break that rule and you break the whole system. It’s all wrong.

Now, if the banks do have an opt-out, and if they don’t have to play along, I say fine once again. But my fear is that Uncle Sam, by using various carrots and sticks, will force banks into positions they do not want to be in.

All this suggests why my friend Dan Henninger had it totally right in his Wall Street Journal column this week, “Repeal the Democrats.” The Democrats are the party of big government. They have completely deserted Bill Clinton’s moderate legacy. Meanwhile, Republicans have clearly become the party of the private sector. If they stick to their guns, the GOP is on the right track.

As for the new housing bailout, all Republicans should oppose it, just as they correctly opposed Obamacare and the massive tax-and-spend “stimulus” package.

Speaking of Obamacare, what about the fallout from taxing Caterpillar and 3,500 other American corporations? How about a medicine-cabinet tax on your Tylenol gel caps, and everything else you purchase over-the-counter? This is all nuts.

Believe me, just as it was with the stimulus package, the more we learn about Obamacare, the worse it’s going to get. This is why I say it’s time for Republicans to stand up on their hind legs and shout down their opposition. Washington is producing products that the rest of the country simply doesn’t want to buy.

We will soon see how all of this turns out. There may be a game-changing political revolt in the cards come November. Now that would be wonderful news.

Thursday, March 25, 2010

King Dollar

The biggest story out there right now has got to be the re-emergence of King Dollar. This could be a major game changer for both Wall Street and Washington. All the dollar bears from the beginning of this year, and all the gold bulls, have been completely and utterly wrong.

Now, why is this? Is it Fed head Ben Bernanke’s monetary restraint? Nope. Is it Tim Geithner’s spirited dollar defense? Nope. It’s Greece, Portugal, Italy, and the sinking euro, which has dropped 12 percent from early December. And there’s no end in sight.

Unsurprisingly, the broad dollar DXY index is up 10 percent, reversing a 17-percent drop from March to November of last year. Gold, meanwhile, is off 12 percent.

Now you know me: I love King Dollar. You can’t have a growing, healthy, free-market, supply-side, capitalist economy without a reliable currency. I learned that from Ronald Reagan. But this King Dollar story is getting a little weird. After all, the Fed is still pumping out money like there’s no tomorrow. Its balance sheet is still growing. Meanwhile, tax rates are going up, not down.

But here’s the key point: the euro is going down -- more. And this could wind up being a big game-changer for investors.

By the way, Ben Bernanke is being bailed out by this cheap euro, the same euro that can’t seem to bailout its weakest European sisters. It’s a very strange story. As I’ve said before, Mr. Bernanke ought to go to the Greek Parthenon and genuflect over the weak euro bailing out his super-easy money policy.

A high dollar can suppress nascent inflation pressures. And if you take a look at February, you’ll see that price indexes came down. (They had been rising for several months.) So without inflation worries, a high dollar gives Mr. Bernanke a lot of zero-interest-rate running room for as far as the eye can see.

The question is whether a high dollar is in fact good for stocks and economic growth, because oftentimes a rising currency can be deflationary. A lot of people on Wall Street are shying away from the so-called “risk trade,” meaning stocks, in favor of the dollar trade.

Speaking of deflation, is the Chinese renminbi going to be revalued in order to choke off inflationary pressures in China? If you think all this currency talk is confusing, join the crowd.

To sum up, as a good free-market supply-sider, I want a reliable King Dollar and low marginal tax rates to spur economic-growth incentives here at home. Now, I may get the former, but I am probably dreaming on the latter.

But then again, despite Obamacare’s tax-and-spend big-government policies (which remind me of the Eurozone), we could get free-market banking reform if Sen. Chris Dodd stays with me and ends too-big-to-fail. Could we be looking at the Dodd Dollar? Think of that one.

On Tonight's Kudlow Report

This evening at 7pm ET:

CNBC senior economics reporter Steve Liesman reports.


- Adam Boyton, Deutsche Bank Sr. Currency Strategist; Fmr. Australian Treasury Official
- Peter Navarro, "The Coming China Wars" Author; University Of California - Irvine Business Professor


- Chip Hanlon, President Delta Global Advisors
- Dan Fitzpatrick,, President & CEO; Senior Contributor,


CNBC’s Diana Olick will report on the Home Affordable Modification Program


- James Pethokoukis, Reuters Money & Politics Columnist


- Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board; "Return to Prosperity" co-author
- Teresa Ghilarducci, director of economic policy analysis at the New School for Social Research, is the author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them.”

Please join us. The Kudlow Report. 7pm ET. CNBC.

Wednesday, March 24, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:

CNBC’s Hampton Pearson reports the latest from Washington.



- Arthur Laffer, Laffer Investments CIO; Fmr. Reagan Economic Advisor
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer
- David Kelly, Chief Market Strategist JPMorgan Funds

CNBC chief Washington correspondent John Harwood reports.

