Friday, August 27, 2010

John Boehner’s Pro-Growth Message

It’s a bit too early for House Republican leader John Boehner to measure the drapes and pick out new wallpaper. But the Intrade pay-to-play prediction markets are now showing a 76 percent chance of a GOP House takeover in November, along with a 60 percent probability that Republicans will capture at least seven new Senate seats.

So Boehner’s lengthy broadside attack on Obamanomics at the City Club of Cleveland this week takes on special meaning. Headlines following the speech were all about Boehner’s call for the resignation of Obama policy generals Larry Summers and Timothy Geithner. But the more substantive question is this: What might a newly ascendant congressional Republican majority actually stand for?

Republican leaders are expected to publish a governing agenda next month, probably an updated version of the bold and successful Newt Gingrich/Dick Armey “Contract with America” of 1994. John Boehner is a key alumnus of that effort. But folks around the country are waiting to see if congressional Republicans will make a strong and aggressive case for a true economic-growth and jobs agenda now, in 2010.

The stock market, for example, has known for months that the GOP will capture the House. But investors are not yet confident that the GOP will focus on GDP, instead of mere ambiguous generalities, trying to be all things to all people. Indeed, if the Republicans borrow heavily from the tea-party “Contract from America” — and its call for constitutional limits to government, tough spending restraint, free-market reforms, and supply-side tax policies — stocks could mount a mighty rally in the weeks ahead.

Well, Mr. Boehner’s speech was a very promising beginning to all this.

Near the top he said, “Right now, America’s employers are afraid to invest in an economy stalled by ‘stimulus’ spending and hamstrung by uncertainty. The prospect of higher taxes, stricter rules, and more regulations has employers sitting on their hands.”

His first proposal to break that uncertainty? Boehner said, “President Obama should announce he will not carry out his plan to impose job-killing tax hikes on families and small businesses.” In other words, extend all the Bush tax cuts. To this end, Boehner quoted former President John F. Kennedy: “An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs.”

And Boehner was just getting started.

He called for an Obama pledge to veto any lame-duck congressional actions that would damage the economy, including the union card-check bill and a national cap-and-trade energy tax.

He called for the repeal of Obamacare’s job-killing 1099 mandate that would require small-business paperwork to show any purchases of more than $600.

He slammed Obamacare in general, noting the creation of more than 160 boards, bureaucracies, programs, and commissions, and the 3,833 pages of new regulations already in place.

He called for an aggressive spending-reduction package that would rollback non-defense discretionary expenditures to 2008 levels, before the stimulus plan was put in place.

He said he wants to end TARP and all TARP bailouts.

He bemoaned the fact that no one in the White House has any business experience, chiding Obama by saying, “We’ve tried 19 months of government-as-community-organizer. It hasn’t worked. Our fresh start needs to begin now.”

He called for a freeze on federal pay and hiring. He noted that, on average, federal employees now make more than double what private-sector workers take in.

He cited Wisconsin congressman Paul Ryan’s plan for $1.3 trillion in specific spending cuts. He called for strict budget caps. And he argued for pro-growth tax reform that would get rid of “the undergrowth of deductions, credits, and special carve-outs in order to bring simplicity and certainty, instead of transfer payments to the favored few.”

And he spotlighted the fiscal restraint of governors Bob McConnell of Virginia and Chris Christie of New Jersey, elected Republican officials who balanced their budgets by throttling spending instead of raising taxes.

All this is good. Very good.

Instead of playing it safe, it looks like Republicans intend to be aggressive in changing the statist, government-planning, socialist-lite agenda of President Obama, Majority Leader Harry Reid, and House Speaker Nancy Pelosi. It sounds like the new Republican party intends to end the ongoing war against private-capital investment, entrepreneurial rewards, free-market incentives, and private business that is plaguing the economy and sapping the strength of the recovery.

In a little over two months, the election will take place. In a little over four months, the 2003 tax cuts will expire. And in just a few weeks, congressional Republicans will presumably put more meat on the bones of their new platform. John Boehner’s Cleveland speech was a very encouraging beginning. Now let’s see if the Republican’s next step will truly provide some much needed optimism to the economy and body politic.

Tuesday, August 24, 2010

Why Is the Paris-Based OECD Pushing Obama's Big-Government Agenda With Your Tax Dollars?

Here's the latest must-see mini-documentary from my old friend Dan Mitchell.

