Friday, November 30, 2012

The U.S. Debt Inflection Point???

I listened to a CNBC debate the other afternoon featuring The Center for Economic and Policy Research's Dean Baker, and The American Enterprise Institute's James Pethokoukis. As the two competed to see who could audible the loudest without actually yelling, I heard Baker respond to a Pethokoukis jab at Washington's fiscal irresponsibility with a comment on how our record low treasury rates are an indication of how healthy we are in the eyes of the bond market.

Baker is making a most dangerous and, frankly, irresponsible assumption.

Any good, nonpartisan, market-savvy economist would tell you that markets move in cycles, that inflection points are impossible to predict, that the further the pendulum suspends in one direction--the longer its momentum pushes against gravity--the more forceful will be its move in the opposite direction when it finally capitulates.

Indeed, there was this one day when Greek bond prices subtly began their decent. When something began to unravel, when some bondholder somewhere woke up to the reality that even a country can't spend beyond its revenues forever. That a country whose leaders promote an entitlement mentality is doomed to squeeze its private sector to the point of exhaustion--to the point where the prospects for growing its way out of its bloated predicament is so dim that its creditors will demand a rate of return consistent with the risk they're taking. Thus the awakened, forward-thinking bondholder began dumping his Greek debt, and the rest followed his lead.

The inflection point for the U.S.--the home of the world's reserve currency--may very well be years away. And perhaps our policymakers will make better policy that will avert our creditors' exodus in the meantime. But that of course would depend upon us voters getting a clue. For as Harry Reid suggested yesterday, when the voter says "tax producers and don't touch entitlements", the self-interested policymaker has zero incentive to make better policy.

Here's an excerpt from my upcoming book Leaving Liberty?, Essays on Politics and Free-Market Thinking. This will be my plea to everyday consumers who typically wouldn't touch a book on politics and economics--who tend to believe most of what the media (both liberal and conservative) throws at them...


DAY 19: A Bloat of a Different Color

If I told you you’re spending 70 percent more than your annual income, you tell me: Will you be richer or poorer a year from now?

What if I told you you’re currently netting, on average, 250 calories per meal more than you’re burning off daily? You tell me: Would you be fatter or skinnier a year from now?

If you arrange your daily activities so as to net minimal physical stress, you tell me: Will your bones and muscles be more or less dense, and will they possess more or less capacity a year from now?

What would you say if I told you that you could lose weight by increasing your caloric intake by 70 percent daily? And what if I told you that you could become physically stronger while exerting even less over the next twelve months? As much as you’d love to believe me, you’d tell me I’m full of it.

But what if I were the recipient of the Nobel Prize in nutrition (were there such a thing)? Would you believe me then? Sadly, some of you (those who’d do just about anything not to diet or exercise) would. But alas, my academic prowess notwithstanding, my saying it wouldn’t amount to a hill-a-pork-n-beans twelve months from now.

Now what if I told you that you’re spending 70 percent more than your annual income? You tell me, will you be richer or poorer a year from now?And what would you say if I told you that you’d be in better fiscal shape if you spent even more over the next twelve months? I’d be full of it, right?

But what if you were a company? Still full of it. Ah, but what if you were a nation? Now there’s a bloat of an entirely different color. For at least one Nobel Prize-winning economist, many other not-Nobel-laureate economists, and oodles of pandering politicians would have you believe that very thing. The question is, do you?

Thursday, November 29, 2012

Will raising tax rates raise taxes? The Laffer Curve (white board lesson)

Dang! Just missed Senator Harry Reid's comments on today's budget talks. The follow-up commentary suggested he's frustrated with the other side's unwillingness to bend on tax increases--that they're not paying attention to the polls. Implying that the few hundred, or few thousand, people who responded to a set of questions posed over the phone say they want no cuts to entitlement programs and no tax increases for the "middle class". In other words, the people have spoken; tax the "rich", the "rich" have options--they can take on a higher tax burden. The non-rich have no options, they can't take on a higher tax burden--or cuts in social programs--especially in this economy. And of course that's true, well, mostly.

Let me straighten out that statement (by changing one word) and make it entirely true: The rich have options, they can take pass on a higher tax burden. The non-rich have no options, they can't take pass on a higher tax burden--or cuts in social programs--especially in this economy.

So, consumer spending is supposedly 2/3rds of the economy. The rich have employees, take vacations, go out to dinner, have housekeepers, etc. That (what the haves have) may seem unfair to some--it just feels right that the rich will have to cut back--but make no mistake, the rich cutting back means resources are taken, not only from them, but--arguably more so--from hard-working folks; the rich's employees, hotel employees, waiters and waitresses, busboys, cooks, parking attendants, caddies, scuba instructors, maids, etc. (that 2/3rds of GDP) and redistributed where politicians see fit. That is if the increase in tax rates actually results in more revenue for politicians to spend.

Here's an illustration on taxation that will help you understand the potential revenue implications of adjusting the rates--in either direction. This is an entirely commonsense view, and therefore will not appeal to the most partisan in either camp. Here's the link to a blogpost I reference in the video...

Tuesday, November 27, 2012

Buffett, having tea with Krugman?

