Didn’t our Democratic friends always intend to derail the supercommittee over the top Bush tax rates? You remember that $800 billion revenue number always floating around from the Democratic leaks? Well, that’s the static-revenue estimate of repealing the 35 percent and 33 percent Bush rates. And sometimes that Democratic revenue number moved up to $1.2 trillion. Well, that would include the static-revenue estimate of the 5.6 percent millionaire surtax. Get it?
In an important sense, the whole supercommittee debate from the Democratic side was about taxing the rich. They never went quite as far as Obama’s populist class-warfare rant, at least not publically. But basically this logjam was about so-called tax fairness.
Ironically, when the automatic spending cuts trigger in, Speaker John Boehner will win out. His original vision — going back to the debt-ceiling debate last summer — was $1 in spending cuts for each $1 of debt increase. So the sequester will get $1.2 trillion in spending cuts on top of last summer’s $1 trillion.
No it’s not great. We should have done $4 trillion to $6 trillion by reforming entitlements and undergoing pro-growth tax reform for individuals and corporations. But at the end of the day, we dodged a super tax hike and got a couple trillion dollars of lower spending. Not the worst thing in the world.
Instead of a super tax hike from the supercommittee, a much better option for the economy and budget-cutting credibility would be to implement plan B, which is the automatic spending-cut trigger known as sequestration.
The Wall Street Journal editorial on the sequester scenario shows a roughly $70 billion budget cut in 2013 and probably more in the future as the budget baseline is pulled down. A $70 billion cut would be one of the largest on record — maybe the largest. It would show real budget discipline. And it is vastly superior to the economy-killing $500 billion to $800 billion tax hike supported by Democrats who oppose true tax reform that would lower marginal rates and broaden the base.
But both parties are quaking in their boots over the automatic budget-cutting trigger.
I interviewed senator and supercommittee-member Pat Toomey last night on CNBC. He has the best tax-reform plan, which would drop the top rate to 28 percent, bring other rates down, and limit upper-income deductions and exemptions. Unfortunately, Sen. Toomey’s plan does not at this point appear to have bipartisan support.
Nevertheless, Toomey told me that the automatic trigger has big problems. Specifically, he noted that half the trigger would be concentrated on defense. Then he said, “In the very unfortunate event that our committee were not to be successful, and I still hope we will, but if not, then I think we would have a very concerted effort to reconfigure the sequestration.”
Mr. Toomey’s Republican colleagues undoubtedly agree with this reconfiguration. But you can bet the Democrats on the committee will not. So the only way out would be the most irresponsible way out: junking the automatic spending-cut trigger altogether.
And that option would be a disaster for financial markets. Stocks would plunge. Think back to last July and August during the debt-ceiling debate. Junking the trigger would be a fiscal blight and would mean a sure credit downgrade.
For those who worry about the defense problem, leave it to a post-election Congress that could provide a supplemental to add back some defense spending if necessary. All the budget issues will be revisited post-election anyway.
But junking the trigger would be a fiscal calamity for the United States. It’s an X-rated option. Don’t even think about it.
You wouldn’t know it from today’s stock market, which as of this writing is off nearly 200 points. But the daily numbers continue to show an economy that is stronger than most folks think.
Today, for example, initial jobless claims fell to 388,000 — the lowest level in seven months. And the Philly Fed manufacturing index, which translates to 53 on an ISM basis, shows a very strong employment component.
Earlier in the week, the index of industrial production beat estimates with an especially strong reading on business equipment. That spells strong capital-goods investment, itself a job creator.
Retail sales in October also beat estimates, and are rising over 7 percent against year-ago. Both producer and consumer price inflation dropped slightly in October.
Smart economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP for Q4. Another luminary, Joe LaVorgna, thinks GDP could actually be 4 percent for the quarter ending in December.
All these better readings continue to clash with market pessimism over Europe’s debt and banking problems. Today on CNBC, however, St. Louis Fed president Jim Bullard said the European problem will be contained, and that it won’t have much effect on the U.S. economy.
And eminent economist Art Laffer believes the new Italian government run by Mario Monti is putting together a pro-growth economic plan to extend the retirement age of public workers, knock out 300,000 government-sector jobs, overhaul the tax system, and privatize state-owned properties. Laffer believes Monti, the former European commissioner for taxes, favors pro-growth reform and simplification. Laffer also thinks Germany will knock its budget deficit under 3 percent, with spending cuts combined with a small tax cut.
