Friday, July 23, 2010

WSJ vs. The Joint Committee On Taxation

The issue of federal and, for that matter, state and local tax policy is one as old as the income tax amendment. Ronald Reagan was excoriated for wanting to cut taxes, yet his tax cuts spurred a 20-year US economic expansion.

Thus, a recent battle in the editorial pages of the Wall Street Journal is noteworthy. In answer to an earlier staff editorial, director of the Congressional Joint Committee on Taxation, Thomas Barthold, fired back in a letter published in Wednesday's edition of the paper. The Journal responded with its lead staff editorial that day, in which these passages appeared,

The director of the Joint Committee on Taxation, Thomas Barthold, takes us to task in a nearby letter for exaggerating the revenue impact and economic benefits of the investment tax cuts of 2003. (See "The Obama Tax Trap," July 2.) This is a debate we're delighted to have, and Members of Congress should want to have it too if they ever want to cut taxes again.

In a 2005 paper "Dynamic Scoring: A Back-of-the-Envelope Guide," Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered "the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes." We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003.

So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. (See the nearby table.)

In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. We readily admit that some of this extra revenue flowed from the housing bubble. When that mania turned to panic and the economy went into recession, revenues collapsed. But the 2003-07 growth spurt wasn't all housing related, any more than the late-1990s stock boom was all phony merely because the bubble later burst. The last decade saw growth in technology (Google, the iPod), energy, professional services, biotech and even manufacturing.

As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. (See the second table.) Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted.

Mr. Barthold also claims it is a "non sequitur" to say that the $786 billion, or 44%, rise in federal revenues from 2003-07 was at least partially a result of the tax rate reductions. Why? Because, he says, "in normal economic times, general economic growth and inflation will lead to an increase in revenues from one year to the next with no changes in tax policy."

True enough, but the revenue growth from 2003-07 was anything but "normal." The 44% increase in revenues compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.

Joint Tax now says that rescinding the Bush investment tax cuts will raise about $500 billion in revenue over the next five years. So on January 1 we will enact one of the largest tax increases in history, coming out of one of the deepest recessions in a century, because computer models that we know are wrong are telling Congress that this will raise far more revenue than the increases will raise in reality.

That last statement from the committee regarding the effects of letting the Bush tax cuts lapse is troubling, isn't it? Does anyone believe economic growth will be enhanced through higher taxes?

As it is, the committee has made horrendous estimation errors, in the wrong direction, on prior tax policy effect on tax revenues.

Further, Barthold's letter of reply was a qualitative, shoot-from-the-hip sort of thing, with none of the sensible basic analysis which appeared in the Journal's staff editorial reply. For example, comparing growth in tax revenues in a certain year or period with the long-run average, to assess whether it was really inevitable, or an extraordinary growth rate.

From the exchange, Barthold appears to be both naive and sloppy. Not to mention simply wrong in his and his staff's lack of understanding of the need for dynamic modeling of consumer and investor reactions to tax rate changes.

Thursday, July 22, 2010

Jim Paulsen's Misleading Comparisons of Economic Recovery Statistics On CNBC

Jim Paulsen of Wells Capital Management was a guest on CNBC this morning.

During the 6AM hour, Paulsen aggressively claimed that the economic recovery of recent months has been far stronger than many believe.

Specifically, Paulsen cited the soon-to-be-released quarterly GDP growth, contending that the resulting first 12 months of recovery would post a +3.3% annualized GDP growth, making it "the strongest in 30 years."

For clarity, thirty years from 2010 takes you back to 1980.

But Paulsen only cited the 'jobless' recoveries of 1991 and 2002-03 for comparison, omitting the Reagan recovery. I'm not a degreed economist, but I know I've read plenty of articles from the likes of Art Laffer and Alan Reynolds which have cited that 1980s recovery as being much stronger than any since.

Paulsen also cited jobs growth, claiming that, on the basis of two months of anemic net job creation, each less than 100,000, that this recovery has seen net new job creation at an earlier point than the prior two recoveries. Again, omitting the Reagan recovery.

A couple of questions occurred to me as I listened to Paulsen's market cheerleading:

-Why was he so obviously omitting any reference to the recovery during Reagan's term, which was well within Paulsen's own "30 year" timeframe?

-Is it fair to compare the recent anemic two months of positive job growth, with no adjustment for jobs lost and government tax money spent via borrowing or printing in the so-called 'stimulus' legislation, not to mention unemployment benefits extensions?

-Are the best and most correct metrics by which to judge economic recoveries the earliest point at which GDP and job growth turn positive?

-What if there is a leveling-off of GDP and job growth early-mid 2011? Does that change Paulsen's contentions?

