James Pethokoukis

Politics and policy from inside Washington

The Dow knows — all the Bush tax cuts will be extended

Nov 5, 2010 01:29 UTC

The Dow industrials are up 2 percent today as Wall Street figures out what DC insiders know: All the Bush tax cuts will be temporarily extended, more than likely during the “lame duck” session in December.  Robert Gibbs gave it all away today after Obama hinted as much yesterday:

Two days after congressional elections, White House spokesman Robert Gibbs signaled that Obama might consider a compromise with Republicans that would keep tax breaks not only for the middle-class but for wealthier Americans as well. “He’d be open to having that discussion and open to listening to what the debate is on both sides of that,” Gibbs told reporters. “Making those tax cuts for the upper end permanent is something that the president does not believe is a good idea,” Gibbs said. He said he believed the discussion would take a large part of the final weeks of this year’s U.S. congressional session.

A few more points:

1. The only question is if Obama will get much in return, such as approval for his national infrastructure bank (or likely his fave tax cuts such as the Making Work Pay credit or AMT).

2. Is this a sign of Obama shifting to the center? Look, even if Obama doesn’t want to move right, the Dem Senate will. There are a dozen Dem senators from red-states up for reelection in 2012. They are not going to follow Obama off a cliff on taxes or anything else.

3.  If all the tax cuts were left to expire, it would drop GDP growth by 2-3 percentage points. Even just letting the high-end ones expire would cost 0.2 percentage points of GDP and boost the unemployment rate by as much as 0.7 percentage points (based on Goldman Sachs’s estimate and Okun’s Law).

4.   2011 could be the year of the tax cut. GOP may put in for a corporate tax cut, and Obama may offer a payroll tax cut, in addition to his business tax cuts. Starts to look like an all-of-the above, tax cut  bidding war to boost a weak economy.

QEII will create jobs — for commodity speculators

Nov 4, 2010 20:07 UTC

The Fed’s new bond-buying binge will create plenty of commodity speculation and kill the currencies in some emerging markets. IBD’s Jed Graham puts it thusly:

What’s different about quantitative easing — an effort to lower market interest rates by bidding up Treasury debt — is that the Fed has no ability to direct its fire. What’s likely is that much of the investment capital freed up by Fed purchases of Treasury debt will overshoot its target — the U.S. economy — and flow to emerging markets and especially into commodities that serve as a hedge against a falling dollar.

And economist David Rosenberg adds:

Meanwhile, risk assets from equities, to credit, to emerging markets have, in recent months, become correlated with a weaker U.S. dollar in an unprecedented fashion. A weaker dollar, in turn, fits in very well with Ben Bernanke’s reflationary strategy by cheapening exports and buying jobs from abroad, not to mention adding extra impetus to foreign-currency translated corporate earnings. The question is whether the dollar’s descent becomes destabilizing or what the responses to this overt weak dollar policy will be in other parts of the world. Currency wars tend to lead to trade wars and trade wars do not tend to end very well (gold being an exception). … The bite into discretionary spending from the spike in food and energy prices — at exactly the most important shopping time of the year.

I wonder if all this isn’t just an effort by the Fed to force the hand of the new Congress and Obama to boost the economy through fiscal policy.

COMMENT

Mr. P – I like your concluding remark. Fiscal policy is currently little better than a train wreck. Something has to be done about it, and soon. Mr. Obama can’t keep handing out IOUs forever.

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