Entries for February 2007

Does Wall Street's swoon mean there's a recession on the way? I think JPMorgan economist Jim Glassman summed up the current situation pretty well to me late yesterday: "The question is, does a recession seem a plausible scenario in the current circumstances ... with inflation near post-World War II lows, corporate profit margins at record highs, an unprecedented global awakening underway, financial signals [credit spreads] still at good-time lows? Please!"

Here's a headline sure to spook any investor or economist: "Greenspan warns of likely U.S. recession." That was the headline right near the top of the widely surfed Drudge Report yesterday afternoon and this morning, referring to a speech that former Federal Reserve Chairman Alan Greenspan made the other day via satellite to a business conference in Hong Kong. Many market watchers are blaming those comments– along with a weak durable goods report and the plunge in the Chinese stock market – for today's stock market sell-off. But despite the inflammatory Drudge headline– which, in all fairness, linked to an Associated Press story with that same title – the Maestro was hardly so definitive as Drudge made him out to be. Here is what Greenspan said, according to AP:

Now this would hurt. If the politicians in Washington do nothing, 23 million Americans will get hit by the alternative minimum tax next year, up from 4 million this year. A temporary fix to the AMT will cost some $45 billion to $50 billion. Repealing the AMT, according to the Congressional Budget Office, would cost more than $600 billion over 10 years. Now under new pay-as-you-go rules in Congress, any fixes or repeals will have to be paid for through higher taxes or budget cuts. One payment possibility suggested by some on the left is to repeal the Bush 2001 and 2003 tax cuts, under the logic that many taxpayers will get caught by the AMT because the Bush tax cuts lowered their tax bill. (The biggest problem, though, is that the AMT is not indexed for inflation.)

The global economies that will fare best this century are those that will be the most innovative and productive. Think-tank wonks and Wall Street economists give this topic a lot of thought. But smart guys outside the 212 and 202 area codes have just as many good ideas–probably more. So I decided to ask some of them via E-mail what they would do if they were appointed U.S. innovation czar. (Consider this a sneak preview of a larger story I am working on.)

Recent news reports have hinted that President Bush might be willing to go along with tax increases on wealthier Americans to pay for a costly fix to the alternative minimum tax. One possibility raised by Democrats is raising taxes on those making $400,000 or more. But don't look for the White House to sign up for any plan that raises tax rates, a move that would reverse one of Bush's signature domestic policies. As one White House official put it, "I've heard no internal discussions on that approach and sense no appetite for that kind of a trade-off."

"She scares the hell out of them." That's the way an American businessman, one with strong ties to the Chinese elite and a frequent traveler to Beijing, described to me how that nation's leadership views Speaker of the House Nancy Pelosi. But Madam Speaker shouldn't take it too personally. She probably serves as symbolic shorthand for the Democratic-controlled Congress that took power partly based on a promise to get tough on China. And it sure looks as if it intends to. Earlier this week, Pelosi and other Democratic House leaders called upon President Bush "to present to Congress within 90 days a comprehensive plan to eliminate the surging trade deficits with these 'Big Three' economies [China, Japan, and the European Union] by tearing down market access barriers and eliminating unfair trading practices that have existed for years–in some cases, decades." Also this week, Democratic Sens. Byron Dorgan of North Dakota and Sherrod Brown of Ohio, along with Republican Lindsey Graham of South Carolina, said they were introducing legislation that would strip China of its permanent normal trade status with the United States, subjecting the trade relationship to an annual review by Congress. Brown said in a statement:

The stock market sure seemed to love Ben Bernanke's optimistic testimony before a Senate panel yesterday, with the Dow Jones industrial average hitting a record high on the news and adding to its gains today. "There are some indications that inflation pressures are beginning to diminish," the chairman of the Federal Reserve said. At the same time, the Fed predicted that 2007 economic growth would come in somewhere between 2.5 percent and 3 percent, about a half point lower than its July forecast because of the housing slowdown. Overall, the Fed chief sees moderating inflation and moderate growth, obviously not a bad outlook as Wall Street sees it.

There is supposed to be a battle brewing in the Democratic Party–particularly over trade–between pro-growth centrists who want a return to Clintonomics (300 free-trade agreements, 23 million new jobs, a $6,200 increase in real median income) and spread-the-wealth neopopulists who argue that government needs to focus on stemming rising income inequality through higher taxes and nationalized healthcare.

Is the Social Security solvency "crisis" really not a crisis at all? Maybe not, if Edward Lazear, chairman of President Bush's Council of Economic Advisers, has his numbers correct. Yesterday, Lazear held a media briefing about the 2007 Economic Report of the President. During the press conference, Lazear said the following about the future rate of productivity growth:

How about a windfall profits tax on Google? It's an idea that came to me after watching a video of Sen. Hillary Clinton, speaking at the Democratic National Committee's winter wing-ding, apparently call for the confiscation of oil company profits. As the front-runner for the 2008 Democratic presidential nomination put it:

Last night's première of the 14th season of the reality television show Survivor had a ripped-from-the-headlines feel about it.

The debate about the existence of global warming is over. Mitt Romney, the former Massachusetts governor who will probably announce next week that he's officially a candidate for president in 2008, single-handedly erased any lingering doubts I may have had during his interview yesterday with Lawrence Kudlow on CNBC's Kudlow & Company. (Host Kudlow also writes an insightful blog on economics and policy.) Romney gave some vague answers regarding his views on dealing with climate change, other than to emphasize that he wanted market-oriented solutions. But Romney, a guy who is trying to portray himself as a follower of Reaganomics, never really contested the underlying science. And probably no major 2008 candidate will either, for fear of being labeled a scientifically illiterate know-nothing.

I have this cousin who is a real national security hawk. When he pays his federal income taxes every year, he writes on the check–on the "for" line in the bottom left-hand corner–exactly what he wants his tax dollars spent on. One year he wrote, "B-2 bomber." Another year it was "Strategic Defense Initiative." I couldn't help thinking of him when I heard Sen. Joseph Lieberman suggesting that Congress should consider creating a tax to fund America's war on terrorism. During a Senate hearing yesterday, the Connecticut Democrat said:

Call it Operation Enduring Tax Cuts. President Bush's $2.9 trillion fiscal 2008 budget attempts to balance the federal budget by 2012. According to the proposal, the U.S. government would run a $61 billion surplus that year, though the projected deficits in 2010 ($94.4 billion) and 2011 ($53.8 billion) would be so small relative to the size of a projected $18 trillion economy–0.6 percent and 0.3 percent of gross domestic product–as to be financially insignificant. (And yes, bean counters of America, these numbers do assume that Social Security surpluses are commingled with the rest of tax revenues.)

Maybe the U.S. economy added 111,000 jobs last month, but maybe it didn't. Given that the Labor Department later revised higher its monthly jobs numbers 75 percent of the time last year, there's a good chance the final number for January will be somewhere north of 111,000. (More than one economist has called these preliminary payroll numbers "useless.")