Chronicle of the Conspiracy
Saturday, January 06, 2007WHAT HORRIFIES ME IS THAT PEOPLE LIKE THIS CAN VOTE ...and be parents. From the fan-mail bag:
wow, could you be any more republican? is there anything that money and having lots of it isn't better than in your world? is everything a mickey mouse money rhyme?Update... Bob Ferguson observes,
I suppose we should be happy about the Shirley Benders of the world. Clearly, they, not caring about money, would be willing to keep our tax rates low.
Posted by Donald L. Luskin at 1:55 PM | link
JOURNALISM 101 -- HOW (NOT) TO WRITE A LEDE From this morning's Wall Street Journal:
Who's funnier, on the whole, liberals or conservatives? It's an old question, but a terrible one.I agree with the last phrase.
Posted by Donald L. Luskin at 1:08 PM | link
Friday, January 05, 2007QUICK! DO SOMETHING! Scare headline of the day, from Reuters:
China's largest lake may vanish in 200 years
Posted by Donald L. Luskin at 3:47 PM | link
KUDLOW REPLAY From Tuesday -- in which I am forced to demand that Gary Schilling show me the money.
Update [1/6/2007]... Our correspondent "Irrational Exuberance" adds his view:
Gary Shilling generally either suffers from taurophobia or is very intellectually dishonest. Here's what Yale economist Owen Lamont says about Shilling in a 2002 paper evaluating economic forecast accuracy:One practice is the "broken clock" strategy, which consists of always forecasting the same event. An example in the sample is A. Gary Shilling, a well-known recession-caller. Throughout the 1980s, Shilling continually predicted recession. In 15 out of 18 Wall Street Journal surveys in which he participated 1981–1992 (data which are not used elsewhere in this paper), his year-ahead long-bond yield projection was the lowest among all forecasters. Fig. 1 shows GNP growth forecasts published in Business Week (various issues). As can be seen in the figure, 8 out of 10 times his forecast is below consensus, and he is often the extreme pessimistic outlier (when he is optimistic in his forecast for 1972, he is also the extreme optimistic outlier). Keane and Runkle cite Zarnowitz's (1969) finding that in a survey including non-professional forecasters, "a number of the occasional forecasters submitted extreme and rather unreasonable predictions" as an example of "inaccuracies due to lack of proper economic incentives" of the forecaster. Yet it is hard to describe Shilling's forecasts as anything, but "extreme and rather unreasonable".Shilling's forecasts were so inaccurate that Lamont had to remove them as outliers from the study.
Posted by Donald L. Luskin at 2:13 AM | link
PORKMISTRESS NANCY So Nancy Pelosi plans to lead a crusade against pork spending? Not bloody likely. The local press here in Pelosi's own backyard:
If she's persistent with this crusade, we can expect one of two things: Either San Francisco will be deprived of more than half a billion dollars in federal money we thought we had coming, or Pelosi will squander an opportunity to become this country's first effective national female leader.Thanks to reader Michael Barger for the link.
Posted by Donald L. Luskin at 1:14 AM | link
Thursday, January 04, 2007GIVE JERRY A LITTLE CREDIT! When I appeard on CNBC's "Kudlow & Company" on Tuesday (YouTube video here), Larry gave me a hard time for crediting Gerald Ford as the White House godfather of supply-side tax policy. Tom Blumer asked me to respond to commenters on his blog who have taken the same position. No problem -- the historical facts are squarely on my side.
I relied for my column on the account of events presented in Jude Wanniski’s book The Way the World Works. Most of it is on page 288 of the first edition hardback.
According to Wanniski, “President Ford proposed a 5% surtax on personal incomes as the result of the advice he received at his Economic Summit Meeting in September, 1974 (even as the stock market was plummeting below 600 DJI).”
Wanniski writes, “The Republicans…lost three dozen seats in the House of Representatives. In the days immediately following the GOP debacle, White House Chief of Staff Donald Rumsfeld was persuaded by Laffer that the correct policy was tax reduction, not tax increase. It was for Rumsfeld’s assistant, Richard Cheney, that Laffer drew his Curve for the first time on the back of a paper napkin in the Two Continents Restaurant a block from the White House. The stock market stopped its decline and began a serious advance in December, 1974, with the first hints that Ford was turning on tax policy. And while the ‘tax cuts’ announced by Ford in February  were inefficiently designed by the administration’s conservative Keynesians, it made a great deal of difference to the economy that there would be some movement down the Laffer Curve instead of a leap upwards.”