I find Paulsen's off-the-cuff statements about the unique strength of this economic recovery to ring hollow. There seems to be a lack of appropriate adjustments for many variable which would seem to be important.

Is Paulsen just saying whatever he thinks will motivate the herd of mediocre asset managers who watch CNBC to follow his lead and drive his book's value up?

Innovation In Waste Management

I love to see real innovation and great management. Lately, I've had less of those topics, and a lot more than I have desired about government interference with and takeover of the private sector.

So I was pleasantly surprised yesterday to see a commercial for Bagster from Waste Management. It took me about 10 seconds to realize how clever the men and women at WM were to have conceived and implemented this product/service.

Bagster is essentially a do-it-yourself dumpster that you can buy at, according to WM's Bagster website, "your local home improvement retailer."

Home Depot is the retailer currently mentioned on the website.

The website and commercial advertise a 3,300 pound payload for the product. It's basically a huge, near-dumpster-sized heavy-duty plastic bag with giant handles.

When you've finished filling it, you call WM and they arrive to remove your filled Bagster single-use dumpster.

Cool, eh?

What a clever extension of WM's waste removal skills. Unlike Bloomberg's attempted expansion into online legal search, which requires attacking an existing business with strongly-entrenched competitors, WM is opening up a new product/market.

At present, you need to either rent a dumpster, hire someone with a truck, or make endless trips to your local dump, it you have one, to dispose of your renovation debris and waste.

I absolutely love this story. And, as the nearby five-year price chart for Waste Management and the S&P500 Index illustrates, the company has done a good job outpacing the index over that period, though it seems to have fallen to parity in the past year.
Over the past few years, Waste Management has evidently done much work on its internal processes, including their trumpeting of co-generation of energy from the waste disposal which they manage. Their green trucks have led the public to identify them with a sense of recycling, no matter how appropriate that actually may be.
But, in a business that wouldn't seem to contain all that much innovative potential directed at customers, WM has shown there is room for Schumpeterian dynamics even in the retail waste removal segment.

Confusion About FINREG's Effect On The Finance Sector & The US Economy

Obama, in pre-released remarks yesterday, was quoted as saying that the FINREG bill will be 'good for consumers and good for the economy.'

He couldn't be more wrong- on both counts.

The new financial sector overhaul is going to result in politically-designed credit allocation and shortages. Fannie and Freddie were left completely untouched, while politicians crow about making the new financial world safe for all.

Then there were the lies from our president about 'no more taxpayer-funded bailouts.' Really? Funny, because, if anything, the new legislation gives the FDIC more latitude than ever before to declare insolvencies, while Fannie and Freddie retain their taxpayer-funded, open-ended allowances to run unlimited losses.

How does that square with 'no more taxpayer-funded bailouts?'.

For the economy, there is vastly more uncertainty, which translates into withheld investment and hiring. Thousands of new regulations are yet to be written by agencies, which means continuing uncertainty and expensive lobbying as various affected parties vie to have regulatory details skewed in their favor.

Nice work getting it wrong on two fronts. Messing up a sector in need of clarity and less government interference, while at the same time, injecting so much uncertainty into lending and asset management that investors will stay on the sidelines, rather than commit capital and create jobs.

Wednesday, July 21, 2010

Scary News For The New York Fed

Last week, I wrote this post concerning Lee Bollinger's wacky ideas for government-funded print journalism.

I wrote, in part,

"You can view Bollinger's bio on any number of webpages. While this isn't my political blog, suffice to say, Bollinger's background, including stints in significant administrative positions at several liberal universities, a JD, and clerking for Warren Burger, certainly lead you to expect non-market solutions from him.

And you wouldn't be disappointed in the content of the Journal editorial. Essentially, Bollinger idolizes the BBC and, in the same breath, PBS, calling for an official federal government underwriting of US news gathering."

Bollinger is a lawyer and, by most of his career stint, an academic administrator.

So you might be surprised to learn, as I was, from a rather innocuous little piece in the Wall Street Journal, of Bollinger's next gig.

New York Fed Chairman.

That's right. A guy who has zero financial services background and virtually no private sector experience is about to be named the chairman of our Federal Reserve's most important regional Bank.

Pretty scary, isn't it?

Scares the hell out of me.

How on earth is Bollinger, currently Columbia University's president, in any way fit and qualified for chairing the New York Fed?

If you want more evidence of our government screwing up its regulatory and oversight roles, this is certainly a relevant item, is it not?

Looks Like We'll Be Getting More Unemployment

Thanks to the vote of deceased West Virginia Senator Robert Byrd's replacement, and the Senate's two stealth Democrats, Snowe and Collins, both of Maine, the Senate proceeded to end debate about extending unemployment benefits for the eighth time. The $34B price of this benefit will, once again, be furnished by borrowing, rather than cutting other government expenses or discretionary spending.