If you happen to belong to the camp so enamored with Warren Buffett, not for his investment prowess, but for his lobbying to support his lately-favorite cause--government revenue--you'll love this excerpt from his op-ed in Sunday's NY Times

 Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

Makes sense, right? Well--his convenient comparison to a savings account notwithstanding--not to everybody. Being one who advises investors, I entirely reject the notion that taxes don't strongly influence investor decisions. In fact here's a quote from a man who would categorically refute Buffett's assertion--a man who, in many circles, is considered one of the best investors ever (per this article): 

If Berkshire, for example, were to be liquidated - which it most certainly won’t be -- shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments. Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed - though the companies’ operating economics will not have changed adversely at all. My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

Funny thing is, that's the man himself, Warren Buffett, in his 1986 letter to Berkshire shareholders in response to changes in the 1986 tax reform act. My real-world experience suggests that the savvy 1986 Buffett had a much better handle on how investors think than does the generous -- with other people's money -- 2012 Buffett.

And of course he, as does everybody in the raise taxes camp, hearkens back to periods in history where the economy did fine while tax rates were higher. And of course he, like the rest, makes no mention of effective tax rates, demographics, the economic environment, etc.

And to top it all off, he thinks the government should strive to spend what amounts to 21% of GDP and to collect revenue amounting to 18.5%--in perpetuity. In other words, what leads to utter failure on the part of businesses and individuals (spending beyond means) somehow works for government. I think he's been having tea with Krugman. He's in essence proposing that government grab another $400 billion a year from the private sector (where incentives are true), while cutting public sector (where incentives are, let's say, less than true) spending by less than half that amount (his numbers). If he's truly out to support his pals in Washington--I can think of no other reason for this lunacy--he'd do better to educate them. That's assuming he understands better himself.

If anyone knows Mr. Buffett's email address, please forward him this link showing long-term capital gains tax rates and long-term capital gains tax revenue from 1977 through 2007 (2nd chart). Here are some highlights: 

1977 LT cap gain tax rate: 39.88%, LT cap gain tax paid: $ 7.9B
1978 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $10.4B
(Tax rate cut 30%, Tax receipts grew 32%)

1981 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $11.9B
1982 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $12.5B
(Tax rate cut 29%, Tax receipts grew 5%)

1986 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $50.8B
1987 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $31.8B
(Tax rate increase 40%, Tax receipts decline 37%)

1990 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $25.9B
1991 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $21.6B
(Tax rate increase 3%, Tax receipts decline 16%)

1992 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $25.8B
1993 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $31.4B
(Tax rate increase 1%, Tax receipts increase 22%)

1997 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $69.6B
1998 LT cap gain tax rate: 21.19%, LT cap gain tax paid: $80.6B
(Tax rate cut 27%, Tax receipts increase 16%)

2003 LT cap gain tax rate: 21.05%, LT cap gain tax paid: $44.9B
2004 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $66.2B
(Tax rate cut 24%, Tax receipts increase 47%)

2005 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $92.3B
2006 LT cap gain tax rate: 15.70%, LT cap gain tax paid: $106.6B
(Tax rate cut 2%, Tax receipts increase 15%)

So, in the year immediately following a cut in the long-term capital gains tax rate, revenue actually rose 5 out of 5 times. In the year immediately following an increase in the long-term capital gains tax rate, revenue actually declined 2 out of 3 times (by $19B and $4.3B). In the only year when revenue increased immediately following a rate increase--a mere 1% increase--it did so by $5.6B.

If Mr. Buffett is sincerely interested in seeing greater government revenue from investors, history offers strong evidence that he ought to be pushing for lower, not higher, capital gains tax rates, or--at a minimum--making the current rates permanent. Or if he's inspired by some backward "fairness" reasoning, he should lobby for the tiniest of increases. 

Sunday, November 25, 2012

How Microsoft Produces Cashews...

Beautiful weather, fall colors, the wonders of nature do not come to mind when one thinks of Fresno, California. But for my wife and I, relaxing in lounge chairs on a late November morning is sheer bliss. Our backyard features three towering redwoods, two large pines and a deciduous tree that I can't identify. We are frequented by playful red squirrels and a variety of bird life. Yesterday morning a woodpecker came to visit.

As we watched the Nutall's (found him on Google) hungrily peck his way between the redwood's thick folds of bark -- after all manner of bug life -- I say to Judy, "isn't it fascinating how nature, spontaneously, takes care of herself? While pursuing his breakfast, the woodpecker is protecting the tree from the life-threatening damage caused by burrowing insects, and thus helping sustain the habitat for countless other organisms." Or words to that effect...

The same can be said of markets. As Judy and I pecked at a bowl of cashews while taking in nature's perfection, we were -- at the moment as oblivious to our beneficence as was the woodpecker to his -- supporting our local community (via our grocer), the community of Pleasanton, California (where Safeway packages the nuts), the maker of the plastic tubs they come in (its owners, employees, etc.), the transportation industry, etc., etc., etc., etc., etc., etc., etc. Not to mention Microsoft, Caterpillar, Apple, Pfizer and countless other U.S. exporters. Only a desire for the stuff U.S. dollars can buy would inspire the Indian, Vietnamese, Indonesian or Tanzanian (according to the label) cashew producer to cater to the U.S. consumer. At first blush one would assume that the U.S. climate isn't conducive to cashew production -- oh but one would be profoundly mistaken. The U.S. business climate, through the production of technology, industrial equipment, pharmaceuticals and myriad other goods and services is perfectly suited to the production of cashews in India.

No amount of government planning -- however bright the minds or good the intentions -- will ever remotely yield the universal benefits of free trade.

Friday, November 23, 2012

Ah, Freedom!