Here are the details of the Ford tax cuts. “In March 1975, Ford signed into law a bill that provided individuals with a 10 percent rebate on their 1974 tax liability, a fattened standard deduction, and a temporary $30 tax credit for each taxpayer and dependent. For companies, the investment tax credit was temporarily increased to 10 percent.”
It seems clear to me that while we can fault Ford for not doing more or for not doing better with his tax cut, he deserves a great deal of credit for (a) having an organization that was capable of getting outside-the-box inputs from a then-unknown Arthur Laffer, and (b) having the wisdom to take that advice and stand away from doing something really terrible – raising taxes – even though it was firmly embraced by the conventional wisdom of the time.
Posted by Donald L. Luskin at 11:11 PM | link
POLL MANIPULATES SOCIAL SECURITY SOLVENCY? Social Security reform paranoia seems to be the flavor of the month. Here's a new Harris Poll, reports that "Social Security reform to ensure the Social Security fund has enough money to provide benefits for all Americans for the next 50 years" has the support of 88% of Americans (68% strongly). Sure, well why not? The problem is in the choice of "50 years"? Why 50? Why not forever, or why not the 75 years normally quoted as the definition of actuarial soundness? Actually, when you pick any number of years other than forever you have a conceptual problem. That's because the system is solvent today in the sense that its tax intake is sufficient to cover its benefit outflow. But the more years in the future you look at, the worse it gets, as gradually benefits start to overtake tax revenues. So even today, with no reform, 50 years looks better than the usual 75 years. Okay, so why would the Harris pollsters ask people about the relatively rosy (but still problematic) 50-year horizon, instead of the relatively dark (in fact, very problematic) 75-year horizon that is the standard way of looking at it? Could Harris have been tipped by Democratic staffers? Could this be a "trial balloon" floated by Democrats to try to legislate away the optics of the problem by instructing the Social Security actuaries to start thinking in terms of 50 instead of 75 years? A friend with the right connections tells me he asked the Harris people, and they claim the choice of 50 was entirely arbitrary... but you can't be too careful nowadays.
The reality is that both 50 years and 75 years look horrible. Benefit payments exceed tax intake after 2017, and from that point on the system has to redeem the "assets" of the so-called "trust fund" -- assets that are, in fact, just government debt owed to itself, without any actual wealth being stored to back eventual repayment. Hey, that gives me an idea. Let's pass a law mandating examining solvency on a 10-year basis. That will solve all our problems!
Posted by Donald L. Luskin at 11:41 AM | link
DENVER VS. NEW ORLEANS: DENVER WINS Here's one of those emails that's making the rounds:
Up here, in the Northern Plains, we just recovered from a Historic event--- may I even say a "Weather Event" of "Biblical Proportions" --- with a historic blizzard of up to 44" inches of snow and winds to 90 MPH that broke trees in half, knocked down utility poles, stranded hundreds of motorists in lethal snow banks, closed ALL roads, isolated scores of communities and cut power to 10's of thousands.Thanks to Jameson Campaigne for passing this along.
Update... Friend Rick Gaber adds:
“The response to Hurricane Katrina was by far the largest -- and fastest -- rescue effort in U.S. history, with nearly 100,000 emergency personnel arriving on the scene within three days of the storm's landfall. ... By the end of the week, 50,000 National Guard troops in the Gulf Coast region had saved 17,000 people; 4000 Coast Guard personnel saved more than 33,000.” (And despite media stories to the contrary, FEMA is NOT -- and was never supposed to be -- a first-responder agency.) -- Popular Mechanics, March 2006
Posted by Donald L. Luskin at 10:32 AM | link
Wednesday, January 03, 2007CALAME DOESN'T SPEAK TO "THE MEDIA" -- UNLESS ITS ABOUT HIM So the word is that the New York Times is considering eliminating the position of "public editor." No loss. The two they've had so far have been ineffectual fall guys, although it seems that even that was too hot to handle for the thin-skinned Masters of the Universe who publish the Times. The current "public editor" Byron Calame was useful last year in getting two major corrections of Paul Krugman columns (here and here) -- but I had to drag him kicking and screaming to bother to do it. And when the second one was done, he let me know that he couldn't correspond with me any more because I am "the media," and his job does not permit him to talk the "the media." How strange, then, that he is willing to talk to the New York Observer when the issue is his job, and there is no reader such as myself to serve.
