One of the interesting questions asked of President Obama was how would Americans know his economic politices were working to turn around the economy. The first thing Obama mentioned was an improvement in the labor market. Actually, that might be the last thing to turn around. Even after the economy starts expanding again, the unemployment rate will likely continue to rise for some time.
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Ross Douthat echoes my point about the lack of policy imagination or guts among the congressional centrists who whittled down the Senate version of the stimulus package. In a way, I would almost be more excited about some crazy-ginormous $2 trillion plan that would have spent $100 billion on a new electrical grid and crisscrossed the country with bullet trains and covered the deserts with solar collectors. At least, there would some cool 1960s “can-do” energy and spirit in the darned thing. Of course, even better would have been a plan that acknowledged that while the government may cushion the impact of the downturn, it’s going to be the private sector that restores prosperity. How about 50 percent Green New Deal and 50 percent Reaganomics 2.0? Now there’s your compromise. Well, there’s always the next stimulus package.
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Larry Kudlow brings some needed clarity to the Obama stimulus proposal as only the Great One can:
And in what may prove to be the biggest stimulus-package hurdle of all, news reports suggest that Team Obama is contemplating as much as $2 trillion in TARP additions to rescue the banking system in one form or another. That would be $2 trillion on top of the nearly $1 trillion stimulus package. Government spending, deficits, and debt creation of this magnitude is simply unheard of. So the added TARP money will surely imperil the entire stimulus package as taxpayers around the country begin to digest the enormity of these proposed government actions. Financing of this type would not only destroy the U.S. fiscal position for years to come, it could destroy the dollar in the process. What’s more, the likelihood of massive tax increases — which at some point will become front and center in this gargantuan funding operation — would doom the economy for decades.
Me: Here is what Fed economist Emre Ergungor said about nations that undergo a big credit crisis:
Banking crises can have devastating effects on the economies of developing and industrialized countries. In addition to the taxpayer costs of recapitalizing the banks, banking crises have negative longterm effects on the economy, such as slow growth, high interest rates, and lower living standards.
This seems to be right where we are headed unless we begin to adopt some pro-growth economic measures.
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Larry Kudlow says what urgently needs to be said to Bailout America as he only he can say it. Here are some excerpts but please read the whole thing:
We don’t need bailout nation. Nor do we need the government picking winners and losers in a massive, Keynesian, new-New Deal spending extravaganza. And it’s not Obama’s middle-class tax cut that’s going to get us out of this economic jam. At best his vision is incomplete. But at worst his aversion to successful earners and investors is a real obstacle to full economic recovery.
Social historian and early supply-side activist Irving Kristol taught us three decades ago that the top earners are the economic activists. They’re the ones with the highest propensity to consume and invest. They’re the ones who buy the yachts, which are built by blue-collar workers. And they’re the ones who run the small businesses and provide the capital for the new entrepreneurial start-ups that are the lifeblood of the economy. It is they who energize free-market capitalism.
If we had an economy without rich people we wouldn’t have much of an economy. That’s why lower tax rates to reward the economic activists — the most prominent capitalists — are so essential.
In fact, the GOP has a great opportunity to challenge Obama’s Keynesian pump-priming by insisting there be a major tax-cut component in any new fiscal package. Republicans shouldn’t merely push for somewhat less government spending. They have to make a bold case that tax rates matter for economic growth and job creation. They must insistthat any recovery package includes this key element. Shift the debate. Say clearly that a reenergized economy cannot occur without lower marginal tax rates.
In particular, the GOP position should include lower tax rates on large and small businesses. Right now the top federal tax rate for C-corps is 35 percent. Small businesses, which pay the individual rate, also are taxed at 35 percent. These rates should be 20 percent for both C-corps and S-corps (including LLCs). This would make a huge difference. It would be a boon for our global competitiveness, since companies in the U.S. (as well as Japan) are taxed way above the rates of other advanced countries. It also would attract job-creating investment flows to the U.S. at a time when capital is on strike in our financial markets and economy. And while businesses collect corporate taxes, it’s really consumers who pay the final cost.
Republicans also could promote a middle-class tax cut that would reduce the 28 percent and 25 percent brackets down to 15 percent. And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance, and top individual rates.
In fact, lower capital-gains tax rates will raise revenues, since this is the single most sensitive tax on the Laffer curve. Indeed, many economists — including Alan Reynolds at the Cato Institute — argue that the growth and simplification effects of reducing the corporate tax rate would be revenue positive.