Target and Toys 'R Us opened their doors at 9pm on Thursday. Walmart's Black Friday sales began at 8pm. Edward S is thrilled because he and his wife celebrated her "Super Bowl of shopping" at a reasonable hour, which means he gets to play golf on Friday. Mike L is out on Thursday night shopping for a TV, but he's saddened that his kids are with the grandparents on Thanksgiving. And then there's your former Walmart employee using the Thursday-Black-Friday phenomenon to protest poor wages, benefits and working conditions.

On balance, the exit polls are suggesting that folks are pretty jazzed about not staying up all night to save a couple hundred bucks on a flat screen. I wonder how many of these enthusiastic opportunists have given thought to how all this retail activity is supporting jobs in China? While I suspect, if asked, many would voice a concern, I don't suspect that bringing it to their attention would save their VISAs a single swipe.

Ah, freedom -- it's a beautiful thing. The retailers' freedom to open their doors whenever they choose creates options for the Edward S's, and Mike L's of America. Edward gets to play a round of golf, and Mike's kids get more choices for fun with their well-rested Dad come Friday. As for the protesting former Walmart employee, well, he gets to complain awhile before he ventures out to explore better-paying options. Perhaps he has a knack for sales and can learn the golf business. Being that the Edward S's of the world will be hacking away on Friday -- some getting hooked on the sport, some hooking their drives -- both resulting in future equipment sales.

As for China, talk about your blessings! Can you imagine a world without the freedom to trade across borders? If so, you can imagine a world without affordable stuff. And a world without affordable stuff is a world with less stuff, and a world with less stuff is a world with fewer options, and a world with less stuff and fewer options is, well, just watch the following...

Thursday, November 22, 2012


As I sit here staring at my iPad, straining to find some pithy analogy befitting the moment (Thanksgiving morning), so many things come to mind. It occurs to me that while you and I may disagree on certain issues of the day—health care reform, government debt, “entitlement” programs, global warming, taxing the “rich”, regulations, etc.—we would yet find common ground on the deeper sentiments, the blessings of family, of health, of liberty and so on.

Here’s a little message we all can relate to — from my soon to be released daily devotional Leaving Liberty?, Essays on Politics and Free Market Thinking.

Wishing You and Yours a Very Happy Thanksgiving!!


DAY 1: The Good Old Days

When I look to the future I get very nervous, but when I look to the past I feel pretty good.—James Buchanan

I’m generally not one for reminiscing, but the other day I found myself in the throes of a sentimental moment. A friend forwarded me an e-mail titled To Those of Us Born 1925–1970, and man did it ever take me back. Back to my childhood, to a simpler time, to a time when kids could entertain themselves for hours on end—without the luxuries of video games or cable television. I literally got goose bumps as I was reminded of how my pals and I would pile into the backs of our parents’ pickups after Little League games. But now that I think about it, I’m not entirely sure whether my goose bumps were inspired by nostalgia or by my memories of how friggin’ cold it was riding in the back of a truck.

Ah, the good old days, when the future seemed so bright! Like during the Great Depression, WWII, Korea, Vietnam, the Cuban missile crisis, Kennedy’s assassination, Nixon’s resignation, the Arab oil embargo (remember those gas lines?), the Cold War, 19 percent mortgage rates, the junk bond scandal, the savings and loan crisis, the Mexican and Asian currency crises, the 1987 crash, the tech bubble, September 11, 2001, the real estate bubble, and the myriad events between all those I just listed? Seriously, if you were born between 1925 and 1970—or from 1970 on, for that matter—how often were you truly looking to the future with optimism?

In the words of economist James Buchanan, “When I look to the future I get very nervous, but when I look to the past I feel pretty good.”

Now in spite of my calamitous chronology of the past eighty-five years, I believe those of us born in the heart of the twentieth century indeed have much to be thankful for. Life was blissfully less complicated back when the notion of paying even a nickel (let alone a buck-fifty) for a bottle of water, as we drank from garden hoses, would have seemed utterly absurd. Yet while we will forever romanticize our past, we nonetheless strive mightily to make life more comfortable for ourselves and for our posterity. And clearly we have succeeded beyond our wildest expectations.

Pessimists consider themselves realists, and they call optimists idealists. But like Buchanan, when I look to the past and consider how far we’ve come, I’m thinking the optimists had it right.

Of course we have issues. We’ve always had issues, and of course we always will. You may indeed be pessimistic—you indeed have reason to be—and you’ll indeed be proven right every now and again. Or you may be an optimist—you indeed have reason to be—and you’ll indeed be proven right every now and again as well.

I have often wondered if we even have a choice, in terms of those predispositions. Perhaps it’s a chemical thing, or maybe it’s environmental. Speaking for myself, particularly when we’re talking public policy, I concede to both. But again, when I look at the world in retrospect, when my thinking transcends the headlines of the day, I can’t help but be optimistic in the long run.

If you consider yourself a “realist,” no offense—I did not intend here to criticize you. For as the buyer needs the seller, you are every bit as essential to the market’s function as the optimist.

Or, for that matter, if you’re an optimist, I did not intend here to inflate your ego. For you are the pessimist’s pawn. When Gloomy Gus gets it right, there has to be some bleary-eyed buyer to sell to.

