James Pethokoukis

Politics and policy from inside Washington

Waist deep in the Big Muddle

Aug 9, 2011 16:56 UTC

A needed dose of Larry Kudlow to counter my gloom:

The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.

1) Our financial system is in vastly better shape than it was in September 2008. Vastly better shape.

2) The Federal Reserve is highly accommodative, as illustrated by the upward-sloping yield curve. Using the yield-curve measure alone, the chances of recession based on historical analysis are very low.

3) And energy prices are coming down, with oil moving toward $80 a barrel. Oil analyst Peter Beutel points out that gasoline prices in the last two weeks have fallen by 35 to 40 cents. Adding in other oil-related savings, the energy-price drop amounts to a $100 billion tax rebate for consumers.

4) Plus, corporate profits will continue to rise while business balance sheets are pristine and chock full of cash. Consider the combination of solid productivity, moderate wage rates, and falling commodity prices. These are all plusses for the economy and stocks.

So in light of all these factors, it seems to me that the economy can hold up. It’s not the kind of rapid growth I’d like to see. But it’s not the deep and dark recession that seems to be embodied in the stock market plunge. … The American free-enterprise system can weather these shocks, and I believe favorable political and policy changes are on the way

So no Great Recession 2.0, just a continued muddling though. High unemployment. Weak growth, with maybe a negative GDP quarter here and there. The American economy getting boiled one degree at a time.  I am not sure what policy changes are coming. President Obama hinted at some new ideas in his speech yesterday. One can hope.

Kudlow on Washington’s spending problem

Jul 7, 2011 19:41 UTC

Larry Kudlow breaks it down, even has a chart!:

The blue line you see is President Obama’s budget. The green line is Congressman Paul Ryan’s budget.

Now, Paul Ryan’s is of course a couple of trillion dollars lower than Obama’s over the next ten years. But what do they both have in common? They both go up. As in spending more, not less. As in, roughly $40-45 trillion dollars more. That’s a whole lot of taxpayer money, folks. Now why is this? It’s because of something called the “current services baseline” which includes population and inflation increases built into the budget. Entitlements have their own formulas. So when you hear a politician tell you they’re cutting spending, they’re actually referring only to reducing the growth of spending. Rarely, if ever, do they actually reduce the level of spending.

Here’s yet another scam: big budget deals say they “cut” (there’s that word again) a couple of trillion dollars over ten years. But most of it is targeted for the last couple of years, as in years eight, nine, and ten. So basically it’ll never happen. It’s four or five congresses from now. Laws change. Deals are broken. At the end of the day, the only thing that really matters is next year’s budget. Will it be cut?

When I look at this budget stuff, I focus on spending, taxes, interest and debt as a share of the economy. That way I don’t get dragged down into the world of comparing baselines. Here, for instance, is how the CBO looks at the Ryan plan:

 

Obama’s upside-down tax reform

Apr 14, 2011 19:34 UTC

Larry Kudlow notices on part of the Obama budget/speech that doesn’t seem to echo Bowles-Simpson:

We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.

But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.

Basically, the president is giving successful earners and small-business filers a double tax hike. That’s what it really is.

Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit. In the latter part of his speech the president did mention some kind of middle-class and corporate tax reform. But he gave no specifics.

COMMENT

Everybody should pay an equal percentage of taxes. If you only bring in a cute little 15k a year then maybe you should take your pell grants and go to school so you can do something useful with your life. Whoever thought penalizing the successful was a good idea was clearly not very successful.

Posted by JKHazen | Report as abusive

Supply-side Pawlenty?

Mar 29, 2011 16:08 UTC

My pal Larry Kudlow had a great chat with Tim Pawlenty last night on CNBC. And he pressed T-Paw hard on a lack, so far, of a detailed pro-growth agenda:

KUDLOW: Reagan had flatter tax rate reforms. … Let’s have new incentives.  Let’s stop the double tax on capital gains and dividends and estates and savings and investment. Where are the business tax cuts? We need specifics governor. You’ll turn people on with specific growth measures but you don’t have them yet.

PAWLENTY:  Larry, I think have been in the race for all of three business days now. Nonetheless, I agree with what you said. I’ve talked publicly and repeatedly … whether it’s corporate rates, whether it’s individual rates, whether it’s dividends, whether it’s capital gains, whether it’s the death tax, whether it’s capital equipment … we need to take all of those rates and reduce them as far as we can. We need to simplify the tax code, make it pro-growth, make it more transparent and make it friendlier for investment and the deployment of capital.

And then Larry asked him if he was in favor of a 15-17% flat tax. Pawlenty’s response: “Of course, I support a flatter tax rate. I don’t know if we can get to a flat tax in one leap, but moving in a flatter more transparent direction, absolutely.”