According to Dan:

U.S. taxpayers finance nearly 25% of the budget for the Paris-based Organization for Economic Cooperation and Development (OECD), an international bureaucracy that routinely advocates for more government - including more taxes and spending in the United States. In just the past couple of years, the OECD has used American tax dollars to advocate Obamacare-type health policies, push for failed Keynesian stimulus spending, promote Al Gore-style carbon taxes, and urge the enactment of a value-added tax. This CF&P Foundation video advocated in order to reduce wasteful spending and protect America's free market system, American subsidies for this Paris-based bureaucracy should be eliminated.

Friday, August 20, 2010

Barney Frank Comes Home to the Facts

Can you teach an old dog new tricks? In politics, the answer is usually no. Most elected officials cling to their ideological biases, despite the real-world facts that disprove their theories time and again. Most have no common sense, and most never acknowledge that they were wrong.

But one huge exception to this rule is Democrat Barney Frank, chairman of the House Financial Services Committee.

For years, Frank was a staunch supporter of Fannie Mae and Freddie Mac, the giant government housing agencies that played such an enormous role in the financial meltdown that thrust the economy into the Great Recession. But in a recent CNBC interview, Frank told me that he was ready to say goodbye to Fannie and Freddie.

“I hope by next year we’ll have abolished Fannie and Freddie,” he said. Remarkable. And he went on to say that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.”

When I asked Frank about a long-term phase-out plan that would shrink Fannie and Freddie portfolios and mortgage-purchase limits, and merge the agencies into the Federal Housing Administration (FHA) for a separate low-income program that would get government out of middle-income housing subsidies, he replied: “Larry, that, I think, is exactly what we should be doing.”

Frank also said that any federal housing guarantees should be transparently priced and put on budget. But he added that the private sector must be encouraged to re-enter housing finance just as the government gradually withdraws from it.

Some would say Frank’s mea culpa is politically motivated in advance of an election where bailout nation and big government are public enemies number one and two. Of course, poll after poll shows that the $150 billion Fan-Fred bailout, which the Congressional Budget Office estimates could rise to $400 billion, is detested by voters and taxpayers everywhere.

In fact, these failed government agencies are in such bad shape that they can’t even pay Uncle Sam the dividends owed under the conservatorship deal reached two years ago. That’s right. In order to pay a $1.8 billion dividend on Treasury department stock, Fan and Fred had to borrow $1.5 billion from — you guessed it — the Treasury.

Then there’s this head-scratching detail: In an absolutely outrageous move last Christmas Eve, President Obama signed off on $42 million in bonuses for the top twelve Fannie and Freddie executives, including $6 million apiece for the two CEOs. (Hat tip to attorney Stephen B. Meister.)

Voters are on to all this. So politics may indeed be motivating Barney Frank’s turnaround. But I’m going to credit him with more than that.

I think Chairman Frank watched these government behemoths descend into hell and then witnessed the financial catastrophe that ensued. And I think he has come to realize that the whole system of federal affordable-housing mandates that was central to the real-estate collapse — including the mandates on Fannie and Freddie and the myriad bad decisions made by private banks and other lenders in response to the government’s overreach — simply needs to be abolished.

Noteworthy is the fact that Treasury Secretary Tim Geithner has come to a similar conclusion. Geithner told a recent Washington conference on the future of housing finance that the system needs fundamental change. He said, “We will not support a return to the system where private gains are subsidized by taxpayer losses.”

Of course, the withdrawal of housing markets from government programs, and the onset of a reinvigorated private sector for providing mortgages, must be done gradually over a period of years. But it is possible that the federal mortgage madness is coming to an end.

We will have to see if Congress really does say good-bye to Fan and Fred, as Republicans like Jeb Hensarling are advocating. Equally important, we will have to see if the federal affordable-housing mandates created by Congress and implemented by HUD and banking regulators are similarly repealed.

And then we will have to see if reformed federally guaranteed housing insurance includes larger down-payments, stricter underwriting standards, and greater reliance on private capital markets, lenders, and insurers. In other words, we need to see if housing will be restored to a market-based system and removed from the government-backed system that has proved so disastrous.

The broader lesson here is that government planning doesn’t work. And if left to their own devices, market processes will work. I don’t know if President Obama gets this. But my hat goes off to a man who does, Chairman Barney Frank.