In other words, the European story may not be quite as bad as the bond-market vigilantes believe.
There’s no question that the Eurozone is close to recession, and that many of its members still have massive work to do. They need to live within their means, thwart the social-welfare entitlement system, and curb government-union excess. Plus there’s the need for flatter-tax simplification to promote growth.
But I can’t help but think that whatever the state of decline in Europe may be, it is the U.S. that ultimately will benefit. Despite the class-warfare mistakes coming out of Washington and a weak-kneed supercommittee, political regime change is coming. Meanwhile, the U.S. economy is more resilient and perhaps even stronger than people think.
It would be a great tragedy if a super tax hike came out of a supercommittee compromise deal. It would do great harm to the economy — just as much harm as President Obama’s various tax-hike threats. And on the Republican side, a super tax hike would irreparably split the GOP.
Okay. Here’s the good news. In a CNBC interview this week, I asked supercommittee co-chair Jeb Hensarling about an idea of the Democrats to raise taxes by $600 billion to $800 billion. About $300 billion of that might be up-front, with $500 billion later from some tax-reform overhaul. This would be an unmitigated economic disaster.
But Hensarling was blunt: “Not going to happen, Larry.” He said no such deal has been presented to him. And if it were, he and other Republicans on the supercommittee would not support it.
The 12 member congressional supercommittee is still working on a deficit deal, but co-chairman Jeb Hensarling (R., Tex.) told me on The Kudlow Report that “super” tax hikes will not be part of any compromise.
“We’re facing a jobs crisis and a debt crisis,” he said Tuesday night. “We’re certainly not going to exacerbate one by trying to address the other. Frankly, that’s one of the reasons we are stymied at the moment.”
Hensarling denied any knowledge of what the Wall Street Journal said was a plan for $300 billion in tax revenues up front and $500 billion in tax revenues later. “As the co-chairman of the committee, I don’t know what agreement you are talking about,” he said. “It certainly hasn’t been presented to me.”
The supercommittee has until November 23 to agree on a plan to cut the federal deficit. The legislation that established the panel of six Democrats and six Republicans put in place an enforcement mechanism that will trigger automatic cuts if the committee fails to reach an agreement on $1.2 trillion in deficit cuts over ten years.
Hensarling told me that Republicans have gone as far as they feel they can go. “We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates,” he said.
Hensarling believes they can bring down the top individual tax rate to between 28 and 30 percent and the corporate rate to 25 percent. “On balance, we think that would be pro-growth,” he added. “But listen — any penny of increased static revenue is a step in the wrong direction. We can only balance that with pro-growth reforms. And, frankly, the Democrats have never agreed to that.”
Fears over the European debt crisis sent the market lower Monday, with financial stocks leading the way. But Rochdale Securities’ Dick Bove says what’s happening in Europe is actually helping U.S. banks.
“The irony of what’s going on right now is that the banks are benefiting at the moment from what’s going on in Europe,” Bove told me on last night’s Kudlow Report. “The European banks are selling American assets to American banks at discounted prices, which is creating a benefit for the American banks.”
The fact is that banking companies are in pretty good shape, Bove noted, adding that there should be no worries about funding issues since U.S. banks are flush with cash. In fact, he thinks U.S. banks are overcapitalized.
“If you take all the numbers going back 75 years to when the FDIC was first created,” he said, “we’ve never had this high a level of capital plus reserves as a percentage of assets in the banking industry, ever.”
Plus, Bove said deposits are pouring in as people fearing what’s happening in the market put money in banks. “The banks have too much liquidity right now; too much capital right now,” he said. “There is no funding issue.”
Which banks are Bove’s picks? He likes JPMorgan Chase, U.S. Bancorp, and Morgan Stanley.
There were three winners in the CNBC debate: Herman Cain, Mitt Romney, and Newt Gingrich. Gov. Rick Perry was the obvious loser because of his memory lapse.
The guy with the toughest job on Wednesday night was Herman Cain, who has been hammered by sexual-harassment charges. He needed a strong performance to put him back on message with his 9-9-9 tax plan and pro-business, free-enterprise views. I give him first prize, simply because he performed so well. He had the most to gain and the most to lose. He gained.