- Robert Albertson, Sandler O'Neill, Principal & Chief Strategist


- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
- Dick Armey, Former House Majority Leader; Chairman of


- Thomas Curran, Peckar & Abramson Partner
- George Strickland, Co-Portfolio Mgr, Thornburg Municipal Bond Funds

Please join us. The Kudlow Report. 7pm ET. CNBC.

Market Musings

We had a nice triple-digit Dow rally yesterday for the best finish in 17 months as the index closes in on 11,000. So, despite all the left-wing politics pouring out of Washington, the stock market reality remains. Why? As I’ve said dozens of times in recent months, we’ve got a strong cyclical rebound in corporate profits riding on a wave of ultra-easy money from our nation’s friendly central bank.

Profits are the mother’s milk of stocks. Right now it’s a global beverage.

So while housing remains an issue -- with the latest batch of home-sales reports showing no imminent end in sight -- we do have positive signals like this morning’s durable-goods report, which is now up three months in a row. Also, the index of U.S. leading indicators has increased the past 11 months -- the longest stretch since 2003-04.

Meanwhile, Stefan Abrams, my old friend and investor, reminds me that railroad- and freight-company indicators are showing a pick-up of inventory-rebuilding to create more production and real output. I think he’s right.

On another note, as a very special gift to Fed head Ben Bernanke, the euro continues its slump in the wake of the Greek debt problem that still hasn’t been solved. That means a strong U.S. dollar, despite all the Fed’s ultra-easy money. I think Mr. Bernanke ought to visit the Parthenon, the symbol of ancient Greece, and genuflect in thanksgiving for the modern-day Greek crackup that has helped support King Dollar in spite of his ultra-easy money.

This is called having your souvlaki and eating it too.

Speaking of central bankers, San Francisco Fed president Janet Yellen didn’t disappoint yesterday with a dovish statement that boosted stocks in late-day trading.

So I bring good tidings to equity investors, despite the fact that I can’t for the life of me find a single free-market policy in our nation’s capital. Not one single policy. But sometimes the business cycle, and of course the Fed, can trump Washington.

Friday, March 19, 2010

Kudlow & Cramer Reunion: Will Obama-Care Topple Stocks?

My old pal Jim Cramer and I reunited last night to discuss the impact Obama-Care will have on the stock market and economy if it passes.

According to my former co-host: “First, it is the single biggest impediment to the stock market going higher. And a lot of this has to do with what's not being talked about enough with how it's going to be paid for and also about what it will do to small business formation. This bill is a disaster for both.”

I can't say I disagree...

Thursday, March 18, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:

CNBC's Mad Money host Jim Cramer will be aboard.

Plus analysis of today's U.S. economic data

- Ed Yardeni, Yardeni Research President
- Jason Trennert, Strategas Research Partners; Chief Investment Strategist & Managing Partner

- Rep. Paul Ryan (R) Wisconsin; House Budget Ranking Member


-John Carney, Managing Editor

Please join us. The Kudlow Report. 7pm ET. CNBC.

Two Really Bad Deals

I don't know if ObamaCare is going to pass the House or not. As of this morning, the Intrade pay-to-play betting parlor is giving a 75 percent probability that it will go through. So Intrade seems to think so. But here's what I do know: ObamaCare's worst tax hike is the imposition of a new 3.9 percent Medicare payroll tax on capital gains and other investments. What will this do? It will depress the economy, depress wages and depress jobs. Washington doesn't understand that you can't create jobs without new healthy businesses.

Can there be anything dumber?

Look, raising the capital gains tax to 24 percent from 15 percent, which includes repealing the Bush tax cut, is a 60 percent tax increase. So instead of keeping 85 cents on the extra dollar invested, you will only get to keep 76 cents. That's a 10 percent drop in the after tax incentive for capital formation. Incentives matter. This is a bad deal for everyone.

If Washington keeps hiking taxes on investment and risk-taking, then we are not going to get the new entrepreneurial businesses and job creation or productivity or high risk innovation and invention that is so essential to a healthy and vibrant economy.

Here's another really bad deal: the protected and privileged class of mostly unionized government workers at all levels is bankrupting this country. They are demanding exorbitant wages and benefits. Get this: a new Bureau of Labor Statistics report shows these government workers have a 44 percent excess of their total compensation versus their private sector counterparts. And this, despite the fact that these government workers have much better job security.

I’ve talked about this before, but a recent Barron’s article highlights the states’ problems, where pensions look to be $3 trillion dollars in the hole with double dipping and spiking. This is going to create huge problems down the road in the tax-free municipal bond markets. Of course, it’s also going to be a problem for taxpayers who may wind up having to finance these ridiculously exorbitant pensions with all their double-dipping and spiking. It’s ultimately one gigantic stranglehold on the entire economy.

So to be blunt: ObamaCare's tax-and-spend and government unions spend and spend is basically thumbing their nose at taxpayers and economic growth.

