Vast Write Wing - June 2010

[lwoolley]

Sean <sean@ooleytech.com>

Floyd was partially right. Assuming we were living before the 14th amendment. Before the 14th amendment, certain amendments, did not apply to the states. The 14th amendment was crafted to force states to follow all amendments.

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Clearly, from that clause, some states were not following the constitution.

[lwoolley]

Krugman is more Keynsian than the man himself. He is a liberal of the first degree. What is needed are tax cuts to get business spending and consumers buying. We are about to cripple this country with the tax increases that are coming against the backdrop of high unemployment that has no end in sight. This economic situation is unlike any I know about in history, particularly given the buffoon in the White House with no knowledge or experience in how business really works or what made this country a great economic powerhouse. More government spending of the type we have seen in the last two years is the last thing that we need.

Bill

***

Bill,

I am in agreement with you on all points.

Unfortunately, the tax bill passed in 2000 and signed by President Bush contained a return to the tax rates of 1999 as a basic provision. That bill had that part in it as part of the “Pay-Go” law that demanded a neutral budget, i.e. one that did not increase the deficits. I do find it a bit interesting that most of the people who so strongly object to the sunset provision in the Bush Tax-Cut bill are also incensed by the level of deficit the U.S. is running.

There was an attempt earlier this year to pass a compromise which would have limited the tax increase on estates, but it was thoroughly defeated.

Frankly, I am not sure that the revision to the 1999 tax rates will have a profound effect on the economy. The increases are going to be in effect at the top brackets primarily on the earned income side. The capital gains and dividend increases will be more significant, but again that will be at the upper end of the income scale. At the moment, nationally, upper income people are in “saving” mode and are not spending anywhere near as much of their income as they commonly do. In order to have a negative effect on the economy the increased taxation will need to reduce spending. Since those who are going to have the lion’s share of the effect are currently not at all in a spending mood, the net effect will probably be quite low. The consumer spending in the economy is currently coming from the bottom of the economic scale and the problem is that with unemployment this high that is limited.

When the 2011 tax rates hit, the average family in the United States will be paying almost exactly the same percentage of income to the federal government as they were after the 1982 Reagan tax cuts (21 cents per dollar). The top 20% of earners will be paying 26 cents compared with 24 cents in 1982, but the lowest 20% will be paying a lot less in taxes. Given that the amount of total income spent rather than saved grows as one goes down the economic ladder, based on pure tax rates, that should produce a net increase in spending.

In 2011 that may not be as true as the debt overhang and unemployment and underemployment issues are most severe at the lower end of the income scale as well.

I, by the way, am in that 20% at the top of the income scale, so I fully well understand that my taxes will be higher next year. We have a potentially serious problem that must be addressed though. In 2011 there are no stimulus bills or other domestic spending issue on the table. What we will be facing is a truly huge military expenditure that is growing each year, a Medicare cost structure that is expanding at an astonishing rate, and the ever-present Social Security obligation.

A 50% cut in defense spending has got to happen, and if we don’t get that quickly then it will have to be more. The Medicare tax on investment income scheduled to hit in 2014 has at least the potential to move us closer to being able to pay for that, presuming at least some of the medical cost reductions work. Social Security will need to be a means tested benefit or it will become unsupportable.

While I am no fan of tax increases, there is a reality here that is very counter-intuitive. When President Reagan’s administration created an overall tax rate in 1982 that equated to 21 cents on the dollar, the economy boomed. Under President Clinton in 1993 the rates were increased and the economy sagged. The tax reductions that followed the take-over of Congress by the Republicans decreased the federal income tax back to an effective rate of 21 cents and the economy once again boomed. Effective in 2001, under President Bush, tax rates were lowered to about 19 cents and the economy sagged.

That pattern actually goes back a long, long way. Arthur Laffer was one of the principal architects of the Reagan tax cuts and noted that 21 cents was the “sweet spot” or “Laffer Point” where taxes produced the maximum revenue to the government. If taxes were higher, then revenues would lag and if taxes were lower then government services would suffer or we would accumulate structural deficits. It appears he was right.

