Entries for July 2007

Right now if the stock market were an open house, the real-estate agent would be sitting alone. The Dow industrials are down about 500 points since hitting 14,000 last Friday—including a huge drop today—mostly over concerns about the subprime mortgage market and whether problems there will spread to more borrowers and companies.

The big catalyst, of course, was comments from Countrywide Financial CEO Angelo Mozilo who said 1) the housing market won't turn around until 2009, and 2) borrowers with better credit records are starting to miss payments at a higher rate. (Widely followed economist Ed Yardeni called Mozilo's comments the "first piece of hard evidence that the subprime mess may be spreading.") And certainly not helping matters was today's news that new-home sales in June fell 6.6 percent and that the median home price was down 2.2 percent from a year ago.

Oil prices have surged again, and investment bank Goldman Sachs thinks they have the potential to spike to near $100 a barrel by the end of summer unless Middle East production increases. How would a rise to, say, $95 a barrel affect the global economy? Some key take-aways from a new analysis by the bank:

"This issue of energy and global warming has the promise of creating millions of new jobs in America. It can be a win-win, if we do it right."—Sen. Hillary Clinton, at last night's Democratic debate in South Carolina

Quick quiz: What does Hillary Clinton think is a "great organizing principle" for the American economy? Increasing our standard of living? Maximizing economic growth and economic freedom, maybe? Putting a chicken in every pot, perhaps? Nope, none of those. In a speech to the Chicago Economic Club last spring, she suggested that climate change would be a cool concept to organize an economy around.

"We have to understand how weak [Iran] is," explained Sen. Joe Biden last month at the Democratic presidential debate in Nashua, N.H. "They import almost all of their refined oil. By 2014, they are going to be importing their crude oil." If Biden really meant to say what he said, that places him firmly in the camp of those analysts who believe in "peak oil" and predict that global oil production will soon decline even as demand continues to rise, with the results being ever higher oil prices and shortages.

Peak oilers contend that the Middle East oil reserves are vastly overstated. Some, the minority to be sure, even think that global oil production will fall so far, so fast, that western civilization will have to return to some sort of pre-industrial way of life. Here are some choice predictions from one well-known proponent of the theory, James Howard Kunstler:

Tomorrow, the Chinese government will release its second-quarter gross domestic product report. Economic growth for the period will probably come in between 10 percent and 11 percent. Another amazing performance, one not likely to go unnoticed on Wall Street or Capitol Hill, says the always-insightful Donald Straszheim, vice chairman of Roth Capital in Los Angeles, former chief global economist at Merrill Lynch and China expert:

"Is China trying to kill us?" seems to be a popular headline question on Internet message boards these days, rivaled only perhaps by the slightly more alarmist "Is China trying to kill us all?"

Sure, it's somewhat over the top, but enough deadly pet food, toxic fish, lead-painted trains, and poisonous toothpaste will make just about anyone a bit paranoid. The Chinese government seems to be taking all this pretty seriously, at least on the image front, sending lobbyists to Capitol Hill and hiring a U.S. public relations firm to get out its positive message. And earlier this month, the government executed its top food-and-drug regulator after convicting him on bribery charges.

"This is far and away the strongest global economy I've seen in my business lifetime," is how U.S. Treasury Secretary Henry Paulson recently described the current global boom. Hyperbole? Actually, that dramatic declaration probably understates things. Let's refer back to this piece of analysis from Paulson's old firm, Goldman Sachs: "If we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data [have] been collectible for much of the world."

As I wrote in my blog yesterday, I think that efforts in Congress to raise the tax rates on private-equity firms that have gone public and on hedge fund managers presage a bolder assault on the current capital-gains-tax rate.

Look for proponents of a higher cap-gain-tax rate to argue that having a different tax on ordinary income and capital gains adds unnecessary complexity to the tax code and is somehow unfair to workers who get the bulk of their compensation through labor rather than investments. (One of several reasons for having a lower cap-gains rate is that it helps offset the effect inflation has on investment income.)

Plus, Democrats will be looking anywhere and everywhere for dough to pay for new spending programs without adding to the deficit. Already, difficulty in doing so is causing them to scale back efforts to eliminate the alternative minimum tax in favor of yet another temporary fix.

But first things first: Will Congress pass new taxes on Wall Street? It might either raise the tax rate from 15 percent to 35 percent on carried interest—the 20 percent cut hedge fund managers take from fund profits—or impose the "Blackstone tax," which would alter the tax status of publicly traded financial services partnerships, or PTPs. Here are a few cogent observations from political analyst Anne Mathias at the Stanford Group:

"I have come here not to bury the capital-gains-tax rate, but to save it," was the de facto message delivered by Sen. Chuck Grassley at the U.S. Senate committee hearing I attended today on the wisdom of forcing hedge-, venture-capital-, and private-equity-fund managers to pay a higher tax rate—ordinary income rather than the cap-gains rate—on their 20 percent "carried interest" in the profits of their funds.

While much of the immigration debate has revolved around the economic impact of low-skilled workers heading north into the United States, the effect of high-skilled workers has been given less attention. But consider this:

"Business Loves Hillary!" was the gushing declarative that appeared on a recent cover of Fortune. The magazine's political conclusion seemed validated by a June 26 Manhattan fundraiser for Senator Clinton hosted by multibillionaire business legend Warren Buffett. Clinton praised Buffett as "patriotic" for understanding it was the national duty of wealthier Americans to pay higher taxes.

And guess what, if Clinton or any of the other Democratic presidential candidates gets elected, it's a fair bet that corporate America will get a chance to do its duty. In a May 29 speech, Clinton said, "It's simply not fair that as corporate profits have skyrocketed, the percentage of taxes paid by corporations [has] fallen...It's as though we've gone back to the era of the robber barons." During the recent Democratic presidential debate at Howard University, the major candidates agreed with John Edwards on the need to "eliminate all tax breaks for companies who are taking their jobs overseas and getting a tax break for doing it."

"If you want a job and you're a college grad, you can get one," is the smart—only somewhat overstated—observation that Roy Krause, head of staffing company Spherion, just imparted to me over the phone. Indeed, college grads had just a 2 percent unemployment rate in June, according to new Labor Department data, vs. 3.5 percent for those with "some college," 4.1 percent for high school grads, and 6.7 percent for those who did not finish high school.

Is America ready for a "new" New Deal? When you put together all the various strands coming out of Democratic politics and liberal think tanks these days, it's pretty clear that plenty of people on the left-of-center side of things sure think so. Consider this new effort from the New America Foundation. The D.C.-based policy shop calls it the Next Social Contract Initiative. Here is the group's thesis:

The global economy has three great hubs: New York, Tokyo, and London. Two of the three have already suffered terrorist attacks this century, and London is under fire again. Don't forget that the 9/11 attacks were, to a great extent, the start of a war on globalization, as symbolized by the World Trade Center. "The towers are economic power," Osama bin Laden said in an October 2001 interview. It's globalization—the worldwide spread of people, capital, products, brands, and ideas—that's the real threat to the terrorists. Geopolitical strategist and consultant Tom Barnett, a former professor at the U.S. Naval War College, says the jihadist menace is, in reality...