Wednesday, March 17, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:


- Robert Reich, Fmr. Labor Secretary, Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy
- Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board; "Return to Prosperity" co-author



- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer
- Steve Forbes, Forbes Chairman and CEO; Forbes Editor-in-Chief; Fmr. Presidential Candidate; "How Capitalism Will Save Us" Co-Author
- James Altucher, Managing Director Formula Capital


- Steve Forbes, Forbes Chairman and CEO; Forbes Editor-in-Chief; Fmr. Presidential Candidate; "How Capitalism Will Save Us" Co-Author
- Peter Morici, University of Maryland Robert H. Smith School of Business Prof; U.S. International Trade Commission Fmr. Chief Economist


- Bill Ford, Fmr. Atlanta Fed President; Middle Tennessee State University professor

Please join us. The Kudlow Report. 7pm ET. CNBC.

Tuesday, March 16, 2010

Is Dodd Ending Too Big to Fail?

Surprise, surprise. Sen. Chris Dodd’s financial-regulation proposal raises the possibility of substantial progress on the road to ending “too big to fail” (TBTF) and bailout nation for banks and other financial institutions.

How the Dodd bill will play out in the final details remains to be seen. But when you read the Dodd fact sheet, there are a few key items to like.

First, under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called “funeral plans.” Then, in terms of these orderly shutdowns, the bill would create an “orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.” Good.

Then comes the “liquidation procedure.” This spells out that the Treasury, FDIC, and Federal Reserve must all agree to put companies into the orderly liquidation process. “A panel of three bankruptcy judges must convene and agree -- within 24 hours -- that a company is insolvent,” the bill goes on to say. It also states that the largest financial firms will be assessed $50 billion for an upfront fund that will be used if needed for any liquidation. This is a kind of debtor-in-possession safety net for the bankruptcy-liquidation process. Also good.

Finally, under the heading of bankruptcy, the bill stipulates that most large financial companies are expected to be resolved through the normal bankruptcy process. This is the key. However, it is not an airtight case for bankruptcy. It is possible that a government-resolution process could keep big banks alive or in conservatorship, such as with Fannie and Freddie. That would be wrong. Very wrong. In fact, one of the flaws in the Dodd bill is that there is no mention of Fannie and Freddie.

But the strict language on bankruptcy judges and shutdowns, and the line stating that most large failed financial firms are expected to be resolved through the normal bankruptcy process, is very hopeful.

The biggest flaw in the Dodd bill is that it gives the Consumer Financial Protection Agency (CFPA) far too much free reign. The agency will be housed in the Federal Reserve. But it will be independent inside the Fed, with a director appointed by the president and financed by the Fed’s own profits.

The Fed itself apparently would have no say on CFPA rule-making, which is sort of like giving Elizabeth Warren her own wing at the central bank in order to make mischief. At a minimum, she’ll need grown-up supervision. Many smaller community bankers and non-bank Main Street lenders -- such as stores with layaway plans, check-cashing companies, pay-day lenders, and even car dealers -- could be put out of business by Elizabeth Warren. (Hat tip to Capitol Confidential of Andrew Breitbart’s

Another issue is the so-called “Volcker rule,” set forth by the White House, which would limit proprietary trading for Wall Street banks, a big source of revenue and profits. Under the rule, it looks like the Federal Reserve or other regulators would supervise any trading limits, but not necessarily eliminate proprietary trading. I think TBTF is terminated under the threat of a true bankruptcy-court liquidation. That’s enough of a disincentive for excess risk-taking to obviate the need for a Volcker rule.

Ditto for the trading of derivatives and other counter-party activities such as credit-default swaps. These are useful hedging devices, although they should be fully collateralized, with clearly valued assets and cash behind them.

Back to the Dodd plan, it also stipulates that the U.S. president appoints the New York Fed president. That’s another flaw. It politicizes the Fed big time. Right now, reserve-bank presidents are chosen and appointed by their boards of directors.

And then there’s a “proxy access” provision that would force public companies to list rival slates for election to their boards of directors. This goes way beyond “say on pay.” And it would permit a bunch of liberal-left, union-type interest groups to spread their anti-business opinions.

However, with the Dodd plan, the possibility remains that a true bankruptcy process will replace government bailouts.

This is vital, since TBTF and government bailouts are among the root causes of the banking crisis, where large financial companies have a moral hazard to take too much risk at taxpayer expense.

The devil will be in the details. And of course, Dodd’s Senate bill will have to reconcile with Barney Frank’s bill in the House. But Chris Dodd conceivably may have opened the door to ending TBTF and bailout nation.

Maybe retirement is the key to good policymaking.

Monday, March 15, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:


NBC's Steve Handelsman reports from Washington.

- Ron Kruszewski, Stifel, Nicolaus Chairman & CEO
- Mark Calabria, Director of Financial Regulation Studies at the Cato Institute
- Frank Sorrentino, North Jersey Community Bank
- Thomas Harrison, Michigan Ladder Co. CEO

- Richard Blumenthal, CT Attorney General


CNBC's Hampton Pearson reports from Washington.


