Entries for June 2007

A few thoughts on Thursday's Democratic presidential forum at Howard University, here in steamy Washington, D.C.:

1) What happened to Bill Richardson? I mean, the New Mexico governor came into the race as a supposedly "different kind" of Democrat with a reputation as a pro-growth tax cutter back in his home state. And to be sure, he still throws around all the right buzzwords, as in this hunk from the debate: "We need to rebuild this economy by being pro-growth Democrats. We should be the party of innovation, of entrepreneurship, of building capital, getting capital for African-American small businesses."

That came right out of a 1988 Jack Kemp presidential campaign speech. But then Richardson veers into pure 1988 Mario Cuomo. For instance, he wants to raise taxes on wealthier Americans, as do his rivals. And as we found out in his answer to a question about outsourcing, Richardson is also, apparently, a believer in "an industrial policy where we invest in high-growth industries, in health industries, in high-tech, in renewable energy, to keep those jobs here."

Maybe he could make a government-directed industrial policy work, but government's track record doing that sort of thing is terrible. Venture capitalists have a tough enough time identifying future winners—do you think government bureaucrats or the commerce secretary could do a better job? Democrats used to point to Japan as a paragon of successful industrial policy, but its economy has been in a two-decade funk, and the latest academic thinking on its efforts to manage industry back in the 1970s and 1980s is that the policies were a failure.

The economy is reaccelerating after a bit of a soft patch, unemployment is low, and the stock market is near record highs. Yet poll after poll shows people are sour on the economy. An American Research Group survey last week found that 55 percent of respondents say the economy is "getting worse" vs. 16 percent who say it's "getting better." And the recent Conference Board numbers on consumer confidence fell to a 10-month low. To help figure out what is going on here, I dropped an E-mail to Bryan Caplan, an economist at George Mason University, coauthor of the EconLog blog and author of a new book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Is it Iraq? Is it gas prices? Caplan gives me his two cents:

Superstar investor Warren Buffett held a fundraiser last night for Hillary Clinton in Manhattan, an event that's been interpreted by some as Wall Street's endorsement of the Democratic frontrunner. (Side note: Buffett, who called at the event for higher taxes on corporations and wealthier Americans, pointed out that he had paid a lower tax rate in 2006 than one of his office secretaries and explained how wrong that was. So why doesn't he just cut a check to Uncle Sam to make up the difference? Just wondering.) Let's assume for a second that the Big Money crowd does love Hillary. Why might that be, given that Wall Street is often assumed to be a Republican stronghold? Three reasons:

"Through persistence and patience, [Hillary] Clinton has assembled what is probably the broadest CEO support among the candidates, ranging from Wall Street to Hollywood," concludes an article in the most recent issue of Fortune. "Business Loves Hillary," is how the business magazine's cover—which features a photo of a bemused Clinton—puts it. Now a more accurate description might be "Big Business Loves Hillary," since the story is all about how Fortune 500-type business leaders and megarich Hollywood moguls are sweet on the junior U.S. senator from New York. But why is this surprising? To put a twist on a famous Dilbert quote, "Large corporations welcome change and risk-taking in the same way the dinosaurs welcomed large meteors." And in many ways Hillary looks like a safe bet.

"Greed—for lack of a better word—is good," declared corporate raider Gordon Gekko 20 years ago in the film Wall Street. "Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms—greed for life, for money, for love, knowledge—has marked the upward surge of mankind. And greed—you mark my words—will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A."

Of course, director-writer Oliver Stone meant just the opposite, that greed—or what others might call "self-interest" or even the "pursuit of happiness"—was destroying America. He wasn't alone in that opinion. When that movie came out in December 1987, the market had crashed on Black Monday two months earlier. A few days before that plunge, the House Ways and Means Committee had filed legislation to eliminate tax benefits associated with financing mergers. Greed seemed to be hurting America, and Congress was trying to do something about it.

"I think attempting to bludgeon China is a very risky course," is how Larry Summers, President Clinton's final Treasury secretary and former president of Harvard University, analyzed—in a chat with me this week—the wisdom of congressional attempts to push Beijing into quickly raising the value of its currency vs. the dollar in hopes of reducing America's massive trade deficit. Summers is currently working with his cabinet predecessor, Robert Rubin, to keep alive the embers of Clintonomics—balanced budgets, open trade—through the Hamilton Project, a public-policy initiative sponsored by the Brookings Institution.

