James Pethokoukis

Politics and policy from inside Washington

Walking on the supply-side

Mar 23, 2011 20:09 UTC

One of my favorite blogs, The Supply Side, has a great round-up of an NY conference supply-side economics:

Regarding substance, here are a few notes:

Lindsey predicted the end of fiat money by the end of the decade. He also observed that congressional Democrats lost the House because they lost seniors. He believes Nancy Pelosi plans to win them back in 2012 by aggressively attacking GOP proposals to cut entitlement costs.

Kudlow disputed that the budget deficit represents a “red menace” (Indiana Gov. Mitch Daniels’ description), arguing slow growth was the bigger threat. He noted that one can almost plot the rise of American power in recent decades with gold coming down, and its decline with gold’s rise.

Lehrman explained that the U.S. will never get fiscal deficits under control without monetary reform through a convertible dollar, because the world sells us its goods, then uses the dollars buy up our debt.

Laffer was typically optimistic, saying supply-siders are still winning the tax cut argument and that the rate of growth over the next three decades will exceed the 1980s and ‘90s.

Prof. Mundell argued the route to stronger U.S. growth is making the Bush tax cuts permanent and cutting the corporate tax rate to 15 percent. Explaining his view that exchange rates – set by the U.S. Treasury not the Federal Reserve – transmit inflation and deflation to the domestic economy, he suggested the biggest threat to recovery isn’t inflation but a significant rise in the dollar against the euro later this year. Such a rise would cut off the already-weak expansion and magnify America’s debt crisis.

White House confusion on corporate tax holiday

Mar 23, 2011 19:18 UTC

The White House perhaps rightly worries, via a Treasury blog posting, that a tax amnesty for U.S. companies repatriating profit might distract from broader reform. (House GOP Majority Leader Eric Cantor recently came out for the idea.)  But its economic objection to the idea is confused.

As things stand, there’s an incentive for companies to stash cash overseas, because bringing it back triggers a U.S. tax rate of up to 35 percent, depending on the level of local taxes already paid. A big but temporary reduction could see a lot of cash returning to the domestic economy — especially in the technology and drugs sectors.

Treasury notes, though, that this might result in very little direct new investment or job creation. When such a holiday was last tried in 2004, tax data show that 843 companies brought back nearly $400 billion. But for every dollar returned, about 91 cents went toward share buybacks with another eight cents toward boosting dividends, according to research from economists at the University of Connecticut and the National Bureau of Economic Research.

Meanwhile, President Barack Obama and others want to reform corporate taxes more broadly. A reduction in America’s fairly high headline tax rate would most likely come with the elimination of some tax breaks beloved of companies. With limited political capital available — his own congressional Democrats don’t want to cut rates or provide a tax holiday — Obama may need to focus on this more lasting change. Moreover, if company bosses are given reason to believe they’ll get an amnesty every few years, they might lobby harder to keep their favorite tax breaks, thereby derailing reform.

If the political calculation is slightly negative, though, the economic one tips the other way. Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.

COMMENT

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Rand Paul and the 2012 Republican presidential nomination

Mar 23, 2011 19:01 UTC

Steve Kornacki of Slate makes the case:

Rand Paul was in South Carolina on Monday and will soon make appearances in Iowa and New Hampshire. On Monday he told reporters that “the only decision I’ve made is I won’t run against my dad. I want the Tea Party to have an influence over who the nominee is in 2012.” An unnamed “Paul family advisor” also told CBS News that “there’s better than a 50/50 chance that there will be a Paul in this race.”

While it’s hard to envision Paul actually winning the GOP nod, improving on his father’s performance in the 2008 primaries seems entirely possible. Ron Paul finished fifth in Iowa with 9 percent and fifth in New Hampshire with 8 percent, then became a media afterthought. Given that he began the campaign with no money, no name recognition and no expectations, this represented a remarkable showing; he ended up beating Rudy Giuliani — the early GOP front-runner — in nearly every state in which they both competed. But it was also something of a disappointment, given the tens of millions of dollars Paul was able to raise and the free media he attracted. The New Hampshire GOP electorate, with its fierce libertarian bent, seemed a particularly promising audience for his message, and his campaign had hoped to break through with a much stronger performance there.

The best-case scenario for Paul would probably be replicating what Pat Buchanan achieved in 1996: a surprisingly strong showing in Iowa (he nabbed 23 percent, good for second place), followed by a startling win (with just 29 percent of the vote) in New Hampshire — at which point a panicked GOP establishment rallied around the strongest non-Buchanan candidate (Bob Dole) and denied him the nomination.

And James Antle of the American Spectator gives his two cents:

The case against Paul running is obvious. The voters in Kentucky just elected him in November. Like Chris Christie, Bobby Jindal, and a host of other recently elected promising Republicans, he should wait until he has accomplished more. For those of us who think a successful Senator Paul could do better than the Buchanan ’96 campaign, a concern might also be that becoming a perennial candidate by running too early could undermine that. It could also hurt his support at home in Kentucky if voters there think he’s only using their Senate seat as a stepping stone to his own ambitions.

The case for Paul running is that he’s simply a better politician than his father and would move the ball farther than either Ron Paul or Gary Johnson could. As a senator, he’d have the luxury of four years to mend fences with Kentucky voters. Paul could bring the constitutionalist message to the forefront of the Republican primary debates without getting sidetracked into theoretical discussions of libertarianism. And a premature presidential campaign in 1968 ultimately didn’t hurt Ronald Reagan.

To me, the biggest thing Paul has going for him is that he is perfectly attuned to the Tea Party GOP. He is actually saying something with a degree of specificity that puts to shame the current crop of GOP presidential contenders. He has, for instance, put forward a 5-year balanced budget. Among its high points:

SPENDING:

Brings spending near historical average in very first year

Reduces spending by nearly $4 trillion relative to the President’s budget

Achieves a $19 billion surplus in FY2016

Brings all non-military discretionary spending back to FY2008 levels

Requires the process of entitlement reform, including Social Security and Medicare, with final implementation by FY2016

Does not change Social Security or Medicare benefits

Block-grants Medicaid, SCHIP, foods stamps, and child nutrition

Provides the President’s request for war funding

Reduces military spending 6 percent in FY2012

Eliminates four departments:

Department of Commerce (transfers certain programs)

Department of Education (preserves Pell grants)

Department of Housing and Urban Development

Department of Energy (transfers nuclear research and weapons to Department of Defense)

Repeals Obamacare

DEFICITS/DEBT:

Never exceeds $12 trillion in debt held by public

Creates $2.6 trillion less in deficit spending relative to the President’s Budget

REVENUE:

Extends all the 2001 and 2003 tax relief

Permanently patches the Alternative minimum tax

Repeals Obamacare taxes

COMMENT

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