Entries for September 2007

After perusing the blizzard of U.S. economic data that we've gotten this week, you could easily—and quite plausibly—draw this megaconclusion: The Federal Reserve will cut interest rates again, inflation is under control, and while the economy is weakening, it won't slip into recession. Here is the evidence:

If you've a hankering for higher government spending and higher taxes—and I know plenty of people who do—you most likely got a bellyful at last night's Democratic debate in Hanover, N.H. Here are a few takeaways:

An interesting bit from Democratic political consultant Mark Mellman (via The Hill) that plays into my thesis that the economic slowdown—even if the economy reaccelerates after a quarter or two—is mega-bad news for Republicans next year:

Investment adviser Kurt Brouwer puts in his two cents, via his outstanding Fundmastery blog, about my recent post concerning capital gains taxes and innovation:

In an Associated Press interview, Rudy Giuliani refused to rule out raising taxes to save Social Security. As the AP quotes Giuliani:

Here's the deal with the falling dollar: Over the long run, a country's currency reflects its economic strength. When the U.S. economy boomed in the '80s and '90s, so did the greenback. So when the greenback is tumbling, I prefer to go beyond short-term factors such as whether the Federal Reserve is cutting interest rates or what the near-term inflation outlook is. Perhaps the deep factor at play here is a global vote of no confidence in the direction of American economic policy. First, you have a Congress that is tilting protectionist. As Morgan Stanley's Stephen Roach writes in a New York Times column this week:

Some key 2008 takeaways from the latest research by Greg Valliere, politics guru at the Stanford Group, a Wall Street institutional research firm:

1. A president with approval ratings as low as President Bush's always gets replaced by someone from the other party.
2. The immigration debate may hurt the Republicans badly with Hispanic voters in key states such as Florida, Colorado, New Mexico, and Arizona.
3. Ohio appears to be a solid "blue state" after the GOP was wiped out there in last year's election.
4. Hillary Clinton will be the de facto Democratic nominee after the February 5 "Super Duper Tuesday" primaries in 20 states.

No sooner had the Federal Reserve cut interest rates than the inflation hawks began squawking that Bernanke and company had blown it and inflation was sure to worsen. And not without some plausible reasons.

It's an interesting little factoid. The median American house has grown by some 40 percent over the past generation. Yet to hear some economists tell it, that huge home enlargement somehow has happened just at the same time that the average worker has seen no increase in his real, inflation-adjusted wages. That means no increase in his standard of living—at least as measured by his take-home pay. (Of course, living in a bigger house filled with flat-screen TVs, iPods, laptops, Wiis, and carpet-cleaning robots could be taken as de facto signs of a higher standard of living. Plus, those wage numbers ignore nonwage compensation such as healthcare benefits and 401(k) programs).

But here's the thing: If one readjusts wage growth for the likely fact that government inflation numbers have continually overstated inflation, guess what? You find that real wages have grown by around 40 percent over the past generation—matching the increase in home size. Here is how Northwestern University economist Robert Gordon calculated the numbers for me during an E-mail exchange earlier this year:

Plenty of Democrats, including presidential candidates Barack Obama and John Edwards, are talking about rolling back the 2003 capital-gains-tax cut. Here is an interesting piece of analysis looking at capital-gains taxes and the venture capital industry from economic consultant Gerard Jackson:

This ugly news from Reuters: "A record 26 percent of U.S. homeowners say the value of their homes has fallen during the past year, above the previous peak of 24 percent seen in 1992, a survey released on Friday showed. Reflecting the extent of the prolonged housing slump, 21 percent of homeowners polled in September expect the value of their home to decline in the year ahead, up from 18 percent in August, according to the data from Reuters/University of Michigan Surveys of Consumers." By the way, 1992 was a year when a Republican lost the White House despite a so-called good economy as measured by GDP growth.

My good friend Larry Kudlow reviews Bush's economic reasoning and record:

At his news conference yesterday, President Bush proclaimed that he's a supply-sider. He added that he remains determined to keep tax rates low in the face of a large-scale tax hike threat from the Democratic Congress.... The president did not completely describe the incentive model that is central to supply-side thinking. But he did point out that economic growth and budget revenues have responded favorably to lower marginal tax rates. He's absolutely right. Total revenues have far surpassed the 2000 peak at lower marginal tax rates. In fact, since the mid-2003 tax cuts, revenues have grown by 45 percent. Revenue growth has averaged almost 10 percent per year since 2003 and has far surpassed the previous 2000 peak.

This sort of analysis drives liberal economists crazy. Too bad. The budget numbers are the budget numbers. Meanwhile, the deficit has fallen substantially from about 4.5 percent of GDP to 1.5 percent of GDP under Mr. Bush's tax-cutting policies. The 2001 tax cuts were not supply-side, but the 2003 tax cuts that lowered the tax rate on incomes, capital gains, and dividends most certainly were. Remember, the basic tenet of supply-side economics is keeping more of each extra dollar earned or invested. This makes it more profitable to work, save, invest, or take risks. If it pays more, after tax, then people will respond to the incentives. As Nobel Prize-winning economist Ed Prescott has put it, economic behavior responds to changing tax rates.

Richard Berner, chief U.S. economist at Morgan Stanley, frets more about protectionism than about the falling greenback:

I don't buy the dollar crisis scenario; instead, a softening economy, falling inflation, and policy easing are classic signals of a benign decline. While the dollar is hitting record lows, the pace of the dollar's decline has been measured, if relentless. And neither investor flows nor positioning seem to indicate sizable short dollar positions; if anything, investors have been surprised at how weak the dollar has been lately and seem to be playing catch-up.... [Yet] three risks worry me: First, the pace of the dollar decline could intensify, unsettling investors. Second, the combination of these developments may boost inflation expectations. Finally, in a weak economy, the threat of protectionism will escalate, which would push up inflation and undermine growth.

And after surveying the American and European economies, economist Robert Brusca agrees: "It is fair to say that the U.S. is in state of repair and Europe is in a state of despair. So much for the fate of the poor dollar.... Dollar rules! Euro drools! Why? Because the dollar and U.S. economy can survive this sort of thing since IT IS A REAL RESERVE UNIT with all the trappings. The euro, sadly, is not."

The proposed purchase of a 20 percent stake in the Nasdaq by Borse Dubai, a Dubai-controlled exchange, probably won't raise anywhere near the same level of alarm in Washington as the attempt in 2006 by another Dubai company to buy a company that managed operations at U.S. ports. That latter deal was bashed over concerns it would somehow compromise national security. As Rep. Barney Frank of Massachusetts told the New York Times yesterday, "In the ports deal, the concern was smuggling something or someone dangerous into ports. What are we talking about here—smuggling someone onto a stock exchange?"

It's a core message found in almost every Democratic presidential stump speech.

"Corporate profits and CEO pay are hitting new highs, while wages for hard-working Americans are stagnant." —Hillary Clinton, February 2007

"For too long, they've told us we can't do anything about disappearing jobs and stagnant wages."—Barack Obama, June 2007

"I talked earlier about some of the adverse effects of globalization—stagnant wages and rising inequality." —John Edwards, August 2007