I really do not think it is politically feasible to reduce Medicare, Social Security, military retirement pay, or civil service retirement pay by any significant amount. We have a minimum we need to spend on defense, including certain Homeland Security functions (Coast Guard, Border Patrol, etc.). By the time we add up all those expenses and add 10% for debt service, we are not currently paying enough taxes to balance the budget, even with a defense reduction of 50%. At 21 cents on the dollar, IF we can get the economy to grow (and I believe it already is), and we can means test Social Security in the relatively distant future, we can bring the budget back into balance and over the next two or three decades, pay down the debt levels we have accumulated.

Believe it or not, what I have outlined above is a conservative view. It includes a return to the 1999-2000 tax brackets (adjusted for the inflation we have incurred along the way), a 50% defense cut, and a means test for Social Security. It also notably includes an end to stimulus spending beginning next year. There are a lot of “ifs” in all of that and an assumption of economic growth as well.

By the way, the Obama administration has proposed cutting corporate domestic income tax rates and if that proposal becomes law it has the potential to more than offset the tax increases on capital gains and dividends.

Jeff

[lwoolley]

The Bill of Rights: "In order to prevent misconstruction or abuse of [the Constitution's] powers..."

Endeavoring to define further our Constitution's limits on government interference with the innate rights of the people, James Madison, its primary architect, introduced to the First Congress in 1789, a Bill of Rights -- the first 10 Amendments to our Constitution, which was then ratified on the 15th of December 1791.

The Bill of Rights was inspired by three remarkable documents: Two Treatises of Government, authored by John Locke in 1689 regarding protection of "property" (in the Latin context, proprius, or one's own "life, liberty and estate"); the Virginia Declaration of Rights, authored by George Mason in 1776 as part of that state's constitution; and, of course, our Declaration of Independence, authored by Thomas Jefferson.

There was great debate about the need to enumerate these rights, as such a listing might be taken to suggest that they were amendable rather than unalienable; granted by the state rather than "Endowed by our Creator."

As Hamilton argued in Federalist No. 84, "Bills of rights, in the sense and to the extent in which they are contended for, are not only unnecessary in the proposed Constitution, but would even be dangerous. ... For why declare that things shall not be done which there is no power to do?"

On the other hand, George Mason was among 16 of the 55 Constitutional Convention delegates who refused to sign it because the document did not adequately address limitations on what the central government had "no power to do." Indeed, he worked with Patrick Henry and Samuel Adams against its ratification for that reason.

As a result of Mason's insistence, 10 additional limitations were placed upon the federal government by the first session of Congress, for the reasons outlined by the Preamble to the Bill of Rights: "The Conventions of a number of the States having at the time of their adopting the Constitution, expressed a desire, in order to prevent misconstruction or abuse of its powers, that further declaratory and restrictive clauses should be added: And as extending the ground of public confidence in the Government, will best insure the beneficent ends of its institution..."

Read in context, the Bill of Rights is both an affirmation of innate individual rights (as noted by Thomas Jefferson: "The God who gave us life gave us liberty at the same time."), and a clear delineation of constraints upon the central government.
MPG

[lwoolley]