The idea of 99 percent of the population versus 1 percent of the rich, which Occupy Wall Street protestors have made their mantra, is just wrong, GOP presidential candidate Newt Gingrich said on The Kudlow Report last night.
“I am for 100 percent,” he said. “I think this idea of 99 percent and 1 percent is grotesque European-socialist class-warfare baloney.” And President Obama is playing right along with that class warfare by expressing sympathy for the protesters, he said.
“I repudiate anybody who wants to divide Americans, and I think that there is a fundamental destructive quality to this 99 percent idea,” Gingrich said. “I think that it is shameful the president of the United States would engage in class warfare and pit Americans against each other in way[s] which can only be destructive of the fabric of American society.”
If elected president, Gingrich plans to jump-start the economy and create jobs by taking a page from Ronald Reagan. The plan, he said, is simple: “lower taxes, less regulation, more American energy, and work with the people who create jobs and don’t engage in class warfare against them.”
Gingrich noted that while he was speaker, he worked with President Clinton on reforming welfare and cutting taxes. But Clinton was a centrist, he said, while Obama is a genuine “radical” who has difficulty negotiating.
The candidate also addressed the sexual-harassment allegations plaguing his rival Herman Cain, telling me that Cain did the right thing by addressing the claims. “He was clear, he was forceful, and he certainly deserves people giving him the benefit of the doubt,” Gingrich said. But he noted that we’ll have to wait and see how it plays out. “It’s not over yet,” he said.
Small-business jobs in the Labor Department household survey have increased by an average 335,000 in each of the last three months. Kelly Evans of the Wall Street Journal notes that the ADP survey is showing stronger small-business employment. Earlier reports on business-capital investment show considerable strength. Despite all the debt and banking-contagion worries over in Europe, the U.S. stock market continues to creep higher. Initial jobless claims have slipped under 400,000. Oil prices continue to rise, gaining almost $20 over the past few months. Bank loans to businesses are rising in double digits. So is the M2 money supply. And corporate profits have exceeded expectations once again.
No, Washington is not helping. Neither is Europe. China looks shakier and shakier. And we know that consumer real incomes and housing are still problematic.
But let me wonder out loud: Is the American economy stronger than we think?
Despite some modest improvements in the jobs picture with the release of today’s Labor Department report, I would guard against any irrational overexuberance that problems with employment or the economy are being solved.
A smaller-than-expected 80,000 gain in nonfarm payrolls was bolstered by upward revisions in the prior two months, amounting to 102,000 additional jobs. So over the past three months the establishment survey has averaged 114,000. It’s really nothing to write home about.
A 2 percent economy is simply way too slow to generate the kind of 300,000 per month job gains the country needs. Economic growth at 5 percent would be more like it.
And this should be a warning to members of Congress who are flirting with higher tax rates as part of the supercommittee deficit deliberations. There’s loose talk about raising the top Bush tax rates and adding to that a surcharge on millionaire tax rates. That would be a big negative for future growth. Moving the top rate for investors, small-business owners, and other successful earners from 35 percent to 50 percent in the name of deficit reduction would be a devastating blow to growth. By the way, it would not even remotely solve our deficit problems, which are the result of overspending across the board.
Turning back to the employment report, one of the biggest problems is the lack of income and earnings power. Average hourly earnings are only 1.2 percent annually over the past three months, compared to a consumer price increase of 4.8 percent. So after-tax post-inflation income is still falling.
Meanwhile, aggregate hours worked rose by only one-tenth of a percent in October and only 1.7 percent over the past three months at an annual rate. So even when you combine hours worked with hourly earnings, there’s still a shortfall in real income.
The best part of the jobs report is the recent surge in the household survey, which picked up 277,000 in October and has averaged 335,000 over the past three months. This is a good sign for small business, and it’s responsible for the small drop in unemployment to 9 percent from 9.1 percent.
But it seems as though the difference between nonfarm payrolls and the household survey is starting to narrow. Over the past year, for example, corporate payrolls have increased 125,000 per month while households have increased 102,000. This is a normal pattern over time.
Again, while there’s progress on the jobs front and the economy is moving away from recession, the numbers are relatively small. That’s why Washington must be mindful of the tax and regulatory barriers which continue to impede economic growth. Republicans in particular should not be lulled into a bad deficit package that could inhibit growth.
Tax incentives matter enormously, and we’re still in a very slow-based economy.