Tuesday, November 20, 2012

Incentives (white board lesson)

So what's so bad about the "fiscal cliff"? Well, it depends on your bent. If you're all about tax fairness, and you're focused on tax rates, as opposed to the distribution of taxes paid (the upper 25% of income earners pay 80+% of all income taxes), then you're all for the expiration of the "Bush Tax Cuts"—on families earning over $250k per year that is. That'll also stick it to those greedy investors who, in the pursuit of profits, promote the capital markets that support the enterprises that support the American workforce—as the top tax on capital gains goes to 23.8% and dividends to 43.4% (although I expect compromise on dividends). If, on the other hand, you happen to be one of those crazy people who believe resources are better allocated in the private sector, you're not at all excited about taxes going up for anyone, regardless of how much they earn.

As for government spending, if you're in the "fairness" camp, I suspect you're adamantly opposed to the sequester (automatic spending cuts). If you're in that crazy resources-better-allocated-in-the-private-sector camp, you know that lower government spending ultimately means more resources left where the incentives promote lasting economic growth, as opposed to where the incentives promote lasting political careers.

Here's what I'm getting at:

Sunday, November 18, 2012

Even as reality plays out in Europe, we still don't seem to get it...

Just a year ago top Democrats were set to give a little on Social Security and Medicare. Today, however—emboldened by President Obama's victory—they're singing a different tune.

Here's Harry Reid last week:

"I've made it very clear. I've told anyone that [sic] will listen, including everyone in the White House, including the president, that I am not going to be part of having Social Security as part of these talks relating to this deficit."

A year ago one might have thought that reality was at last finding root in Washington—the reality that the present course cannot be sustained. But, sadly, the only reality motivating the actors last year was their fear that—given the Republican's mid-term success with their supposed smaller-government platform—reality may have at last found root in the American electorate. 

If indeed the President's win means what Reid's position would suggest, well then, even as reality plays out in Europe, we the electorate still don't seem to get it. 

As for the politicians; as Gordon Tullock suggests (The Economics of Politics, Volume 4), they won't get it until we do:

Politicians and businessmen will sometimes pay a price (lost constituent support) in order to do what they think is good, but on the whole they can be expected to act in such a way as to maximize their own well-being in terms of re-election prospects. Stated in different language, the politician as businessman pursues policies which he thinks the people want because he hopes they will reward him with their votes.

Saturday, November 17, 2012

Lessons of Nature...

As I've expressed herein ad nauseam, loss is an all-important economic concept. Loss teaches the losers, and the observers, how not to do things. Loss clears markets of excesses born of gluttony and greed.

Nature forever offers the best metaphors for life, and, as follows, for business and economics as well.

Here are a few excerpts from Science Daily's April 2012 article Loss of Predators in Northern Hemisphere Effecting Ecosystem Health—each followed by my analogy...
"A survey on the loss in the Northern Hemisphere of large predators, particularly wolves, concludes that current populations of moose, deer, and other large herbivores far exceed their historic levels and are contributing to disrupted ecosystems."
Modern-day fiscal and monetary policies are designed to neutralize the natural culling effect of economic contractions—plausibly leading to the disruption of the naturally-cyclical economic system.
"The research, published recently by scientists from Oregon State University, examined 42 studies done over the past 50 years. It found that the loss of major predators in forest ecosystems has allowed game animal populations to greatly increase, crippling the growth of young trees and reducing biodiversity."
With loss out of the equation (via subsidies and bailouts), we effectively mitigate creative destruction. We, in essence, severely limit the opportunities for nimbler competitors—and the consequent benefits to consumers—that would otherwise occur during economic contractions.
"In recent years, OSU researchers have helped lead efforts to understand how major predators help to reduce herbivore population levels, improve ecosystem function and even change how herbivores behave when they feel threatened by predation -- an important aspect they call the "ecology of fear.""
The threat of loss, the "ecology of fear", engenders thoughtful calculation. Knowing there'll be no compromising the taxpayer to rescue them from their mistakes, corporate execs would painstakingly assess the risks of their prospective ventures.
"In systems where large predators remain, they appear to have a major role in sustaining the diversity and productivity of native plant communities, thus maintaining healthy ecosystems."
A truly healthy economy is dependent upon the knowledge among all players that regardless of how deep into woods they venture, they're entirely on their own.

Thursday, November 15, 2012

We'll See...

I'm reading a lot of commentary these days about how "conservatives" need to wake up, to abandon their "radical", "rancid", "divisive"—and a host of other adjectives—agenda. The people have spoken!

Well, what if "the people"—that 51% of Americans who voted for big government—got it wrong? I mean do you suppose the progressive columnist would admonish those who oppose Venezuela's Hugo Chavez to wake up and abandon their cause since he just retained office at the behest of 55% of Venezuelans? I think even the likes of Washington Post's Eugene Robinson and E.J. Dionne, Jr., and NY Times' Paul Krugman just might confess that the Venezuelans got it wrong (although you never know with Krugman).

Of course we're a long way from Venezuela (but a little closer to Europe), and, honestly, I'm not at all torn up over the Democrats' victory. In fact, if entitlement reform is imperative (which it absolutely is), a rational, forward-thinking liberal would face substantially less resistance (think Clinton and welfare reform back in the '90s) than a hard-nosed conservative. But I'm not seeing that classic (and so necessary) second-term move to the center from President Obama—not in the least!

