Entries for December 2006

A swing of just under 12,000 votes in Delaware and Ohio and Gerald Ford would have beaten Jimmy Carter in 1976. Could Ford have done a better job dealing with the economy than President Carter? It may not seem like it would have been such a tall order, given that the Carter years were plagued by terrible stagflation. (The "misery index"–the unemployment rate plus the inflation rate–averaged a horrific 16.3 under Carter.)

Here's one idea to boost workers' wages: Cut corporate taxes. As a recent study by the nonpartisan Congressional Budget Office concluded, workers bear 70 percent of the tax burden. And a 72-country study by the conservative American Enterprise Institute found that higher corporate taxes push down workers' wages.

Some quick thoughts–with plenty more to follow in coming weeks–on the odds of President Bush's raising taxes to help bolster Social Security's long-term solvency. Ever since the midterms, Washington has been buzzing about the possibility of Bush cutting a deal with Democrats that would raise or eliminate the current $97,500 cap on income subject to payroll taxes–all as part of a comprehensive reform package.

Tired of strolling through Wal-Mart or Costco with your family and salivating over those sub-$2,000, 50-inch flat screens–but not buying? (I've only heard about this strange phenomenon, of course.) Worried that the housing recession or higher energy prices might still tank the economy and the 60-month expansion? Fear not. There are plenty of good economic reasons to feel secure in finally laying out the big cash for the plasma.

It's a truism that there's often a big bipartisan gap between campaign rhetoric and governing reality. So it was with a little surprise that I read this analysis of the new Democratic majority in Congress, courtesy of the political analysis team at Prudential Financial:

What, maybe you expected Treasury Secretary Hank Paulson to come home from China with a pledge from Beijing to let the yuan strengthen, say, 30 or 40 percent against the dollar? If so, you were probably disappointed with the results of this initial "strategic dialogue" meeting between American and Chinese economic policymakers. Instead, China merely agreed to make its currency more flexible. Then again, if you expected dramatic results, you've probably never done business in China. Any U.S. salesperson or marketing executive with experience there surely understood just where Paulson was coming from when he said that the two groups of officials "agreed on many principles" and that the talks fostered "mutual understanding and trust."

It's not as if the housing slowdown isn't hurting the economy; it certainly is.

Don't expect any blockbuster legislation, such as major tax or entitlement reform, over the next two years–not with a presidential election looming in 2008. (Look for Social Security and extending the Bush tax cuts to be major issues in the race for the White House.) But what might get passed? One hard-to-escape issue is the alternative minimum tax. It will cost about $45 billion to keep millions of Americans from getting pinched next year. How will Congress pay for the temporary patch?

While Democrats and liberal think tanks have been raising the volume over the issue of growing income inequality, less has been said about spending inequality. Now, you're probably well aware that your investment banker brother-in-law spends more than you do–darn those fat year-end bonuses!–but that makes sense since he earns more than you do. But what's interesting is knowing whether or not his spending is growing relative to your spending. As it happens, the Labor Department has recently released its 2005 Consumer Expenditure Survey. Delving into the numbers, I compared consumer spending in 2001 vs. 2005, looking at spending by various quintiles. In 2001, per-person spending in the top 20 percent was $24,879 vs. $16,817 in the second quintile, $14,264 in the third quintile, and $12,041 in the fourth quintile. (Think of the second, third, and fourth groups as the broad middle class.) Next, I compared the 2001 numbers with the 2005 numbers.

Today's jobs report showed that average hourly earnings rose 0.2 percent in November, boosting the 12-month increase in earnings to 4.1 percent–the highest level since 2001. And last month's earnings report showed that average weekly earnings are up a robust 3.2 percent during the past year, taking inflation into account. But these data points are probably going to do little to cool concern about stagnant wage growth. Overall, it's been flat since mid-2003–though if you drill down a bit, you find that the average hourly wages fell 3 percent from June 2005 to September 2005. Since then, they've made up that loss with a couple of cents to spare.

In the ongoing debate about growing income inequality in America — the top 10 percent of families grabbed 43 percent of income in 2004 vs. 33 percent in 1980 — some have argued that America needs a more progressive tax system, both to share the wealth and to help deal with the government's long-term budget woes. When the Bush tax cuts on income and investments end in 2010, plenty of liberals and budget hawks will surely argue that they should not be extended. (This is going to be a huge issue in the 2008 presidential campaign.)

Now that they've taken over Congress, Democrats want to show that they can govern. That means pushing practical, incremental solutions that might actually avoid a Bush veto. (So no proposals to implement a Canadian-style national healthcare system or a return to Jimmy Carter-era income tax rates.)

Don't think it's too early to ponder 2008 presidential politics. Yes, yes, we are still digesting the impact of the 2006 midterms. But potential candidates are already forming exploratory committees and hiring top talent in Washington and in key early states like Iowa, New Hampshire, and South Carolina. Take well-groomed 2004 vice presidential candidate John Edwards, widely assumed to be an almost sure-go for 2008. Just today, he announced that former Michigan Rep. David Bonior has joined his "One America" PAC as senior adviser for policy and politics–and de facto campaign manager should Edwards officially join the hunt.

When President Clinton left office on Jan. 20, 2001, the 30-year U.S. treasury bond was trading at 5.55 percent. The U.S. government had just posted its third straight year of budget surpluses. Fiscal rectitude was a key feature of Clintonomics/Rubinomics under the theory that such prudence would encourage bond investors to accept lower rates of return, thus lowering interest rates and boosting economic growth. In fiscal 2000, the surplus was $236 billion. In 2001, the federal budget was again in the black, registering a $128 billion surplus.

Just for fun, let's say that Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are wildly successful on their jawboning trip to China in mid-December. Although there's no formal announcement, within days, the yuan begins to gradually appreciate against the dollar. Over the next two years or so, it rises some 20 percent against the greenback.