Capital Commerce
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Forget the Fed—Try Cutting Taxes Instead
Continue reading… 3 CommentsWall Street and Washington may be overly focused on what the Federal Reserve will do next week at its policy meeting. What about fiscal policy to boost both the slowing economy and the dollar? Here are three different takes on that issue. First up, an analysis by Cesar Conda, former domestic policy adviser to Vice President Cheney:
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Globalization May Keep U.S. Tax Rates Low
Continue reading… 0 CommentsInteresting story in the International Herald Tribune about a growing consensus in Denmark that income taxes are too high and hurting the country's ability to keep workers in the country. This, I think, is another example of how global economic competition and greater worker mobility will have a tendency to push tax rates down. There is actually a movement in the European Union to harmonize tax rates to minimize the sort of wage arbitrage this story talks about:
Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent . . . Denmark is the home of "flexicurity," the catchy name given to a system that pays ample unemployment and welfare benefits but, unusually in Europe, imposes almost no restrictions on hiring and firing by employers. . . . The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark's growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor. . . . The movement toward lower taxes passed Denmark by, even as it took root in much of Europe . . . . Small East European countries, notably Estonia and Slovakia, started the trend by imposing low, flax taxes on income and corporate profits about five years ago. Those moves helped prod Austria, and eventually, Germany, to slash high marginal rates as well.
By the way, if the Bush tax cuts are left to expire in 2010, if Charlie Rangel eventually gets his surtax on the rich passed, and if we lift the income tax on Social Security as Barack Obama wants to do, our top marginal income tax rate will be like Denmark's—if not higher. Remember, economic growth is all about how many people are working and how productive they are.
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UCLA: Economy Will Slow, Not Tank
Continue reading… 0 CommentsClose but no cigar. Add another member to the "no recession" camp:
The UCLA Anderson Forecast is calling for real GDP growth to be just above 1% for the fourth quarter of 2007 and the first quarter of 2008. . . . In his national report, UCLA Anderson Forecast Senior Economist David Shulman asserts that the ongoing pessimism in the overall Forecast comes from the continuing deterioration of the housing market. The Forecast has lowered its expectations for housing activity as the tightening of credit standards, combined with an ebbing of the builders' practice of building new houses to get out of the underlying land takes its toll. . . . Down the line, growth will remain lukewarm until the economy returns to a 3% trend in 2009. The expectation is that the Federal Reserve will cut the Fed funds rate from 5 ¼% to 4 ½% by year-end. The economy will avoid recession on the strength of net exports and business investment in equipment and software. It's expected that it will take years for the housing market to recover to "normal," a situation likely to be exacerbated in the short-run by changes in the legislation affecting the mortgage industry.
My take: UCLA buried the "lede," the more I think about it. That last sentence about the effect of congressional action on the mortgage industry is critical.
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The U.S. Economy: A 25-Year Boom—or Bust?
Continue reading… 1 CommentI have been writing a lot about America's quarter-century economic boom. Now CNBC's Larry Kudlow and former Labor Secretary Robert Reich both give their two cents on the long-term performance of the economy from very different perspectives. Here is a bit of how Kudlow sees the past 25 years:
A significant paradigm shift has taken place in the U.S. economy over the last quarter century. During that time, the U.S. economy has been in prosperity 95 percent of the time and in recession only 5 percent. That is, the United States has had a grand total of only five negative GDP quarters in the past 25 years. In the prior two decades, the U.S. economy was mired in recession about a third of the time. This earlier period was a time marked by high inflation, high taxes, and overregulation of the economy. This caused the U.S. to look weak, while the Soviet Union looked strong. Clearly, things have changed. Prosperity has become the rule, not the exception...
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The Economy Ain’t Dead Yet
Continue reading… 0 CommentsMore news today hinting that the economic slowdown will be just that—a slowdown, not a recession. The ADP estimate for the increase in November payrolls was a bullish 189,000, suggesting a total payroll gain—public and private—of some 225,000. The current consensus guess from Wall Street is 70,000. The preliminary jobs number comes out Friday, so we'll see who's right. Moreover, the November ISM survey of nonmanufacturing conditions dipped to just 54.1 from 55.8 in October. A reading above 50 usually means the economy is still growing, and this number may mean it is growing as fast as 2.5 percent annualized, according to economist Mike Darda over at MKM Partners. And as the econ team at JPMorgan sees things, these data signal "a deceleration in growth between 3Q and 4Q, but [the numbers] are non consistent with a collapse." Well, that's something, I guess.