Thursday, August 19, 2010

On CNBC's Kudlow Report Tonight

Tonight at 7pm ET on CNBC:



- Robert Reich, Fmr. Labor Secretary; "Aftershock: The Next Economy and America's Future" author; CNBC Contributor; Univ. of CA., Berkeley Prof.
- Steve Moore, Sr. Economics Writer for WSJ Editorial Board; "Return to Prosperity" co-author; Founder & Fmr. President of the Club for Growth

-CNBC’s Jon Fortt reports.


- David Kelly, JP Morgan Funds Chief Market Strategist
- Joe Battipaglia, Stifel Nicolaus Market Strategist -

CNBC’S Diana Olick reports.


- Harvey Pitt, Kalorama Partners, CEO & Founder; Former SEC Chairman
- Steve Malanga, Manhattan Institute Sr. Fellow; City Journal Contributing Editor

GOP Connecticut Senate candidate Linda McMahon will be aboard.

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

Wednesday, August 18, 2010

My Interview with Barney Frank on Fannie & Freddie

The estimable Barney Frank, Democratic chairman of the House Financial Services Committee, told me on last night's Kudlow Report that he opposes any more government housing stimulus. He also said he favors putting an end to Fannie and Freddie, as soon as the market can bear it. I say bravo.

Our conversation begins at the 1:48 mark.

Tuesday, August 17, 2010

Lessons of the Summer Swoon

The economy is suffering from something like a summer swoon. In the words of business columnist Jimmy Pethokoukis, the recovery summer has gone bust. We all know this from the sloppy statistics coming in for jobs, retail sales, and most recently manufacturing. But market-based indicators are telling the same story.

Let’s start with the Treasury bond market. Yields have fallen to 2.6 percent today from 4.1 percent last April. Decomposing this Treasury rally shows that real yields have dropped 79 basis points, which is a signal of lower economic expectations.

Meanwhile, inflation break-even TIPS (Treasury inflation-protected securities) have fallen 64 basis points, showing that price expectations also have dropped. The consumer price index is only rising 1 percent over the past year. And long-term inflation fears have fallen all the way to 1.7 percent. It’s not deflation. It’s disinflation.

The corporate-bond market shows a similar decline of economic-growth and profits expectations. Credit-risk spreads are widening. The spread between investment-grade corporate bonds and risk-free Treasuries have widened 62 basis points, while higher-yielding junk-bond spreads have increased 138 basis points.

Now, all these bond-market indicators don’t tell us a whole lot about the future. But they are corroborating the summer slump in the present. Lower inflation is a good thing, but lower growth is not.

And here’s another hitch in the story. Using the break-even TIPS, the Federal Reserve’s zero target rate is really minus-1.7 percent, which is the same sort of negative real interest rate we had in the early and mid-2000s. This is undoubtedly why Kansas City Fed president Thomas Hoenig is worried about a new boom-bust cycle.

Hoenig calls the Fed’s latest decision to maintain the zero-interest-rate target a “dangerous gamble.” Those are strong words of criticism leveled at Ben Bernanke and the other Fed bigwigs. Hoenig says the financial emergency is over and predicts a modest economic recovery that requires small increases in the Fed’s target rate — still accommodative, but slightly less so.

Hoeing also echoes the fears of Stanford economist and former Treasury official John Taylor, who argues that the Fed is keeping its target rate too low for too long, just as it did between 2002 and 2005.

Are we doomed to repeat the boom-bust cycle? Very few people agree with Hoenig and Taylor. But one market that does is gold. While bond rates have been declining this summer, gold has jumped $100, and it is hovering near its all-time nominal high. That’s food for thought.

And let me repeat my own mantra: The Fed can produce new money, but it cannot produce new jobs. Fiscal policy — and its threat of overtaxing, over-regulating, and overspending — is what’s ailing the economy. And that threat is reverberating through stock and bond markets. (The stock market, by the way, is still about 11 percent below its late-April peak.)

So the long-run message of the gold rally may be this: The Fed may print too much money, but taxes and regulations may hold back the production of goods and services. And if too much money chasing too few goods is inflationary, then lower taxes and regulations to encourage more goods would promote stronger prosperity and domestic price stability.

Free-market supply-side father Robert Mundell argued for lower tax rates and stable money. Is anyone listening?

