Capital Commerce
-
Dude, Where's My Recession?
Continue reading… 47 CommentsOut: Recession. In: Expansion. That's my quick take on today's first-quarter gross domestic product number, which showed that the economy grew 0.6 percent in the first quarter. Now that's not a robust number by any means, but it's not so bad given all the worry out there that the economy is headed off a cliff. Before you declare a recession, as many economic pundits have, shouldn't the economy, well, actually recess a bit—if only for a quarter?
Remember, the shorthand rule for declaring a recession is back-to-back quarters of negative growth. The semiofficial recession judge, the National Bureau of Economic Research, has a more complex formula, but I am not sure it has ever declared a recession when the economy never actually shrank. And consider this: The Intrade online betting market now says there is a meager 25 percent chance of a recession—using the negative-back-to-back-quarters definition—in 2008.
-
Maverick McCainomics Could Alter Our Fiscal Future
Continue reading… 10 CommentsUncle Sam has plenty of dough. That's the core belief at the center of McCainomics. Or maybe we should call it "maverick economics," since John McCain's approach toward taxes and government spending has the potential to change the rules of the Washington budget game. Actually, it has the potential to change the game itself and perhaps create a long-term solution to America's fiscal problem—with trillions left over. See, that's what the Wall Street Journal didn't seem to understand when one of its reporters wrote the following last week:
Sen. John McCain is proposing tax cuts that would either cause the federal deficit to explode or would require unprecedented spending cuts equal to one-third of federal spending on domestic programs.
-
McCainomics: The Right Reacts
Continue reading… 5 CommentsJohn McCain's top economic adviser, Douglas Holtz-Eakin, didn't much like Wall Street Journal reporter Laura Meckler's recent analysis of his boss's economic plan. Meckler's lede: "Sen. John McCain is proposing tax cuts that would either cause the federal deficit to explode or would require unprecedented spending cuts equal to one third of federal spending on domestic programs." In a response he wrote at National Review Online, Holtz-Eakin outlines a number of problems, including this one:
Meckler presents "independent" sources to back up basic assumptions that are not really independent or relevant at all. The Center for Budget and Policy Priorities is liberal-leaning and the Concord Coalition has largely lost relevancy. Yet, these are the only two sources quoted. Why didn't Meckler reach out to the Heritage Foundation, Cato Institute, or the American Enterprise Institute for a more balanced piece?
-
Analyst: Obama, Clinton Budgets Don't Add Up
Continue reading… 18 CommentsDan Clifton over at Strategas Research crunches the numbers on the Clinton and Obama economic and budget plans and squeezes out a lot of red ink:
Our review of spending and tax proposals show Democratic candidates are seeking to make their proposals "paid for" in a budget neutral manner. Hence, the candidates are ignoring the fact that they will be facing possibly a $500bn budget deficit upon entering office. The net effect of this is that most of the spending plans being promised will be scuttled for only the highest priorities.... We pulled the major tax proposals and matched the number to the proposed spending. If Clinton was able to enact all of her promises, the deficit would increase by more than $100bn and Obama by $175bn. We were generous by assuming troop withdrawal will occur immediately, the tax cut repeal is retroactive, [ignoring] automatic entitlement spending, and the AMT and the spending proposals were not even close. Governing will be very different than campaigning.
My take: The news could be even worse since the higher tax rates could retard economic growth and lead to lower government revenues. This could be 1993 all over again, where Bill Clinton scrapped his Putting People First agenda in favor of budget cutting.
-
Still Waiting for the Great Recession of 2008
Continue reading… 1 CommentBrian Wesbury and Bob Stein of First Trust Advisors still see better days ahead—and soon!:
In our view, the economy has been slow in the first half of 2008 due to an almost irrational level of fear and risk aversion. This risk aversion can be seen in very rapid growth in money market mutual fund assets—from $2.4 trillion a year ago to roughly $3.5 trillion today. ed rate cuts, which are likely to end this week, have temporarily created a self-fulfilling prophecy of economic slowness, as some businesses and consumers postpone activity until they are confident rates have hit bottom. But that scenario makes us confident in a sharp rebound in the second half of the year. With rates days away from their bottom, the full force of the Fed's loose monetary policy is about to be unleashed. Faster growth is just around the corner.