As Art Laffer wrote recently in the Wall Street Journal,

"On the face of it, the idea that higher unemployment benefits won't lead to more unemployment doesn't make much sense."

Here's what yesterday's lead Journal staff editorial had to say on the topic,

"In the immediate policy case, Democrats are going so far as to subsidize more unemployment. If you subsidize something, you get more of it. So if you pay people not to work, they often decide . . . not to work. Or at least to delay looking or decline a less than perfect job offer, holding out for something else that may or may not materialize.

The economic consensus—which includes Obama Administration economists in their previous lives—couldn't be clearer on this. In a 1990 study for the National Bureau of Economic Research, labor economist Lawrence Katz found that "The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks." "

To highlight the failure of the current administration's economic efforts to facilitate the creation of, or directly create jobs, the same editorial opened with this scathing passage,

"Presidents typically invite Americans to appear at Rose Garden press conferences to trumpet their policy successes, but yesterday we saw what may have been a first. President Obama introduced three Americans—an auto worker, a fitness center employee and a woman in real estate—who've been out of work so long they underscore the failure of his economic program. Where are his spinmeisters when he really needs them?"

I don't think anyone with any common sense really believes that extending unemployment benefits has anything to do with job creation, do you?

But, thanks to the Senate, we're going to actually see more unemployment, as the federal government votes to pay people more and longer not to work.

How's that for sensible economics? And with money borrowed in your name.

Tuesday, July 20, 2010

The Emerging Congressional Credit Score Fiasco

While watching CNBC this morning, I was shocked to see/hear a debate involving, I believe, a House member, and another guest, concerning a bill to shield consumer credit scores from the effects of mortgage modification.

We saw, in 2007 & 2008, what happened when credit rating agencies dumbed-down their ratings for CDOs and various mortgage-backed instruments. It resulted in a catastrophe as many investors, overly reliant on ratings from S&P, Fitch or Moodys, simply took AAA ratings on faith and bought instruments which later were found to perform far below the expectations of their credit ratings.

Now we have Congress trying to whitewash consumer credit scores.

The argument put forward by the Congresswoman on CNBC was that mortgage modifications are simply contracts between two consenting parties, and, therefore, involve no forgiveness nor default or delinquency on any loan.

The argument against allowing this hiding of true consumer credit history is that any modification is, in fact, the failure of the consumer to honor the terms of the original contract and, thus, be in default or delinquency on an instrument to which they were a party. Additionally, it's very disingenuous to say that banks are doing modifications out of their own free will, when, in fact, the current administration coerced banks into suspending foreclosures and offering modifications, instead.

So we have yet another situation in which the federal government is attempting to alter useful private industry measures and practices, distort reality and rewrite history.

Combined with the recent FINREG bill, this should add impetus to financial institutions to back away from lending to all but the best-collateralized, least-risky consumers.

Everybody else, especially those with anything approaching a middling, sanitized credit score, will probably be denied credit.

I guess this proves that Congress has learned nothing from the recent financial sector meltdown and its own role in the mess, via Fannie, Freddie and too-complex regulatory processes.

Can we say "unintended consequences?"

Monday, July 19, 2010

Goldman Sachs Caves & Settles

Back in late April, in this post, I contended that Goldman Sachs was probably eager for the Abacus case to come to trial.

Thus, Friday's announcement of a half-billion dollar settlement with the SEC by the firm was unexpected news, at least to me.

The Wall Street Journal's lead staff editorial this past weekend pretty much summed up the situation. The SEC case opened on or near the day that the FINREG mess began rolling in Congress. Its settlement, with no admission of guilt by Goldman, on the day of the FINREG passage appropriately signaled the case as the political witch hunt it was.

With FINREG passed, and Goldman having been muzzled during the process, a trial was no longer actually desirable for either party.

The really bad news is how this case illustrates the nature of federal government thuggery now commonly practiced on private sector businesses.

And the mute acceptance of said thuggery by said business leaders.

I would have had a lot more respect for Blankfein, et al, had they stood up and demanded vindication and acquittal in court. Instead, they meekly agreed to a settlement, which signals that they didn't really believe they could or would win.

Others may argue that they got off cheaply. That a court case and potential civil liabilities were not in the shareholders' interests.

I'm not so sure. How can business operate for the long term in an environment in which government is so openly corrupt and coercive? If the SEC could get away with this case, who's to say who and how large will be the next coerced target of the administration?

This isn't justice. It's a private business succumbing to coercion by the government, rather than exposing it from the rooftops for all to see and understand.