Like everybody else I'm jubilant about the latest Supreme Court decision in support of the second amendment. But I want to inject an idea about this. Not in opposition to the decision but in opposition to the "Incorporation Doctrine" that justifies our position in this decision.
The Bill of Rights was passed to please the anti-Federalists so they would agree to the passage of the Constition. All 10 amendments originally bound the Federal Government only. You can easily see that this was the intent by reading the first Amendment that forbids Congress from creating a "State" Church or religion. That clearly wasn't binding the states because many of the ratifying states had state church's at the time of ratification and maintained that arrangement several years after the adoption of the Constitution.
When the 14th amendment was passed it addressed rights within the states and it was meant to bind the states. Although this should not have affected the application of the rights enumerated in the first 10 the liberal judges decided that that amendment bound all previous amendments to the states also. They called this view the "Incorporation Doctrine".
This doctrine has been used against freedomists much more than the other way around. Because of the "Incorporation Doctrine" They claimed the amendment saying that " Congress Shall Make No Law" now applied to the school principal that says grace over his lunch.or any student who would consider praying before a football game. It means the federal court must be consulted before a state can pass marriage laws or enforce criminal penalties. Certainly no state can pass anti- sodomy laws like the court struck down in Texas.
This time the doctrine worked in our favor. This is one in a million.
If you still doubt this, why has the gun law in Texas violated the second amendment since way back in the 1800's?.If you don't think it violates the amendment ask any policeman what happens when you get caught bearing a pistol without a CCP. Remember we've only had the CCP for a few years. Many,many states have laws against bearing arms and some even have laws against keeping them. The Amendment says "The Right of the citizen to keep and BEAR arms shall not be infringed".
So as I said, if we grant the incorporation doctrine, then the decision of the court was totally right. But I oppose that application of the 14th amendment and if original intent is utilized then it would not be right. But if they used that, as they should, they would have to overturn all of these assaults on the states such as Roe vs Wade and everything else like that..
Just some of my thoughts and I invite your reply. Just remember, Be gentle, I too am a strong advocate of the Right to Keep and Bear.

Floyd

[lwoolley]

Hi Jeff,

You know I love to dialog with you on this issue. I know that you have pointed out the counter intuitive results of the economy and the tax rates, but I think that there is more to the change in the economies than the rates. That statement is made without in depth research or documented fact. I just know that the Bush tax cuts occurred at a time when a lot of other things happened in the world and domestic economy as a result of 9-11. The impact on the airline industry and travel had a major impact on our national economy. The fear factor alone had us in gridlock for a couple of years. The fact the rates were low helped somewhat when we got somewhat back to normal until the election year of 2008. When the oil prices climbed out of logical range, I think that was the beginning of the fall of the rest of the economy that took real estate and banking house of cards down.

I think that the war spending had and has a lasting impact on our fiscal situation. I agree that it will not change in the near future, nor will the entitlements. The only chance we have to get around this fact in the relative short run is to get taxes low. Certainly there is savings at the upper level at this time, but that will change if we get the change to the political situation that takes us on the path of free and open capitalism again unconstrained by the threat of unfettered socialism. A change in Congress will be a start but the ultimate change has to be on January 20, 2013. A change in Congressional make up will stifle Obama, however, no agenda can be implimented until there is someone in the White House to sign legislation that is passed. The only way out of this situation is national economic growth. It will not happen at a rate under Obama that will do much more than keep things form getting worse. He will not moderate like Clinton did. I never liked Clinton, but at least he was smart enough to moderate his position to accomplish things that appeared to be good for the country when Congress went Republican. Obama will not change.

It will be an interesting rest of this year. We are not out of the woods with this economy. I am seeing great hesitation in industry from my companies perspective. We are doing a lot of quoting, but there is not a lot of buying going on. We are not losing deals, they are just not happening. This seems much like a Presidential election year when no one likes the uncertainty and so they just hang on until we know more. There is a great deal of uncertainty right now. That will drive the remainder of this year in my opinion.

Thanks for the discussion.

Bill

[lwoolley]

As the instigator of this little discussion, I must point out that the surpluses of the latter Clinton years came through his working with the Republicans through a process called "triangulation" urged on by one Dick Morris. (And which allowed WJC to take credit for Republican successes.) Clinton was never so much ideologue as he was practical. He did what was best for William Jefferson Blythe Clinton. Now he can sit back and take credit for surpluses that he never in a million years thought he would have -- nor did he actively pursue them.