But hey, it's still very early, and the President, like virtually every other politician (on both sides of the aisle) I can think of, has a history of threatening one thing (no closed-door meetings, kicking out the lobbyists, etc, etc, etc, etc.), and delivering another (breaching the Constitution and bankruptcy laws to—after many closed-door meetings—screw creditors and hand GM over to the UAW, all the exemptions from the ACA (aka Obamacare), inviting in a record number of lobbyists, etc, etc, etc, etc.). I'm hoping that what we've witnessed the past couple of weeks is simply the President offering a big thank you to his many supporters, and that by next Monday he'll wake up and realize that if he's to leave any semblance of a respectable legacy, the next four years will have play out markedly different than the last (we'll just have to wait and see). Which means he'll be disappointing the sadly confused constituent Frederic Bastiat had in mind (in 1848) when he wrote:

"The oppressor no longer acts directly and with his own powers upon his victim. No, our conscience has become too sensitive for that. The tyrant and his victim are still present, but there is an intermediate person between them, which is the Government - that is, the Law itself. What can be better calculated to silence our scruples, and, which is perhaps better appreciated, to overcome all resistance? We all therefore, put in our claim, under some pretext or other, and apply to Government. We say to it, " I am dissatisfied at the proportion between my labor and my enjoyments. I should like, for the sake of restoring the desired equilibrium, to take a part of the possessions of others. But this would be dangerous. Could not you facilitate the thing for me? Could you not find me a good place? or check the industry of my competitors? or, perhaps, lend me gratuitously some capital which, you may take from its possessor? Could you not bring up my children at the public expense? or grant me some prizes? or secure me a competence when I have attained my fiftieth year? By this mean I shall gain my end with an easy conscience, for the law will have acted for me, and I shall have all the advantages of plunder, without its risk or its disgrace!"

As it is certain, on the one hand, that we are all making some similar request to the Government; and as, on the other, it is proved that Government cannot satisfy one party without adding to the labor of the others, until I can obtain another definition of the word Government I feel authorized to give it my own. Who knows but it may obtain the prize? Here it is:

"Government is the great fiction through which everybody endeavors to live at the expense of everybody else.""


Wednesday, November 14, 2012

The hunt for bias-confirming data...

Letter to the team at Fidelity Viewpoints

In your recent article Stimulus vs. austerity: Getting it just right you state the following: "We looked at a variety of countries faced with financial crises and high debt levels*. So far, it looks like the U.S. has been following the more successful recovery paths of Sweden and Finland rather than those of Japan, Spain, or even the U.K. The key now is how U.S. policymakers deal with the looming fiscal cliff." You then proceed to make a case that, among other things, the ill-conceived timing of fiscal-tightening resulted in economic downturns. You essentially suggest that your three subjects simply didn't engage in government spending sufficient to get themselves out of their respective fixes.

*Note; Sweden's and Finland's "high debt levels" as a percent of GDP were 40% and 38% respectively in 2008.

What troubles me about reports such as yours is that they all-too-often appear to represent the bounty from their author's hunt for bias-confirming data. If—in your case—not, then I'm left to presume that the "variety of countries" you "looked at" didn't happen (oddly) to include Canada, Switzerland, Lithuania, Latvia, and I'll throw in Estonia—even though its debt level wouldn't be considered high. That assumed, here's some data—most of it taken from Michael D. Tanner's June article Austerity Workson these five countries that might inspire you to re-think your thesis. And yes, I confess, this would be the bounty from my own hunt for bias-confirming data. However, while you and I may invoke the old correlation-ain't-causation argument when critiquing each other's case, we can't deny that the data don't lie.

Canada has been cutting government spending since the early 1990s. It has also cut capital gains taxes, and income taxes, and has brought its corporate tax rate down from 29% in 2000 to just 15% today. Its national debt is now only 34% of GDP, while ours is over 100%—and its budget deficit is just 3.5% of GDP, while ours is 8.3%. Canada is looking at 2.6% GDP growth this year — ours, 1.9%. Its unemployment rate is 7.3%, while ours sits at 7.9%.

In a CNBC interview yesterday, Cisco Systems CEO John Chambers stated that Canada is a great place to do business, and Cisco plans to invest heavily there in the years to come. He said "we could learn a lot from them".

Switzerland abides by its constitution that limits its ability to grow debt and increase taxes. Consequently, its national debt is only 41% of GDP and on the decline, and it sports the lowest unemployment rate in Europe, 3.1%.

Lithuania dramatically cut spending on public sector wages and pensions. Sadly, however, they are offsetting those cuts with tax increases. Still, GDP is expected to come in at 2.2% this year.

Latvia responded to the recession with the toughest budget cuts in Europe. Half of all government run agencies were eliminated, one-third of all government employees were let go, and public sector wages were cut by 25%. Unemployment has dropped from 19% to 15%. This year's budget deficit is just 1.2% of GDP and the national debt is only 37% of GDP and declining. GDP growth looks to come in at 3.5% this year.

Estonia cut government spending sizably and has "liberalized the country's labor market, making it easier for business to hire and fire workers". Result; a budget surplus, while servicing a national debt of only 6% of GDP. While it enacted a small increase in its value-added tax, "it deliberately kept taxes low on businesses, investors, and entrepreneurs, refusing to make changes to its flat 21 percent income tax. In fact, the government has put in place plans to reduce the income tax to 20 percent by 2015." Its GDP looks to come in just north of 2% this year, after growing at an amazing 7.6% in 2011. Unemployment remains at a high 11.7%, however that's a reduction of 38% from the recession-depth high of 19%.