Will the Federal Reserve’s Ben Bernanke soon follow the European Central Bank’s Mario Draghi? In his first action as Jean-Claude Trichet’s replacement, Draghi cut the ECB target rate by a quarter percent to 1.25 percent from 1.5 percent. It was a surprise.
Given the hullabaloo over Greece’s bailout referendum (which is now dead in the water) and the likelihood of a new Greek government, Draghi’s liquidity addition is a modest but useful antidote to major financial stress and uncertainty in the Eurozone. He’s probably going to cut rates a lot more in view of Europe’s perilous financial and economic situation.
So that leads to this question: Will Bernanke soon surprise the U.S.?
At his news conference yesterday, the Fed head emphasized the ongoing weakness in housing as a key factor in the sluggish economy and high unemployment rate. He openly acknowledged that the door is wide open for a new Fed action to purchase mortgage-backed bonds in order to provide additional support for the weak housing market. This goes beyond Fed actions to reinvest MBS bonds as they mature. In other words, quantitative easing.
Wall Street may be impressed with recent economic data, like the ISMs and other stats that show the economy is not now flipping into recession. But Bernanke is less impressed. The Fed downgraded its 2012 forecast for real growth from 3.5 percent to 2.7 percent. And it raised its unemployment estimate for next year from 8 percent to 8.6 percent by year-end 2012. And despite continued inflation pressures, the central bank essentially kept its inflation target at a low 1.7 percent.
So it’s not unreasonable to suggest that Bernanke is setting the stage for a new round of QE. Growth at 2.7 percent is insufficient to significantly reduce unemployment. And housing remains a big problem. So while the U.S. doesn’t face the kind of financial stress that Europe does, Bernanke may follow Draghi with a U.S. easing move.
The Federal Reserve is still in quantitative-easing mode, according to congressman and Republican presidential candidate and Ron Paul, despite the fact that it announced Wednesday it would hold off any new actions to aid the economy.
“In a way I think they’re still in QE, because [Ben Bernanke] guaranteed interest rates were going to stay about 0 percent for the next couple years,” Paul told me last night on The Kudlow Report.
And if tax rates don’t go down and spending isn’t cut, he added, all the quantitative easings in the world won’t solve our problems and “will eventually destroy our currency.”
The Fed on Wednesday left interest rates unchanged, cut its growth forecasts, and said it expects the unemployment rate to remain largely the same. It also left the door open to taking further actions to aid the economy in the future.
But according to Paul, Bernanke is doing exactly the opposite of what he should be doing.
“For him to do what I want him to do, he would have to admit his whole career was misdirected,” Paul said. Bernanke would have to acknowledge that his theories were wrong, according to Paul, who added that “all this QE stuff doesn’t work.”
The congressman from Texas is a long-time critic of the Federal Reserve and Bernanke, and his view didn’t change after watching the chairman’s latestpost-Fed-meeting news conference.
In that press conference, Bernanke defended the central bank’s record on keeping inflation low and said the Fed may look to reinvest in mortgage-backed securities to provide additional support for the weak housing market. But Paul believes buying more bonds just exacerbates the problem.
“I see no benefit from this whatsoever,” he said. “I think we don’t get the correction that we need. We need some of that debt liquidated. We need some of that mal-investment taken care of. We need prices to go down.”
And Bernanke is wrong about inflation not being a problem, he said. It’s here and it started with the increase of the money supply.
“There’s a lot of factors that go into pushing prices up,” he said. “We know that the stimulus has been put out there, and all we need to do is have a multiplier effect and this thing could get way out of control. And eventually I think that’s what’s going to happen.”
Paul said his ultimate goal is to diminish the power of the Fed to monetize debt. His pick for chairman if he’s elected president? Economist Jim Grant.
“I think he’s capable because he is a free-market person,” said Paul. “He understands sound money, and I think if he had to work within the system, he would be able to restrain the Fed money machine as much as anybody else could.”
Investors dumping U.S. bank stocks are overreacting to all the European debt-crisis speculation, Rochdale Securities’ Dick Bove told me last night on The Kudlow Report.
“I think we’ve gone nuts,” he said. “I think [U.S. bank] stocks are so cheap, that people should be buying them as aggressively as they could.”