Friday, August 13, 2010

On CNBC's Kudlow Report Tonight

Tonight at 7pm ET on CNBC:


- Larry Sabato, Director, University of Virginia Center for Politics
- David Wasserman, The Cook Political Report House Editor


- Greg Valliere, Chief Political Strategist; Potomac Research Group CNBC Contributor
- Andy Busch, BMO Capital Markets; CNBC Contributor


- John Kilduff, CNBC Contributor; Again Capital
- Frank Gaffney, Center for Security Policy President; Former Asst Secy of Defense for International Security Policy Under Reagan


- Ron Insana, CNBC Contributor; "How to Make a Fortune from the Biggest Bailout in U.S. History" Author
- Michael Pento, Chief Economist; senior economist at Euro Pacific Capital


- Joe Battipaglia, Stifel Nicolaus Market Strategist
- Warren Meyers, CNBC Market Analyst; Walter J. Dowd CEO


CNBC’s Diana Olick reports.

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

Thursday, August 12, 2010

On CNBC's Kudlow Report Tonight

Tonight at 7pm ET on CNBC:

CNBC real estate correspondent Diana Olick reports.


- Brian Wesbury, First Trust Advisors Chief Economist
- Gary Shilling, A. Gary Shilling & Co. President


- James Paulsen, Wells Capital Management Chief Investment Strategist
- Jim Glassman, Fmr. Undersecretary of State; George W. Bush Institute Executive Director - avail

CNBC’S Phil LeBeau reports.


CNBC’s Eamon Javers reports.


- Robert Reich, Fmr. Labor Secretary; "Aftershock: The Next Economy and America's Future" author; CNBC Contributor; Univ. of CA., Berkeley Prof.
- Steve Moore, Sr Economics Writer for WSJ Editorial Board;"Return to Prosperity" co-author; Founder & Fmr. President of the Club for Growth


- Megan McArdle, The Atlantic Business & Economics Editor
- Jeremy Siegel, Professor of Finance Wharton School at Univ. of Pennsylvania; "Stocks for the Long Run" author

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

Wednesday, August 11, 2010

On CNBC's Kudlow Report Tonight

Tonight at 7pm ET on CNBC:


- Barry L. Ritholtz, Fusion IQ; CEO, Director of Equity Research
- Art Hogan, Global Equity Product Director
- Jim LaCamp, Macroportfolio Advisors Sr. VP, Portfolio Manager
- John Rutledge, Rutledge Capital Chairman; Fmr. Reagan Economic Advisor


- CNBC’s Rick Santelli and Sue Herera
- Dave Goldman, Senior Editor First Things Magazine; Fmr. Wall St. Economist: Bear Stearns & Credit Suisse


- Robert Shiller, Economics Prof, Yale School of Management's Int'l Center for Finance; Chief Economist Macromarkets
- Joseph LaVorgna, Deutsche Bank Chief U.S. Economist


- Jim Amos, Tasti-D-Lite CEO
- Rich Karlgaard, Forbes Publisher; "Life 2.0" Author

CNBC’s Sue Herera and Ron Insana will be aboard.

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

Tuesday, August 10, 2010

The Fed Can Print More Money, but It Can’t Print Jobs

Did the Fed choose stimulus over dollar stability? The greenback fell and gold rose after the FOMC signaled today that it would keep its balance sheet steady by reinvesting the proceeds of mortgage bonds into Treasuries. This is the first Fed policy shift in about a year. It comes in response to a slower economy and disappointing job numbers, with the Fed downgrading its economic outlook in its FOMC statement.

By itself, this is a modest move. But it could be the start of something bigger. If recovery conditions continue to slow, the Fed could be more aggressive by monetizing more Treasury debt and expanding the balance sheet to print money. If it does that, the dollar will depreciate more and gold will rise more. A lot more.

But here’s the central problem. The Fed can print more money, but it can’t print jobs -- or capital formation, or productivity. With a trillion dollars of excess bank reserves already in the system, there’s no shortage of money. The recovery is being held up by the tax-and-regulatory threats and anti-business attitude coming out of Washington.

Today, for example, the House passed a $26 billion spending plan to bail out Democratic blue states and government unions. That money could have been used to extend the 2003 tax cuts on upper-income earners and investors. And part of this state bailout is a tax hike on the foreign earnings of big corporations. Of course, on top of that, nobody understands how Obamacare mandates and regulations will ultimately affect the cost of doing business and the hiring of new workers.

So in terms of Fed money-pumping, you can lead a horse to water, but you can’t make it drink. You can add more cash, but that doesn’t mean businesses and entrepreneurs will use it. Fiscal policy is the obstacle right now, not a shortage of money.