- David Goldman, Senior Editor First Things Magazine
- Peter Navarro, "The Coming China Wars" Author' Univ Of CA/Irvine Business Professor


- Bob McTeer, CNBC Contributor; Fmr. Dallas Federal Reserve Bank Pres. & CEO
- Jack Ablin, Harris Private Bank Executive VP & Chief Investment Officer

Please join us. The Kudlow Report. 7pm ET. CNBC.

Sunday, March 14, 2010

Yellen Is Spellin' Future Inflation

The new Obama Fed is going to be very dovish when it comes to fighting future inflation and defending the value of the dollar.

The president has nominated Janet Yellen to be vice chair of the Federal Reserve. Ms. Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation. In other words, rather than excess money creation as the cause of rising prices, she focuses on the unemployment rate, the volume of new jobs being created, and the growth of the overall economy. For Ms. Yellen, inflation is caused by too many people working and too much economic prosperity.

And since we have the opposite problem today -- high unemployment and too few people working -- she will be the last Fed governor to turn out the lights on the central bank’s zero interest rate.

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.

Even more troubling, fiscal policies coming out of Washington will reduce the investment demand for money. This is because tax rates on those individuals, families, and entrepreneurs who are most likely to save and invest are going up. Rather than extending the Bush marginal-tax-rate cuts on capital gains and other forms of investment, Washington will let that tax relief expire at the end of this year.

On top of this, Obamacare proposes to apply the 2.9 percent Medicare payroll tax on ordinary labor income to capital gains, dividends, interest, and profits from passive investments in partnerships and S-corporation small businesses.

Saving and investment are already double-taxed several times over. This includes the inheritance tax, which is slated to rise substantially next year. But taxing successful investors and earners is the exact wrong policy.

Alan D. Viard of the American Enterprise Institute writes that 2007 tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a “staggering” 84 percent of all net capital gains. These folks are the economic activists, the ones most likely to reemploy their investment gains into new job-creating businesses. But these new tax penalties will blunt their investment activities, thereby reducing the demand for money. Of course, the whole economy will suffer as a result.

Even with the same volume of money in circulation, new tax penalties from Washington will lower money demand for investment purposes, making each new dollar printed by the Fed that much more inflationary. So the great risk is that rising tax rates will make the Fed’s bloated balance sheet even more inflation prone over the next few years. As many have noted, inflation itself is the cruelest tax of all.

The original supply-side model crafted by Robert Mundell and Art Laffer argued that low tax rates and a tight-money-linked sound dollar was the best path to maximizing economic growth. This model prevailed through the highly prosperous 1980s and 1990s. Launched by Ronald Reagan, it basically continued, with a few bumps here and there, through Bush 41 and Bill Clinton. But the dollar side of the model was badly broken during the 2000s, and at the moment, it looks like it may stay broken.

This is a crucial juncture. The Fed is going to encounter excruciatingly difficult problems as it deals with the magnitude and timing of its decisions to start withdrawing excess cash and raising the fed funds target rate. Markets should be the guideposts for these decisions, not the unemployment rate.

Janet Yellen, who served as a top economic advisor to President Clinton and was a Clinton appointee to the Federal Reserve Board, has for the past six years been the president of the San Francisco Fed. She is a very able economist. But if you work from the wrong money model, you are likely to get the wrong money results.

Friday, March 12, 2010

My Interviews with Mitch McConnell & Bob Corker

Here are my two recent Kudlow Report interviews on financial regulation and other pressing political subjects with Sen. Bob Corker (R-TN) and Sen. Mitch McConnell (R-KY).

Thursday, March 11, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:


On board:

- Peter Navarro, "The Coming China Wars" Author; UC/Irvine Business Professor
- David Goldman, Senior Editor First Things Magazine

CNBC chief Washington correspondent John Harwood reports from Washington.

Senate Republican leader, Mitch McConnell of Kentucky, will be aboard to discuss financial regulation as well as the growing controversy surrounding high government pay.

NBC's Steve Handelsman reports from Washington.

- Sallie James, CATO Trade Policy Analyst


CNBC's Jane Wells reports from Los Angeles.

The Wall Street Journal's Steve Moore will weigh in with his perspective.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Positive Signals, Despite Washington Threats

If I told you that the dollar is up, gold is down, and profits are powerful, would you be bullish or bearish? Well, I would be bullish -- at least for the short-run. There are a lot of positive signals out there right now, quite apart from all the Washington tax threats and big-government politics.

For example: The 10 percent NASDAQ stock correction was erased with a good gain on Wednesday. The techie index is now nearly 2 percent above the January 19 correction level. And the broader S&P 500 is coming back -- it has recouped virtually all of its election losses.

There now is a growing consensus that the U.S. economy, at a minimum, will outperform the economies of Europe and Japan. Plus, business profits, the mother’s milk of stocks, could hit $90 a share. That comes to an earnings yield of over 7.5 percent, or a price-earnings multiple of about 13 times.

So let me ask you this: Do you want to own a 3.7 percent Treasury bond? Or would you rather take a 6 percent corporate bond? Why not take the stock yield which is much higher?