The whole debate in Washington is heavily skewed toward government spending on infrastructure. It’s all spending and virtually no tax cuts. For a more balanced and effective recovery policy, the GOP has to bolster its argument for spending discipline with a loud case for tax cuts.
It truly is time for a choice, not an echo.
Found on Capital Commerce
Here is what I learned from today’s commentary by Larry Summers in the WaPo:
1) Be afraid. Be very afraid. Summers says unemployment could hit 10 percent, higher than most Wall Street estimates. Even worse, I think, is his prediction that the economy could fall “$1 trillion short of its full capacity.” Now if the economy were to grow at 3 percent over the next 12 months — including the current quarter — it would grow by roughly $350 billion. To fall short by a trillion bucks, the economy must actually shrink by $650 billion, or around 5.5 percent, over 12 months. Basically, that would be a mini-depression and certainly as bad a 12-month stretch as any economic period since the Great Depression. Thanks for the pep talk. Hey, who wants to buy a McMansion or a flat screen?2) “Stimulus” is out. In a 761-word piece, Summers doesn’t use the word “stimulus” even once. Maybe that’s because the plan isn’t about stimulating anything other than the quick passage of the Obama economic agenda. Oh, and the plan is not about “public works” but “public investment.” Remeber that.
3) The Obama plan kind of pays for itself. Since without the plan, Summers argues, the economy will lose $1 trillion in output, then spending $700 billion to $1 trillion over two years to mitigate that loss really is kind of a bargain. Like plumbers and mechanics say, “It costs money, it costs money because it saves you money.”
4) There will be tax cuts. Summers does mention tax cuts in the 761-word piece. He said there will be “tax cuts.” Two words. “Tax” and “cuts.” Thanks for the clarification.
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News like today’s terrible housing report makes me ever more sure a federal housing bailout is on its way. Here is what IHS Global Insight has to say about the day’s news:
The November home sales report illustrates the ultimate risk in a situation where negative business cycle momentum persists for an excruciating length of time. The home sales market has been in recession for over three years. Builders have been reducing supply since the first quarter of 2006, and housing starts and permits were further collapsed to record low levels in November. The housing industry in the U.S. in the process of reducing capacity to dangerously low levels.
Found on Capital Commerce
Superstrategist Andy Busch of BMO Capital Markets on why looking at Ireland gives some the future of the U.S. government’s deepening involvement with the banking system (my bold):
Ireland took steps today to stabilize their banks by injecting capital into their financial institutions after one bank had an accounting scandal hit its shares. Remember, this country intervened aggressively after the Lehman collapse to guarantee all deposits and debt of the country’s major financial institutions.For the three major banks, the first part of the plan is to make direct capital injections and take voting rights in exchange. … And the money comes with serious strings attached. According to the WSJ, “In exchange for the money, the banks have agreed to increase lending to small and midsize businesses by at least 10% next year, the finance ministry said. The banks also agreed to increase lending to first-time house buyers by 30% next year, subject to demand, and to wait at least six months after a homeowner first defaults on a mortgage before taking legal action or repossessing the home. The banks also promised to work with regulators to develop financial-education programs for consumers.”
As US banks carry a chain of woe longer than Marley’s, I can only think that the incoming US politicos are all nodding their heads in unison in agreement over what Ireland has done. … Due to the a credit crisis brought on by lack of enforcement of laws on the books and an irresponsible monetary policy, the risk for the United States is that government oversteps its bounds and dictates what lending policies should be for the current financial institutions. While this won’t kill a recovery, it will eventually produce massive misallocation of precious resources. Like Scrooge, It’s not too late to change…but I’m not sure we’re going to wake up in time.
Found on Capital Commerce
The econ team at Goldman Sachs explains why the traditional drivers of an economic rebound won’t help the economy much this time around, and thus we need a $600 billion stimulus package this year alone. Some excerpts:
1) Housing recovery. Prospects for a housing recovery large enough to replicate the usual US cyclical experience are extremely dim given the huge excess supply that hangs over the market. Note in this regard that homebuilding would have to rise by about 33% to add one percentage point to real GDP since the sector has shrunk to only about 3% of US economic activity. Although rebounds of this size have been commonplace over the years, the sector has not faced the extraordinary excess volume of unsold and unoccupied homes that currently exists—about one million units judging from the homeownership vacancy rate, with more in the foreclosure pipeline. Until this excess has been absorbed, a meaningful recovery from the current depressed level of starts is extremely unlikely, even though this level is well below the rate consistent with underlying demographics.
