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Kudlow: Obama's War on Investors, Capitalism
Tweet Share on Facebook February 27, 2009 Comment (14)Last October, I wrote the following.
if Barack Obama is elected president next week, 2009 may well bring a concerted and all-out effort by the Obama administration and a Democratically dominated Congress to turn the generally pro-Republican Investor Class into an endangered class by, among other tactics, raising investment taxes and ending the tax preferences for 401(k)'s, IRAs, and other retirement accounts.... if the Democrats control both the White House and Capitol Hill, look for them to move hard in the other direction, from an Ownership Society to a Government Owns It Society that would perhaps nudge America back to the left.
It appears I suffered from a lack of imagination. Here is Larry Kudlow:
Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds.
Me: Something is building here. The unified GOP against the stimulus bill. The post-election stock market plunge. The unpopular housing bailout. Geithner's bank rescue fumble.The Santelli Soliloquy. The trillion-dollar tax increase during a recession. The nationalization of healthcare, student loans and energy. And now this jaw-rattling uppercut by Kudlow, which may rank up there with Ronald Reagan's "Time for Choosing" speech as a meta-political inflection point. Hey, where are the Obamacans?
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A 6.2 Percent GDP Drop? Ouch!
Tweet Share on Facebook February 27, 2009 Comment (1)The revised fourth-quarter GDP number is pretty terrible, biggest drop since 1Q 1982. And it might get a twin in the current quarter. And 2Q might not be much better. But yet Team Obama expects over 3 percent GDP growth in 2010, followed by an acceleration in 2011 and 2012 despite higher income and investment taxes on wealthier American and higher energy taxes on everyone. Here in alternative view:
IHS Global Insight expects that in the current quarter the U.S. economy will contract by another 6%. We also expect a second quarter contraction of 3% to 4%. The recently enacted $787 billion stimulus package will have virtually no impact on growth in the first half of this year, but will help to turn the economy around by the second half. Even then, the best we can hope for is an average growth rate of around 0% in the third and fourth quarters—with a small contraction in Q3 followed by weak positive growth in Q4.
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Why Mitt Romney Gets It
Tweet Share on Facebook February 27, 2009 Comment (41)I sat down this morning for a chat with Mitt Romney here in Washington. (He's in town to give a speech today at the Conservative Political Action Conference.) I am going to post the interview later, but one thing struck me right away. He really understands the dynamics of our current economic problems. Here is one snippet:
This is a downward spiral where you have two elements encouraging the other down a steep slope. On one side you have the collapse of the stock market and housing market which means Americans have less net worth and feel poorer and as a result they buy fewer things and as they buy fewer things, business see greater losses and that depresses the stock market even further and this a self-actuating downard spiral.
Me: Yes. Analysts keep forgetting how the halving of the stock market has crushed people's net worth and is contributing to a reverse wealth effect. And what if people fall permanently out of love with the idea of building wealth by building assets through stocks? It will be a huge drag on the economy moving forward since people will be saving too much in low-yielding assets and not taking full advantage of global economic growth when it returns. This is a point economic consultant David Smick makes in his great book, The World is Curved. (A book, by the way, Romney just finished reading.) Restoring confidence to investors is crucial for a sustained economic recovery. Yet we are going to raise capital gains taxes and re-engineer the economy with massive de facto carbon taxes? Those don't strike me as huge confidence builders ...
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Obama's $646 Billion Cap-And-Trade Green Tax
Tweet Share on Facebook February 26, 2009 Comment (38)As I see it, the most important single item in President Obama's budget is his commitment to a cap-and-trade plan (to limit and reduce carbon emissions). It represents nothing less than an absolutely breath-taking attempt at reengineering the entire American economy. The White House expects the system will begin generating revenue for the government in 2012. By auctioning off carbon permits, the White expects the plan to bring some $80 billion a year between from 2012 to 2019.