Now here’s a good leading indicator: Financial stocks are coming alive again. Citigroup and AIG are leading the parade. The whole group has recouped its correction loss, plus 2 percent. Others like Morgan Stanley, BB&T, BofA, and Goldman Sachs have good momentum. And corporate bond rates are coming down. The Treasury curve is still steeply upward-sloping. Heck, even a banker can make money with a zero interest rate and a more than 3.5 percent 10-year bond.

And guess what? I love this. Rich people actually may be on the rise. According to the new Forbes list, billionaires in the U.S. went from 359 last year to 403 in 2010. You can’t have successful free-market capitalism without rich people. You can’t have capitalism without capital. Washington doesn’t understand this.

We should not be eating our rich with punitive tax rates. We should be rewarding them for their successful investing and entrepreneurship. No capitalism without capital. Capital creates jobs. So let’s help those who are the most successful; they help everyone else. (By the way, this is one of the reasons why there is going to be one powerful political regime change come November.)

On the downside, the U.S. just posted a record budget deficit in February. Yet again. This, despite the fact that tax revenues actually rose for the first time in almost two years, which is a sign that the economy is improving. But here’s the rub: Spending increased almost 17 percent in the last 12 months!

This is nuts. Stop the madness.

And here again, a new congressional bill that just passed the Senate will cost $150 billion -- and for what? Little temporary tax credits and more transfer payments to the state. No spending-cut offsets whatsoever. Will they ever learn? Ever?

But the wonder of wonders is that our mostly free-market economy and stock market are pointing to recovery, despite Washington.

Wednesday, March 10, 2010

Are We Headed for Another Bull Market Year?

The key question facing investors right now -- on the anniversary of a record-breaking stock surge, the best in 75 years -- is whether we’re headed for a second bull-market year.

It’s a battle royale between rising corporate profits -- which are the mother’s milk of stocks, business, and economic growth -- and the high-tax policies pouring out of Washington, aimed at capital gains, dividends, top earners, banks, foreign earnings, and financial transactions. It’s a miserable list of tax hikes.

Then, of course, there’s the looming specter of Obamacare, with all of its high taxes, spending, and regulatory burdens to control almost 20 percent of our nation’s economy. My CNBC pal Jim Cramer says the passage of Obamacare could really damage the bull market. He makes an important point, one with which I totally agree.

Right now, it’s big government versus the free market.

So, will the profits surge, coupled with an accommodative Fed, overcome the Washington tax surge? Will profits trump tax hikes? Is political regime change lingering in the cards? Perhaps a defeat of Obamacare? That would certainly bolster the free market and encourage more investment in stocks, new businesses, and new jobs.

This is the key debate facing investors. Short term, I like stocks. Longer term, it’s a very open and difficult debate.

On another note, I’d like to mention Cisco’s announcement of a new high-tech innovation in the form of a powerful new router. This thing has 12 times the capacity of Cisco’s closest competitor. And get this: It could download the entire Library of Congress in a little over one second. This is a shining example of American ingenuity. But we should reward it, not punish it. Likewise, we should punish failed banks, not reward them.

We also should be reducing excessive government pay and pensions, bringing those federal (as well as state and local) workers in line with the gigantic setbacks suffered by the beleaguered private-sector workforce. Doing so could reduce tax burdens.

Special Kudlow Report Tonight...

This evening at 7pm ET:

Karl Rove, former top adviser to President George W. Bush, will join me on The Kudlow Report tonight. Lou Dobbs will be aboard too. Should be interesting.

Topics will include Obama tax hikes, tea parties, Bush legacy, 9/11, U.S. economy, etc.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Tuesday, March 09, 2010

On the One Year Anniversary of a Booming Stock Market

So here we are on the one-year anniversary of a booming stock market -- the best in 75 years. That continues to tell me things are getting better in the American economy, and that the global economic story is improving.

Of course, I know that Washington is still going completely in the wrong direction. Instead of embracing free-market capitalism, it’s threatening to move toward statism, with its big-spending, over-regulating, high-taxing, and economy-controlling “eat-the-rich” cannibalization of successful investors and entrepreneurs.

So while Washington has run amok, I do believe that this great stock market rally over the past year -- the S&P 500 is up 68 percent and economy-sensitive small-caps are up 95 percent -- is in part telling us that political regime change is coming our way this November.

Lawmakers are selling a product that the rest of the country refuses to buy. The big-government march toward statism is under so much attack that it may be overthrown before it really takes hold. That’s the beauty of a free voting democracy like ours.

We the People are the best bulwark to maintain the kind of economic freedom that creates wealth, prosperity, and American exceptionalism. That’s why I can still find some optimism in this story.

Meanwhile, inside the economy, king profits are strong -- $80 a share on the S&P 500 is delivering a roughly 13 times multiple. That, along with a low Treasury bond rate of 3.7 percent, makes stocks look pretty attractive, at least for the short run. Profits remain the mother’s milk of stocks. So, combined with easy money from the Fed, I think stocks can run a bit here.

Another key point is King Dollar. The greenback is improving. The resulting world capital inflows may really help stocks.

