James Pethokoukis

Politics and policy from inside Washington

10 reasons to be cautious on economy

May 3, 2010 17:25 UTC

I will say this: As much as I press WH officials to take a victory lap on the economy, they want no part of that — especially not with unemployment at these high levels and the evolving EU debt crisis.  David Rosenberg of Gluskin Sheff gives some more reasons for caution:

1. Markets were unimpressed with the size of the just-announced $145 billion rescue package or the ability of Greece to meet the terms. A bailout of all Club Med countries would, according to estimates I’ve seen, approach $800 billion. This is bigger than LEH.

2. China raised reserve ratio requirements 50bps for the third time this year (to 17%). A decisive slowing in China and the U.S.A. is a crimp in the near-term commodity price outlook.

3. Australia just unveiled a massive new mining tax. This is weighing on material stocks overnight.

4. Possible criminal probe on Goldman weighing massively on the stock price; financials being re-rated by rising spectre of financial re-regulation. Shades of Sarbanes-Oxley. There has never been a financial crisis that was not met afterwards with regulatory reform — it’s how the SEC was created in the first place.

5. ECRI leading economic index just slipped to a 38-week low. With the restocking phase complete and fiscal stimulus waning, prospects of a second half slowdown loom large. Buy the recovery story when ISM is at 30 and policy stimulus in full swing (13 months ago); fade it when ISM approaches 60 and stimulus subsides. Market Vane sentiment is pushing towards 60% too — yikes! Too much priced in. As for the macro scene, the U.S. economy is barely growing at all, net of all the federal stimulus (+0.7% SAAR in Q1). And net of housing impacts, neither is Canada … should set us up for a fascinating second-half.

6. Attempted terrorist attack in Times Square a reminder that geopolitical risks have not gone away.

7. Treasury yields have collapsed nearly 35bps from the nearby highs and are not consistent with the recent move by equities to price in peak earnings in 2011. Junk bonds trading back to par for the first time in three years.

8. The U.S. implicit GDP price deflator receded to its slowest rate in 60 years in Q1 (+0.4% from +2% a year ago) in a sign that this profits recovery is still being underpinned by cost cuts, tax relief and accounting shifts than by anything exciting on the pricing front.

9. The latest Case-Shiller house price index confirmed that we are into a renewed leg down in home prices. Financials, retailers and homebuilders are not priced for this outcome.

10. Initial jobless claims, around 450k, are not consistent with sustained employment growth, notwithstanding what nonfarm payrolls tell us this Friday. A new peak in the unemployment rate and a new trough in home prices stand as the most pronounced downside surprises for the second half of the year

COMMENT

Geez, what a sourpuss. Mr. Rosenberg must be short EVERYTHING. For now I’ll go with Larry Kudlow – way more credibility and he likes what he sees out there.

Posted by Gotthardbahn | Report as abusive

Mankiw on the VAT

May 3, 2010 17:02 UTC

A nice primer on the issues surrounding a value-added tax from Greg Mankiw. This is the key part for me:

Moreover, a VAT is the twin of the flat tax that conservatives sometimes advocate. To see why, imagine that we started with a VAT. Then we add a wrinkle: We allow businesses to deduct wages, in addition to the cost of goods and services. We also require households to pay a tax on their wage income.

Other than shifting the responsibility for the tax on wages from the business to the household, it might seem that we haven’t done anything significant. Indeed, we haven’t. But the new tax system would no longer be a VAT. It would be the flat tax that Robert E. Hall and Alvin Rabushka first proposed back in 1981.

Me: Wouldn’t the D-R compromise here be a Hall-Rabushka VAT as a revenue-neutral replacement for the income tax? See how to what extent it works its pro-growth magic before boosting it. But those would need to significant given the disruption converting a brand-new tax system would cause. Just eliminating investment taxes is a quick and easy way to a consumption tax.

Wealth taxes, Washington’s next bad idea

May 3, 2010 16:04 UTC

Some Democrats seem to have no problem raising the cost of capital.  Dividend taxes rates are scheduled to triple, while capital gains rates will only increase by a mere 60 percent. But as a I poke around the liberal idea factories here in Washington, I am hearing more and more about wealth taxes on the wealthy, just like they have in Europe.

This goes far beyond estate and property taxes.  In theory, even portfolios would be taxed on paper gains, from 1 percent to 3 percent. If applied to just the top 1 percent of taxpayers, such a tax could theoretically raise $300 billion in new revenue. Assuming, of course, all those rich folks didn’t hightail it to tax havens abroad. (Just ask Gov. Chris Christie of New Jersey about capital flight in the fact of high taxes.) No wonder so many nations want to crack down on these pockets of economic freedom.

I would dismiss the idea as nonsense if it were not for the fact that Democrats a) constantly complain about U.S. income inequality, b) seem so cavalier about cranking up taxes on wealthier Americans and c) think boosting taxes is the only way to deal with the budget deficit.

COMMENT

If this were to pass for only the top 1 percent, and half of them left the US, what would be the net tax revenue afterward?

Posted by drewbie | Report as abusive
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