-
Avoiding a 'Soylent Green' Future
Continue reading… 14 CommentsHere is something to keep in mind concerning the sudden Soylent Green hysteria about rising food prices: Resources are limited only by the imagination and creativity of people operating in a free marketplace. Peak oil? Maybe. Peak energy? No way. Likewise, I don't think that McDonald's selling vat-grown burgers and algae fries is in our future. And neither does University of Chicago economist and Nobel laureate Gary Becker, who makes some sensible points in his blog (boldface by me):
An analogy is often drawn with oil prices since both have risen rapidly during past couple of years, and there is much fear by oil importing countries that oil prices will continue to go up during the next few years.... However, the analogy to oil is seriously flawed. Whatever happens to oil prices, there are grounds for much greater optimism about food prices. Any increase in the production of oil is limited by its fixed availability at different locations on earth. The supply responses to higher prices of agricultural production will be much greater than that of oil production for two fundamental reasons. The first is that only a small fraction of potential arable land is used for farming because the growth of cities and suburbia has led to mass conversions to other purposes of land formerly used to grow foods. Persistent high and climbing prices of grains and other foods will induce conversion of some of this land back to farming.
The second reason for optimism relates to the lower productivity of food production in the poorer parts of the world relative to the United States and other developed countries. Higher food prices will induce an increase in productivity in developing nations by encouraging greater use of machinery, fertilizers, and other forms of capital. It will also encourage consolidation of some agricultural holdings into the hands of more efficient farmers. Efficiency in oil production is more uniform in different parts of the world than is food production since the major energy international conglomerates produce all over the globe, including many poorer nations.
-
Wall Street Still Sees an Obama Presidency
Continue reading… 1 CommentIs this as good as it gets for John McCain? The latest from political analyst Alec Phillips at Goldman Sachs:
Recent polling indicates a tighter general election than many observers would have expected. This is largely because McCain has greater support in head-to-head polls against Obama than against Clinton in key swing states like Florida and Ohio. The general election may indeed be close, but it is likely that these polls will begin to change as the contest moves from a three-candidate race to a true head-to-head contest later this year.... These polls imply a close race at the moment, although Democratic performance may improve once the nomination is decided. Taking poll results for the states named above at face value and plugging in the 2004 election results into the rest, Obama would win 268 electoral votes to McCain's 270, while Clinton would win 289 to McCain's 249. Notwithstanding these implications, political prediction markets continue to imply a 60% probability that the Democratic candidate will win the election this fall.
-
Why Won't This Expansion Die?!
Continue reading… 0 CommentsIs the economy weak? You betcha. Is it falling off a cliff? Doesn't seem to be. According to new data today, weekly initial jobless claims fell from 375,000 to 342,000, the lowest level in two months. And outside of the transportation sector, durable-goods orders rose 1.5 percent. From these numbers, the folks at Action Economics conclude the following:
Both the U.S. durable goods and initial claims reports this morning bucked the path that seemed likely following the last round of weak payroll figures, and further truncated downside risks to growth as we enter Q2. Though we will keep our -0.5% GDP forecast intact until we get next week's April jobs report, we have now revised up our Q1 estimate to 0.8%, and there remains little evidence in the available equipment figures that businesses are pulling back on equipment spending beyond simply sustaining the sluggish sideways path of the last two years. The new home sales report for March squelched any hope for good news from this sector, however, as it's clear that if the economy is going to avoid outright declines in the first half of the year, it won't be because of a change in the trajectory for new home construction.
-
McCain: Nuclear Good, Ethanol Bad
Continue reading… 2 CommentsMy pal Dan Clifton over at Strategas Research has the skinny on John McCain's upcoming energy proposal. "The major trade on McCain's energy proposals is long nuclear and short ethanol," he says. Among the details:
1. Nuclear Energy. We believe McCain will address these issues comprehensively focusing on how the US can build more nuclear plants.... 2. Increasing Refinery Capacity. We believe McCain will propose a new method for refining capacity, either through new construction or upgrades, while balancing environment, regulatory, and cost concerns.... 3. Ending Ethanol Subsidies. McCain will adamantly campaign to end ethanol subsidies, even despite the fact that Iowa is a key swing state in this election.
-
Obama Adviser Strikes Back!
Continue reading… 3 CommentsAustan Goolsbee, an economics professor at the University of Chicago and Barack Obama's affable top economic adviser, takes issue with my recent post "Obama and (Even) Higher Capital-Gains Taxes." In an E-mail I got last night, Goolsbee writes: "Jimmy, You know I love reading your posts—you keep us on our toes. One objection, though, on factual grounds with this one."
This is the offending passage that Goolsbee goes on to cite:
In a recent chat, Austan Goolsbee, Obama's economic adviser, told me that the candidate was not in favor of equalizing income and capital-gains rates. Yet consider this: Obama says he intends to, at minimum, make the budget deficit no worse. But in my conversation with Goolsbee, it was clear that the campaign is underestimating the size of the 2009 budget deficit by $100 billion or more.