Our mostly free-market economy, including the financial sector, is gradually healing. The optimistic mustard seeds that I saw being planted in the dark days of the autumn of 2008 are growing. Now, I know that my left-wing critics don’t like my optimism. But I’m sticking with it. Even with all the threats coming out of Washington.

America can beat these threats.

Friday, March 05, 2010

Are You Listening Washington?

There’s a lot of loose talk on Wall Street right now about the risk of a double-dip recession. I’m not buying it. Now, I’m the first to admit there’s a good debate about the overall strength of the recovery rebound. But the recession ended last June, and I’m still thinking a 4 percent growth rate in 2010 is likely. That could spell another large rally in stocks.

We had pretty strong numbers yesterday on retail chain-store sales, as well as a welcome drop for unemployment claims. That was followed up by this morning’s better-than-expected loss of 36,000 jobs in the February report. Consensus was for a loss of 65,000 jobs. And don’t forget the ISMs earlier this week were both pretty solid. Stronger business profit performance remains a key stimulus to the U.S. economy. That’s a lot more powerful than this phony Washington government spending and borrowing. Meanwhile, the power of easy money from the Fed is still an active propellant for economic growth.

We do need to remain vigilant over Washington’s tax, spend, and regulate threats to economic growth, jobs, and investment. Higher tax rates to deal with the monster deficits may be lurking in the not-too-distant future. Big tax hikes will really hurt the economy longer-term.

This country is not currently on the supply-side model of growth. At least not yet. Smaller government and lower tax rates across the board, along with a stable King Dollar, would give me much more confidence about the economy’s long-term future. Perhaps sweeping political changes in Washington come November will move us in the supply-side direction.

Incidentally, I just loved Dan Henniger’s Wall Street Journal column yesterday, “Bring Back the Robber Barons.” He nailed it. We should be rewarding the great entrepreneurs who will build new American businesses and create millions of American jobs.

That’s right, reward them, not punish them. Are you listening Washington?

Think Carnegie. Think Rockefeller. Think Vanderbilt. Think about creating new Oracles, new Microsofts, new Fed-Exs. That’s what they’re doing in places like China, Brazil, and India. They don’t eat their rich in those places. But that’s not what we’re doing here at home.

Fortunately, the political tide may be turning toward the supply-side. Never forget: We cannot and will not have strong and vibrant capitalism without capital and capitalists.

One Giant Government Leap Backwards

Rather than a post-partisan olive branch to congressional Republicans and the American public, President Obama’s latest health-care speech was a declaration of war. He’s more than willing to use a 51-vote reconciliation majority to jam through a roughly $2 trillion health-care plan that amounts to a government takeover of nearly one-fifth of the economy. He’s prepared to stick Uncle Sam right in the middle of the age-old relationship between patients and doctors, and doctors and hospitals, all while subjugating the private health-care insurance system to the status of a government-run utility -- without bending the cost curve downward.

More spending. More tax hikes on investors, businesses, and individuals. New government boards to control prices, ration care, and redistribute income. The Obama administration is basically taking a giant government leap backwards that the country doesn’t want to take.

One of the most galling features of this plan is a taxpayer-subsidized government-insurance entitlement for people earning up to 400 percent above the poverty line, or nearly $100,000 for a family of four. In other words, a middle-class health-care entitlement that will add millions of people to the federal dole. It’s all too reminiscent of the political dictum of the old New Dealer Harry Hopkins: tax and tax, spend and spend, elect and elect.

The spending has been well chronicled by congressman Paul Ryan, who baffled President Obama at the so-called health-care summit with his cogent analysis of a ten-year cost of $2.3 trillion that sets a floor, rather than ceiling, for the likely expense of this entitlement package. Obama had no rebuttal.

On taxing, let’s not forget that the current health-care payroll tax of 2.9 percent will be expanded to cover all forms of investment and capital formation, on top of the repeal of the Bush tax cuts. The anti-growth consequences are incalculable. As the late Jack Kemp used to say, you can’t have capitalism without capital.

The White House says job creation is priority number one. But you can’t have new jobs without healthy businesses. And healthy businesses require investment. However, by taxing investment more we’ll get fewer jobs, reduced real wages, and slower economic growth.

And how stupid is it for the president to support a six-month payroll-tax cut for small businesses in the name of job creation while imposing a 1 percent permanent increase in that very same tax to fund the massive new health-care entitlement. Talk about self-defeating.

Oh, by the way, a government takeover of health care will cripple one of our most productive job-creating sectors. Over the deep two-year recession, while overall corporate payrolls fell by about 7.5 million, private health-care firms created almost 700,000 new jobs.

And the health-care industry is one of our fastest-growing, most technologically advanced areas. With constant breakthroughs in biotech, pharmaceuticals, medical equipment, and diagnostics, the growing demand for more health care could elevate this prosperous job-creating sector to a third of the economy in the decades ahead. What’s wrong with that? Why crush it?

