New Europe Gets It Right

Tax Cuts and other free market reforms are paying off in three central European economies slated to join the European Union on May 10, 2005. Stock indexes in the Czech Republic and Hungary are each up more than 50% in the past year. Poland is up 21%. The top twenty central European companies by market value are up 39%. In contrast, German and French stocks are up about 8%. The Polish economy is expected to grow 5% this year, while Old Europe growth is coming in les than 2%. Of course, EU bureaucrats want to stop New Europe from competing with lower tax rates. Sclertic Old Europe wants to harmonize at higher tax rates. New Europe understands political as well as economic freedom, and hopefully will fight Chirac and company on both counts.

Business In New york

Yet another study shows how uncompetitive New York State business conditions are. Tax and regulatory policies are way above the national average, as are electricity costs. The Public Policy Institue in Albany finds that NY state's overall business costs are American's ninth highest, with the local tax index in first place. This corroborates other surveys showing that the state ranks at or near the bottom in business and investment climate.

Thanks

Many thanks to John Hinderaker of Powerline for linking to the re-importation post. And best wishes for the new year, too.

Palestinian Elections

Last Friday, in 26 Palestinian communities, elections were held to determine the next head of the PA. This was the first such election since 1976. It is only the first round fo electioms, which will continue continue into the next year. And the results may be distasteful -- Hamas made a strong showing, winning in nine of the communities polled. But it was a first step toward democracy, even if the particular parties and politicians on the slate hold beliefs that are inimical to democracy.

Tsunami

Both Glenn Reynolds and the Wall Street Journal’s editorial page make the same point about avoiding natural disasters and catastrophes such as swept across South Asia on Sunday. Economic growth is necessary, indeed crucial, to put in place the best protections, such as forecasting techniques and communications systems, to prepare against tsunamis and earthquakes in advance. The WSJ argues against the global warming fanatics. Glenn Reynolds concludes that “Where survival is concerned, rich is better. That’s something to keep in mind when people describe economic growth as ‘anti-human.’” Earlier in his excellent piece, he states that “Over the longer run, of course, the best protection against catastrophes, whether foreseen or unforeseen, is a society that is rich enough, and diverse enough, to be well-prepared for all sorts of contingencies. Which means that economic growth, and the freedom that produces it may be the best guarantor of safety for us all.”

Rumsfeld's Troops

Of course, our men and women fighting bravely in Iraq and elsewhere are America’s troops. But lately the MSM is trying to make the case that the troops and their generals are totally opposed to the SecDef. A new poll says otherwise. 63% of active duty military people approve of President Bush’s handling of the war, and 60% remain convinced it is a war worth fighting. Support for the war is even greater among those who have served longest in the combat zone: two-thirds of combat vets say the war is worth fighting. 87% say they are satisfied with their jobs. A year ago, 77% said they thought the military was stretched too thin. This year, that number is down to 66%. 60% blame Congress for the shortage of body armor in the combat zone. These results are from the annual Military Times poll.

DC Baseball

Excellent article by James H. Joyner, Jr. on Tech Central Station arguing against public subsidies of privately owned baseball teams and their sporting arenas. My thought is simply that the evidence is scarce regarding a so-called trickle-down economic growth effect for the communities in which baseball stadiums are built. DC city council member Linda W. Cropp was right to oppose zero private financing for the Washington Nationals. Unfortunately, she got rolled.

Tax Reform

This morning’s Washington Post reports that Bush’s major tax overhaul will not in fact be major. This is no surprise. Nor is it necessarily a mistake. As Steve Moore has argued, making the existing tax cuts permanent and adding full cash expensing for business purchases of plant and equipment, along with simplified and expanded tax-free savings accounts, would be a nice piece of pro-growth tax reform in and of itself. I agree. National Review’s Ramesh Ponnuru argues that Reagan 1986 tax bracket simplification, this time with a pro-saving and investment bias, would be a sensible reform. I agree with this, too.

Fannie

A twenty-six million dollar farewell compensation parachute, plus $116,300 per monthly pension, for former Fannie CEO Frank Raines seems a bit much. Make that way too much. The books were cooked, and all the top executives benefited handsomely. Isn’t this fraud? Lining one’s own pockets at the expense of shareholders? Violating regulatory accounting rules? Somebody needs to take a good hard look at this. If it were Enron, total disgorgement would be undoubtedly be the solution. Why shouldn’t the government-sponsored Fannie be treated the same?

9%

Don Luskin wrote a great piece, “The Lesson of Thrift”, on NRO about the Thrift Savings Plan of the US federal government. On K&C last night, he told us that the plan not only yielded 9% per year to its participants, but its administrative costs are only about 6 basis points (six one-hundredths of one percent) of invested assets. This is critic-slaying work by Mr. Luskin. It is an important policy contribution to the somewhat mangled debate. I can only add that for decades, state and local pension retirement plans for police, fire, and teacher’s unions have been successfully investing in private markets. Why shouldn’t Social Security contributors have the same rate of return benefits? Paul Krugman and Michael Kinsley never tell you this. But Mr. Luskin does.

No Reimportation

Drug reimportation is a terrible idea. 30 million Canadians cannot supply enough drugs for 300 million Americans. Leaving alone the safety issue (re-imported drugs are not produced under the auspices of the FDA), doing it wouldn’t even save American consumers that much, after all the necessary bureaucracy is put in place. Two excellent articles on this theme, one from Rick Weiss in the Washington Post, and one from Laura Gilcrest at CBS Marktewatch, go into more depth. The more details emerge, the more it looks like generic drugs, US-made, are the way to go.