Clearly, what you deem "premature fiscal consolidation" doesn't always lead "paradoxically to rising and even more unsustainable debt/GDP levels over time." In fact, as evidenced above, fiscal consolidation—whenever called for—may in fact lead to declining and totally sustainable debt/GDP levels over time.

Marty Mazorra

Market Commentary (audio)

Click here for today's commentary...

Today's TV Segment (video)

When I suggest that the answer to getting this economy moving would be a tax-neutral plan where rates are lowered and loopholes and deductions are eliminated, the "getting the economy moving" part would come from the certainty (think CEOs sitting on $1.5 trillion in cash) that comes from knowing where the !@#& we stand going forward. And of course there's so much more to be said that we can't accommodate in a four minute TV spot.

Tuesday, November 13, 2012

Big government doesn't happen without our cooperation... (and two white board lessons)

John votes yes on California Proposition 30—he's the superintendent of his local school district.

Jane lobbied for the Affordable Care Act—she's the CEO of a major generic drug producer.

Jack votes for the candidate who promised to buy up a few million pounds of Midwestern-grown beef—he's a drought-stricken Midwestern meat producer.

Jill votes for the candidate who she believes will push hardest for yet tighter nutrition standards for the nation's schools—her company produces boxed juices.

Josh votes for the candidate most likely to raise the minimum wage—he's the CEO of a major big-box retailer that pays an entry-level wage substantially higher than the minimum. He knows that a higher minimum wage could do real damage to his smaller rivals.

Joan votes for the candidate who she figured would play toughest with China—she belongs to the United Steel Workers Union.

Jason votes for the candidate most likely to extend the Renewable Fuel Standard (blending ethanol into the gasoline pool)—he farms corn.

Julie votes for the candidate most likely to promote the strictest regs for the financial services industry—she's a compliance consultant to registered investment advisors.

John, Jane, Jack, Jill, Josh, Joan, Jason and Julie are all simply looking out for their own separate interests. The problem being, when the achieving of our own objectives results in the taking from others (through higher taxes, higher cost items and fewer freedoms), we, ourselves, are not spared the adverse consequences. Every resource extracted [from the private sector] by government is a resource allocated under compromised incentives. Not that every government function is a terrible thing, it's just that the incentives that arise from the politician (in pursuit of his own objectives) spending other people's money on other people are vastly different than they are in the private sector—where, while spending our own money on ourselves, prudence and productivity are paramount.

As for markets; in a world where 85% of the population resides in developing nations, it's hard not to be optimistic over the long-term. The only 'long-term' scenario that I can conceive of that would lead to a perpetually sluggish global economy is one where growing governments entirely crowd out private sectors. Thankfully, the U.S. (and a few others) notwithstanding, that would not be the present dominating global narrative.

Here are two recent white board lessons illustrating the importance of free trade: Linked to The Aging of America, The Stock Market and Free Trade, and, Whom Should We Protect:


Friday, November 9, 2012

A Long Way from Getting Our Nursery in Order...

Jared Bernstein, debating the liberals' tax case with a conservative opponent (missed his name) on CNBC this morning, said it all. I paraphrase; we can talk about closing loopholes all day long, but, in reality, every loophole is somebody's baby that they're not going to give it up without a fight. Suggesting that a compromise on revenue will not happen without raising marginal tax rates on those earning over $250k — which, by the way—all things being equal—would raise an estimated $60-70 billion a year. So if you think, as the President implies, that this will go a long way toward solving our fiscal problems, you've got another think coming. That "boost" to revenue amounts to maybe a week of government spending.

Nevertheless, for the sake of expediency, raising tax rates on the "rich" sounds a whole lot more doable (fiscal-cliffly speaking) than tackling our monstrosity of a tax code. But what about spending cuts? Isn't every dollar spent somebody's baby as well? And what happens when those who'd take the higher tax hit also benefit from government spending? How hard do you think they'd lobby to protect their baby?

Don't worry folks, compromise will happen—and somehow, someway, everyone's baby will survive. Which means we're yet a long way from getting our nursery in order.

Thursday, November 8, 2012

A Simple Look at The Market (day after the election) - (white board lesson)

Here's a most basic look at what drives stock prices. Of course, as you know, intermediaries exist between the buyers and sellers of securities, but when it's all said and done--in a competitive market--prices (even of stocks) are a function of supply and demand.

Market Commentary (audio)

Click here for today's commentary...

Tuesday, November 6, 2012

Market Commentary (audio)

Click here for today's commentary...

How not to kill your portfolio...

I recall during campaign season 1992, a good friend declared that if Clinton wins he's leaving America. He figured that life would be better lived outside a country led by a politician he viewed as a hard-left-wing ideologue. Well, Clinton of course won, and my friend stayed put and got to enjoy the fruits of a fabulous economy, fueled by the tech revolution. Yes, I give the tech-driven private sector of the '90s, not a politician, credit for the '90s economy.

Today is Election Day 2012. Like any ordinary day, the TV in my office is tuned to CNBC, I keep the sound off probably 90% of the time—it's easier to glance up at the indices than it is to pull the numbers up on my computer. If something captures my eye, perhaps a featured economist or analyst whom I'd like to hear, I'll turn up the sound. Of course today's theme—all over the financial media—being, what happens with the markets and the economy in either (Obama or Romney) event. I just received an email invite to an online video event titled The Post Election Economy, A Clear-Eyed Analysis of the Risks and Opportunities for Investors. In case you're thirsting for such analyses—wondering how best to allocate your portfolio for the years to come—here's our straight forward, un-sexy, view:

For starters, the winners and losers, by sector, will (I suppose) be different depending on who takes the White House. But, please, don't dare venture any guesses. Stay diversified across sectors and take no oversized bets based on any guru's prognostication. If you are our client, you know that last year we did recommend an increase in consumer staples stocks—which was inspired by what I'd call palpable global uncertainty. This is different than playing a sector based on some singular view of what one ever-wavering (that would characterize all of them) politician may or may not do during the course of his term.