The financials led the S&P lower Tuesday after investors fled the market on fears that the European debt deal could fall apart. After reports conflicted on whether Greece plans to hold a referendum on the debt agreement reached last week, the government jumped in to say the vote is on.
But what’s happening in Europe should not affect U.S. banks, Bove said, because most have virtually no exposure to the European Union. Plus, most banks beat their earnings estimates for the third quarter.
As for the “five big American banks” that do have exposure to Europe, their risk is “not very great at all,” he said. That’s because Bove believes the EU will not let its banks fail.
“The ECB will do, if you want, a QE2,” he said. “It’s going to save all of the major European banks. It’s already shown its will to do so.”
The Fed is meeting Tuesday-Wednesday on monetary policy. The FOMC statement will be released at 12:30 p.m. on Wednesday, and then Ben Bernanke will have a news conference at 2:15 p.m.
With both real GDP and inflation at 2.5 percent, there doesn’t seem to be much of a case for new Fed quantitative easing. While unemployment is high, that’s a function of regulatory and tax obstacles — certainly not tight money. Both QE1 and QE2 have failed to bring down unemployment. There’s a lesson there.
The real side of the economy is governed more by tax and regulatory policies that either create new incentives for growth or take those incentives away. And massive spending stimulus threatens higher future tax rates — a disincentive for growth and job creation.
The monetary-policy lever affects the level of prices and the inflation rate, along with the dollar’s value. But money has no permanent impact on jobs and growth.
Now here are some interesting statistics. Believe it or not, business loans are picking up. According to the Fed, commercial and industrial loans by banks to business have increased 16 percent annually over the last 13 weeks and 11.9 percent annually over the last 26 weeks. So some expansion is going on out there. And that’s what the strong business capital-goods-investment numbers showed in Q3 GDP.
Here’s a second stat. Over the past year, the M2 money supply has grown at 10.2 percent while C&I loans have increased 9.2 percent. So as credit is expanded to business, the deposit base of the banking system is also expanding. And as those $1.6 trillion in excess bank reserves on deposit at the Fed are put to work, credit expansion is going to be that much stronger.
We all know that Herman Cain is strongly denying the sexual harassment charges written up in the Politico story. And he has said that he was falsely accused while at the National Restaurant Association.
But there’s a sentence in the Politico story that I wanted to point out to everyone. It makes no sense at all: “There were also descriptions of physical gestures that were not overtly sexual but that made women who experienced or witnessed them uncomfortable and that they regarded as improper in a professional relationship.”
What does this mean?
The gestures weren’t overtly sexual, but the women were uncomfortable and believed the gestures were improper in a professional relationship. These are all second-hand testimonies from “close associates” of the women accusers, but I don’t know what standards are being talked about.
I mean, based on this sort of thing, anybody could think anything about almost anything. I’m not blasting the Politico people per se. I just don’t understand the meaning of what they’re reporting.
Basically, if Herman Cain faces new and additional charges, I guess he’s gonna have a big problem. But right now this is just too vague for me. It may well be that it was cheaper to send the women packing with a settlement than go through a long hearing with huge legal fees. I just don’t know.
But with so many of Cain’s fellow board members and co-workers praising him, as Politico reported, I just don’t think there’s much behind this.
Last night on The Kudlow Report I interviewed Charles Dallara, former assistant secretary to the U.S. Treasury and the current managing director for the Institute of International Finance. Fresh back from Brussels, Dallara was the lead negotiator for the banks and the private creditors regarding the Greek debt.
Here are the video and transcript:
LARRY KUDLOW: A dramatic late night meeting that was somehow last night, although it probably seems much longer than last night for you. Let me ask you, in that meeting, can you tell us what actually happened? You’ve got Merkel, you got Sarkozy, you got LeGrange, rather. Did Sarkozy, for example, actually threaten you with 100 percent haircut on the Greek bonds for your banks? Did he actually come in threatening, two guns out? What was the story there?
CHARLES DALLARA: No, Larry, he was not threatening. We had a good, good discussion about the remaining issues that needed to be resolved in order to put this issue behind us there. We had spent the prior two and a half weeks negotiating and it came down to this final meeting between me, one of my colleagues)…and Chancellor Merkel and President Sarkozy. It was not a threatening meeting, it was a professional meeting where we exchanged views on the differences. And where it was very important for us to secure an increase in the amount of collateral that Europe would fund in order to underpin these new claims on Greek debt.