1) What this is, of course, is a de facto business tax that will get passed along to workers and consumers. (Not to mention the impact on economic growth.) And not a small tax, at that. Over that same period, the White House expects regular corporate taxes to bring in some $3.8 trillion dollars. So the cap-and-trade auction impose an additional 20 percent tax or cost above that level. And remember that we already have the second highest corporate tax rate in the world.
2) Of that $80 billion, $15 billion would go toward "clean" energy investment. The rest would pay for his Making Work Pay tax credits. So what we have is, in essence, an enormous wealth transfer from job creators to consumers.
3) Let me also go back to something I wrote last summer:
Here is what William Pizer, an economist at Resources for the Future and a lead author on the most recent report from the U.N.'s Intergovernmental Panel on Climate Change, said at a symposium earlier this week here in Washington: "As an economist, I am skeptical that [dealing with climate change] is going to make money. You'll have new industries, but they'll be doing what old industries did but a higher net cost.... You'll be depleting other industries."
Of course, many economists will recognize "the green is good for growth" trap that Obama and Clinton have stumbled into. It's just a modern iteration of the famous "broken windows fallacy" where people mistake the shifting of wealth and resources for the creation of new wealth and resources.
Pizer went on to say that calls for dramatic reductions in carbon emissions—the Democrats want 80 percent, John McCain 65 percent—were also unrealistic unless there was"some event"that really galvanized public opinion. Instead, what he predicted was a modest price on carbon via a cap-and-trade plan, a greater push for efficiency, and more regulation of energy-intensive industries.
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Economic Math Vs. Obama's Speech
Tweet Share on Facebook February 25, 2009 Comment (41)President Obama's speech seemed to go over pretty well. Words are important, after all. A CNN/Opinion Research insta-poll found that 85 percent of respondents said the address made them feel more optimistic about where the country is heading. But math is important, too. And that afterglow of optimism will assuredly fade as unemployment numbers continue to rise and a return to true prosperity remains elusive. Let me break it down for you:
1) The economy, as measured by gross domestic product, may well begin to expand again by year's end. Federal Reserve Chairman Ben Bernanke said yesterday that there is a "reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." There are plenty of mustard seeds around if you are looking for them. Over at the Calafia Beach Pundit blog, Scott Grannis highlights many of them including stability in industrial metals prices, falling TED spread, strengthening dollar, rising shipping rates as tracked by the Baltic Dry Index, and the continued strength of total bank credit. Heck, Irwin Kellner has compiled 21 signs that the worse is over. Fine, let's assume no Great Depression 2.0.
2) That being said, banking crises are usually followed by lackluster recoveries, as happened in Japan and Sweden. Fed economist Emre Ergungor has said the following 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 long-term effects on the economy, such as slow growth, high interest rates, and lower living standards."
As it is, the Fed now projects that the unemployment rate could climb to more than 9 percent this year and next, and still be above 8 percent in 2011 -- some four years after the recession began. And the Philadelphia Fed surveyed 43 forecasters who predicted that the unemployment rate would rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010.
3) The tendency for unemployment to keep rising even after an economy starts growing again means voter crankiness doesn't subside quickly. According to the National Bureau of Economic Research, the 1981-82 recession bottomed in November 1982. President Reagan's approval rating, according to Gallup, bottomed at 35 percent in January 1983, down from 68 percent in May 1981. His approval rating didn't rise above 50 percent until November 1983, a full year into the recovery. And recall what kind of red-hot recovery it was. The economy grew at rapid 4.5 percent in 1983, and unemployment plunged from 10.4 percent to 8.3 percent.
4) But good luck finding someone who thinks the economy will grow at such a blistering pace next year. The Fed sure doesn't. A better comparison is the 1990-91 recession. The economy was hammered by imploding real estate bubble, a construction bust, a banking crisis, and a credit crunch. The downturn bottomed in March 1991. But the jobless rate kept rising, from 6.8 percent that month to 7.8 percent by June 1992. In parallel, President Bush's approval rating bottomed at 29 percent in July 1992.The lesson here: Recessions are murder on presidential approval ratings, especially downturns that come with jobless recoveries. And remember, moving out of this recession, the economy might get hit by a tax big increase, higher interest rates, and cap-and-trade legislation that would impose huge costs on businesses and consumers. Those economic ingredients could make for a recipe of intense political pain for the Obamacrats next year and beyond.