Earlier this year, we suggested something on the opposite end of the spectrum—a modest increase in exposure to emerging market equities. This speaks to our view that many developing world stocks suffered mightily due to a flight to "quality" (the US dollar), brought on by palpable global uncertainty—and the prospects for years of growth where 85% of the world's population lives. Again, this would have absolutely nothing to do with who will occupy the Oval Office over the next 48 months.

We've also stayed, stubbornly, out of long-dated bonds—based on the sheer commonsense that while bond prices share an inverse relationship with interest rates, you don't hold bonds when interest rates are at history-of-mankind lows.

And going forward we will no doubt, as always, look to make sound fundamentally-(not politically)-based improvements at the margin. Natural gas, for example, is looking more interesting all the time.

Bottom line; smart investors remain diversified, rebalance periodically to some pre-determined target equity/fixed-income allocation, and never base their decisions on the whims of short-minded policymakers or the prognostications of those who absolutely cannot know what the future holds—as I illustrated with pictures in this brief fit of sarcasm, Beware the King(s). 

Portfolio killing mistakes are virtually always the result of get-rich-quick thinking—which is, in essence, attempting to guess the utterly un-guessable.

Monday, November 5, 2012

The Big Day!

Tomorrow's the big day! And make no mistake, this presidential election is without question the most important of your life. That is if you're a hedgehog (they live about four years on average). If you happen to be a human, the next 48 months will (assuming you're taking care of yourself) represent merely 5% or so of your earthly experience.

Oh but I know, there's so much at stake! A couple Supreme Court appointments could change the landscape for literally generations to come. Sure, that's something to consider. But weren't you blown away by conservative judge Roberts' deciding vote on the health care plan. Even with the panel stacked on an issue, human beings can surprise you.

And sure, we can wax eternal (oh and I will) about the ills of big government. But the thing is, while government growth has indeed accelerated of late, both parties have a proven penchant for wielding policy at virtually every arising issue. Remember, the recent round of corporate bailouts was born under a Republican administration. And if you think McCain would not have signed on to a few thousand pages of new banking regulations, you better think again. Here's the man himself on the stump in 2008:

"Government has a clear responsibility to act in defense of the public interest, and that's exactly what I intend to do."  "In my administration, we're going to hold people on Wall Street responsible. And we're going to enact and enforce reforms to make sure that these outrages never happen in the first place."

But would we now have McCaincare? Good or bad, surely not, right? Well, he was promising health care reform should he win the White House—although his approach was (supposedly) somewhat market-oriented. But would the debt have grown by $5 trillion under McCain (Obama accomplished that feat in half the time it took GW Bush)? I would like to think not.

Of course we can do this for a dozen pages—there's this website that lists Obama's top 50
"accomplishments" (I read the first 20 and had to stop—I treasure my low blood pressure)—but I'll cut to the chase. A day and a half from now, assuming no Bush/Gore repeat, we'll know which puppet is going to man the nation's helm for the next 16 quarters. That's right "puppet". Folks, wherever we're to be in the years to come will not be determined by a single politician who, at best (or worst), will captain our ship through a couple generations of hedgehogs. Whatever the metaphor, puppet or chameleon, know that the politician aims to please his base (whatever group he determines that to be on any given day). If we don't like the direction we're heading—if our present course destines us to wreckage on the rocky shores with Europe—well then, I suppose we should grab hold of the strings now and force a change in course onto our captain and crew.

Read again my 9/29 post, in its entirety below. And, when you vote tomorrow, I urge you to vote for whomever and whatever you believe will result in less government. And lobby ever-harder in that direction going forward...

The Next American Idol - Or - We Need Our Own Euro-Moment - Or - Be Careful What You Pine For...

Of all the arguments for limiting government, the fact that, in the best of circumstances, some number of elected agents composing an effective majority on a given issue determines the standard for 100% of the people (speaking of our representative democracy) is probably the most compelling. Of course it goes without saying that 51% (or 66%) – attending, alas, to their respective agendas – dictating a standard is infinitely better than .0000003% (a single dictator). But, nonetheless, those things we decide collectively should be, at all costs, as few as possible.

So what are we to do with this contagion we call government? This virus that consumes the limbic system of the under-achieving individual. Through sensory-dulling support (which includes a debit card, a cell phone, heavily subsidized rent, etc.), it destroys his motivation – he dare not dare to exploit the American opportunity. As for institutions, it opens itself and baits the highest bidder. Deals are struck. Capital, via subsidies, tariffs, regulatory engineering and tax loopholes, is redistributed to the politically favored. The alleged efficacy of a given regulation or program is trumpeted by the institutions it was designed to serve – the CEO turns politician.

Back-stage-Washington is where politicians bargain on behalf of their respective agendas. Front-stage is where they say what we want to hear. They know their constituent. They know the voting majority is more interested in the next American Idol than it is the next American President. Thus, the candidate with the swagger – the stage-presence – takes home the spoils.