KUDLOW: Is that the 30 billion euros that’s being talked about that Greece has to borrow in order–this is important, you have to explain this to us. Greece borrows that money, that money goes into these new bond instruments, and that is what’s being traded out, that’s the actual transaction?
DALLARA: Well, that’s a core part of it. Of course, the key of all this is reducing Greece’s debt. You know, we agreed an historically significant reduction, 50 percent in the nominal value of Greece’s debt held by all private investors. It’s a remarkable agreement, Larry. But key to this forus was to insure that the new claims on Greece, the new paper, would not be full Greek exposure. And that’s where the 30 billion euro became pivotal. They had not been willing to commit that amount until that final meeting which we had with the chancellor and the president in order to secure for us what was a balanced deal.
KUDLOW: And regarding the 30 billion euros, what percentage of the total deal, what’s the net present value of this deal as you would estimate it, because after all, Greece is going to get this money but doesn’t Greece still stand behind most of these bonds in this transaction?
#more#DALLARA: Well, Greece will stand behind the remaining bonds, but for every 100 billion euro bonds that’s outstanding today, when the transaction is done, there should be roughly only 50 billion outstanding at that time. The new bonds will be Greek debt but the collateral will underpin the value of the principal on this so that the investors which we represent, Larry, will be exposed to Greek risk for the interest risk and will be collateralized for the principal risk. That’s the key to this, and it was the 30 billion that made it possible for us to agree to such a large, up-front haircut.
KUDLOW: Well just…
DALLARA: The net present value is something that we have to work out in the next round of more mechanical negotiations, but it’ll be somewhere probably just north of 50 percent.
KUDLOW: And you’re saying in published reports before you got on the plane, this is a voluntary decision on the part of the creditors that you represent. Is that still true now in the–after your long plane trip, and does that mean that the credit default swaps will not be triggered in?
DALLARA: Well, Larry, on the first question, it is absolutely a voluntary deal. I was in constant communication with my chairman, Joe Ackerman, will all of my board members, and with all of the major investors who were not represented on our board, to insure that they were willing, in this final hour, to go along with this transaction. We are confident that it will be very, very highly subscribed when the deal is done. And so I’m very confident that this is voluntary and it will lead to a very successful debt exchange when the details are ironed out and when the deal is implemented.
As far as the credit default swap is concerned, we’re not the judges of what activates a credit default swap. That’s up to those who are responsible for the standard setting in that–in that important element of the industry. It is my understanding, however, based on conversations that my staff have had with them, that it is unlikely that this would trigger the credit default—a credit default event, since it is a truly voluntary deal.
KUDLOW: Can you help us understand, a lot of people are asking this question.Two hundred and ten billion euros worth of private credits in this Greek deal but there’s still 350 billion bonds outstanding. In other words, the private creditors are only 60 percent of the total. People want to know, A, what is the participation rate going to be among private creditors, and B, what about the outstanding balance that is with the IMF and governments and elsewhere? How does that get handled in this transaction?
DALLARA: Well, that’s a very good question, Larry. It was very important for us to hear that both European governments and the IMF are going to sustain and augment their commitment to Greece because they don’t pursue the debt reduction route. They’re actually extending more debt, more loans to Greece. But I would say that it is extremely low interest rates on concessional terms and it is also an important part of helping funding the Greek economy in the next years. But one of the reasons why we resisted going any higher than the 50 percent was because there’s only so much you can squeeze out of the private sector turnip here. We only hold, as you said, 60 percent. And a substantial portion of that, Larry, substantial portion of that is held in Greece by Greek banks, Greek citizens, Greek pensioners, Greek insurance firms. So we still have to work out some important arrangements to protect the Greek economy from this decision that has been made.
KUDLOW: Could these arrangements be possible deal-breakers, Charles?
DALLARA: No, I don’t see any. I mean, I feel comfortable after the extensive discussions we’ve had, and they were not only with leading European officials but with Greek government officials as well, that there are no deal-breakers lying ahead of us. So, of course, one can never say never, and we do have a lot of technical issues to be worked out, but I’m quite confident these are not issues, based on my experience, that should pose insurmountable hurdles, Larry.