When reached by phone on Dec. 29, Mr. Calame said he had heard the news. His assistant, Joseph Plambeck, had attended an in-house Q&A on Dec. 15, at which Mr. Keller expressed the idea. “I have been critical of the newsroom,” Mr. Calame said. “I’ve also praised the newsroom, and I think that Bill Keller has been—quite obviously—unhappy with some of the things I’ve written.” “It seems to me that the high degree of independence that has been given to the public editor at The New York Times makes it a situation that inevitably causes criticism,” Mr. Calame said. He added: “So it is not a surprise to me that The New York Times—that Bill Keller, the executive editor, and Arthur Sulzberger, the publisher—would want to sit down and think about whether they want to have a public editor.”
Posted by Donald L. Luskin at 8:36 PM | link
Tuesday, January 02, 2007BEN BERNANKE MUST BE REALLY PISSED The Zambia National Broadcasting System reports:
Fundanga named Global BankerThanks to "Irrational Exuberance" for the link.
Posted by Donald L. Luskin at 1:53 PM | link
MORE ON FORD'S LEGACY Readers respond to my SmartMoney.com column on "Ford's Legacy."
Skip Oliva of Citizens for Volutary Trade notes,
Part of Ford's anti-inflation plan was more aggressive antitrust enforcement. In fact, most of the modern antitrust structure came into place during Ford's administration. I have a post on this today.
Reader Mark Michael says,
You posted about Pres. Ford's legacy today, saying that Arthur Laffer persuaded Dick Cheney who persuaded Don Rumsfeld to do the Laffer supply side thing rather than cut spending and raise taxes per the advice of industry types. You later say that Ford decided not to veto a congressional spending increase due to the same kind of thinking: a fiscal stimulus in a recession is a good thing, even if the spending isn't things of much worth. In other words, stimulus is good regardless.
Posted by Donald L. Luskin at 1:43 PM | link
KRUGMAN'S DEFICIT FLIP-FLOP For years I've called Paul Krugman "America's most dangerous liberal pundit" because of the bald-faced lies about the economy and politics that spewed twice a week from his New York Times column. Now, for a change, he's telling the truth. And that makes him more dangerous than ever, because as always Krugman represents the vanguard of elite liberal opinion.
Krugman revealed the truth in a Times column just before Christmas, when he created a rationale for why Democrats now in control of congress should abandon any concerns about the federal budget deficit, and instead go on a spending spree. How things have changed! While the GOP controlled congress, Krugman devoted column after column to what he called America's "fiscal train wreck," President Bush's "sheer banana-republic irresponsibility," a "fiscal catastrophe" and a "fiscal quagmire."
When Democrats were out of power, they all followed Krugman's deficit-hawk lead. Hillary Clinton worried about the "staggering federal deficit," Nancy Pelosi warned about "mountains of debt," Barack Obama fretted about "our structural deficit problem" and John Kerry raved about "fiscal cancer."
But now that they're in power, get ready for deafening deficit silence from the Dems. Krugman has their new deficit-embracing talking points all figured out. Surpluses are bad, deficits are good. According to Krugman now, the budget surplus of 1998 to 2001 was "a bad thing, because it greased the rails for Mr. Bush’s irresponsibility." Now, Krugman says, "let the deficit be."
It's not only Krugman. He's just channeling the spirit of the whole Angry Left blogosphere, from which Democratic leadership now takes all its cues. For example blogger Matthew Yglesias writes,
Just because these thought leaders on the Left are signaling that Democrats won't care much about deficit reduction anymore, don't think that means they won't want to see higher taxes. They will. Their mechanism for getting them is "pay-as-you-go" budgeting, which Krugman explains "would basically prevent Congress from passing budgets that increase the deficit." He says, "I’m for pay-as-you-go," and Angry Leftist blogger and UC Berkeley economist Brad DeLong explains why:
Put it all together and rephrase: raise taxes and spend the money on programs favored by Democrats -- and spend it quick before the GOP gets back into power!