Health-care reform was supposed to be about getting 10 million low-income, chronically uninsured people some health insurance. But that can be solved by playing small ball. Health-care reform also was supposed to slow down cost increases. But that will never happen until the third-party payment system, run by Big Government and Big Business, is replaced by true consumer choice and market competition.

Just give consumers the tax break, and let them shop across state lines to find the right insurance plan. And young people who are already paying taxes into Medicare should not be mandated to pay more taxes into this entitlement plan. The young will pay for health insurance when they’re ready to pay for it.

Clearly this new New Deal, or new Great Society, or whatever it is, is the government selling a product that the rest of the country doesn’t want. Ironically, polls show that roughly 80 percent of voters believe their health insurance is satisfactory, good, or excellent. Polls even show that the public knows that a simple majority vote on reconciliation is an insufficient check on runaway government.

The Byrd rule says that reconciliation is for budget control and deficit reduction. But the Obama Democrats think they can use reconciliation to install a massive new social policy that would emulate the socialist-labor entitlement state now prevalent in Western Europe. As the Greece crisis amply shows, that entitlement state is on the verge of bankruptcy.

Perhaps Obama’s throwing down the gauntlet on nationalized health care will be the political gift that keeps on giving, in terms of political regime change come November. But if Obamacare does pass, a future rollback will be very difficult, and American health care and economic prosperity will be put in grave jeopardy.

Thursday, March 04, 2010

On CNBC's Kudlow Report Tonight

This evening at 7pm ET:


- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer
- John Ryding, Chief Economist and founding partner at RDQ Economics


What’s the next market move?
Is a double-dip recession in store?
Should Greece sell its family jewels?

Ed Yardeni, Yardeni Research President will join us with his perspective.


- Arthur Laffer, Chairman, Laffer Investments; Fmr. Reagan Economic Advisor
- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"' CNBC Contributor' Univ. of CA., Berkeley, Prof. of Public Policy

- Rep. Patrick McHenry (R-NC) will discuss his bill.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Scott Brown Challenges Obama on Reconciliation

Here's a clip of my interview with Sen. Scott Brown (R-MA) on last night's Kudlow Report where he responds to Democrats using reconciliation to pass health care.

Washington to Wall Street Mishmash

The Bunning Blockade: Sen. Jim Bunning was right all along. He was just trying to get the Senate to enforce its own pay-go budget rule and actually find $10 billion of spending cuts out of a $3.5 trillion budget to pay for extended unemployment benefits and other items in a catch-all spending bill.

For this, an act of integrity, everyone in Washington and the media piled on him. So I’ll defend him. Bunning actually favors unemployment benefits, but he wants Congress to find $10 billion in a $3.5 trillion budget to pay for it.

Look, it was only a month ago that Congress passed a new pay-as-you-go bill. And now they’re going to break it. That’s insane. That’s one of the many reasons why voters are furious with Congress. It’s called hypocrisy.

Bunning’s objection to a unanimous consent was not a filibuster. It just says vote on it. Go on the record. Show how hypocritical you really are when it comes to spending taxpayer dollars.

By the way, do we really need two years of unemployment benefits? That’s more than Europe pays! Isn’t 18 months enough? We are subsidizing unemployment. As a result, we’ll just get more and more unemployment if we keep this up.

Jim Bunning is just exposing Washington hypocrisy.

Hats Off to Ford: On a more optimistic note, bravo to Ford Motor Company, which beat GM in monthly car sales in February for the first time since 1998. Ford deliveries jumped 43 percent to 142,285 cars compared to 141,951 for GM.

Remember this: Ford didn’t take a single nickel of TARP bailout-nation money. Not one nickle. And its brilliant CEO Alan Mulally has downsized, simplified, and cost-cut to make Ford a profitable winner. Ford stock has absolutely soared from a little over $1 at the end of 2008 to well over $12 bucks today.

And get this: Using the discipline of the free market, rather than a government bailout, Mulally has reduced Ford wages and benefits to about $50 an hour compared to $75 an hour just a few years ago. That’s a terrific achievement that makes Ford competitive with Toyota and Honda.

Unfortunately, overall car sales were 10.4 million at an annual rate in February. A bit slower than January’s 10.8 million.

Stocks & Bonds: The stock market is edging higher yet again this morning. Stocks have recouped roughly three-quarters of the correction that dates back to mid-January. Money may be flowing in from Europe, in flight from the bankruptcy of the European entitlement state and the slump in the currency which has boosted King Dollar by about 10 percent.

The Treasury yield curve is still steeply positive. That’s a bullish signal. And corporate credit risk spreads, especially the high-yield junk spread compared to 10-year Treasuries, have narrowed enough to indicate confidence in future profits and the possibility that stocks have at least one more big upward move in front of them.

Real Housewives at the Fed: There are currently three open seats at the Fed, following news of vice chairman Donald Kohn’s resignation come June. What we need is a real housewife, someone who actually shops for food and gasoline, to go on the Federal Reserve Board. We need a real, commonsense, cost-conscious U.S. housewife. Not another Princeton PhD academic. Anyone who targets the so-called core-inflation rate excluding food and energy should be constitutionally barred from serving at the central bank.