KUDLOW: Charles, you’ve been around this block many times. You’ve been involved in a lot of important international negotiations down through the years when you were in the Treasury Department, now as a private citizen. Let me just ask you, at the end of the day, when people look at this deal, is it really backed up ultimately by the ESFS, and I want to ask you if this emergency fund is going to be levered up four to five times to at least a trillion euros or more? There’s confusion about this, there’s no specific statements. Part of the original money from the EFS–EFSF has been sequestered, apparently, to–for emergencies for Italy and Spain and Portugal and perhaps other countries. Will there be enough money in this emergency fund or in whatever special investment vehicles it may also hold, to cover, to ring-fence to backstop your deal and the banking system in Europe?
DALLARA: Yes, Larry, this is very complex, you’re right. The 30 billion euro that’s been committed to us will come through the ESFS structures. In addition, they have developed two different arrangements, which are quite, I think, workable and complementary. One will be an insurance fund and one will be a special purpose vehicle lending facility which will enable the ESFS to leverage its capital fire power and support countries such as Spain and Italy, if necessary. I actually think that even though once again, all the technical arrangements have not been worked out, that Europe is on the verge of breaking the back of this sovereign debt problem. A lot of work additionally needs to be done. Countries, especially such as Italy, will need to really earn their credibility in the markets, Larry. But I think these firewall arrangements, alongside the Greek debt deal, now provide the best opportunity that we’ve had, really, since the sovereign debt crisis erupted, for Europe to move past this crisis.
KUDLOW: And do you feel longer term–this is my last question, Charles, and again, drawing from your extensive experience in these matters–do you feel that the conditionality from the emergency rescue fund, from the IMF, from whomever else, whether the ECBS is participating, the individual governments, the so-called troika and so forth, will this force these countries to live within their means, to downsize their governments, to downsize their entitlements? And is there any hope of an economic growth plan as well? Do you see what I’m saying? Is this just a short-term fix we’re going through with euphoria in the markets or is there a long-term solution that you, yourself, foresee?
DALLARA: Well, Larry, I think you’re going to the heart of the matter there now. A lot of the adjustment plans that are being developed now for Greece, for Spain, for Portugal, Ireland and Italy, have a focus on budget discipline. There are, however, crucial elements of structural reform, liberalizing labor markets, bringing pension benefits back into reasonable proportions, reducing a wide range of structural rigidities in their economies, which inhibit efficient allocation of resources and inhibit growth. Those areas will really prove to be the ultimate test of whether Europe can move through this and establish sustainable growth again. If you look at the measures announced by Italy last night as part of this package, for example, increasing the retirement age from 65 to 67, removing restrictions on various industries in terms of how a person can be employed and how a person can be released, these are crucial to the future of Europe, Larry. And I believe they are just getting their shoulder to the wheel on these areas.
KUDLOW: Hm. All right, Charles Dallara, we thank you ever so much for your time. Please go and get a great night’s sleep. Congratulations on the deal you worked out. It’s a great pleasure for me to interview.
The world economy has once again dodged Armageddon. The European Union finally forged a Greek bond deal, and a rescue fund big enough to ring-fence banks and sovereign debt, in order to avoid a catastrophic, Lehman-like contagion event. At the same time, the U.S. economy moved away from the threat of recession with a third-quarter real GDP report of 2.5 percent. In response, stocks are soaring. We’ll live to see another day.
First the American economy. Led by surging business investment of highly profitable corporations and a modest gain in consumer spending, the new GDP report says “no” to a double-dip recession. As the economy stalled out in the first half of the year — with 0.4 percent GDP growth in the winter quarter, 1.3 percent growth in the spring, and August data showing zero jobs and retail sales — I warned nearly two months ago that we were on the front end of recession. Turns out I was too pessimistic.
GOP presidential candidate Rick Perry, who unveiled his 20 percent flat tax Tuesday, said his economic plan will “lower taxes across the board” and pull back every regulation that has been implemented since the 2008 financial crisis. He also dismissed criticism that it would raise taxes on the middle class.
“This is a tax cut for everyone in this country. Those who want to pick this apart, those that want to play class warfare, that’s their business,” Perry said. “Let’s not get down in the weeds here from the standpoint of going and saying this person over here is going to get a little bit different tax.”
The Texas governor is hoping his “Cut, Balance, and Grow” plan will help jump-start his fading presidential campaign. He’s now trailing four other contenders for the 2012 Republican nomination in a new CBS/New York Times poll. He stands at 6 percent; Herman Cain is leading the pack with 25 percent; and Mitt Romney is in second place with 21 percent.