Power -- that's what it's about, not deficits. It's never been about deficits. All that matters for Krugman and the Dems is which party has the power to do the deficit spending. The last time Democrats were in power, Krugman was sounding just as sanguine about deficits as has suddenly become again now. During the Clinton administration and before the GOP takeover of the congress, in his 1994 book Peddling Prosperity Krugman wrote that even though the "Federal debt, as a share of GDP, has been rising... the U.S. government is not in any kind of financial crisis." The debt then was 49.3% of GDP, higher than in any year of the Bush administration when Krugman was ranting about a "train wreck" and a "catastrophe."
There is a rational case to be made to "let the deficit be" at this point. Sincere fiscal conservatives can argue about the details, but the reality is that it's not all that bad anymore. The annual deficit is now running at only 2.1% of GDP, well below its height three years ago at 3.6% of GDP. But that's not the case Krugman and the Dems will make. They will frame their position in terms of "Mr. Bush’s irresponsibility," when it's Bush who deserves credit for getting today's deficit to a level lower than its average in the 1990s of 2.2% of GDP.
Instead, even as they prepare to spend every penny they can get their hands on, the Democrats still masquerade as the party of fiscal responsibility. In a blog posting that inspired Krugman's column, DeLong aggrandizes his party (and himself) by re-inventing on his blog the legend of "Rubinomics" -- named for Clinton Treasury Secretary Robert Rubin -- by which Democrats take credit for the budget surpluses and the economic growth of the late 1990s:
Ignore the preposterous slander that George W. Bush somehow redistributed the surpluses of the Clinton era to the rich. Ignore the attempt to steal credit from the GOP congress that actually led the charge on fiscal balance in the 1990s. The key idea here is that fiscal balance raises the rate of economic growth. The theory behind that idea -- the essence of "Rubinomics" -- is that deficits cause interest rates to rise and choke off growth, while surpluses cause interest rates to fall and stimulate growth.
Krugman writes now that "Rubinomics made sense in terms of pure economics." Yet today, despite the Bush administration's deficits, the yield of 30-year Treasury bonds is only 4.81%, lower than at any point during Rubin's tenure as Treasury Secretary with the exception of just two single days in 1998. Low interest rates may indeed be good for growth, but evidently Rubin's deficit policies were less effective in achieving them than those of the Bush administration and the Republican congress. Don't expect the Democrats to give the GOP any credit, though -- just expect them to spend money, now that they don't have to worry about rates.
It's not just the Democrats who won't give the GOP any credit. Many conservatives are convinced that the GOP lost control of congress last November because of excessive spending. But the reality is that the GOP has bequeathed to the Democrats budget deficits that are trivial, both by historical standards and by the evidence of interest rates. So the Right and the Left have something in common now -- they can both beat up the GOP for a profligacy that doesn't actually show up in the numbers anymore . The difference is that now the Democrats get to open up the spending spigot even wider, and raise taxes to boot.
Posted by Donald L. Luskin at 6:07 AM | link
Monday, January 01, 2007FORD'S LEGACY Here's my remembrance of Gerald Ford, for SmartMoney.com tomorrow:
Investors ought to remember President Gerald Ford, who passed away last week at the age of 93, for a key decision he made in December 1974. That decision ended America's worst economic downturn since the Great Depression, and marked the historic bottom from which was launched the great bull market in stocks that has endured to the present day.
The U.S. economy fell into recession in November 1973, shortly after OPEC imposed an oil embargo that created the first "energy crisis." This worsened an already critical inflation problem, which neither the Federal Reserve nor President Nixon's imposition of wage and price controls had been able to tame.
Ford took office in August 1974, when the Dow Jones Industrial Average had already lost more than a quarter of its value, having fallen to 777 from its December 1972 highs above 1000.
His famous speech in October announcing "Whip Inflation Now" buttons didn't help matters. In fact, by December, the Dow had lost more than a quarter of its value again -- falling as low as 570. The Dow hadn't been that low for more than a dozen years.
The reason wasn't just Ford's ineffectual attempt to deal with inflation. It was that Ford had convened a summit conference of America's economic leaders, and it looked like he was going to take the conference's horrible advice to deal with the recession by cutting spending and raising taxes with a 5% surtax on personal income.