Oh, by the way, did you see the USA Today report that federal workers now earn double their private-sector counterparts? Total pay and benefits come to about $123,000 for federal workers in 2009, compared with $61,000 for private-sector workers. And who’s paying for that? You are. And President Obama wants a 1.4 percent across-the-board pay hike for the federal workforce in 2011.

It’s all a matter of priorities. Who do you trust? Well, Washington trusts government. So the private sector is very slow to spend and invest.

On CNBC's Kudlow Report Tonight

Tonight at 7pm ET on CNBC:


- John Tamny, Editor, RealClearMarkets
- Steve Liesman, CNBC senior economics reporter
- Vincent Reinhart, AEI Resident Scholar; Fmr Dir. of monetary affairs at the FOMC


- James Altucher, Formula Capital Managing Director
- Mike Ozanian, Forbes National Editor
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer

- Is state aid a jobs bill or govt union bailout?
- Why can't states balance budget w/out fed govt?
- Big panic Dem stimulus coming?
- Update on Bush tax cuts

- Rep. Mike Pence (R-Indiana)


- Matt Miller, Center for American Progress; The Daily Beast Columnist; Public Radio's "Left, Right and Center" Host
- James Pethokoukis, CNBC Contributor; Reuters Money & Politics Columnist


- Diane Furchtgott-Roth, fmr. Chief Economist, US Dept of Labor; Hudson Institute senior fellow
- Gary Burtless, Brookings Institute Sr. Fellow

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

Monday, August 09, 2010

A Democratic Panic Attack?

With the disappointingly soft jobs report for July, and a faltering recovery overall, is Team Obama getting ready for some sort of new, liberal-left, Keynesian, big-bang stimulus package? Will they be desperate to “do something”?

Already there are rumors of an August surprise (to use the phrase of business columnist Jimmy Pethokoukis) where Fannie Mae and Freddie Mac forgive underwater mortgages held by millions of Americans. And with state and local government jobs having fallen 169,000 year-to-date, perhaps the Democratic Congress and the White House will seek an even bigger spending plan for teachers and Medicaid workers -- on top of the $26 billion plan that just passed the Senate.

Or maybe the Democrats will come up with a new infrastructure-spending bill, perhaps for green technologies and whatnot. Or maybe they’ll extend unemployment benefits even more. My liberal friend Robert Reich is even talking up the New Deal’s Works Progress Administration (WPA), where the government employed millions during the 1930s.

With the announcement this week that Council of Economic Advisers chair Christy Romer will leave the White House to go back to teach at Berkeley, it looks like the center of economic gravity will shift leftward inside the West Wing.

Meanwhile, over at the Fed, it seems ever more likely that the FOMC meeting next week will produce a much more dovish policy statement, one that will lengthen the “extended period” near-zero-interest-rate language and hint at new cash purchases of Treasury and mortgage bonds to increase the central bank’s balance sheet and expand the basic money supply. Already, in recent weeks, the dollar has been plunging.

Of course, Republicans will push harder to keep the Bush tax cuts for the wealthy -- as they should. But Democrats are now trapped by Treasury man Tim Geithner’s statements that extending low tax rates for successful earners, investors, and small businesses would actually imperil economic recovery. This is his war against investment and capital formation.

Maybe the Democratic revolt in favor of keeping all the Bush tax cuts will gather steam. But Democrats are more likely to push for greater spending than investment tax incentives. They’d rather take your money than let you keep it.

The GOP also should call for lower corporate tax rates, including full cash expensing for businesses. But so far they haven’t made much noise on this, despite the fact that cash-rich businesses are mostly avoiding new hires in the face of the Obamacare regulatory threats and the uncertainty about future tax burdens.

The bottom line? Panic over this stalled economy may be setting in.

The unemployment rate is hanging stubbornly at 9.5 percent and economic growth looks to be slipping to only 2 to 3 percent. In order to get unemployment down significantly, the economy has to grow by at least 4 percent.

Inside July’s jobs report, small-business household employment dropped by 159,000 jobs -- a very bad sign. In the three months to April, this survey produced 417,000 new jobs. In the three months to July, it fell by 151,000.

At the same time, private payrolls in the corporate survey rose by only 71,000 in July, compared with an expected gain of 100,000. In the three months to April, payrolls gained by 154,000. Over the past three months, payrolls have increased only 51,000. They need to grow at a better-than 200,000 monthly pace in order to reduce joblessness.