-
Obama and (Even) Higher Capital-Gains Taxes
Continue reading… 60 CommentsBarack Obama intends, if elected, to nearly double the capital-gains-tax rate to 28 percent—higher than the 20 percent rate when President Clinton left office—from its current rate of 15 percent. But capital-gains taxes may be going even higher. Consider this: There are plenty of Democrats, such as failed White House contender John Edwards, who want capital to be taxed at the same rate as income. And since they tend to be the same folks who want to repeal the Bush cut in the top marginal income tax rate, such a move would push rates for capital-gains taxes to a sky-high 40 percent. That would be as high as they have been since before the landmark 1978 cut in the capital-gains tax.
In a recent chat, Austan Goolsbee, Obama's economic adviser, told me that the candidate was not in favor of equalizing income and capital-gains rates. Yet consider this: Obama says he intends to, at minimum, make the budget deficit no worse. But in my conversation with Goolsbee, it was clear that the campaign is underestimating the size of the 2009 budget deficit by $100 billion or more. Goolsbee was unaware of private-sector estimates putting the deficit at half a trillion dollars and climbing, thanks to the weak economy.
To have a revenue-neutral budget under that scenario, Obama will have to either cut back on his spending plans or raise taxes even higher. And given that a President Obama would be dealing with even larger Democratic majorities in Congress, it would seem logical that higher capital-gains and/or higher income-tax rates would be a definite possibility.
-
Three Cheers for 'Reganomics'
Continue reading… 2 CommentsI was a guest for the full hour on CNBC's The Call this morning, a show hosted by Trish Regan. When introducing one of the segments, Regan actually hedged on whether the economy is in recession. That's right, she actually had the temerity to suggest that maybe, just maybe, the economy still has a smidgen of growth rattling around in it. That sort of mildly contrarian economic take is heresy on Wall Street these days, where recession is thought to be a done deal.
Well, good for her. Such optimism is not only a welcome change but one rooted in the economic data. Consider the following:
-
Presidential Politics and the Falling Dollar
Continue reading… 3 CommentsIt's been a long time since the dollar was a big presidential campaign issue. Probably not since Bryan vs. McKinley in 1896. And I've noticed that whenever CNBC's Larry Kudlow brings up the possibility that the tumbling greenback—or the "U.S. peso," as he likes to call it—may return to political prominence in 2008, the political smarties on his show always scoff, like Americans are rubes or something and don't "get" the fact that their national currency has become a global joke.
But who can forget TV images of celebrating Canadians when their "loonie" hit parity with the dollar last year? And guess what, Americans make some 30 million trips out of the country every year. Those folks sure know what the dollar is doing. The state of the dollar has even invaded popular culture. Comedians are making jokes about it, like this one from Stephen Colbert:
-
The Real Third Rail of Politics
Continue reading… 3 CommentsMy pal John Tamny edits the wonderful RealClearMarkets site, my first read every morning. He writes for it as well and just turned out a great piece of commentary on why we should dump the sacred mortgage interest deduction. The money graf:
Perhaps worst of all for our economic health, the mortgage-interest deduction drives capital away from the productive sector of the economy, and into the ground. Nineteenth century economist John Stuart Mill called the latter "unproductive investment," whereby capital is consumed rather than offered up as investment. This should concern all Americans, because to the extent that tax incentives create individual preference for consumption over savings, investment lags, and with lower investment comes lower wages.
Please, read the whole thing.
-
Evidence That the Credit Crisis May Be Ebbing
Continue reading… 1 CommentEconomist Mike Darda over at MKM Partners sees some light at the end of the tunnel:
The current credit crisis looks to be about as bad as anything we've seen in the last two decades—but not worse. Various measures of financial system risk were far higher during the downturns of the 1970s and 1980s. Market price indicators suggest the Fed is easy, not tight, which means the economy should be in better shape a year from now. Moreover, the Fed's more aggressive discount window policy seems to have created a financial market inflection point around March 18, which we believe will continue to mark the low point for stocks.... The S&P 500 is now 9% above the March low. The two-year Treasury note yield has risen to 2.24% from a low of 1.34% on March 17. These are positive signs that risk aversion is beginning to ebb. While credit strains will be a headwind for some time, we believe there is substantial upside in risk assets such as equities and corporate bonds and significant downside risk in Treasuries.
-
Gramm Speaks! The Views of Our Next (Maybe) Treasury Secretary
Continue reading… 2 CommentsIf John McCain is elected the 44th president of the United States, the 75th secretary of the treasury just might be Phil Gramm. The deficit hawk former U.S. senator from Texas is currently a vice chairman of UBS Investment Bank and a top economic adviser to McCain. I recently chatted with Gramm, who has done few interviews since leaving office in 2002. (In an earlier post, I questioned Gramm on whether his efforts to deregulate the financial industry contributed to the current subprime crisis.) Excerpts (boldface mine):
Housing bailouts, fiscal stimulus packages, calls for higher taxes to deal with the budget deficit—is the era of big government back?