Perry’s plan calls for a 20 percent flat rate on individual and corporate incomes and has a $12,500 exemption per person. It will keep deductions for mortgage interest, charities, and local taxes.
“We need to get America working,” Perry said. “We need a president who understands that the way to get this country back on track is by lowering the tax burden and particularly the regulatory climate, and that’s what this plan does.”
In fact, he plans on “pulling back every regulation that’s gone into effect since 2008.” He would repeal Dodd Frank, section 404 of the Sarbanes-Oxley Act (which requires companies to provide an auditor’s report on the adequacy of their internal controls), and Obamacare.
“Let me tell you, if you do just those things, put this flat tax in place . . . the stock market would go through the roof,” he said. “But more importantly, there are going to be a lot of people who don’t have a job today that will have one.”
Perry also vowed that his economic plan, which cuts government spending and overhauls the Social Security program, will balance the budget by 2020.
And if you don’t like the flat tax, you can stay in the old system, he said.
The latest Gallup poll pegs President Obama’s approval at a new low of 41 percent. That adds to the thought that the winner of the GOP presidential-primary sweepstakes is going to be the next president.
And inside that Republican contest, the policy pendulum is swinging toward pro-growth, flat-tax reform. A new agenda. With Herman Cain’s 9-9-9 plan and the announcement of a Steve Forbes-type flat tax from Gov. Rick Perry, the GOP flat-tax-reform competition is dominating the headline news.
While President Obama stumps for huge tax hikes — on incomes of $200,000 to the millionaire and billionaire level — and demoralizes businesses and entrepreneurs with his populist attacks on success and risk-taking, the GOP is fast coming up with a much better idea.
While investors wait to see if the Europeans will agree to a major boost in their rescue fund to backstop sovereign debt and the banks who own it, here at home the economic news has turned slightly more positive.
A month ago, significant coincident economic indicators for August for nonfarm payrolls, retail sales, and industrial production all registered zero. It was a bizarre and pessimistic coincidence. Now, a month later, the September figures are coming in better. Not fabulous, but better.
Jobs were revised up 57,000 for August and scored 103,000 in September. That’s way below what’s necessary to make a serious dent in unemployment, but at least it’s moving away from recession.
Retail sales in September gained 1.1 percent while August’s zero number was revised to a three-tenths-of-a-percent increase. Over the past three months, retails sales are rising 7.6 percent at an annual rate, a very decent number that reflects improving car and weekly chain-store sales. As a result, consumer spending after inflation in Q3 will come in at least 2 percent annually. Again, not fabulous, but certainly moving away from recession.
On the supply-side, industrial production came in at only 0.2 percent, with August remaining flat at zero. However, manufacturing increased 0.4 percent after a three-tenths rise in August. Additionally, the production of business equipment surged 1 percent in September after a 1.4 percent August gain, making for a hefty 15.3 percent annual increase over the past three months. That means businesses are investing their profits in new capital equipment.
The bottom line is that the September data could be signaling we’re not on the front end of recession. But the monthly numbers are volatile, and I’m not quite ready to remove the danger sign — especially since consumer incomes are barely rising, and any increases are coming in below the inflation rate.
And speaking of inflation, producer prices surged 0.8 percent in September and are up 6.9 percent over the past year. All that easy money from the Fed, producing an overly cheap dollar, is still circulating enough to keep inflation concerns on the front burner — despite the sluggish economy.
Inside the PPI, consumer goods — a proxy for the CPI — gained 1 percent in September for an 8.8 percent yearly jump. Even taking out food and energy (a silly thing to do), core consumer-goods prices are up 3.6 percent annually over the past three months.
And then of course the Washington message on the left hasn’t changed. Obama and the Democrats are continuing their populist left-wing campaign to tax millionaires and billionaires, beat up on banks and bank profits, and attack the oil-, gas-, shale-, and energy-production miracles that could lift the whole economy if government would only keep out of the way.
It’s not an encouraging sign for animal spirits. Rather, it’s a demoralizing message from the top. Without any serious policy change toward pro-growth tax and energy-regulation reform (or other regulatory barriers for that manner), it’s hard to get excited about the outlook for the economy.
But at least on the tippy-tip margin, the economic numbers are getting a bit better.