Also, it must be mentioned that this is a government-induced recession brought on largely by government pushing the envelope on mortgages and during which many well-heeled Democrats enriched themselves at the expense of the taxpayer at Fannie Mae & Freddie Mac. Franklin Raines comes to mind, and Obama himself got $126,000 in political contributions. Some guy on the radio wrote a column on Human Events called "Obama's Friends at Fannie Mae" that went through the entire litany of BHO buds who made some serious bucks that way. Note that the new financial bill does not address Fannie or Freddie.

Then there's the Kemp-Roth Act of 1981 that did pretty well at busting a recession from the supply side although it's been spun both ways. Supply side has always made more sense to me than demand side, which explains my distaste for John Maynard Keynes.

Finally, while I do not totally buy in to Objectivism, that closing scene in "Atlas Shrugged" where John Galt basically says "screw you" to the socialists and the lights go out over New York City is freakin' unforgettable!

Lynn

[lwoolley]

Memo to the members of the most euridite circular firing squad:

Thanks for including me in the 'Reply All' format. The three little letters after my name equip me poorly to be a participant in this circular verbal firing squad, but my baccalaureate degree in economics credentials (that's a verb) me to offer a little blue-collar input. Y'all have written some interesting (or at least entertaining) stuff and said stuff would be right at home in the faculty lounge. Inflation and pregnancy have at least one thing in common,,,,,,,there's no such thing as a little bit of either and the ultimate result is always the same even if the inflationary spiral turns deflationary as the velocity of economic activity diminishes. Back where I was raised we had a colorful generic acronym to describe such things: "BOHICA" stood for Bend Over Here It Comes Again. Think of this as the monetary equivalent of Newton's third law.........that equal and opposite reaction thingy. Hizonner Billy Bob III came pretty close to describing the concurrent reality of this when he declared below that "the deals just are not happening" at Methodist Tabernacle Church (aka MTC).

The baccalaureate degree as opposed to a PhD in economics greatly enhances my credentials. In college I had to listen to my eco profs extoll the virtues of Keynesianism and then play their BS back to them at exam time. I always hung on to my Austrian School roots, however.

Keynesianism is discredited. Deal with it. Rearranging the Titanic's deck chairs will change nothing. The beginning of change could start in November and January 20, 2013 may indeed vindicate Abba Eban's (former Israeli ambassador to the United Nations) maxim: "Men and nations can act responsibily once all other alternatives have been exhausted."

This is fun! Thanks again for including me.
Glenn

[lwoolley]

As several have mentioned, this is an interesting conversation.

I agree with Bill that there is the potential for us to slide back into recession, however I also note that generally when there are a lot of policymakers that know of something potentially bad and are worried about it, it rarely happens. Generally it is the thing we are not too concerned about that blindsides us. As an example, I have been unable to find anyone who realized the degree to which residential housing and the derivatives mortgage obligation markets could interact to produce the near catastrophe we had in 2008-2009.

Next year’s tax increases are a given. They have been hanging over our heads for ten years and I have not found a single person who realistically thought that they would not take place. I believe that the effect is already in the market and in the economy.

The clear and present danger is deflation. Inflation cannot happen without rising house prices and that is not going to happen anytime soon. Milton Freidman very accurately said that the money supply is the culprit in creating inflation. The money supply is very different from the stock of money. There can be huge amounts of money in circulation, but if most of it is being hoarded then the velocity gets very low and so does the money supply. In other words, we can have a huge money stock and very low money supply. Corporations and banks are setting on the largest percentage of cash since anyone has been keeping records on this. The prime rationale behind the now-defunct tax on liabilities of the largest U.S. Banks was to encourage those banks to lend out the money rather than just sitting on it.

The issue behind the money hoarding is psychological more than factual. Greece has defaulted about six times in the past hundred years. It has a 3d world economy yet is tied to the first world economies of Europe. It feels the need to sustain an armed forces that is several multiples of its needs in order to feel that it is a world player on a large scale. It has very little to offer the world other than some beautiful ruins, some good olives, and a little wine and cheese. It has been losing its edge as a center of shipping for decades. Greece is a special case that has been blown out of proportion and the resulting fear has got everyone spooked.