So just like the overall economy, the jobs recovery is faltering. It isn’t a double-dip recession. But the story is moving in the wrong direction. And if the Democrats in power push for a big-bang summer surprise that seeks even more failed stimulus spending, they will do much more harm than good.

The Intrade pay-to-play investment parlor already shows a 60 percent likelihood of a GOP House takeover this November. That’s the ultimate silver lining in this story.

Friday, August 06, 2010

The Washington War on Investment

Will higher tax penalties on investment really spur jobs and faster economic growth? Most commentators would say no. It’s really a matter of economic common sense. But Tim Geithner says, Yes!

Speaking to a group in Washington this week, the Treasury secretary said that extending tax cuts for the wealthiest Americans would imperil the fragile economic recovery. He argued that government needs the revenues from those top-end tax hikes. So failure to raise taxes would harm growth. And then he went on to say that the trouble with the wealthy is that they save more of their tax breaks than do other groups.

Okay. Are you confused now? Most people would be.

Let’s start at the top. The coming tax bomb would raise the top marginal tax rate on capital gains from 15 to 20 percent, on dividends from 15 to 20 percent (or perhaps all the way to 39.6 percent), and on top incomes from 35 to 40 percent. Meanwhile, the estate tax could go as high as 55 percent.

Now, it is indisputable that cap-gains, dividends, and estates are essentially investment. What’s more, most successful earners who pay top personal tax rates are by near all accounts the folks who are most likely to save and invest.

But Mr. Geithner is suggesting the economy doesn’t need more saving. This thought was echoed by Jared Bernstein, a top White House economist, who told me in an interview that the saving and investment multipliers for economic growth are way below the stimulative effects of government transfer payments, such as more aid to state and local governments and further extensions of unemployment benefits.

Echoing that thought, the Senate this week voted to approve $26 billion in aid for state and local governments -- partly funded, by the way, by an $11 billion yearly tax increase on the foreign earnings of U.S. multinational corporations. Here, too, a tax on profits is a tax on investment. The Senate also rejected an amendment by South Carolina Republican Jim DeMint that would extend all the Bush tax cuts.

In effect, pulling all this together, the position of the Democratic party in power in Washington is that transfer payments (taxing and borrowing from Peter to pay Paul) are good for growth, and that investment is bad.

Go figure. I guess it’s a battle between the demand side and the investment (or supply) side.

The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money-market funds, commercial paper, venture capital, private equity, real estate partnerships -- all that saving is channeled into business investment. And whether that capital goes into new start-ups or small businesses or large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.

But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment.

Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.

Now, there are some Democrats who understand this. Senators Evan Bayh and Joe Lieberman, among others, support an extension of the upper-end tax cuts precisely to increase investment incentives that will create jobs. Bayh and Lieberman often refer to the John Kennedy tax cuts that lowered marginal rates across-the-board for successful earners and businesses. They correctly worry about small-business job creation in this process. And they have moved from the demand-side of today’s Democratic party over to the supply-side of the John Kennedy era.

Bayh and Lieberman have the story exactly right. And Treasury man Geithner has it fundamentally wrong.

Geithner tries to make a deficit-reduction argument, saying that extending tax cuts for the wealthy will cost $700 billion over the next ten years. But the real debate in advance of the Erskine Bowles deficit commission, which will restructure budget and tax reform, is about a one-year extension of the Bush tax cuts. That’s priced at $30 billion by the White House, about the same as the new bill to aid state and local governments. Which policy would help growth more?

My answer is to keep the incentives for investment. Or, find spending cuts immediately to cover both options. That would restore even more confidence.

We might also be surprised when the growth-and-revenue-increasing benefits of lower investment tax rates pay for those tax cuts in the future -- just as they have in the past.

Wednesday, August 04, 2010

Behind the Fed's Policy Leak

A front-page WSJ story, “Fed Mulls Symbolic Shift,” is a great leak from the central bank to reporter Jon Hilsenrath. Basically, the Fed wants to stop its $2.3 trillion balance-sheet portfolio from shrinking and therefore tightening monetary policy. So, when its mortgage-bond holdings mature, the Fed would take the principal and interest and go into the open market to replace the bonds. This would keep the Fed’s holdings flat, or stable, rather than have the holdings run off.

Inflation-sensitive markets did very little on the news yesterday. Gold was up slightly to $1,189, and the trade-weighted dollar continued its recent drop by about half a percent to 80.6.