Wednesday, March 03, 2010


Scott Brown, newly elected Massachusetts Republican Senator, will join me for an exclusive interview discussing his first major tax-cutting policy proposal tonight.

7pm ET on CNBC.

GOP Congressmen Mike Pence & Jeb Hensarling will also be aboard to discuss ObamaCare and reconciliation, despite a clear majority of opposition from Americans.

Rush on My Interview With Alan Reynolds

Rush Limbaugh was pretty fired up about my interview earlier this week with Cato's Alan Reynolds. Alan and I were discussing whether extending unemployment benefits ultimately leads to a higher rate of unemployment.

As Alan put it to me, there's "an awful lot of research that says the intensity of job search really picks up in the last four weeks or so before the benefits run out." So if you're collecting $30,000 a year in benefits, you're in no "real big hurry to get off of that gravy train."

Click here for the transcript and to read what Rush had to say.

Stop the Insanity!

The big topic in Washington is still health care. It’s still tax-and-spend entitlement time for even bigger federal government. And get this: President Obama’s new health-care push would apply the 2.9 percent health-care payroll tax to investments. We’ve never done this before. If we do, with the Bush tax cuts set to expire, the tax rate on capital gains and dividends could jack up over 50 percent. This is insanity. It is anti-investor, anti-stock market, anti-capital formation, and anti-growth.

I took a trip last week that offered a little perspective on where we’re heading. I was across the pond in Europe, on holiday with my bride in London and Rome. And as all the latest headlines attest, the continent is erupting. There are labor strikes everywhere. Government unions staged a general strike in Greece. Lufthansa Airlines went on strike in Germany. In France, the air-traffic controllers are on strike. And just this week, British Airways voted to strike in England.

Does any of this sound familiar?

Of course it does. It’s just like the 1970s, before Ronald Reagan and Margaret Thatcher entered the fray and put a swift end to union work stoppages and economic destruction. Unfortunately, there are no Reagans or Thatchers riding to the rescue right now.

We are today watching the total bankruptcy of the European entitlement state. We are witnessing the wholesale powerlessness of European governments to curb the massive social benefits and union wage hikes that these very governments bestowed.

Now, I wish this was strictly a Euroland problem. But Democratic Washington seems hell-bent on following a similarly disastrous policy course. Coddling unions has become a hallmark of the Obama administration. And then we have our very own Greeces, right in our own backyard. Look no farther than California and New York.

And what’s Washington’s solution? Tax hikes and increased spending.


Look, raising tax rates will simply depress our struggling-to-recover economy and shrink the revenue base. Gargantuan spending? It will never be paid for.

Do we in the United States really want to imitate the failed economics of Old Europe? Do we want redistributionism and welfarism run amok? Do we want VAT-type sales taxes that will penalize the middle class? Do we want Asia to run away with the economic-growth prize?

I say no to all of this. No, no, no.

Let me repeat my mantra: Free-market capitalism on the supply-side is our way out of this mess. It is the tried-and-true answer. What we desperately need is smaller government, fewer services, and flat-tax reform. We need a growth solution that limits government spending, limits debt, and expands the economic pie.

Washington has gone totally nuts. It’s become too much like Europe. It continues pushing blindly ahead with a fiscal product that the rest of the country doesn’t want.

Lawmakers need to change their stripes. If they don’t, voters will send them packing come November.

Tuesday, March 02, 2010

On CNBC's Kudlow Report Tonight

This evening at 7pm ET:


- David Goldman, Senior Editor First Things Magazine
- Vincent Reinhart, AEI resident scholar; fmr. dir. of Monetary Affairs at the FOMC; fmr. dir. of the federal reserve board's division of monetary affairs

- Sen. Judd Gregg (R-NH)

- Cato Institute senior fellow Dan Mitchell


CNBC chief Washington correspondent John Harwood reports.

- Mark Callabria, CATO Director of Financial Regulation Studies
- Peter Morici, University of Maryland Robert H. Smith School of Business Prof; U.S. International Trade Commission Fmr. Chief Economist

- Mark Skousen, Forecasts & Strategies Editor

Please join us. The Kudlow Report. 7pm ET. CNBC.

Monday, March 01, 2010

On Tonight's Kudlow Report

This evening at 7pm ET:

- Sen. Lamar Alexander (R-TN; Budget & Appropriations Cmte. Member)

Alan Reynolds, Cato Institute Sr. Fellow

CNBC’s Becky Quick reports from her conversation with the Oracle of Omaha.

-What are the Germans going to do?
-Is Germany’s Merkel in trouble?

- Peter Navarro, "The Coming China Wars" Author; UC - Irvine Business Professor
- Andrew Busch, BMO Capital Markets; CNBC Contributor

Fast Money’s Karen Finerman reports.

CNBC’s Mary Thompson reports.

Thomas Curran, Partner ; Peckar & Abramson, P.C

Please join us. The Kudlow Report. 7pm ET. CNBC.