Dollar Redux

Many thanks to the excellent Glenn Reynolds for the Instalanche in response to my piece on the dollar last week. And equal thanks to the many commentators who responded to the piece.

I can’t answer all the comments, but let me express a few general thoughts. First, not for one nanosecond do I believe the US is on the decline. Our relatively free economy is healthy and strong. Given the attacks on it in recent years, this is a near miracle. It attests to the benefits of economic freedom that provide the necessary resiliency and flexibility to survive numerous shocks such as wars, burst bubbles, corporate scandals, energy spikes, and the rest. We are different from Europe and Japan, where there remains over-taxation and over-regulation, and very little flexibility to move capital and labor from old, dying sectors to new dynamic ones. Ours is a Schumpeterian economy. It is fast becoming an investor-based ownership economy. I love the term “cowboy capitalism.” I am also learning to appreciate James Bennett’s Anglosphere challenge. In the next technological takeoff, the English-speaking nations will lead the way again, adding to their lead. As for economic policy, I think Bush’s ownership vision of reform is a good one. It will move us in the direction of Hayekian liberalism and strengthen the new market order put in place by Reagan (and Thatcher.)

On the dollar, I continue to believe it has adjusted too far on the downside. The Fed is draining excess money, which is the ultimate determinant of currency value. The rising gold price and the slow creeping-up of inflation tell me that there are too many dollars out there in relation to world demand. So the Fed is right to gradually remove the post-9/11 monetary excess that they properly created a few years ago. Combine this Fed restraint with a healthy economy and handsome investment returns, and we have the right mix for a dollar recovery. This is what I expect. Using the Fed’s broad dollar index, the greenback today is still way, way ahead of the early 70’s, the early 80’s, and the early 90’s. Unfortunately, at the turn of the new century, a deflationary monetary policy overvalued the dollar. Then a reflationary policy undervalued it. But these are minor adjustments.

For those declinists who subscribe to the twin-deficits theory of dollar weakness and US economic pessimism, I must respectfully disagree. As the US economy responded to lower tax rates incentives and reflationary money, the budget deficit is now narrowing as growth-induced tax collections rise in the aftermath of lower tax rates. This is the Laffer curve at work, a paradigm with which I fully agree. Delighted to see recent Nobelist Ed Prescott also agrees, as does Nobelist Robert Mundell (who also believes the dollar is now undervalued.) At the same time, stepped-up economic growth is causing an import surge, which widens the trade gap. So what? I fully believe in the comparative advantages of free trade and intensified global competition. Just as New York trades with New Jersey, to the mutual benefit of all involved in these private exchanges, so it is when the US trades with the rest of the world. Mr. Bush had a delightful put-down in his press appearance last week with Silvio Berlusconi. The Texan said foreign nations need only purchase more US goods to narrow the gap. This was his polite way of telling them to grow faster. To adopt a little more of US cowboy capitalism. If our biggest customers fail to grow, that is regrettable from their impoverished standpoint. But there is no funding problem. Private capital inflows as well as government purchases of US treasury bonds more than cover the trade gap. Indeed, some believe that the massive volume of foreign capital inflows, which raises US income and investment, is the cause of the trade gap. But trade imbalances do not create new dollars. Only the Fed does that. Instead, trade merely recycles dollar flows. And those dollars generally wind up back in US assets with attractive investment returns. Again, I argue “So what?” Let me add my personal suspicion that the twin deficits crowd of pessimists and declinists has no sympathy with the US, and certainly not with the current US administration. More than a few of these critics are desperately trying to resurrect quaint Keynesian notions that always and everywhere lead to the inevitable conclusion that taxes must be raised, rather than lowered. Put another way, they prefer government prosperity rather than private sector abundance. Respectfully, I totally disagree with this view. And I believe history, especially recent history, bears me out.

Similarly, I agree with the boys at Powerline that the greatest fear of today’s left is that not that we will fial, but that the US will succeed in its economic policies at home and its foreign policies abroad, especially in the Middle East. The greatest fear of Bush’s critics is that free elections and democratization will succeed throughout the Middle East region, bringing light into an area which has for many centuries been living in darkness.

Cowboy Capitalism

While the mainstream media keeps carping on the notion that Bush’s 2-day economic conference was comprised of supporters rather than dissenters, as though this is some great surprise, there is a much bigger picture that has been missed. Namely, the President used this conference to speak directly to the nation regarding his economic plans for the second term. Including a revealing news conference with Silvio Berlusconi, Bush gave 3 full-fledged statements on his economic intentions. Reading through his comments, one is struck by the clarity of his message. Every one of his key points is pro-growth incentive, investor- and owner-oriented, favoring entrepreneurs, importuning for more saving and capital formation, as well as a healthy dose of deregulation. In short, market-oriented measures to spur prosperity and wealth creation. A clear rejection of government planning or engineering. To be blunt, it is cowboy capitalism. Schumpeterian capitalism. Entrepreneurial capitalism. In this light, take a look at the Texan’s key point: tax reform, social security reform, tort reform, energy reform, budget restraint and, surprisingly, dollar stability or even greenback strength. This last point comes as something of a surprise, but is real nonetheless. Worried about budget deficits? The President intends to combine economic prosperity with intensified budget restraint. Worried about trade deficits? The President argued for more purchases of US goods by foreign customers, which is rather a polite way of saying Europe and Japan should take measures to grow their economies more rapidly. Worried about savings? Let’s have more private saving through lower tax rates, expanded and simplified tax–free savings accounts, as well as shrinking government budget deficits. Saving fuels capital formation, and capital funds businesses that create jobs. Worried about the shrinking dollar? I’m working with Fed Chairman Greenspan to slow money growth and normalize interest rates. Worried about healthcare affordability? Reform of medical malpractice lawsuits will go a long way, as will health savings accounts and small business community group purchasing power. Let’s work through consumers exercising responsible choices rather than governmental benefit explosions that leverage business and insurance costs. If you think the US is about to lurch toward a European style economy, think again. There will be no explosion of payroll taxes. Nor will there be sales or VAT taxes layered on top of income taxes. Does the president know every detail of each program that will make up his economic reform plan? Not yet. Will he get absolutely everything he wants from Congress? Never happen. But, will this most underrated politician succeed in implementing his broad-based vision? Don’t bet against it. This is the guy who barely won in 2000, yet he was able to get big pieces of his reform plans for education and healthcare, not to speak of four significant tax cuts. Mightn’t international events get in the way of his domestic agenda? It is possible. But then again, following free elections in Afghanistan, itself rather a miracle, it is possible that in a little more than a month’s time, the world may witness free elections in Palestine and Iraq. Indeed, Bush’s strong belief in the transformational power of international freedom and democracy is nearly equal to his strong belief in the transformational power of a free economy. And that is a visions thing worth fighting for. One of the best barometers of the health of the political economy and the future outlook for business and economic growth are the broad US stock averages. Since the election, the equity marts have gained 6%. Since Bush took a lead way back last August, the averages are up over 12%. Question: what do stock markets know that the MSM doesn’t? Answer: almost everything.

Bush's Dollar

When I read the full transcript of President Bush’s media appearance with Italian PM Silvio Berlusconi, I found an unusual Presidential reference:

“Independently, the Federal Reserve, under the leadership of Alan Greenspan, raised the interest rate yet again, a signal to the world markets that the Chairman is also aware of the relative currency valuations between the euro and the dollar.”

Earlier, Bush referred to “making the conditions such that a strong dollar will emerge, we’ll do everything we can in the upcoming legislative session to send a signal to the markets that we’ll deal with our deficit, which, hopefully, will cause people to want to buy dollars.” Now, Bush has never before commented on Fed policy. Linking the Fed’s recent restraining move – which hopefully drains excess dollars as well as raising the target business rate – is therefore a significant Presidential statement. It hints that the period of floating exchange rate benign neglect is coming to an end. This is potentially a very important announcement. In terms of the Bush reference to the upcoming legislative session, he is referring pro-growth tax cuts and social security reform, along with intensified spending restraint. These policy actions will stop the dollar from becoming an inflationary dollar. Add to this mix the prospect of an early vote to pass tort reform capping abusive litigation settlements, itself a kind of tax cut. Today, the President mentioned how he looks forward to working with OMB director Josh Bolten to restrain federal spending. This is all to the good. It suggests a Bush dollar defense policy that will include restraint of money creation, lower marginal tax rates, new savings incentives, and a tighter budget. Fewer dollars in circulation and strong economic growth incentives will in fact bolster the greenback’s value both at home and abroad. Gold prices fell after hearing this new Presidential plan, and Treasury bonds stabilized at a historically low yield. The Fed will make additional restraining moves this winter. Hopefully the President will succeed in his legislative agenda. Stock markets moved higher on the news. The post-election stock rally is signaling stronger economic growth ahead. And why shouldn't it? By all appearances, Mr. Bush is operating on the supply-side.

Social Security

Some very good articles on social security reform from Don Luskin, Michael Tanner, and Bill Shipman. Worried about transition costs? Send the surpluses in the next few years back to payroll taxpayers in the form of inflation adjusted ten-year TIPS or zero-coupon bonds. Both would be marketable instruments that could be held in personal retirement accounts or traded into an acceptable investment vehicle like the Wilshire 5000 index or the S&P 500 index. The new paper would be an obligation of the Social Security administration. As an “agency” bond, it would not be scored as a full faith and credit of the federal government. Just a thought.

Global Warming

Two good articles by James K. Glassman and Nick Schultz. If the UN-Kyoto crowd has its way, the US economy will be decimated according to an Energy Department study published during the Clinton years. Once again, I say how about nuclear energy?

Richard Rahn wants to end the corporate income tax. He’s right.

Strong Dollar

“The policy of my government is a strong dollar policy,” Bush told reporters in the Oval Office after a meeting with Italian PM Silvio Berlusconi. “We believe that the market should make the decisions about the relationship between the dollar and the Euro,” Bush added. Now, the interesting thing here is the Berlusconi part. Unlike his Euroland peers, the Italian is a capitalist. Maybe even a cowboy capitalist. Think of it. Also, a few weeks ago, he stated that the Euro was destroying the European economy. Both because Euroland money supply is too tight, and fiscal rules virtually prohibit tax cuts to spur growth. Right on, Silvio.

Maestro

Of course the Fed will snug up a bit at today’s meeting. Since they began to slow money creation and raise their overnight target rate last June, stocks and bonds have rallied while the yield curve has flattened. These market signals suggest a positive reaction to the shift in Fed policy. Continued prosperity with relatively low inflation is likely in the years ahead. The spurt in gold and the downside overshoot in the dollar, along with a small creeping-up of inflation, suggest the central bank has more work to do. Gradual and measured steps will do the trick. The term structure of interest rates will gradually normalize, but short rates will go up much more than long term rates in the next year or two. As businesses and consumers move ahead of future ate hikes, the economy in 2005 may well speed up rather than slow down. Conventional wisdom will be wrong, just as it was wrong about the lasting impact of lower tax rate incentives to increase employment and investment.

A solid industrial production report for November, featuring strong high-tech and business equipment gains, suggests near 4% real growth in the 4th quarter. So does the solid retail sales number last Friday. Small business optimism rose in Novemebr to its highest point in more than 20 years, according the National Federation of Independent Business. Whatever happened to John Kerry’s Hoover economy?

Amity Shlaes tells America’s trading partners in Europe, Japan, and China to stop scolding America. Look to your own problems, she says. Of course, she’s right. Europe and Japan need a strong dose of American cowboy capitalism. China needs to end its state-run economic sectors and liberalize its political system.

Bush’s tax-cut on investor dividends is, well, paying dividends. Year to date, S&P dividend stocks have gained 16.7% versus 9.8% for non-dividend companies based on data from FactSet Research Systems. Recent dividend announcements from BellSouth, GE, Dow Chemical, Edison International, Pfizer, and Exxon Mobil underscore the point. Microsoft’s 32-billion-dollar one-time distribution is a macroeconomic event.

Greg Mankiw defends dynamic scoring at a Heritage Foundation speech. Increased income from lower tax rates reduces the cost to the government. Sounds supply-side to me.

There is no national home-price bubble, according to the New York Fed.

Faith-Based Bush

Good article by Kathleen Parker on W’s faith-based politics. She spoke to Bush speechwriter Michael Gerson, who emphasized that the President is an incrementalist. He split the difference on stem cells, he supports a partial-birth ban, but doesn’t believe the country is ready for repeal of Roe v. Wade. He favors a constitutional amendment for traditional marriage between a man and a woman, but also supports some kind of civil union for same-sex couples. His basic credo has been “Freedom is not America’s gift to the world. Freedom is the Almighty God’s gift to every man and woman in the world.”

Here’s my take. Ronald Reagan believed that we derive our human rights and freedom from God, not government. Government works for us. This is right out of the Declaration of Independence, “we are endowed by our creator…” So Bush is very similar to Reagan.

Also, I believe that Christians voted heavily for Bush because of the sort of person he is. Strong and decisive during troubled times. Clarity between good and bad behavior, whether among nations or individuals. Faithful to his wife, his children, and to God. In other words, personal virtues.

Stronger

On the economic front, retail sales were stronger than expected in November, after October was revised up significantly. Core sales are now rising at 8% at an annual rate over the past three months compared to 6.2% over the past year. Business sales are up 11% over the past year. Profit margins are still positive. Businesses have an excess of cash flow. Both corporate and consumer wealth has expanded significantly. Next year’s economy will be stronger than folks think – at least 4%. Employment is growing by 1.5% and productivity is rising at a 3% rate. Theoretically, that gets you to 4.5% growth. Inflation is creeping higher, as indicated by gold and recent price reports. But low tax rates, strong productivity and solid growth should keep inflation around 2.5%. This is an excellent scenario for stocks. However, not for bonds. Greenspan is right to normalize the Fed’s target rate. Next year interest rates will rise, but so will the economy. Higher rates create an incentive to spend and invest now in order to beat still-more expensive credit later. The conventional wisdom that focuses on so-called twin deficits is, as usual, missing the key point. Oh, by the way, did I mention lower tax rates? Employment and investment responded quickly to the June 2003 reduction in marginal tax rates. If future tax reform flattens rates, broaden the base, and simplifies the code, the economy’s potential to grow will be event greater.

Rich Reappears

The sudden resurfacing of Clinton pardonee and commodities trader Marc Rich has added a rank smell to an already odorous scandal. Mort Zuckerman has a terrific op-ed.

Congrats!

Congratulations to Jim Nicholson for his appointment as Secretary of Veteran’s Affairs. The former Army Ranger is a wonderful man of high moral character and purpose. He was US Ambassador to the Holy See, and also head of the Republican National Committee. He is a pro-life Catholic and a successful entrepeneur. Having him in the cabinet is a great testimony to George W. Bush’s judgment. Again, congrats to Jim Nicholson.

Now that Mr. John Snow has a new lease on life as top Treasury man, it’s important that he appoint policy heavyweights on tax, economic, and international issues for the current vacancies at Deputy, Undersecretary, and Assistant Secretary.

Optimistic Future

If you haven’t already seen it, take a look at Brian Wesbury’s excellent WSJ editorial, “Trust the People.” He walks through the paradigm shift from government to market that was launched by Ronal Reagan about twenty-five years ago. Assisted by Margaret Thatcher, this paradigm shift has driven the world economy toward nearly uninterrupted prosperity for more than two decades. Those areas that don’t keep up with the new grwht model, such as Western Europe and Japan, have fallen behind the prosperity wave. Those nations that have signed on to the new model, such as China, India, the Asian tigers, sometimes Brazil and Argentina, almost always Chile, and lately the Baltic and East European countries – perhaps Russia as well, but we can’t be sure – are now moving rapidly in the prosperity wave. George Bush’s ownership theme is a valuable extension of Reagan’s new paradigm. Bush also deserves enormous credit for his determination to spread freedom and democracy, especially in Iraq and the Middle East. This comes from Natan Sharansky’s idea of the enormous power of freedom, articulated in his book, The Case for Democracy, which Bush and Condi Rice are apparently reading, according to news reports. Add to these thoughts James Bennet’s idea of “the Anglosphere challenge”, which essentially argues that English speaking countries have embraced the Reagan-Thatcher paradigm more than non-English speaking nations, and hence will lead the prosperity wave in coming decades. Then there is Olaf Gerseman’s book, Cowboy Capitalism, which shows how the European’s have missed the economic growth boat, and have fallen way behind America. I would summaruze by simply saying that the power of free-market capitalism, the power of democracy and freedom, the economic power of lower marginal tax-rate incentives, and the power of Schumpeterian economy (with its gales of creative destruction) are all ideas that have taken hold, and virtually assure an optimistic future.

Recanting in MA

Remember Sergeant Dennis Edwards? The Iraq vet who claimed to have shot a 10-year old insurgent in self-defense? Looks like it’s just not true.

Second Chance

Isn’t America really about second chances? Or maybe even more? Critics of Martha Stewart’s possible comeback don’t seem to want to concede that thought. But I think they should. Ms. Stewart made a mistake, obstructing justice in a meeting with Federal law enforcement officers that she never should have attended in the first place. Any good lawyer would’ve barred the door or thrown themselves in front of Ms. Stewart’s entryway. But the domestic diva went in anyway, and it cost her dearly. So she is now paying the price, spending five months in a jail in West Virginia. Noteworthy is the fact that she was not put away for insider trading, which was the original charge that was subsequently dropped by the judge for lack of evidence. Some even believe both the prosecution and the judge in the Stewart case were overzealous to begin with. Putting that aside, the fact remains that Stewart is paying her dues. Now, as she prepares to come back into the working world, there is simply no reason for anyone to attempt to deny her right to put her problems behind her and start anew. Some very powerful people are putting their trust in Ms. Stewart’s comeback. Susan Lyne, a former ABC entertainment executive, responsible for that network's recent comeback despite her being pushed out by Michael Eisner, has taken over as president of Ms. Stewart’s company, Martha Stewart Omnimedia (MSO). Lyne is a heavyweight. So is red-hot TV producer Mark Burnett, famous for putting together a bunch of successful so-called reality TV shows. Another heavyweight backing Ms. Stewart’s comeback is NBC president Jeff Zucker, who announced the production of a new Stewart show to be aired on the Peacock Network next September. Now, no one can predict whether Ms. Stewart’s return to television will be a success or not. That will be up the viewers, just as futures sales of her many home products will be determined by consumers shopping in Kmart and elsewhere. But the point is not to predict Stewart's future success or failure. The real issue here is the American story that is unfolding, where a highly successful person fell off her horse, and will soon begin the process of trying to climb back into her saddle. How many of us have gone through something so very similar? Whether in business or our personal lives, we have all suffered setbacks, but then picked ourselves up in attempt move ahead one day at a time, and substitute success for failure. I know I’ve been through it. I believe it made me a better human being. And I know lots of others who would make the same claim. In the Presidential election just completed, there was a lot of talk about faith and God and religion in American life. What Martha Stewart and her supporters are doing is to illustrate the importance of faith. Indeed, the importance of that old faith-based virtue called redemption. There is no real political context here, in this current segment of the Stewart story, nor am I trying to create one. Much more important than politics is the American value that people deserve another chance, and that redemption, or even salvation, is an important element of our daily lives. Ms. Stewart didn’t kill anybody, didn’t take any drugs, and didn’t even rob shareholders of hundreds of millions of lost dollars, Enron- or WorldCom-style. Instead, she had paid her price, and is embarking on a new chapter in her life. It’s a story that’s as American as pumpkin pie, and I bet you that the vast majority of people in this country wish her well on her new journey.

Congrats to Snow

Congratulations to John Snow. The President has formally invited him to stay on in the powerful Treasury post. Whatever ham-handed mischief has been coming out of the White House to discredit Snow in recent weeks has thankfully been terminated by Mr. Bush. Supply-siders, including myself, backed Snow for his expertise in pro-growth reforms for the tax and Social Security systems. The Ph.D. holder in economics was a leading member of Jack Kemp’s tax reform commission in the mid 1990s. He brings an enormous body of knowledge to the President’s two key domestic initiatives for the second term; this undoubtedly had a lot to do with the President’s decision. Had Mr. Snow been pushed aside, supply-siders would have mounted a campaign for former Senator Phil Gramm. But leaving Snow in place is a wise decision. If it ain’t broke, don’t fix it.

Shortlist

Check out the Drudge Report for a shortlist of possible National Intelligence Directors -- including Senator Joseph Lieberman, whom I think would make a good addition to the Bush Cabinet.

Treasury Secretary John Snow is a good man, who has been very badly treated by the White House in recent days. Snow is solidly for flat-tax reform and Social Security savings accounts. On the negative side, he has not handled the dollar very well. But here’s the key point: If Mr. Snow will be departing, then, for the life of me, I can’t understand why conservatives and supply-siders don’t get behind Phil Gramm. I am writing a column that will make the case for Gramm. Would welcome any comments on this.

The Tide of Democracy

On the day of Hamid Karzai's inauguration, Amity Shlaes has a great article in the New York Sun highlighting the spread of dmeocracy worldwide.

Berlusconi Was Right

About three weks ago, Italian Prime Minister Silvio Berlusconi attacked the Euro. He was right. The EU’s monetary policies are too tight, and their regulatory policies are too tight. Other than that, they’ve got a great setup. The WSJ chimes in today with this.

The Washington Times’ Don Lambro’s sources inside the White House tell him Social Security reform is full speed ahead and may be larger than conventional wisdom thinks.

The WSJ’s Political Diary has a fascinating (subscription-only) take by the brilliant Holman Jenkins. Basically, he says one way to avoid expensive transition costs for Social Security reform is to securitize payroll tax contributions into a zero-coupon bond, which would then be put into IRA-type personal retirement accounts. As long as this is scored as “agency debt”, it would represent obligations of the Social Security Administration, and therefore would not be scored as an increase in federal deficits or debt. This is totally clever. Worth a read.

New Senate Democratic leader Harry Reid looks favorably on income-tax reform, provided there is no European-style consumption tax addition. Very interesting. Remember, Nevada has no income tax. Hopefully the Bushies will reach out to Mr. Reid. Hat tip: the Market Center Blog.

“If you tax something, you will get less of it: if you subsidize something, you will get more of it....As many of the new market economies have recognized, lower tax rates and fewer exemptions are good for raising revenues – and good for encouraging business.” Believe it or not, this is from an FT editorial. They are not usually in the flat-tax camp. But I couldn’t have said it better myself. In fact, I have said it. Many, many, times over the past 25 years.

Speaking of flat-tax reform, Bloomberg’s Mathew Lynn has an excellent piece on successful flat-tax reforms in Estonia, Slovakia, and Russia. Very nice little piece.

Back on Social Security reform, Jose Pinera’s excellent piece in the New York Times is a must read.

Did someone say twin deficits? Thomas Bray says they’re a sign of economic strength. I agree. And John Tamny says thank goodness for trade deficits in a Hayekian and Von-Miesean sense. I agree with this, too. By the way, Jim Glassman’s Tech Central Station is an awfully good website.

A nice piece in Barron’s by Gene Epstein on jobs. He shows that the participation rate is falling because kids are going back to school and women are going home to have babies and rear them. So, “a recent study from the Atlanta Federal Reserve now sets the bar at 98,000 jobs a month to keep the unemployment rate steady.”

Wish me luck. I’m going into the lion’s den to debate Robert Rubin and Pete Peterson on taxes, trade, and Social Security at the Conference Board today. Whew.

Twin Deficits

An absolute must-read is the article by Alan Reynolds published in today’s Investor’s Business Daily, which debunks the so-called “twin-deficit” impact on exchange rates (and interest rates, for that matter). Using economic history, and classical analysis, Alan takes us through, step-by-step, why this twin deficit stuff is nonsense. Gibberish. He also takes Bruce Bartlett to task for accepting some of the extreme Keynesian twin deficit analysis. Bartlett is a good man, and one of the earliest supply-siders, but on this topic, and the idea of value-added taxes, for the US, I frankly must disagree with my longtime friend. Let me add one editorial point to Alan’s fantastic piece. At the end of the day, the twin deficit bashers really believe that higher taxes are the solution for everything. I couldn’t disagree more. Let me add, lower marginal tax rates are always part of the economic solution, not the problem.

Conservative Art

If you happen to be passing thru St. Simon’s Island or Sea Island, GA, in the next couple of days, and have an interest in beautiful paintings, stop in at the Anderson Fine Art Gallery, at 3309 Frederica Road, in St. Simon’s. An excellent painter named Judith Pond Kudlow – AKA my wife – will be showing her wares. I know I am touting my own bride, but it’s a pleasure to do so. Her work is great. It’s from the classical tradition of beauty and truth. In other words, these are paintings of landscapes, still life, portraits, and figures, that you can look at and enjoy. Her work is based on the 19th century tradition, which emphasizes precise drawing and careful modeling to produce three-dimensional illusion and harmonious and accurate colors and values, based on time-honored rules. Remember, America rose to world prominence in the 19th century, especially in the post-Civil War period, when we became the premiere global economic power. There was no income tax, and money policy was based on the gold standard. Our navy began to rule the world. Industrial production was unparalleled. Religious virtues governed our culture. Unbelievably good literature and art were produced. Judith and her associates, especially Andrea Smith from the Florence Academy, are leading lights in the return to classical painting. Sometimes it’s called natural realism. I just call it conservative art. Let me tell you what it’s not – it’s not modernistic, abstract, self-centered expressionism, or just throwing paint at a canvas. It doesn’t tear down art, or the rest of the world, for that matter. It’s not the negative pessimistic crap that too often passes for art in the blue states of New York, and -- well, you know where else. These are just beautiful, calm, pleasant pictures. Stuff you can enjoy looking at, which is what I think art should be. Her work has been recognized by the prestigious American Arts Quarterly (edited by James Cooper.) It’s a real counter-revolution against all the weird paintings that have been floating around for the last 40 or 50 years. These paintings take a while to produce, and drawing is at a premium. It leaves one positive and optimistic-feeling. This new movement represents the force of light and right and good in an art world, which, too often, lapses into darkness. I’m telling you this because I want to give you a good steer toward some great work. Yes, I am biased. For heaven’s sakes, she’s my wife. And I love her. But she produces great paintings.

Replacing Economic Forecasts

Tradesports.com is now making book on any number of economic forecasts for things like unemployment claims, factory orders, consumer confidence, personal income, and ISM index. This is the first pay-to-play betting parlor on economic stats that I’ve ever seen. It’s really cool. For the jobs number, due out tomorrow, the betting line is a 90% probability that non-farm payrolls will come in over 100K, a 75% probability of over 150K, a 50% probability of over 200K, a 17% probability of over 300K, and a 10% probability of over 350K. I’m taking 200,000 as my number for CNBC’s Squawk Box tomorrow morning.

$400

Steve Forbes and Michael Darda want to see the gold price move down to $400 or less. So do other supply-siders. I agree. It’s not the fall in the exchange rate that bothers me, it’s the rising gold price, which could suggest a 3% handle on domestic inflation. I say could, since the Treasury yield curve has flattened by half this year, and the growth rate of commodity prices has already fallen markedly. Then there’s the current crash in oil prices. But gold is still worrisome, and if the Fed sells treasury bills and bonds to take dollars out of money in circulation, gold price will fall. If I have any disagreement with some of my supply-side friends, it is because I am confident that Greenspan will do just this. The Fed’s basic target rate will be moved up at each of the next several meetings, in quarterly increments, and will probably land around 3% next spring. Then the central bank will probably stop. In other words, I refuse to panic, because I think the Maestro will cover any inflation with gradual policy restraint. But I also think the Euro central bank should be easing its money supply because they are still deflationary and, of course, are still high-tax, -spend, and -regulating. But, yes, gold is telling the Fed they are still a bit too loose.

New Treasury Man?

White House insiders tell me that New York banker Steve Schwarzman is being seriously considered for the Treasury post. For a recent profile of Scwarzman, go to the Sunday Times. Sources also tell me that the Phil Gramm talk is just that -- talk. There is no reality.

Regarding the current incumbent John Snow, the story is confusing. Most people think he will stay on the job for six months or so. Snow is a good man who is supported by supply-siders, who like his positive views on pro-growth tax reform and private savings accounts for Social Security. But apparently Mr. Schwarzman, who is a very bright guy, is definitely in the horse race.

Comments Roundup, Part II

And thanks so much for the great comments on "High for the Holidays"!

RoadtoSerfdom said...

Larry, you have been, and continue to be, a model of the insurmountable qualities of the human spirit and the irresistable force of optimism. You overcame your dependency and used it as an example to others. God Bless you.

1:00 PM

WakingUpCosts said...
Larry,

I'd add to that list of drugs the new antidepressents like Prozac and Paxil. Withdrawal from these drugs is difficult, as well, and the package inserts have finally been ammended to reflect that:
"A withdrawal reaction has been reported with all SSRI antidepressants. The symptoms generally start within one to three days after stopping the drug, and generally resolve within one to two weeks after the drug has been discontinued. Withdrawal symptoms may occur even when the dosage of the drug is gradually decreased. The main symptoms of this reaction are: dizziness, vertigo, uncoordination, nausea and vomiting, and flu-like symptoms that include fatigue, lethargy, muscle pain and chills."
--http://www.citizen.org/eletter/drugprofiles/paroxetine.htm

5:03 PM

Striddy said...
Larry, I'm a frequent reader of your columns and blogs. This is such a timely post. I've been feeling a little overwhelmed lately, you've reminded me of my faith in God. That's all I'll ever need.

God Bless You Larry.

9:21 PM

rachaels_dad said...
Mr. Kudlow, it takes so much courage so post what you did. I admire you for it. I am 5'9" and weight 330lbs, of course my drug of the holidays is food. Your Blog has strengthen my resolve. Thank you.

10:02 PM


Anonymous said...
LK, as usual you are a gem. This is timely and spot on. I would add Ritalin to the list and the hair trigger response we have developed to medicate, as opposed to parent/nuture, our children. This has been brought into stark relief as my neighbors have just put their terrific, 9-year old on Ritalin because he was struggling with homework. Instead of sitting with the kid every night and helping him work through the difficulties and showing him that he can do it with a little perseverence and effort, they turn to medication. Solid support networks and good old-fashioned love/selflessness can avoid the seductive allure of these false solutions.

This has to be understood by those around those who might be vulnerable to this. People in depression or sliding into it, will be unlikely to wake up and say "I'm loved/valuable." They have to be confronted with this fact and told it...

10:20 PM

iKnit said...
Larry - I love your show and now your blog. Reading about your faith has been an unexpected delight. Thanks so much for sharing. I was surprised that you would share something so personal and I think many people will find it helpful. -- Mary

Comments Roundup

The responses to David Goldman's piece were fascinating, and they deserve to be given headline space. As always, we're delighted to get comments, particularly when they're so intelligent.


torchpraise said...
Have you read Berlusconi's recent remarks regarding the Euro.

I especially like the following:

"The blessed introduction of the single European currency has thus far produced the exact opposite result of what the euro was created for -- an asphyxiated economy and hobbled growth under the burden of 'stupid' ties," Berlusconi wrote.

Go here for the rest of it - http://cnn.netscape.cnn.com/ns/news/story.jsp?id=2004112216530002527564&dt=20041122165300&w=RTR&coview=

5:48 PM

Anonymous said...
It must be remembered that the euro is managed by an elites that are vested in zero economic growth (because it protects their relative standing). Zero growth is the elitests last tool.

The hype over the dollar signals that we are headed in the right direction. A weak dollar means that the flow of trade will reverse and America will export. This is bad news to european leaders he will be hit by higher unemployment. Europeans love the status quo becuase it's comfortable. Change is mesy and thus scary.

I am bullish on America's outlook. The economy is strong and the dollar will strengthen sooner than most expect.

9:40 PM

torchpraise said...
Anonymous, like your stuff, especially the shoes.

I definitely agree with you. I alluded to your "elites" thought on my rant/screed yesterday evening on the "Counter-Conventional" comments section.

I think it went something like: "The currency of a group of countries that will be managed by a corrupt, bureaucratic, and easily-manipulated coterie of glad-handing poseurs without legitimate, consensual claim to power."

Yeah, I think that about sums it up.

Ultimately, I think the Euro is doomed for just this reason. To put it quite simply - no meat on its bone.

But the timeline of all of this is the REAL RUB. When does it turn? What is the catalyst? Right now, I see three critical charts that need some cross-confirmation to really get me cookin'.

1) The U.S. Stock Market, which currently looks great.
2) The Gold Market, which looks pretty darn inflationary.
3) The Dollar Index, which looks terminally ill.

At this juncture, the Stock Market is the Ox that is keeping the cart out of the ditch. The other two are already in the soup.

Since I am a more a believer in the pictures, my greatest fear is a push south in the Stock Market which will mean at least another +3-year bear. That southward push would mean the Ox has gone into the ditch, too; and we've missed something.

I'm ready to buy the dollar with both hands, but I'm waiting. I want to watch the other two for just a little more time.

I agree with your fundamental views (and LK's too) but Mr. Market is an irrascible S.O.B.

I'll continue waiting for the pictures.

The Swineherd.

1:45 AM


Anonymous said...
Goldman's note is fine as far as it goes relative to fiscal policy. Sure, eliminate or sharply reduce the multiple taxation of income, and wonderful things can happen, including reducing or eliminating the federal budget deficit.

But in framing the argument, Goldman seems to accept Greenspan's supposition that budget defict reduction is key to moving toward current account balance and, by extension, securing the integrity of the dollar. This is "twin deficit" nonsense, for which there has never been a shred of empirical support. By positing that risks to the dollar are a function of twin deficits, Greenspan seeks to evade accountability for his own negligence in maintaining a monetary policy stance that remains too easy. With gold approaching $450, up about $50 in the last three months, there's little doubt that the Fed is badly behind the curve.

All of Greenspan's great academic pretensions cannot obscure the reality: The dollar is weak because Fed policy is biased toward inflation. The current account is entirely irrelevant to the monetary forces that determine the currency's value.

11:06 AM


Anonymous said...
Goldman's note is fine as far as it goes relative to fiscal policy. Sure, eliminate or sharply reduce the multiple taxation of income, and wonderful things can happen, including reducing or eliminating the federal budget deficit.

But in framing the argument, Goldman seems to accept Greenspan's supposition that budget defict reduction is key to moving toward current account balance and, by extension, securing the integrity of the dollar. This is "twin deficit" nonsense, for which there has never been a shred of empirical support. By positing that risks to the dollar are a function of twin deficits, Greenspan seeks to evade accountability for his own negligence in maintaining a monetary policy stance that remains too easy. With gold approaching $450, up about $50 in the last three months, there's little doubt that the Fed is badly behind the curve.

All of Greenspan's great academic pretensions cannot obscure the reality: The dollar is weak because Fed policy is biased toward inflation. The current account is entirely irrelevant to the monetary forces that determine the currency's value.

11:06 AM


Howard said...
There have been two clear buy signals in the dollar over the past year and a half. I'd like to play when the next one shows up but I don't have any money left.

5:43 PM


cowboy said...
I am baffled how an AEI guy could write the following article at TechCentral but I responded to him by various insertions.

Anyway, Larry, I don't know where you get it but you are dead on right about everything. If I didn't know better I would think you WERE me.

Keep making sense!!!

Washington Fiddles While the Dollar Falls
By Desmond Lachman Published 11/24/2004
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TCS



The steady decline of the US dollar to record lows on almost a daily basis should be sounding alarm bells in Washington. Instead, all it elicits from Washington is the tired repetition by Mr. Snow, the US Treasury Secretary, of the increasingly less credible refrain that the United States believes in a strong dollar policy. This is a great shame. For, as Alan Greenspan so strongly hinted last week, unless the underlying causes of the dollar's weakness are soon addressed, the US runs the risk of a full blown dollar crisis, which could very well undermine the economic recovery.

(((((((((It is not at all clear to me why a low dollar, by itself, is such a negative or seems to attract such hysteria. You make it seem like this is readily apparent when it is a much more complicated issue. I like simplification even more than the next guy, but this is an area in which there is no simplifying approach. First let’s start with a commercial exchange, freely entered into by both sides, which results in a net OUTFLOW of dollars. One mans debit is another mans credit. When such an exchange is made we get something in return. It could be a Mercedes Benz, chocolate, even industrial machinery, maybe even an aircraft and perhaps, as you suggest, a loan to repay. But the fact is we get something. No where in any analysis is there a real understanding of this. Usually people are better off when a free transaction is made. Maybe I am happier eating the chocolate or richer by the machinery I purchase. The argument that my choices are impoverished or restricted to less favorable options is belied by the fact that I have such a wide choice that I choose the international one.

The Greenspan reference is hard to decipher. As you say he hinted. Moreover, Greenspan’s intent is often hard to