2) Rebound in consumer spending. As people buy new homes and exchange existing ones, they buy appliances and other durable goods to put in them. In turn, this suggests that the poor prospects for a rebound in housing activity could spill over to the consumer durable goods sector. Notably, the last two recoveries had weaker than average contributions from both sectors to real GDP growth (though in the 2001-03 cycle this was partly because the previous setbacks were not as extreme). In addition, if US consumers are determined to raise their saving rates—as they currently appear to be given the fact that they are pulling back in the face of sharp declines in energy prices—then purchases of durable goods, many of which are discretionary in nature, may face strong headwinds in the next couple of years. And, of course, there’s always the issue of credit availability.
3) Robust hiring. As most observers of the US business cycle are well aware, the last two cycles have featured jobless recoveries. In an increasingly competitive environment where managing costs of production is at a premium, US firms have found ways to squeeze more productivity (and/or perhaps more hours, whether counted officially or not) out of their existing work forces. They have also learned the value of using temporary workers to meet increases in demand that might not prove to be lasting. As a result, we strongly suspect that companies will not be quick to hire new workers in response to increases in demand for their output, though we’d love to be proven wrong on this.4) An inventory cycle. US firms’ careful attention to inventory management has been evident in the current recession, which began with the real stock of inventories uncharacteristically already in decline. With stocks continuing to shrink, this conceivably sets up a possibility that inventories could provide a more traditional cyclical boost. However, this would seem to require two conditions: (1) that US firms think their inventories are at bare-bones levels when demand starts to pick up and (2) that the improvement in demand appears sustained enough to warrant restocking shelves aggressively. Both seem like tall orders given the excess that overhangs the housing market and the d egree to which US consumers are retrenching and the seemingly structural reasons for that retrenchment.
Found on Capital Commerce
Brian Wesbury and Bob Stein give us reasons to feel good about the economy:
1) Between 1965 and 1982, the US economy was in recession one out of every three years, inflation hit double digits and the unemployment rate peaked at 10.8%. Since 1982, the US has been in recession just one out of 16 years, the unemployment rate bottomed at 3.8% in early 2000 and then at 4.4% in early 2007. In other words, a wobbly economy today feels much worse to the average American and politician than it did 30 years ago.
2) What’s important to recognize is that even at the bottom of the current recession, sometime in mid-2009, the living standards of the typical American will still be amazingly high. In fact, even an aggressive contraction in real GDP will leave per-capita real GDP above 2005 levels.
3) Now, we did not have 8% unemployment back in 2005, but that kind of jobless rate is not unusual for recessions. The unemployment rate peaked at only 6.3% in the recession early this decade but peaked at 7.8%, 10.8%, 7.8%, and 9.0% in each of the previous four recessions, respectively, dating all the way back to the 1973-75 recession.
4) Even the original manifestation of the economic problem – the massive overbuying and overbuilding of residential real estate – will eventually generate benefits once the economy starts to recover. Think about the young worker or family just starting out in 2005. Now think about a similar worker in 2010. The future worker/family will pay less for housing, and not because they get “teaser” interest rates on loans for houses they end up unable to afford. In addition, these very same investors have a chance to buy equities at extremely attractive valuations.
5) Most importantly, for the long run, we still live in a country blessed with a Constitution that limits the power of would-be tyrants and a culture that attracts and encourages entrepreneurs like no other place on earth.
Found on Capital Commerce
A must-read op-ed in the Wall Street Journal Online today:
For more than 30 years the entrepreneurship-venture capital-IPO cycle centered in Silicon Valley has generated new wealth, commercialized innovation, and created new companies and industries. It’s also spun off millions of new jobs . . .
It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators . . .
In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk . . .
According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986 . . .
The most important government actions to foster business creation were the 1978 Steiger Amendment, which cut taxes on capital gains to 28% from 49%, and President Ronald Regan’s tax cuts, which reduced them still further to 20%. These tax cuts unleashed the PC and consumer electronics booms of the 1980s, just as the Taxpayer Relief Act of 1997 restored the 20% rate and did the same for the Internet economy in the late 1990s . . .
If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.
Found on Capital Commerce
Flotsam and Jetsam Founder’s Wisdom Gateway Pundit Back to The Constitution Michelle Malkin Pat Dollard Big Government