Me:  By not pushing bold reform on taxes from the outset, Pawlenty is in danger of negotiating against himself. Now is the time for big ideas. Beyond that, Pawlenty did talk coherently about a strong dollar — maybe creating some sort of commodity link — and applying Six Sigma to the federal government, which is an intriguing notion.

It’s still early, but it seems to me that with current and potential  GOP 2012 candidate all saying kind of the same thing about Obamacare and debt, taxes are a way for Pawlenty to distinguish himself. He’s not going to overwhelm people with his personality, so why not do it with bold ideas, as Kudlow suggests?

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.

Kudlow: Rising oil prices aren’t a big problem … yet

Mar 4, 2011 18:08 UTC

The Great One, Larry Kudlow, on the rise in oil prices:

In any event, I side with clear-eyed Wall Street forecaster John Ryding, who believes the $10 or so oil-price hike will reduce real growth by only one-quarter of a percent while adding a like amount to inflation. Ryding expects 3.5 percent growth this year.

Historically, a combination of spiking oil prices and an inverted Treasury yield curve signaling ultra-tight Fed money are precursors to inflationary recession. This has pretty much held true for the last six economic downturns. But right now, the oil spike is modest and Fed money printing is ultra-easy. The yield curve is steep and upward sloping, with long-term rates 350 basis points above short-term rates. This argues against recession right now.

And let’s not forget: Corporate profits remain very strong, an extension of the Bush tax cuts is helping the economy grow, and the one-time payroll tax cut may help cushion the oil shock. So at the moment, barring a blowup in Saudi Arabia, the economy will survive.

Of course, as Larry hints, the risk is if that $10 turns to a sustained $20 or $30. Then you are chopping a point off GDP growth, assuming a linear relationship between oil prices and GDP growth. At some point, that relationship breaks down and the damage being done gets far worse. The airline industry, for instance, does not seem to operate real well at $140 a barrel oil, as became clear in 2008. Even the current price levels are hitting profitability:

The airline industry will earn almost 50% less this year than in 2010, as fast-rising oil prices pummel the sector’s profitability.

The International Air Transport Association has now downgraded its airline industry outlook for this year to $8.6 billion from the $9.1 billion it estimated in December. This is a 46% drop in net profits compared to the $16 billion earned by the industry last year.

IATA raised its 2011 average oil price forecast to $96 per barrel for Brent crude, up from $84 in December. This will increase the industry fuel bill by $10 billion to a total of $166 billion.

Walking on the supply side with Obama

Jan 5, 2011 15:43 UTC

Larry Kudlow likes what he see so far:

The point is, if Team Obama is moving towards an entrepreneurial incentive model of growth, and away from the false consumption model of big-government spending, it’s very good news. Already we have seen a new free-trade initiative. And there’s even talk of broad-based, personal-income tax-rate flattening that could be part of a big-bang tax-reform package.

And the congressional momentum is decidedly toward lower spending. Without question there’s going to be a huge budget-cutting exercise led by Paul Ryan in the House and Jeff Sessions in the Senate. Sen. Jim DeMint wants a showdown over the debt ceiling in order to force some kind of balanced-budget amendment. And Sen. Bob Corker has taken the bit in order to build a bipartisan group to make sure that Republicans a spending cap in exchange for raising the debt ceiling.

Keynesians do not understand the pro-growth benefits of lower government spending. But any time government resource absorption is reduced, potential investment for the private sector is unleashed.

Yes, once again, we must trust but verify. And there are going to be huge battles ahead over Obamacare and EPA regulation, both of which are anti-growth. But for starters in the new year, carrying over from the November elections, at least fiscal policy appears to be moving in a positive pro-growth direction.

No wonder stocks rallied almost 100 points in the first 2011 trading day. The Gipper must be smiling about all this.

Obama and the Investor Class

Oct 12, 2010 21:19 UTC

Larry Kudlow lays out a compelling case here:

A series of investor-related polls shows how totally detached the president is from the nearly 100 million folks who directly or indirectly own stocks.

A survey conducted by Citigroup Global Markets of 100 mutual-fund, hedge-fund, and pension-fund managers finds that institutional investors fear a government policy mistake far more than inflation, terrorism, a housing double-dip, poor earnings, or any other potential risk to the economy. (Hat tip to CNBC producer John Melloy.) One-third of the survey’s participants list government policy missteps as their biggest worry, ahead of the more than 15 percent who cite protectionism.

But these investors believe the chances of a big policy error will decrease if Republicans take back the House of Representatives in November.

In another poll conducted by Reuters, 75 percent of respondents believe the employment situation is the most important issue for Wall Street, followed by 41 percent who point to consumer confidence. Fleshing out the survey, nearly two-thirds of respondents say extending the Bush era tax cuts should be a high priority; just over a third say the budget deficit is the main concern; more than two-fifths say interest rates will start to rise and the dollar will weaken more if the deficit is not addressed; more than a quarter want Obamacare repealed; and only one-fifth say additional action by the Fed is crucial.