Some (not, I presume, the American-Idol-worshipers) believe this to be the most important election of our time. I disagree. Yes, policy is at the root of the uncertainty holding the American economy at bay, but policy is a mere reflection of the wants of the populace. Obama, the consummate politician, the community organizer, has read the tea leaves and made his calculations. November 6 is entirely his to lose.

My conservative friends fear that he’ll do great damage with four more years and no reelection to concern him. They pray for a Republican dominated congress to stonewall his efforts. Consider me agnostic. Let’s say the Democrats take Congress and Obama wins another term. If his aim is to bring us to some socialist state, as some seem to fear, I suspect the markets will [severely] punish his efforts, and his party will abandon him faster than the Republicans abandoned GW Bush when the Iraqi conflict went awry. Should Romney and company sweep, what are the odds they’ll muster the political will to affect meaningful spending reform in the face of this tepid economic recovery? Zero to none, I imagine.

I’m afraid we need our own Euro-moment before we get our nation back on track. Some see it coming sooner than later, and, again, I see no evidence suggesting either side has the will to force the kind of reforms that would avert such an event. Thus, if the seers are right (our comeupins coming sooner than later), and you’re pining away over your candidate – well – just be careful what you pine for…

Saturday, November 3, 2012

One more stab at Krugman's view of Government Debt - Or - Beware the Slump-Keynesian

A little constructive push back on Thursday's open letter to Paul Krugman got me thinking; "how would the professor respond, were my article to find its way to his computer screen? How do I know government debt matters—even when it's owed to ourselves—when a Nobel economist, and others, say it doesn't?" (Notwithstanding the confirmation from—in my view—more credible economists

So I pondered further:


Krugman maintains that "families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation." When he says "all they need to do is ensure that debt grows more slowly than their tax base", he's concerned with what, in mortgage application terms, would be your debt-(service)-to-income ratio (DTI). You could have outstanding debt that exceeds 100% of your annual income, but as long as the payment on that debt amounts to say a fourth of your income, and you have a steady job and a good credit score, you'd be good to go with a new mortgage—provided the new payment isn't so large as to throw your DTI too far out of whack. And his point regarding the WWII debt never being repaid is of course factually incorrect—all of the original debt has long been repaid. It essentially equates to a family refinancing mortgage after mortgage, in perpetuity, on a home that gets passed from generation to generation. Thus, in that respect, there's no distinction; whether we're talking a family or a government, all either needs to do is ensure that its debt grows more slowly than its income.


Now do you feel better—knowing that as long as the economy grows faster than the rate of government borrowing we're safe? I didn't think so. As you know, recessions happen. And during recessions tax receipts decline. And during recessions politicians borrow and spend heavily (there'll be no suffering on their watch)—the debt's risen 50% in four years because President Obama inherited the worst recession in a century, or so the story goes. But, thanks to lower interest rates, the actual debt service has barely budged during the same time period. I'm reminded of the mid-2000s homeowner who was able to refinance, cash out a chunk of equity, and keep his monthly payment roughly the same. Those mortgage investors of yesterday—just like financial markets (lending to Uncle Sam) of today—were willing to lend at very low interest rates. And as we know, alas, that didn't turn out so well. I fear the professor is taking an awful lot for granted.


Now let's consider an example where Krugman—in stating that governments need to ensure that their debt (regardless of who owns it) grows more slowly than their tax base—was right on the money (or, perhaps, defeats his own argument). That would be Italy—another country whose debt is largely owned by its people. As you know, Italy is in a bit of a pickle. Clearly, its economy has not kept pace with its rate of borrowing. And why would that be? Is it all about the recession? Maybe. But recessions—some harsher than others—come and go. And they tend to deal the heaviest blows to those who chose not to get their fiscal houses in order during the preceding expansion. Krugman likes to lever Keynes's statement, "the boom, not the slump, is the right time for austerity" the problem being, politicians (and too many economists) are great slump-Keynesians, but they're terrible boom-Keynesians. So do you think maybe that's Italy's problem? That it's all about easy-money leading to easy-living? And that easy-living can be addicting (hence no boom-Keynesianism)? And that an addiction to easy-living leads to a decline in productivity? And that a decline in productivity leads to a weak economy? And that a weak economy leads to less tax revenue? And that less tax revenue leads to more borrowing? And that more borrowing leads to less investor confidence? And that less investor confidence leads to higher interest rates? And, finally, as the old debt comes due, higher interest rates incite panic as the government can no longer sustain its debt service obligations. That's when investors (natives even*) flee, and the government is forced, at last, to take austere measures. Which means to shrink itself to an affordable size—while, in the process, exacting the unavoidable pain of withdrawal onto its people—in the hopes of emerging some years later, lean and productive. And remaining that way until its children become Keynesians.


*But financial officials have become jittery about the possibility that Italians may stop buying this debt, and instead become more like Greeks and send their hard-earned savings abroad. —from the NY Times article linked above.


So perhaps, rather than criticizing Krugman, we should be thanking him for enlightening us to the fact that when a nation's debt—regardless of who owns it—grows faster than its income, it's got problems. But do you suppose the professor would appreciate our appreciativeness? Surely not. He would entirely reject the notion that Italy's predicament stems from the manner of activities (over-spending, cronyism, etc.) endemic to government-dominated economies. He blames its creditors for forcing reform at a time when they should be opening the floodgates—as well as the lack of its own printing press. To believe otherwise would be an outright betrayal of the Keynesian ethos...