"What other taxes will be hiked, under the guise of 'fairness,' in the next few years?" is the question that longtime Washington hand Greg Valliere of the Stanford Group asks in his latest piece of perceptive, inside-the-beltway analysis. That apt query is prompted by apparent widespread support on Capitol Hill for legislation that would boost taxes on private-equity firms taking themselves public, like Blackstone. As Valliere sees it, this is the opening gambit in an attempt to raise all sorts of taxes—"everything will be targeted" is how he puts it—in 2009. As he spells it out:

A while back, Democrats turned to George Lakoff, a University of California-Berkeley linguistics professor, for some verbal help on better framing their issues. Take taxes, for instance. Lakoff thinks Dems should refer to them as "membership fees." Sounds much friendlier. As he put it in an interview:

What's it going to be? Raising taxes on individuals making over $200,000? Punishing China unless its currency rises? Imposing higher tax rates on private-equity funds and hedge funds? What move by Congress is the one that could send financial markets tumbling? So far, the stock market has been amazingly resilient to those threats as well as to the recent surge in interest rates. But recall Black Monday, Oct. 19, 1987, and the ensuing stock market crash. In its analysis of those events, the Federal Reserve highlights the following:

So let's sum up this crazy week: 1) Hamas takes the Gaza Strip, putting a possible Iranian surrogate right on Israel's border; 2) interest rates surge to their highest levels in five years, raising fears that the global liquidity boom is at an end; 3) leading Democrats and Republicans introduce protectionist legislation to force China to free the yuan; and 4) new Labor Department data show that consumer prices in May rose at the fastest pace in 20 months.

Yet after some shakiness earlier this week, the Dow industrials surged Wednesday and Thursday and are up 100 points more as I write Friday morning. How can this be? Four problems, four explanations.

Back then: "Debacle Inevitable, Wall St. Now Says" was a front-page headline in the New York Times on Oct. 27, 1929, just three days after the now-infamous of "Crash of '29" that augured the upcoming decade of economic catastrophe. But that death dive was merely the dramatic climax to a more orderly sell-off that had been ongoing since late March of that year. Market commentators of the time tended to blame the decline on interest rates—in particular, they focused on a rise in margin rates and a possible rate hike by the Federal Reserve.

Little attention was paid by stock seers to the progress of a tariff bill that was making its way through Congress. On March 25, in fact, President Hoover had received a report from the House Ways and Means Committee on commodity tariffs that indicated little opposition to such a protectionist bill. Although the newly inaugurated president vowed he would never sign such broad legislation, he ended up doing just that. Hoover signed the Smoot-Hawley Tariff Act in June 1930.

I really hate the classic Main Street/Wall Street division. It ignores the investor class. About half of all Americans own stock, either directly by owning individual shares or indirectly through a mutual fund. So there's a lot of overlap there.

"If we get a recession, then all bets are off," is how David Smick, who provides political analysis to hedge funds, described to me the chances of the new Congress passing harsh protectionist legislation targeting China. He predicted more jawing than action unless there was some external macro event as a catalyst.

"Like Reagan without the new ideas," is the slam the New York Observer puts on likely Republican presidential hopeful Fred Thompson in its new issue, and anyone watching the former U.S. senator and Law & Order actor perform on last night's showing of CNBC's Kudlow & Co. would probably never ask him to play a policy wonk in a film. Thompson mostly stuck to general, tried-and-tested GOP themes during the interview. (Excerpts of the chat can be found at host Larry Kudlow's must-read blog.) About the only aspect of domestic economic policy that seemed to really fire Thompson up was corporate taxes, which he wants to cut—especially after Kudlow informed him that countries in "old Europe" were already slashing theirs.

Evolution, gays in the military, and Scooter Libby all got plenty of time in last night's GOP debate in Manchester, N.H. (What, no questions from CNN moderator Wolf Blitzer about protecting Earth from an asteroid strike, "big love" marriage, or the upcoming Sopranos finale? America needs to know!) But Social Security reform was never mentioned, and there was virtually no talk about what the next president could do to juice the long-run growth potential and competitiveness of the U.S. economy—you know, the things that will help us raise our standard of living, deal with the tidal wave of entitlement debt, generate the technological innovation necessary to deal with climate change, and give us the resources to crush the jihadists.