What’s really behind the Fed move -- if the central bank announces it at its mid-month FOMC meeting -- is fear of an economic slowdown. The Fed doesn’t want to be seen as tightening its policy. The target rate is near zero already. But the balance sheet is the key to money creation.

Noteworthy is the fact that the monetary base has been flat-lined at $2 trillion for about 10 months, going back to last October. In sound-money terms, it would be okay with me if the Fed held the monetary base steady for a long, long time. That would keep the dollar stable and would probably keep gold prices steady. If investors actually believed in a stable policy, perhaps the greenback would rise while gold fell.

But alas, Bernanke is still engaged in economic fine-tuning rather than dollar value. We have no exchange-rate policy. Nor is there a gold policy. So no one could possible know where these prices are going.

Thinking back to Robert Mundell’s original idea years ago, an optimal policy would include low marginal tax rates and a steady dollar backed by gold. But marginal tax rates may go up, the dollar is not backed by gold, and the fate of the greenback is anyone’s guess.

Meanwhile, buying more bonds to create new cash for the economy is futile. There’s already $1 trillion of excess bank reserves on deposit at the Fed. In other words, the financial system has more dollars than it knows what to do with.

The economic recovery and job creation are being held back by tax and regulatory obstacles, not by a shortage of money. It’s fiscal policy that is wrongheaded. But then again, without a strong-dollar policy, no one can really give the Fed any kudus either.

Monday, August 02, 2010

Dave Stockman Totally Backed Down

Dave Stockman totally backed down on his assault against supply-side tax cuts, but he’s given up on the fight to curb spending and entitlements.

The Flaws in Dave Stockman's Thinking

My former boss Dave Stockman blames Republicans and supply-side tax cuts -- rather than big-spending by the Democrats -- for our debt problems and (by inference) the weak economy. I disagree.

We have a bipartisan spending problem, largely driven by entitlements over the long run and ineffectual stimulus in the short term. Stockman seems to want to solve the spending problem with higher taxes. Some recent estimates suggest the need for an 80 or 90 percent tax rate to do that. But what would it do to the economy? Or global competitiveness?

We’re not going to tax our way out of the entitlement quagmire. That’s the fundamental flaw in Stockman’s thinking.

By the way, in the ’80s and ’90s, the debt-to-GDP ratio averaged around 40 percent. Nothing destructive there. Reagan’s low tax rates, which on balance were maintained during the Clinton years (Clinton raised the top personal rate but signed the Republican bill to lower the capital-gains tax rate), generated a long boom of 3.7 percent annual growth, 39 million new private jobs, and low inflation.

I agree with Stockman that Paul Volcker was the great inflation killer. Absolutely. But lower tax rates helped spur growth while Volcker brought down the money supply and stabilized the dollar. In fact, gold basically declined through the whole period, while stocks went up. Government debt held by the public did increase $2.4 trillion. But household wealth jumped $32 trillion.

Incidentally, budget spending as a share of GDP declined during the whole period, from near 24 percent to around 18 percent. Much of that was during the Clinton years, when the president worked with the Gingrich Congress. And a lot of the spending restraint came from the peace dividend after the Soviets folded and defense spending was cut.

Now, Stockman is more on target when he says Bush and the GOP overspent and created new entitlements. But blaming Bush’s tax cuts for the Great Recession and for dropping revenues to 15 percent of GDP is utter poppycock. Of course, Obama is overspending even more, with still more entitlements.

The truth is that spending on entitlements and a stimulus that didn’t really work has made for some truly horrible long-term debt projections. So let’s address the spending instead of jacking up tax rates.

And let’s not forget that tax rates are coming down around the world, both for individuals and businesses. High tax rates in the U.S. will cause us to lose the global race for capital. At some point the question of taxes is really an issue of economic freedom. Let people keep more of what they earn. Marginal tax rates produce huge incentive effects for work, investment, and risk. Higher tax rates undermine economic growth and entrepreneurship. So let’s go for tax reform, with flatter rates and a broader base that gets rid of unnecessary deductions, credits, exemptions, loopholes, and special-interest subsidies.

The goal of policy should be to limit spending and taxes.

Now, I really do agree with Stockman when he fingers the Fed’s erratic stop-and-go monetary policy over the past ten years. Re-linking the dollar to gold or some commodity standard to impose financial and trade discipline is a very good idea. Putting limits on financial leverage is another good idea.

But I would say to my former boss Dave Stockman: You know there’s a spending problem. Let’s tackle that without crippling the economy.