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My Chat with Mitt on Economic Policy: The Expanded Director's Cut
Continue reading… 14 CommentsI chatted with Mitt Romney by telephone last night (he was in New Hampshire) on a variety of economic issues, including taxes, trade, and government spending. (Romney's economic plan can be found here.) Since it's going to be "all Mormonism, all the time" as of Thursday when he gives his big speech on religious liberty, I thought I would ask all the substantive policy questions now. You know, the ones that would never make it into another YouTube debate.
Since the Civil War, every presidential election during a recession has meant defeat for the incumbent party. If nominated, can you win in 2008 if we have an economic downturn?
There are some statistics which don't have a great basis in causal effect, and that may well have some basis, but I actually think that in a setting like we have, where we face real competitive challenges, particularly from Asia and the weakened dollar and high energy prices, that people are going to want someone who understands how the economy works, someone who understands what drives employment, what brings good jobs and what scares jobs away. And so far as I know, I'm the only candidate whose almost entire career was in the private sector, who has done business in well over 20 countries around the world, and I think Americans are going to want somebody who understands the economy. -
Giuliani Shows His Claws on Spending
Continue reading… 2 CommentsRudy Giuliani shifts from military hawk to budget hawk in a commentary piece in today's Wall Street Journal. Among his ideas to cut spending:
1) Save $21 billion a year by rehiring only half of the 42 percent of federal civilian workers due to retire over the next decade.
2) Direct all federal agency heads to find savings of 5 to 10 percent.
3) Save $29 billion by ending earmarks.
4) Convene a Government Waste Commission, such as the one that closed military bases. "It can require Congress to vote up or down on a whole package of recommended cuts, beginning by considering the 3 percent of programs currently rated 'ineffective' by the federal government itself," he writes.
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Economy Continues to Buck the Pessimists
Continue reading… 0 CommentsTwo of my favorite economy bulls are Brian Wesbury and Bob Stein over at First Trust Advisors. Here is their latest take on things:
The consensus among economists, including at the Federal Reserve, is that fourth quarter growth will be just 0.5%. Some are even arguing that the economy will contract, the first negative quarter since 2001. Nonetheless, we still believe the economy is in good shape and expect real GDP to grow between 1.5% and 2.0% at an annual rate in Q4. Yes, this is below trend, but it is partially a payback for above-trend growth in Q2 and Q3. The three quarter average will still be near 3.5%. More importantly, key monthly data releases are nowhere near recession levels. The ISM Manufacturing Index was at 50.8 in November. At the start of the last recession (March 2001) the index was 42.6. The service sector is also still robust, with the ISM Non-Manufacturing Index at 55.8 in October versus 50.0 in March 2001. Other key surveys for November say the same thing. The Chicago Purchasing Managers Index, a measure of midwest manufacturing activity, was 52.9 in November versus 37.2 in March 2001. The Philly Fed Index, a measure of manufacturing in the Philadelphia region, was at +8.2 in November versus -20.2 in March 2001.
They weren't the only guys to notice that bullish ISM survey. Here's the take from JPMorgan Chase:
There were three key messages in the ISM report. First, the composite index is holding at levels far above recessionary territory—indeed, measurably above what might be expected under JPMorgan's GDP forecast (0.5% 4Q, 1.5% 1Q). Second, new export orders have soared while import orders have plunged to recession-like levels: trade should continue to contribute strongly to GDP. Indeed, by disproportionately helping industrial activity, this might explain the dichotomy between ISM and expected GDP growth. Third, the inventory correction looks advanced, with sentiment on inventories returning to more normal levels after being highly unfavorable in October.
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Gloom and Doom, or Zoom?
Continue reading… 2 CommentsBarack Obama and John Edwards, meet Leonard Wood and Frank Lowden, two of the unluckiest presidential hopefuls of the 20th century. Wood, a former Army general, and Lowden, a reform governor of Illinois, were the top two finishers in each of the first eight ballots at the deadlocked 1920 Republican National Convention. But they lost the final ballot to Sen. Warren Harding of Ohio. Actually, what those two gentlemen lost was the presidency itself. Whoever captured the GOP nomination that year was almost a cinch to become our 29th president. Not only was the nation sour about the prosecution of World War I and the subsequent Versailles peace treaty, but the economy was tanking. It shrank nearly 1 percent that year in a downturn that extended midway into 1921 and saw unemployment vault from 4 to 12 percent.
"It was really more of a depression," says David Pietrusza, author of 1920: The Year of the Six Presidents. "Along with the disillusionment over the war, you really had a perfect storm for Republicans." Indeed, Harding won in a landslide over Democrat James Cox, 60 to 34 percent, still the largest victory margin of any U.S. presidential race.