An additional factor is the barrage of negativity coming from talk shows and the print media. For seven months the various confidence indices rose dramatically, but the commentary on that fact was almost non-existent. Last month it fell a little and it made the headlines.

If we get the upside earnings surprises I anticipate coming out of the second quarter I suspect we will see the attitude begin to turn around.

Mark this down. Five years from now I strongly believe that the US economy will be kicking butt and the market will reflect that reality. Only time will tell, but remember I said it.

Jeff

[lwoolley]

Indeed! I'm sure we'll all remember who said what in June of 2010. The title of Judge Judy Sheindlin's 1996 book comes to mind: Don't Pee On My Leg And Tell Me It's Raining. If, in five years, we are living in a US economy that is kicking butt replete with labor unions riding IN the wagon I'd like for you to cook my crow well done.

Kindest regards,
Glenn

[lwoolley]

Glenn,

For all of our sakes, I sincerely hope you are in the position of having crow cooked according to whatever your favorite recipe calls for five years hence. I do remember what I proclaim because we record our shows (which we have done since 1997) and I keep records of my newsletters.

I called the market bottom in August of 2002 to occur in the first week or two of September. It did fall in exactly that time frame. For some reason pessimism tends to hit to maximums in downturns, the first is around the last half of June and first half of July, and the second comes around the end of August/beginning of September.

I have managed to pretty much forecast the opening of bull market runs with a great deal of accuracy now for almost three decades. One of the several indicators I use was coined by Sir John Templeton. He said that bull markets are born in despair, mature on optimism, and die on exuberance. He went on to note that it is at the points of greatest pessimism that the greatest growth runs both in the economy and in the markets are started. Investing and the economy are both intensively counterintuitive. There is a reason for that. It is at the point where all one can hear is bad news that the last seller sells and money hoarding is at its maximum. Conversely, as the bible tells us, “Woe unto you when all around you are saying ‘All is well!’…” When all the media has to publish is good news, then the last buyer has bought and the last spender has exhausted his or her savings and credit!

Another indicator of the bottom is when one or more of the popular newsmagazines have a bear on the cover. Bloomberg Businessweek had a bear’s head on the cover last week. When you see bulls on the cover, the end is indeed nigh.

If the talking heads and the opinion columnists were alarmed about real numbers I would join them, however when I research their claims I have found to date this year that they are either so one-sided that the reported facts are actually the opposite of the real effect, or just flat wrong. That is another indicator of the bottom, when the parts of the media who depend on alarmingly bad news to maintain their popularity must resort to false or misleading reporting to keep the alarm fires stoked.

When the Dow rolls through 20,000 remember that you heard it here first. It will take a while, and my guess would be about five to seven years, but it will get there. That is not someone else’s opinion, it comes from basic research I have and am doing. Meanwhile expect more and louder hysterics from the talking heads as the summer progresses. By the end of the year when the economy and the market have not cratered but have continued their recovery, we will be well on our way back.

Jeff

[Thane]

Dear Lynn,

This back and forth on Keynesian v. Austrian has been fantastic. You need more of this kind of exchange. Kudos to Jeff for bringing up the panic of 1837 which destroyed the presidency of Martin Van Buren and was directly caused by the fiscal/economic policies of his popular immediate predecessor, Andrew Jackson, who conveniently left office before the dung hit the oscillator. Hmmm somewhat reminds me of Coolidge/Hoover or even Reagan / Bush in a way. In 1837 the country and the western world went into an economic freefall, due primarily to big bank policies and manipulations in the upper echelons of the U.S. financial community. So many millions affected by a greedy few.

You have some fact-selective crank who keeps posting a stale quote from some nobody about people forgetting the past and being doomed to repeat it. He fails to realize that a) they forget anyway and b) even when they do remember, they repeat the same mistakes anyway. That quote is about as useful as telling people it gets cold in Minnesota.

Maybe Greg Manning and I should resume our Civil War debates.

Sincerely,
Thane