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Bill Gross: Bank Nationalization Would Cause 'Instability'
Tweet Share on Facebook February 24, 2009 Comment (7)Should we nationalize the banks? This response from Pimco bond guru Bill Gross (bold is mine):
I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.
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White House: Green Taxes by 2012 Via Cap-And-Trade System
Tweet Share on Facebook February 24, 2009 Comment (1)I am starting to lose track here. President Obama wants to raise investment and income taxes on so-called wealthier Americans. Check. There is talk in Washington of a value-added tax to help fund healthcare. Check. And now, according to Reuters, the Obama White House is confirming that it's their intent that there will be a cap-and-trade plan in effect and generating revenue by 2012. New environmental regulations to reduce carbon emissions will raise costs to businesses and consumers as companies have to buy carbon allowances from Uncle Sam. Now this is a less transparent system than a straight carbon tax. What's more, lots of people advocating carbon taxes would offset those tax increases with a cut in payroll taxes. Tax carbon, not work. But a cap-and-trade is just another moneymaker for the government to then spend on "green" initiatives. Unless we get a carbon tax on top of cap-and-trade ...
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Bernanke: 'Reasonable' Chance of 2010 Recovery
Tweet Share on Facebook February 24, 2009 Comment (1)This is the money graf in Federal Reserve Chairman Ben Bernanke's House testimony today (bold is mine):
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.
Me: Let's recall that we have not had a downturn longer than 16 months since the Great Depression, at least as the National Bureau of Economic Research dates things. So even this optimistic scenario, as Bernanke means it, is pretty gloomy.
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Bank Nationalization: Only Costs $598 Billion
Tweet Share on Facebook February 24, 2009 Comment (2)The great Ed Yardeni scores with this one on bank nationalization (bold is mine)
The government can buy the entire banking system for chump change. It can buy the entire S&P 500 Financials sector for $598bn at yesterday’s close. Stock investors seem to be resigned to bank nationalization. In effect, they are telling Washington, “Go ahead, you damaged them, you can have them.” Why should the government waste any more money on programs to provide capital injections to the banks? Take them all. That way all bank deposits and bank debt will be government guaranteed. Barney Franks can make sure they lend money to his friends and relatives. Chris Dodd can refinance his mortgage. Wouldn’t it be a great big joke on us all if the government suspends mark-to-market accounting for the banks it nationalizes? All this time, the Capital Kleptocrats refused to do so to protect investors in bank stocks. Now that they’ve wiped out those investors, who cares whether the nationalized banks’ books add up!
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Gallup Poll: Obama Approval Down, Disapproval Up
Tweet Share on Facebook February 24, 2009 Comment (65)I find this interesting. A new Gallup poll found that President Obama's approval rating of 68% in January has slipped to 63%, while his disapproval rating has climbed from 12% to 24%. Two groups in particular have soured on the president. His approval among Republicans has plunged from a weak 41% to sickly 30% What's more, 58% of middle-class voters approve of him vs. 69% last month. Quick thoughts:
1) His middle-class "tax cut" does not appear to be paying political dividends.
2) This poll really undermines the theory that the public will continue to support the Obamacrats if the recession is a long one. "Blame Bush" has an expiration date.
3) Obama has supplied nothing but left-of-center policy prescriptions for a right-of-center nation There is tension between the two that the Gallup poll has picked up on. Yet the White House could have pushed a truly bipartisan stimulus bill, for instance, that recognized this reality (50 percent "real tax cuts," 50 percent infrastructure, and loans to states). Would have been smart economics, too.