Then there’s a new poll from Investor’s Business Daily. It shows 56 percent of respondents saying they want tax cuts extended even for households with more than $250,000 in income. Only 39 percent in the poll want the rich to pay more, while support for making tax cuts for the rich permanent hit 63 percent for both Republicans and independents. By solid majorities, that includes taxes on capital gains, dividends, and estates, all to be frozen at current rates.

These polls reveal how utterly alien Obama is to the investor class. And it’s worth noting that investors are among the most likely voters to turn out for elections.

COMMENT

Of course Mr. Obama is alien to the investor class, always has been. The question is whether he and his advisors care in the slightest. Given his shameless sucking up to unions along with China-, bank-, big oil- and Wall Steet-bashing, the answer should be clear.

Posted by Gotthardbahn | Report as abusive

Kudlow: WH dismissive of business complaints

Jul 26, 2010 13:47 UTC

From the Great One, Larry Kudlow:

Then there’s the confidence-threatening war between business and the White House, which is also related to the liberal tax revolt. It’s still a battle royale between the nation’s business leaders and the administration over taxes, spending, regulation, and trade.

Treasury man Geithner made lite of this war at a Christian Science Monitor breakfast this week. A Daily Caller headline read: “Geithner Bored by Complaints from Business about Obama Policies.” White House chief of staff Rahm Emanuel also doesn’t seem that concerned. In a Wall Street Journal interview with Jerry Seib, Emanuel was a bit more conciliatory about reexamining regulatory issues, but he was still inconclusive.

There are two big things that businesses want right now: One is an across-the-board corporate tax cut, including cash expensing for investment. This is the single most powerful job-creator of all. The other is a senior business executive in one of the key economic policy slots in the White House. Neither of these requests seems to be on the table. But to conclude that the White House is burying the hatchet with business you’d have to see these conditions met.

So far it ain’t happening.

COMMENT

Starting to get boring; big corps want a big tax break, but what have they done to deserve one? They ship out all the jobs to the third world; they have so many loopholes in the tax code that nine-out-of-ten pay miniscual to no tax at all; they continue to spend liberally on lobby groups and advertising (TV news spots included) that somehow make them seem to be victims.

What I would propose in the face of all this propoganda is an offer of a flat-tax/no loophole policy for corporations: 15% (less than half what it is now), no deductions, take it or leave it. My guess is – with no loopholes to exploit – they will leave it and move on to exploit the developing world more fully.

PS: Kudlow is not the Great One; Wayne Gretzky is! Kudlow is a minor thinker who has been too insulated to have a fair taste of reality, but at least he can debate in earnest which is very important for real progress to be made in America. I will say this in Kudlow’s defence he was the first to make Cramer look like the utter buffoon, double-talking hedgie whore that he is. But I digress…

Posted by CDNrebel | Report as abusive

Kudlow: Time for a tax cut

Jul 6, 2010 16:44 UTC

Larry Kudlow thinks it’s time for Team Obama to consider a different path:

Fred Smith, the CEO of FedEx, does not have a Nobel Prize in economics. But he founded from scratch a gigantic global transportation and delivery company that has employed tens and tens of thousands of workers, something the Nobelists have never done. And Smith argues that the best job-creating measure would be a significant reduction in the corporate tax rate and a move to full expensing for business-investment tax write-offs. He’s exactly right.

Japan intends to cut its corporate tax rate. So does Great Britain. But the U.S. corporate tax rate of 35 percent, or 40 percent when states are included, is not even remotely competitive anymore. So why aren’t people talking about the economic benefits of unleashing business power? The rapidly growing Asian economies treat capital and business better than they’re treated in the United States. Same for Europe. What are we waiting for?

Me:  Even Krugman-ite Democrats — folks more worried about jobs than deficits — should support this. Lowering taxes is the one form of  ”stimulus” that might get GOP support.  Might this mean a bigger deficit in the short run? Perhaps, but I see little evidence that markets are too concerned right now about red ink.

COMMENT

Not for nothing is Larry Kudlow known as the great one! A corporate tax cut is a great idea. Here in Canada business tax rates are tumbling.

Nonetheless, given the dismal electoral prospects faced by Team Obama as outlined in your later article above, it’s quite doubtful Mr. Obama will do anything smacking of doing a favour for American business in the near term. Quite the contrary; this fall election will likely see the Democrats bashing big business, big oil, big banks &c in a last-ditch attempt to shore up their electoral base. With luck, Mr. Obama will lose his super-majority in congress and then, and only then, after being sharply upbraided by the voters, will he look at something like a corporate tax cut. The unemployed will have to wait some while longer, sadly.

Posted by Gotthardbahn | Report as abusive
  •