Well, I don't think in the hearts of the two Democrat contenders for president that the era of big government has ever ended or will ever end. The interesting thing about the economic debate that we are about to have in America is that nowhere in the world can the two Democrat candidates show an example of countries that have succeeded economically by raising taxes, increasing government spending, and instituting protectionist measures.... ...And you don't have to look abroad. Look at American states, look at states that have raised taxes, raised spending, raised the regulatory burden, and look at the states that have kept spending and taxes low and had friendly business environments. In the last 10 years, Michigan has lost jobs, Texas has gained 1.6 million jobs, and some of those jobs are in automaking. I think the strength that Senator McCain will have in the general election is the ability to basically point out that his program is the only program that is working worldwide and is working in America—and that the Democrat proposal has worked nowhere. -
Obama-Clinton Debate in Philadelphia Spawns Weird Economics
Continue reading… 29 CommentsHey, if you thought you could afford to miss the 537th Democratic presidential debate of 2008, you were wrong. Last night's shootout in Philly was extremely illuminating. A few thoughts and observations on the economic talking points from Barack Obama and Hillary Clinton:
1) If Obama is correct and the economy (where the current jobless rate is 5.1 percent vs. recessionary peaks of 8.8 percent in 1975, 10.8 percent in 1982, 7.8 percent in 1992, and 6.3 percent in 2003) is "in a shambles" and "teetering not just on the edge of recession, but potentially worse," why would he want to nearly double the capital-gains-tax rate, which is a tax on savings, investment, and, yes, housing?
-
Bull Moose McCain Gores Wall Street
Continue reading… 3 CommentsSome Capital Commerce readers took offense at my post yesterday that highlighted Reaganesque aspects of the economic agenda that John McCain outlined. In particular, they pointed out that President Reagan never harangued business the way McCain did in that speech. (To be fair to me, I pointed out that the speech was a mix of Reagan, Mike Huckabee, and Teddy Roosevelt.) It was probably this portion that bugged them, the part of the speech where McCain named names:
Meanwhile, the people we expect to be most sober and level-headed in their economic decisions—bankers and other home lenders—forgot some of the basic standards of their own profession. Hard-working homeowners are learning for the first time about the endlessly complicated borrowing, bundling, and betting that has been going on in our capital markets. Americans are also right to be offended when the extravagant salaries and severance deals of CEO's—in some cases, the very same CEO's who helped to bring on these market troubles—bear no relation to the success of the company or the wishes of shareholders. Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while Mr. Cayne of Bear Stearns, Mr. Mozilo of Countrywide, and others are packed off with another forty—or fifty million for the road.
-
Wall Street Sees Higher Investment Taxes From Obama, Clinton
Continue reading… 0 CommentsIn my U.S.News & World Report cover story this week, I wrote about the impending push for bigger government—higher taxes, more regulation, more spending (though in the long term, that push will most likely be thwarted by fiscal constraints, global economic competition, and the verdict of the financial markets). And in a new report, my guy Alec Phillips over at Goldman Sachs sees higher taxes on the way (boldface mine):
1. The federal tax burden is likely to rise regardless of who wins the White House.... We assume that under any presidential scenario, the Democratic majority in Congress is likely to expand by at least a few seats in each chamber. In addition, the fiscal situation will be much different.... From a budgeting perspective it is hard to see how Congress can finance extension of broadly supported tax policies, let alone those on which there are disagreements between the parties.
-
Look for the Media to Attack McCain Tax Plan
Continue reading… 1 CommentI just got out of the media conference call with John McCain's top economic adviser, Douglas Holtz-Eakin. And I can tell you right now that the stories about McCain's economic speech in the New York Times, Los Angeles Times, and a bunch of other newspapers tomorrow are all going to conclude that his tax ideas will worsen the budget deficit.
Although Holtz-Eakin outlined what the compensating spending cuts would be for McCain's new proposals, the reporters were not buying his approach that McCain does not need to justify paying for the Bush tax cuts, rather that Congress needs to justify getting rid of them. (Holtz-Eakin, a former head of the Congressional Budget Office, called the current way of calculating future deficits or surpluses a "budgetary fantasyland.") One reporter traveling with McCain admitted the traveling press corps was confused by the whole thing, including Holtz-Eakin's line-by-line explanation of the tax cuts and corresponding spending cuts. Two other items about McCain's speech:
