Radioblogger

For a transcript of our segment with Glenn Reynolds, please check out the always-excellent Radioblogger.

Europe's Decline

Over a decade ago the idea of economic integration in Europe with a common currency anchoring a free trade zone seemed like a good idea, one that could move the Continent towards free market liberalization and stronger economic growth.

Unfortunately, the hoped-for shift away from rampant welfarism, heavy regulation, and massive over-taxation never came about. Consequently, Europe has fallen way behind the U.S. in economic performance and job creation.

Over the past ten years Eurozone growth is 2.0 percent annually compared to 3.3 percent in the U.S. Eurozone unemployment has averaged 9.2 percent versus 5.1 percent in America. Euro-style socialism has failed to deliver the goods or the jobs.

The Continent has fallen woefully behind in productivity, capital formation, wealth creation, and entrepreneurship. In France the top combined marginal tax-rate is 55.7 percent, kicking in at a dollar comparable $87k. In Germany the top rate is 47.5 percent, kicking in at $57k. In the U.S. it is 41.6 percent, kicking in at $327k.

Euro living standards are falling, youth unemployment is twice the overall rate, the gap between the American and European economies has widened hugely, and the European voters are discontented, fearful of the future, and trembling at the winds of free market change blowing in from the new Eastern European countries with their flat taxes and their market opening reforms.

Old Europe missed the Reagan tax cut revolution and the Thatcher deregulation revolution. Now many of its citizens are angry: at America, at Chirac and Schroeder, and at unelected EU officials in Brussels. So they voted no against capitalism, socialism, immigration, and everything else. It’s a revolt of the masses, though its ultimate meaning and direction is not clear.

I don’t know if political integration is a good idea of not. But I do know that globalization and the spread of free market capitalism is inevitable. On the margin, both economic history and performance are being forged through capitalism in Eastern Europe, China, India, the Pac Rim, and elsewhere. Economic freedom, not protectionism, nor welfarist socialism, is the future. The sooner old Europe accepts this, the faster they will recover.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Jeremy Siegel, of the Wharton School of Business, and Ray Mills, of T. Rowe Price

-- David Malpass, chief economist of Bear Stearns, the Heritage Foundation's John Hulsman, and on the EU constitution

-- Lally Weymouth, of Newsweek, on her interview with Saad Hariri, sone of slain Lebanese opposition leader Rafic Hariri

-- Steven Malanga, of the Manhattan Institute, on his new book The New New Left

-- Glenn Reynolds, on news without newspapers

More Non-Inflationary Prosperity

The headline number for first-quarter gross domestic product has been lifted to 3.5 percent from the so-called advance number of 3.1 percent. Meanwhile, core private-sector GDP (consumption plus business investment) has been lowered from 4.4 percent to 4 percent. In both cases the statistical differences are minor and the economic news remains good. While the 2005 economy is not necessarily bursting at the seams, the outlook remains non-inflationary and bullish. President Bush, the Federal Reserve, the business sector, and the American worker all have a hand in this prosperous cycle.

As for the all-important business sector, strong corporate profits, in particular, signal the health of this economy. Profits on an IRS income-tax basis, as reported in the national income accounts, have moved up to 10.9 percent of GDP -- the highest level since 1968. On an after-tax basis the profit share of GDP is at a post-WWII high of 8.1 percent. After adjusting for the on-again/off-again cash-expensing bonus for depreciation, after-tax profits rose 27 percent (non-annualized) in the first quarter and nearly 37 percent over the past year.

Profits are the hinge of business, and business is the backbone of jobs and the economy. With profits rising to record levels, future economic expansion is assured.

Business equipment expenditures (capex) and consumer spending have both cooled somewhat, but they certainly haven’t gone cold. Capex, after rising 18 percent annualized in the second half of 2004, increased only 5.6 percent in the first quarter, below the consensus estimate of 6.9 percent. Business inventories accumulated about $12 billion less than first estimated. And consumer spending increased only 3.6 percent, following an average 4.6 percent growth-rate in last year’s second half.

While the trade gap has narrowed, raising overall GDP growth, there are actually signs of a somewhat slower economic pace inside the basic economy. Wall Street economist Joe LaVorgna points out, however, that first-quarter wages and salaries were revised up by a huge $163 billion, with the measure growing 7.5 percent over the year-ago pace. That explains double-digit federal tax-collection returns: Lower tax-rates have expanded incomes, which are in turn throwing off more revenues. This, of course, is the Laffer-curve effect.

Core inflation is still tame, rising at 1.6 percent over the past year, about the same as the second half of last year and actually slower than in 2002. The gold price, at $418, is consistent with less-than 2 percent underlying inflation. So is the 10-year Treasury yield of 4.09 percent and a yield curve that has flattened to just over 100 basis points.

The Federal Reserve has restrained inflation expectations, and as a result long rates have descended even while short rates have moved higher. That’s a nice piece of work. Along with rising jobs and incomes, low mortgage rates will sustain the strong expansion in housing investment.

Meanwhile, the strengthening dollar, along with softer commodity prices, also suggests a benign outlook for future inflation. It looks like Fed restraining moves have broken the fever of commodity speculation, which probably means real estate prices will begin cooling soon.

The 91-day Treasury bill is currently yielding 2.93 percent on a coupon-equivalent basis. This is below the 3 percent fed funds target rate, and suggests the central bank could hold steady. However, the Fed is likely to raise its target once more by 25 basis points to 3.25 percent. The 10-year Treasury could dip below 4 percent, but at least the yield curve would remain positive. All this suggests a somewhat slower economy in the year ahead, but no real damage and certainly no recession.

Actually, we are looking at non-inflationary prosperity for several more years to come. This is a good stock market scenario where the broad indices still look to be 20 to 25 percent undervalued. In policy terms the Fed has done its job by restraining inflation and President Bush’s supply-side tax cuts have reignited economic growth. The results are unmistakably positive.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Brian Rogers, of T. Rowe Price, Brett Gallagher, of Julius Baer, and Don Luskin, of Trend Macrolytics

-- US Chamber of Commerce president and CEO Tom Donahue, on CAFTA

-- Deputy Attorney General James Comey, on corporate fraud

-- Countrywide CEO Angelo Mozilo, on the housing market

Looming Filibuster

Well, they certainly didn't waste their time. A story in today's Washington Times states that the Dems are already threatening to filibuster John Bolton. Doesn't this violate the terms of the recent deal? Are we back to square one already?

And what about Max Baucus's hold on the nominations of Bob Kimmitt and Timothy Adams for Deputy Treasury Secretary and Undersecretary, respectively? And the three other open positions at Treasury?

Let's not forget Ben Bernanke. Is he going to get a shot at being confirmed for CEA chair?

It's hard to know what to make of this gang of fourteen.

Death of the Death Tax

Now that the judicial filibuster is off the table and the door is swinging open for new legislative business in Washington, I believe a key item is reform of the estate tax.

The House has passed a bill to eliminate it. The Senate is considering a rate reduction to 15% with higher deductions and an increase in the cost basis.

Inheritances theoretically could be taxed as much as five times: once as work income, again as corporate income, again as dividends, again as capital gains, and yet again upon death.

But pro-growth tax reform stipulates that the same dollar of income should only be taxed once. Death should not be a taxable event.

Reform would increase capital formation and wage growth. It would reduce the tax bias against saving and investment.

It would create new wealth for entrepreneurs, small business owners, farmers, and others who are not yet rich but seek to get rich.

I hope Congress can reform the estate tax burden. It would put more capital into capitalism.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment, with Barry Ritholtz and Richard Clarida

-- James Lucier, on business and the post-Deal Senate

-- Senator Susan Collins, on the Senate's new agenda

-- Rep. David Dreier and Rep. Adam Smith, on CAFTA

Filibuster Obsession

Thank heavens the filibuster on judicial nominations has been taken care of, at least for now. Don’t get me wrong. It’s a key issue. All judicial nominees should be voted on in my view. And there are important business issues such as tort settlements and private property rights on the judicial agenda.

But the filibuster obsession has been sucking the oxygen out of other key issues that will impact the stock market and the economy, such as asbestos reform and medical malpractice lawsuits. Such as a budget-busting $295 billion highway bill. Such as a potential trade and currency war with China backed by Sen. Smoot Schumer and Sen. Hawley Graham. Does anyone remember the 1930s?

Then there are a variety of tax issues, including Sen. Grassley’s proposal to end the alternative minimum tax, and other proposals to reduce or eliminate the estate tax. Of course we have a shortage of gasoline refining capacity, and we need to get moving on the energy bill. Then there is the sagging Social Security outlook. And immigration, which goes hand and hand with border security.

There’s plenty of work to be done. Please, can we get moving?

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Susan Byrne, of Westwood Holdings, and John Rutledge, of Rutledge Capital

-- The New York Times' Andrew Ross Sorkin, on Tyco

-- Senators Kay Bailey Hutchinson and Jon Kyl, on the Senate agenda

-- George Grieg, of the William Blair International Growth Fund, and William Fries, of the Thornberg International Value Fund, on international markets

EU Vote

The natives, as they say, are restless. According to Reuters, the Noes have it not only in France but the Netherlands, too, on the new EU constitution. The old statist guard may be crumbling in Europe. This is probably at least partially due to dismal economic performances and high unemployment. But it may be due to the simple fact that the new constitution seems to reduce local democracy in favor of a massive, state-run bureacracy. Perhaps the defeat of the SDP in North Rhine-Westphalia is a signal of this creeping discontent.

The votes will certainly be close -- but the new constitution might be voted down, all the same. Maybe the citizens of west Europe have decided they don't want to be capitve nations, after all.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segement with Ken Smith, of the Munder Net Net Fund

-- Rich Greenfield, analyst at Fulcrum Global Partners, on TimeWarner and AOL

-- Ray Mills, from T. Rowe Price, on international markets

-- Paul Ingrassia, president of Dow Jones Newswires, and Micki Maynard, of the New York Times, on the auto industry

-- Sen. Charles Grassley, on the AMT and more

Schroeder In Trouble

Isn't it interesting that German Chancellor Gerhard Schroeder and his SDP/Green Coalition got clobbered in North Rhine-Westphalia, Germany's most populous state. Even by using the most virulent anti-American, anti-capitalist rhetoric, Schroeder lost big in a very blue state.

The SDP called U.S. investors "blood-sucking parasites", and compared hedge funds to "swarms of locusts." But it looks like capitalism has more fans in Germany than Schroeder guessed. The German Dax 30 stock index celebrated the election news with a 1.1 percent gain.

So, with 11.8 percent unemployment, and 1.1 percent real growth, Schroeder is calling for a new national election one year ahead of schedule.

It's also interesting to note that America's George Bush, Australia's John Howard, and Britain's Tony Blair -- all pro-war heads of state – won re-election. With this defeat, Schroeder's hopes are dimming. France's Chirac is in trouble too. Maybe the war isn't as unpopular internationally as the mainstream media would have us believe. Could it be that, even in the heart of Old Europe, pro-America capitalism trumps anti-war socialism?

Blogger Segments

For those interested in a transcript of our blogger segments, please go to RadioBlogger. Enjoy!

Declare Victory

Whether or not Alan Greenspan’s Fed term ends in January, or 100 years from now, the reality is the central bank is on the verge of making a serious monetary mistake that could pull down the economy next year.

If the Fed raises its target rate to 4% and if 10-year Treasuries continue around 4% or even less, the flat or even inverted yield curve suggests a 40% chance of recession next year, according to my reworking of a New York Fed model.

Already, it looks like next year’s real GDP could have a 2% handle compared to 3.7% expected this year and 4.4% last year.

So the stakes are high. And while no forecasting technique is perfect, far from it, the differential between long and short term rates has as good a track record as any other approach.

So I say to our central bankers: declare victory on taming inflation and then take a nice long sabbatical, which will allow the economy to prosper without Fed overkill.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Elaine Garzarelli, of Garzarelli Research, and Mike Holland, of Holland and Company

-- Washington Post columnist Nell Henderson, on Alan Greenspan

-- Michael Tanner, of the Cato Institute, on social security and the 450 economists who support ownership-based reform

-- Bloggers Jeff Jarvis and James Taranto

James Madison and the Filibuster

Via Instapundit -- Ann Althouse has dug up a fascinating bit of information: apparently, James Madison considered the nomination of judges so essential a part of the suite of executive powers that he suggested a supermajority be required to reject judicial nominations. Chew on that, Harry Reid.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Frank Gannon, of AIG SunAmerica Asset Management, Barry James, of James ADVANTAGE Funds, and Stanley Nabi, of Silvercrest Asset Management

-- Senior Newsweek writer Charles Gasparino, on the Morgan Stanley/Ronald Perelman settlment

-- Senator Judd Gregg, on the highway bill

-- Secretary of Agriculture Mike Johanns

-- The Right Wing, with Human Events' Terry Jeffrey, National Review's Ramesh Ponnuru, and Kellyanne Conway of the Polling Company

Blundering on China

Readers of MoneyPolitic$ might be interested in today's unsigned editorial in the New York Sun, "Blundering on China." It has strong affinities with my own views on the subject. VERY strong. (Incidentally, I should mention that I am a columnist for the paper.)

Here's the full text. Enjoy.

Since 1994, when China instituted a quasi currency board system, the Chinese economy, linked to the greenback as its reserve currency and standard of value, has created more prosperity in that huge country than at any time before in its history. Since 1994, real growth of gross domestic product in China has averaged about 9% a year. During this time, in a country previously plagued repeatedly by unreliable money and a volatile but usually high inflation rate, the Chinese consumer price index has risen only slightly above 3% a year. Japan would die for this kind of economic performance. So would Western Europe. Why would anybody in his or her right mind wish to meddle with this kind of economic performance.

Just ask the other developing economies in the Pacific Rim. Neither Free Korea, nor the Philippines, nor Thailand, nor Indonesia, nor Malaysia can boast of this kind of track record. Turn the clock back to 1997 and 1998. All those aforementioned countries were pegged to the dollar and enjoying solid prosperity. So what happened? Robert Rubin's Treasury, along with the geniuses at the International Monetary Fund, decided that these countries should float their currencies and de-link from the U.S. dollar. What happened? The currencies promptly sank.

There's a lesson here. It's a simple one. Emerging currencies don't float. They sink. Why is this? Because they have a history of instability. They do not have a history of monetary value that is reliable. That is why the dollar link was correct in those days and that is why the consequences of this currency meddling by the IMF nearly threw the world economy into a deflationary spiral. And those countries suffered the most, as foreign investment flows were immediately withdrawn. As such money left those countries, their economies shrank, unemployment rose, and in many places there was rioting.

It is precisely this outcome that China seeks to avoid by operating a so-called monetary price rule with the dollar as its lodestar. In effect, the communist Chinese central bank has had the wisdom to restrain its money creation by merely backing international investment flows, which are predominantly dollars and sterling, with new currency units. This is why inflation remains contained while the fledgling Chinese market economy continues to expand at such a hefty pace. In fact, over the past 12 months, the consumer price index of China has registered a tepid 1.8% gain through the dollar peg.

But it's not merely a peg. It's reminiscent of the old Bretton Woods dollar-gold exchange system, when the dollar value was linked to gold as a restraint on the creation of greenbacks. Today, for China, the dollar is, in effect, gold. The greatest monetary error made by America in the past four decades was the one made by President Nixon when, in 1971, he closed the gold window and, in 1973, signed off on the scrapping of all references to gold as a guidepost to American monetary policy. It was this error that opened the era of stagflation, whereby both inflation and unemployment rose together to undermine the American economy and to damage our position in global affairs.

So why would we wish to inflict this kind of damage on a relatively healthy Chinese economy, with its growing benefits for America and the rest of the world? A small appreciation of the yuan would make no difference for cost differentials between America and China. It would take 40% or 50% appreciation, which might level out cost and wage differentials but would in the process create a massive deflation of the Chinese economy and threaten not only its prosperity but that of its neighbors and of our country.

The only thing more dangerous than forcing China off the dollar standard is the protectionist idea being advanced by Senators Smoot Schumer and Hawley Graham. They are advancing the idea of a 27.5% tariff on Communist Chinese imports into the United States. Does anyone remember the Great Depression? It was triggered by, among other colossal blunders, the passage of the Smoot-Hawley tariffs, which not only blocked imports to the United States, impoverishing our businesses and our families. It also triggered worldwide retaliation that set the stage for the flourishing of enemy ideologies that delivered World War II.

We are not against pressing for reform in China. But the right area for American policy-makers to focus is the political side of the freedom equation. The problem with China is not, in fact, that it's managing its currency, as we manage ours, in a stable way. They need to address their human rights problems, end their persecution of religion, open up their polity to multi-party democracy, free their press, further liberalize their economy, and help America confront the nuclear threat emerging from North Korea.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with John Augustine, chief investment strategist with Fifth Third Asset Management, and James Glassman, senior economist with JP Morgan Chase and Co.

-- Senator Jeff Sessions, on the judicial filibuster and the Bolton nomination

-- Rep. Robert Wexler, on his social security plan

-- ProLogis CEO Jeffrey Schwartz, on REITs and China

-- Rep. John Boehner, on the pension bill

Global Bonds, China Prices, PPI and Production

Mr. Greenspan talked about a bond conundrum a few weeks ago before he retracted the phrase and the thought. Retraction is the right strategy because U.S. Treasuries are trading right in line with the low yields of other major countries.

The 10-year Treasury today yields 4.11 percent, compared to 4.37 percent in Britain, 4.04 percent in Canada and 4.0 percent in China. France and Germany are around 3.35 percent.

Not all the debt of all these countries is being bought by China.

Instead, the main reason world bond rates are low is that global inflation expectations are rock bottom. Additionally, the world is still awash in savings, a point made by Richard Clarida that explains low real yields. The U.S. TIP, for example, is 1.61 percent. The index-linked British gilt is 1.63 percent.

The world economy today, driven by open markets and rapid technological advance, with intense business competition, and relatively tight central banking, is simply not inflation-prone.

That is the real message of low global bond rates.

---

The China CPI has eased down to only 1.8 percent from a peak of around 5 percent nearly a year ago.

This is significant because the China yuan is linked to the U.S. dollar. It should remain so. Currency stability has boosted China growth. Creating currency instability would be a very bad idea, one that might well undermine world (including U.S.) growth. For China, the dollar is in effect a gold standard.

The interesting question is whether the decline of China’s CPI will soon be followed by a similar easing of the U.S. CPI.

---

British economic and financial trends often lead U.S. trends. Noteworthy is the inversion of the UK yield curve. The overnight central bank target rate in Britain is 4.75 percent, compared to a 4.37 percent 10-year rate. The British curve has been inverted about the last eight months.

British growth has been slowing gradually since late 2003, from about 3.5 percent to 2.5 percent.

In the U.S., as the Fed has raised its target rate to 3 percent from 1 percent, 10-year yields have declined. Hence the curve has flattened.

Question is, if the Fed takes its target rate to 4 percent or more, will the curve invert because long rates drop to a 3 percent handle?

---

Today’s PPI report came in a bit stronger than expected. However, core consumer goods were a tame 0.2 percent, for a 2.0 percent annual rate over the past three months. Last January the three-month change was 4.8 percent. Over the past year this measure has leveled off at around 2.6 percent. It is this measure that links to the CPI.

However, the slowdown of industrial production -- only 1.8 percent annually over the past three months, is somewhat troubling. Production of consumer goods is declining at a 0.6 percent annualized three-month rate. Fortunately, the production of business equipment continues to expand nicely at a 4.1 percent annual rate over the last three-month period. However, the three-month change ending in February was 12 percent annually.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Barbara Marcin, of Gabelli Asset Management, and Michael Darda, chief economist of MKM Partners

-- National Council of Textile Organizations president Cass Jonhson, and the National Retail Federation's Erik Autor, on textiles

-- Senator Johnny Isakson, on pensions

-- Natan Sharansky, on Bush and democracy

-- Senator Norm Coleman, on the UN and the Oil-for-Food hearings

Buffett, Consumers, EAFE

Wall Street sources tell me that Warren Buffett’s breakeven price on his short dollar trade is about 1.22 euros. Today it’s quoted at 1.264. The March high was 1.346.

Just thought you’d like to know.

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Retail stocks are doing horribly in the main, but the recent jobs report shows a very strong pick-up for personal income. Using the so-called income proxy (courtesy of John Ryding and Michael Darda), average hourly earnings times aggregate hours equals 5.9 percent growth over the twelve months ending in April. In early 2002 the income proxy was zero. In early 2004, it was about 2 percent.

As David Malpass has written, household net worth continues to rise because of real estate and mutual fund appreciation. Consumers are taking on more debt, mostly related to homes, but their equity is appreciating more rapidly.

There is no reason to expect a consumer crackup anytime soon.

Unless the Fed inverts the yield curve and deflates the high-powered money supply. Market bears are very worried about this. So am I.

---

Professor Jeremy Siegel recommends a 50 percent investor exposure to an index of international stocks such as EAFE. Interesting idea.

From its market low registered in March 2003, EAFE has appreciated 76 percent. From October 9, 2002, the S&P 500 has increased 49 percent and the Wilshire 5000 has gained 55 percent.

Over the past year, EAFE has grown 18 percent, while the other two have increased just more than 6 percent.

Year-to-date, EAFE has lost 4.2 percent, the S&P 500 has declined 4.0 percent, and the Wilshire has given up 5.1 percent.

Priscilla Owen

Liberal Dems opposed to the nomination of Judge Priscilla Owen have been attacking her with the words "pro-business." As if that were such a terrible thing, especially given the economic damage that frivolous lawsuits can do. But what has she done that's so terrible? Here are a few "chilling" examples:

-- endorsed, with two other judges, a pro-business PAC

-- reversed an award of $30 million dollars against Ford

-- dissented in several other decisions in lawsuits against corporations

Wow. Pretty awful, huh?

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment, with Jeremy Siegel of the Wharton School of Business, Jeff Bagley, a portfolio manager with McCabe Capital Managers, and Michael Kahn, of Barron's Online

-- Arch Coal CEO Steven Leer

-- General Wayne Downing, on Iraq

-- Yellow Roadway CEO Bill Zollars, on trucking and his entry into China

-- Scott Hodge and Andrew Chamberlain, of the Tax Foundation

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

FedEx CEO Fred Smith

Markets with Mike Holland (president of Holland & Co.), Andy Kessler (author of "Wall Street Meat" and former hedge fund manager) and Ken Smith (Munder Net Net portfolio manager).

Politics with John Fund (columnist Wall Street Journal) and Jim Warren from the Chicago Tribune.

Economic Bloggers Dan Mitchell (Center for Freedom and Prosperity) and Don Boudreaux (Cafe Hayek).

Take a Breather

Clearly a sea change in declining inflation expectations is taking place. One might even describe it as an unexpected whiff of deflation.

Gold, oil, Treasury bond yields, and the TIP spread are all declining. So is monetary base growth. The dollar is rising.

In a price-rule framework, these leading indicators of liquidity excess and future inflation are all telling the Fed that, at least for now, their inflation-fighting job is well done.

A combination of rising economic investment, reduced cash injections, and repeated interest rate target increases has removed excess money and lowered the outlook for future inflation.

If the Fed continues to raise rates, as suggested by the fed funds futures market, then the only rationale will be a mistaken attempt to limit economic growth, job creation, or housing credit. These Keynesian fine-tuning efforts will undermine the future economy. Exactly what the stock market is worried about.

Instead, the Fed should come up for air after 200 basis points of rate hikes and pause for several months. Wait and see what the market indicators are telling them.

Here’s a clincher. Take a look at the chart of the CBOE gold stock index. It is one sick puppy. Even though I am in love with my Sealyham terrior, I am pleased that gold stocks keep going down. When gold falls, the value of money rises. Interest rates relax. Inflation worries recede. Lower tax-rates have room to breathe. The economy and stocks benefit.

Dr. No Obstructionism on Social Security

Washington observers of this week’s Social Security hearings chaired by Bill Thomas came away disappointed. Chairman Thomas got no help from his Democratic colleagues who continued their Dr. No obstructionism. Led by Charlie Rangel, the Dems attacked Posen indexing of benefits. They attacked any benefit reduction whatsoever, even though under current law the troubled system will never deliver promised benefits. Clearly the Dems are not serious about reforming the system.

The only bright spot was some Republican support for the “stop-the-raid and start savings accounts” plan that Steve Moore and I, among others are supporting. This idea would take the estimated $2 trillion of projected surpluses over the next ten years and convert them into marketable Treasury bills or TIPS that would be placed in Social Security IRAs for system members who choose this option. This is the proverbial camel’s nose under the tent. Congress would still get our money, but at least we would get ownership of real assets, a real lockbox, and only we would control the key.

It’s a long shot. Mr. Thomas still hopes to get a reform bill next month. I’m rooting for him. But without any Democratic support, the chances for Social Security reform are presently slim at best.

Tom DeLay's Remarks

Here is a transcript of House Majority Leader Tom DeLay’s remarks last night at the American Conservative Union tribute.

Mr. DeLay is a friend who has appeared on Kudlow & Company, most recently to clearly oppose any increases in the Social Security payroll tax wage cap. He is one of the most important conservatives in the nation. He is undoubtedly the most influential conservative in the House.

In his remarks below he talks about the conservative reform agenda of the Republican Party in a nation that he describes as “right-of-center”. Note also his inclusion of estate tax repeal as a key legislative priority.



ACU Tribute Remarks
Majority Leader Tom DeLay
May 12, 2005

I want to thank all the people in this room who have worked so hard over the last 10 years and longer, first to create the Republican majority in Congress, and then to build it into the strong, vibrant, governing coalition it has become.

And for that matter, we all owe the American people more thanks than anyone, as they are the ones who have repeatedly given us their trust and our historic opportunity… to lead.

For 10 years, the Republican Party has made the most of that opportunity, turning the American people’s trust into action.

In our first decade as a national majority, we reformed welfare, we ended partial-birth abortion, we balanced the budget, and we lowered income taxes for every American who pays them.

We have shifted political debate in this country: on the economy, on the size and mission of government, on our national security, and on the role of faith in our society.

We have identified and tackled huge issues, oftentimes at great political risk, and we have done so at every turn from a principled, conservative perspective.

And the American people have responded.

Since 1995, 17 million more Americans have jobs, 14 million more own their own homes, and 18 million more are invested in the stock market.

Inflation and unemployment and the number of people living in poverty have plummeted, as has the national debt as a percentage of GDP.

Meanwhile, we have recovered from the most devastating act of terrorism ever to mar our soil, and we have liberated 50 million Afghanis and Iraqis in the war on terror.

Libya has disarmed, Syria has retreated from Lebanon, and the voice of the people has been heard in historic elections from Kiev to the West Bank.

We have banned partial-birth abortion and written into federal law the protection of unborn children from attacks against their pregnant mothers.

We have reasserted the constitutional role of Congress — and of the courts — in interpreting our laws.

We have reaffirmed both the indispensable role of faith in our society and the definition of marriage as a sacred bond between one man and one woman, period.

And we have defended the dignity of all human life, born and unborn, wanted and unwanted, loved or unloved — because human life is not given its dignity by its quality, but by its Creator.

America is safer, stronger, more prosperous, and better prepared for the future than at any time since the end of the Cold War.

And in response to this mountain of evidence, this colossal testament to the strength of our ideas, our opponents have offered… nothing.

No ideas. No leadership. No agenda.

And just in the last week, we can now add to that list, “No class.”

As you may have heard, Senate Democrat Leader Harry Reid went out and called George W. Bush, the President of the United States, our commander-in-chief, “a loser.”

We shouldn’t be surprised, I suppose.

After all, similar insults were once hurled by Ann Richards and Al Gore and John Kerry — you’d think by now Democrats would have learned not to mis-underestimate this president’s strategery.

After all, he’s spent the last four years standing up to al-Qaeda, Saddam Hussein, Moammar Gadhafi, Yassir Arafat, and tyrants and terrorists from around the world.

Democrat leaders can’t even stand up to Michael Moore.

We’ve spent 10 years making history while Democrat leaders have spent 10 years making noise.

And you know what, their rank-and-file members are starting to agree.

Democrats around the country are growing more and more alienated every day because they see that the once-great party of Roosevelt and Kennedy has become the party of Howard Dean.

Whatever your opinion of modern political liberalism, there is no denying that for most of the 20th century, the Democrats were a party of ideas and ideals — now, they’re just the “party of NO.”

And I’ve got news for you — rank-and-file Democrats know it.
That is why, over the vociferous objection of their leadership, dozens of Democrats of good will have joined Republicans in the House in recent months to pass our reform agenda — bankruptcy reform, class action reform, energy, border security, repealing the death tax.

On issue after issue, Democrats are rejecting the bitter extremism of their leadership and embracing the commonsense reform agenda of the Republican majority.

The tide has turned.

We live now in a right-of-center nation, and in a time of historic opportunity.

Democrat leaders may wish we just disappeared, or that they could defeat us by some means other than the ballot box.

But I’ll tell you just what I tell them: we’re just getting warmed up.

This Republican Majority has worked too long and too hard to stop now.

Our nation, however secure, is still too vulnerable; however prosperous, is still leaving too many Americans behind; however virtuous, is still wounded by a culture of pride.

And as long as any American is threatened by terror, unable to find a job, or anxious about his child’s education and safety, we’ll be there.

Because tonight in America, a young wife is driving back to her home on the base, having just kissed her husband goodbye as he boarded a transport en route to Iraq.

Tonight in America, a doctor in a small town is trying to determine how he can continue his practice after seeing his new malpractice premiums.

Tonight in America, a college freshman has found out she is pregnant, and, all alone in her dorm room, contemplates what seems to her a choice between the impossible and the unthinkable.

Tonight in America, a wounded soldier is recovering at Walter Reed, wondering what he can still contribute to his country as a 22-year-old without his legs or a college degree.

Tonight in America, an abused and neglected child will spend her first night in the warm, safe home of her adoptive family.

A middle-aged housewife is proudly informing her family that she has decided to go back to school.

A young husband is frantically reminding his wife to “Breathe!” as they speed toward the hospital to deliver their first baby.

A newlywed couple is placing a bid on their first home.

A poor daughter of immigrants has just been accepted to medical school.

And a young man who grew up in the shadows of the World Trade Center is walking into a recruiting office to enlist in the Marine Corps on his 18th birthday.

This is our nation; this is our mission: earn it.

Thank you all for everything you do, thank you for this unforgettable evening.

May God bless you, and may God continue to bless the United States of America.

###

Tonight's Lineup

Tonight, on Kudlow & Company:

-- Reid Ziesing, CEO of Cardinal Asset Management, and Patrick McKeever, of SunTrust Humphry McKeever, on retail

-- a market segment, with Craig Russell of Alaron FX, Jeff Grundlach, president of TCW Asset Management, and Keith Wiertz, President & CIO, Fifth Third Asset Management

-- Senator Mel Martinez, on John Bolton

-- Frank Gaffney of the Center for Security Policy, and David Rothkopf, CEO of the Rothkopf Group, on John Bolton

-- Natan Sharansky, on Bush, Russia, and the Middle East

Yalta Revisited

Tonight, I will be interviewing former Soviet dissident Natan Sharansky,whose book The Case for Democracy has had such a strong influence on George W. Bush's political philsophy. I am going to ask him waht he thinks of the following statement, from Bush's recent speech:

"We have learned our lesson: no one's liberty is expendable. In the long run, our security and true stability depend on the freedom of others...The agreement at Yalta followed in the unjust tradition of Munich and the Molotov-Ribbentrop pact. Once again, when powerful governments negotiated, the freedom of small nations was somehow expendable. Yet this attempt to sacrifice freedom for the sake of stability left a continent divided and unstable. The captivity of millions in Central and Eastern Europe will be remembered as one of the greatest wrongs of history."

Let's see what he has to say.

Bolton Must Go -- To The U.N.

The Senate Foreign Relations Committee vote on U.N. nominee John Bolton is scheduled for tomorrow. It’s an absolutely crucial vote for the Bush administration, its foreign policy vision of freedom and democracy (including thorough reform to clean up the U.N.), and the right of the President to choose his own people for the task.

Alleged charges against Mr. Bolton are not sticking because they have no basis in fact. This is tough-minded foreign policy, not therapy. Is he really too nasty for the U.N.? Well, Americans don’t think much of the scandal-ridden organization. A bit of nasty there will strike a popular chord. Zimbabwe has just been put on the Human Rights Commission, another example of Kofi’s bad judgment.

Mugabe is a dictator. His nation shouldn’t be on that commission. And Kofi Annan appears to be covering up his other bad decisions regarding the Oil-for-Food scandal. Kofi must go. But John Bolton must go to the U.N.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Barry Ritholtz of the MAXIM Group, Noah Blackstein of Dynamic Mutual Funds, and Mary Farrell of UBS PaineWebber

-- Peter Beinart of the New Republic and National Review's Byron York on Hillary's possible run for the Presidency

-- Wilbur Ross, CEO of WL Ross and Co., on coal

Frist and Filibusters

Here’s a brief update on judicial nominations and the filibuster in the Senate.

My sources tell me Majority Leader Frist has made up his mind and will press for a simple majority up or down vote on a judge, namely Texas Supreme Court justice Priscilla Owen, nominated for the 5th US Circuit Court of Appeals, before the next recess which begins May 28th. Any so-called compromise with Democratic leader Senator Harry Reid must include votes on all judicial nominees. Frist will not bargain away what he believes is a constitutional must to vote on judges.

Remember, judicial decisions affect more than social issues. They will include economic regulation on matters such as media piracy, tort reform including asbestos settlements, intellectual property rights, and the takings clause power of local city governments, to name a few areas.

President Bush stands behind Frist in the matter. So what I hear now is the so-called filibuster rule on judges will be determined within the next couple of weeks.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment, with Norm Connelly, of JAG Advisors, Liz Ann Sonders, CIO of Charles Schwab, and Mike Churchill, of Churchill Advisors

-- Greg Zuckerman, of the Wall Street Journal, and Charles Gradante, of the Hennesee Group, on hedge funds

-- Senator Jon Kyl, on Bush's Russia visit, John Bolton, social security, and immigration

-- Senator Norm Coleman, on Kofi, the UN, and John Bolton

Tax Blog

Andrew Chamberlain, of the excellent Tax Foundation, has started an excellent blog, here. Check it out!

Tonight's Lineup

For tonight's Kudlow & Company lineup:

Markets with Elaine Garzarelli, Jeremy Siegel, and Barbara Marcin

Secretary of Commerce Carlos Gutierrez

Gary Gensler and Steve Moore to talk about Social Security and the 30-year bond.

Peter Brookes to talk about Bush and Putin

Show Me The Money

The latest US Financial Data release from the Federal Reserve Bank of St. Louis shows a marked slowdown in key money supply measures. The adjusted monetary base over the past 6 months is now only 2.6% at an annual rate and 0.8% over the last 3 months. MZM is growing only 0.7% over the past half-year, and is actually declining at a 1.3% rate over the past quarter. M2 is rising 3.5% for the six months and 1.6% for the three months.

There may be two key reasons for this money slump. First, the Fed is injecting less and less new cash into the economy as it raises its short-term target rate. Second, the increase in short-term rates to 3% from 1% may be reducing the demand for money – and quite possibly future economic demands as well.

Every one of these readings is way below the 6% growth of money GDP. While the fit between money and national income is a loose one, it is not irrelevant. This picture strongly suggests an economic slowdown is in the cards.

The Keynesians at the Fed are up to their old tricks. This time, they may be targeting the so-called housing bubble. Last time, it was the Internet bubble. But any time you deflate the money supply, the economy slumps badly. By the way, metals prices and spot commodities overall are also slumping. Gold is going nowhere.

This is not good. Why do we need any more Fed rate hikes?

And by the way, let me add that more people working is definitely not inflationary.

Jeremy Siegel

Judging from an interview in TechCentralStation, by Nick Schulz, Jeremy Siegel now believes that 50% of your investment portfolio should be indexed to the world market, including the US. He think the other 50% should be in diversified strategies that take advantage of a value-based approach with high dividends and low price-earnings ratios. Jeremy especially likes consumer-staple stocks, with brand names and international sales.

Retirement Returns

If you didn’t see it, Lawrence J. McQuillan’s NRO article, published May 4th, is definitely worth reading for the data on social security returns. Calculated by the mainstream Urban Institute, men aged 65-74 get a 3% return. Women get 4.4%.

Everyone else behind them gets much less. Men born between 1956 and 1964 will receive only 2%, women 3.3%.

For those born today, the return will be a disappointing 1.6%.

Personal Lockbox

John Fund’s article in this morning’s WSJ.com Opinion Journal about creating a true lockbox is must-reading. I appreciate the mentions from my Pozen and Bill Thomas interviews. More important, John has explored the politics of combining Pozen means-tested indexing with a lockbox personal account featuring T-bills or TIPS bonds.

If my accounting is correct on the lockbox, the $2 trillion or so social security surplus projected over the next 9 years would still find its way into the cash coffers of the US treasury (and therefore the Congress) for government spending purposes. All that would happen is that instead of exchanging cash surpluses for non-marketable Treasuries held by the Social Security Administration, and not owned by social security payroll taxpayers, the new idea would exchange cash surpluses for marketable T-bills or TIPS that would be owned by payroll taxpayers in the social security system. These new lockboxes would permit exchanges into specified indexed funds for stocks and bonds as per the Thrift Savings Plan.

But of course the ownership of a social security IRA is incalculably important. It would be the proverbial camel’s nose under the tent. If these marketable treasuries are exchanged for indexed funds holding corporate stocks and bonds, then they would eventually contribute to more capital formation, boosting the economy.

By the same token, any new debt incurred during the so-called transition to private accounts could be sold to social security members in the same fashion. This idea was, to my knowledge, first broached by Holman Jenkins of the Wall Street Journal many months ago, and it is a good idea. John Fund compares the personal lockbox concept to issuing savings bonds, and this is a good comparison. By the way, during the two world wars, we sold liberty bonds and war bonds to finance the war effort. Norman Podhoretz’s concept that the terror war is in fact World War IV makes this comparison even more relevant.

At the end of the day, Ways and Means chair Bill Thomas is the key player. If he reports out a bill in June, as he promised on Kudlow and Company, and if that bill contains the Pozen plan with the marketable Treasury lockbox plan, as well as other retirement savings and long-term healthcare reforms, then Mr. Thomas can literally drive the entire political process towards a hallmark vote on the floors of both Houses.

Back in 2003, Bill Thomas snatched victory from the jaws of defeat regarding President Bush’s idea of lowering the investment tax rate on dividends and capital gains. No-one believed it possible. History could repeat itself. The nay-sayers on the left and right may be proven wrong again.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment, with Joe LaVorgna, chief US economist at Deutsche Bank, Gene Henssler, CEO, Henssler Financial Group, and Don Hahn, chief investment strategist for Mesirow Financial

-- a social security debate, featuring Robert Pozen, chairman of MFS Investment Management, and Jack Kemp, co-director of Empower America

-- Timothy Bitsberger, Assistant Treasury Secretary for financial markets, on the 30-year bond

-- bloggers Charles Johnson of Little Green Footballs, Roger Simon, and Glenn Reynolds

Congrats to Blair

Congrats to Tony Blair. Though his margins may have been cut, he’s still Prime Minister. And even though I am a conservative, I would have voted Labour had I lived in Britain for this election. The Tories’ attacks (and those from the far left) on Blair were all too reminiscent of those launched by Howard Dean, MoveOn, and George Soros – that Blair is a liar, a cheat, a puppet; that he involved himself in the war for purely cynical reasons. They failed here, and they failed in Britain, although they seemed to have gained a bit more traction – George Galloway won, after all.

Blair, Bush, and Australia’s John Howard have stood firm in their unyielding prosecution of the war on terror. The MSM makes the case that anti-war candidates are the most popular, but look at the facts: Bush won handily, Howard won handily, and Blair, at least, won. As one of Instapundit’s readers points out:

What the media just isn't picking up on is that this election is between the party that invaded Iraq because it wanted to enforce international order, versus the party that wanted to invade Iraq because Saddam needed to be taken out. Where else is that the case? The openly anti-war party is running a distant third -- anywhere else, they'd be the govenment or the main opposition.

Besides: it’s relatively uncommon for a PM to win a third term. It’s all the more impressive, considering the circumstances of this election. So, again, congrats.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- Brian Johnson, of Sanford Bernstein, on GM and Ford

-- a market segment with John Waterman, CIO of Rittenhouse Asset Management, and Steve Bauer, CEO of Truffle Hound Capital

-- Dow Chemical CEO Andrew Liveris

-- Representative David Dreier, on the Middle East, free trade, and social security

-- a political panel, with National Review's Byron York, Slate's Mickey Kaus, and Time's Margaret Carlson

Lower Tax Rates, Higher Revenues

This morning’s Washington Post headline reports “Tax Receipts Exceed Treasury Predictions.” Digging underneath the headlines, I found inside the daily Treasury statements that during the April tax payment month non-withheld receipts from capital gains, dividends, stock options, and other sources came to $144 billion, an incredible 29% increase from a year ago. Last year, these receipts fell by 5%.

Consequently, the FY2005 budget deficit should come in around $395 billion, or 3.2% of gross domestic product, calculations that include the military appropriations supplement for the terror war. As a result, the Treasury Department will actually pay down $42 billion in debt during the April-June quarter. Last year they had to borrow an additional $42 billion. Last year’s budget gap was $412 billion, or 3.6% of GDP.

Whether the deficit goes up or down, the Treasury’s new idea to re-open 30-year bond issues is a good one. At historically low interest rates, the whole $4.5 trillion of publicly held national debt, which comes to 37% of GDP, should be refinanced and permanently funded through long-term offerings. Britain, France, and Japan even use 50-year bonds. Why shouldn’t the U.S.? Insurance companies, pension funds, and other institutional investors will gobble up the paper.

But the real story behind the higher tax payment numbers is the successful supply-side experiment that began in the middle of 2003, when investment tax rates were slashed on capital gains and dividends. With new incentives to counter the deflation of investment in 2000-2002, both capital formation and economic growth have come back from the dead over the past 2 years.

Real GDP since the tax cuts has averaged 4.3% at an annual rate, whereas growth was only 2.4% in the anemic recovery preceding the tax cuts. The latest government data on tax collection for calendar 2004 confirms the tax-cut-led recovery through the explosion of high tax collections at lower tax rates. The Laffer curve is working.

With more people keeping more of what they earn and invest, after-tax, a major new economic boom has been launched. Enormous wealth creation from real estate, stocks, and small business creation is the backbone of this entrepreneurial recovery. Despite naysayers in the mainstream media and parts of Wall St., strong economic expansion will continue for many years.

Supply-siders in the White House and the Republican Congress have the economic story absolutely right. That is why the investment tax cuts have been extended to 2010 from 2008 in the budget resolution. Even the estate tax rate may be cut to 15%, or eliminated altogether, in this Congress.

The biggest economic threat? Will the Keynesians at the Federal Reserve tighten money too much and deflate the boom? Let’s hope the Fed comes to its senses and stops their rate-hiking crusade. Lower tax rates and strong growth are antidotes to inflation. But money-meddling at the central bank will only make matters worse.

Tonight's Lineup

Tonight on Kudlow & Company:

-- NEC director Al Hubbard, on social security

-- House Ways and Means Committee Chair Bill Thomas, on social security

-- Representative Jeff Flake and Representative Christopher Shays, on the Volcker Report, PNB, and the UN

-- Volvo CEO Leif Johansson

-- a market segment with Dr. Arthur Laffer of Laffer Associates and Morris Mark of Mark Asset Management

Just When You Thought It Couldn't Get Any Worse

A groundbreaking UN-watchdog reporter, Claudia Rosett has an indispensable piece in today's New York Sun. A series of murky internal transactions at PNB, the UN's Oil-for-Food bank. Payments to arms dealers, members of the Saudi Royal House, and Baathist front companies, climbing into the hundreds of millions of dollars. And not one unearthed or disclosed by Paul Volcker since he began his investigation a year ago. It's gone beyond "Kofi Must Go" -- now we have to say "Volcker Must Go."

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Barbara Marcin of Gabelli Asset Management, Barron's columnist Michael Kahn, and Schwartz Investment Counsel's George Schwartz

-- UBS's Glenn Schorr, on the downgrade of brokerage stocks

-- Andrew Ross Sorkin, of the New York Times, on Tyco

-- Frank Gaffney, of the Center for Security Policy, on North Korea

Volcker's Disgrace

This is a real outrage. Paul Volcker, the highly respected former Fed chairman, apparently made calls to various congressmen, lobbying them not to sepak to or ask questions of the two investigators, Miranda Duncan and Robert Parton, who resigned from his commission on the UN and Oil-for-Food. We are making our own inquiries to find out precisely who Volcker called. It is shameful to see Volcker wallowing in the partisan political mud in this way.

Bush's Plan

President Bush’s social security proposal made at his news conference last week may not be my first choice. I would have preferred Ryan-Sununu and it’s emphasis on personal savings accounts with no benefit cuts or tax hike.

But let’s give the President some credit for being ahead of the curve and sincerely seeking a solution to a system that is clearly broken.

Combining a progressively tiered benefit system with social-security type IRAs will get the job done. For me it gets the camel’s nose under the tent. Namely, personal accounts will be part of the plan.

I’m saving my scorn for the hypocritical and weak-kneed democratic response. The usual demagoguery of benefit cuts, benefit cuts.

Under current law, eve