Yes, tax hikes and spending cuts in a recession make about as much sense as putting a starving man on a diet, especially considering the astronomical tax rates that were already in effect then -- the top personal tax rate on earned income was 50%. And inflation was pushing more and more Americans into higher and higher brackets.
But that's what America's best economic minds were recommending -- and the stock market knew it would only worsen the recession.
Then in December 1974, everything changed. In a restaurant in Washington, D.C., a young economist named Arthur Laffer was having dinner with a young White House aide named Richard Cheney. Laffer explained to Cheney that, if you raise taxes, you diminish the incentives to work, and the economy slows down (and tax revenues for the government fall, despite the higher tax rate). If you lower taxes, the opposite happens. Incentives to work are increased. The economy grows faster (and tax revenues increase, despite the lower tax rate).
Laffer illustrated this principle by sketching a diagram on a cocktail napkin. His diagram has since been immortalized as "The Laffer Curve."
Cheney told his boss, White House Chief of Staff Donald Rumsfeld, about the Laffer Curve. And the rest, as they say, is history.
Soon Ford stopped talking about raising taxes, and instead started talking about lowering them. That's when the stock market stopped going down.
In March 1975, it was official: Ford signed the tax cuts into law. That month marked the bottom of the recession.
And armed with the logic of the Laffer Curve, Ford decided not to veto a federal spending bill designed by the Democratic congress to stimulate the economy. Ford made the bet that lower taxes would generate enough new growth to create the revenues necessary to pay for the spending.
The tax cuts weren't much. And most of that government spending was probably wasted. But every little bit of stimulus helps when you're in a recession. Small tax cuts were far better than the 5% tax hike that the stock market had been afraid of, and a little new government spending was better than slamming on the brakes.
Ford's legacy for investors was that by the time he left office, the Dow had rallied back to within a few percentage points of its 1972 peak above 1000. The market was back from the brink.
But most important, a powerful new economic principle was abroad in the land -- the idea that you could grow the economy by reducing the tax rates that hold back economic incentives.
Jimmy Carter, who followed Ford as president, did nothing with the new idea that Ford had fostered. (And, when Carter left office, the Dow was lower than when arrived.) The next president, Ronald Reagan, grabbed that idea with both hands in the 1980s, with massive tax cuts that kicked Ford's bull market into high orbit. The Dow blasted through 1000, and never looked back.
Similarly, the massive growth spurt of the late 1990s began when President Bill Clinton reduced the tax rate on capital gains. And the economic expansion we're in right now kicked into gear in earnest in 2003 when President Bush cut tax rates on income, dividends and capital gains.
So don't belittle the memory of Gerald Ford as the hapless figure with a WIN button in his lapel. Take a look at the Dow Jones Industrial Average, now more than 20 times higher than that it was in that bleak December in 1974 when Ford made the right decision, and changed the course of economic history.
Thank you, President Ford.
Posted by Donald L. Luskin at 4:04 PM | link
THE LAFFER CURVE LIVES! A single un-named taxpayer has stepped forward under California's amnesty program for back taxes owed, and paid the state $200 million. The amnesty program effectively lowered the tax rate for those who owe back taxes by eliminating criminal consequences. So this is the Laffer Curve in action: lower the tax rate, and you get more tax revenues.
The payment is almost certainly related to a law signed by Mr Schwarzenegger in 2004 offering “taxpayer amnesty”, so that the very wealthy could set their taxes straight without risking fines or jail. The deadline for applying for amnesty was April 1, 2005, so any settlements would probably have been made this year and could cover several years of earnings...Thanks to the Club For Growth blog for the link.
Posted by Donald L. Luskin at 1:00 PM | link
LESSONS FOR LEFTISTS: HOW TO TURN GOOD NEWS INTO BAD NEWS Far-left ecnonomist Dean Baker counsels the Left-leaning media on how to ignore the good news that stocks are at all time highs (on his blog that purports to educate the media on economics):
The Stock Market is Not the Home Team: A Rising Stock Market Is Not Good NewsTranslation: unless a reporter can be sure that the benefits of a thing are perfectly evenly distributed to all people, that thing should not be reported as good. So.... for example, a cure for AIDS would not be a good thing, since it benefits disproportionately that tiny minority of people who suffer from AIDS.
Posted by Donald L. Luskin at 12:51 PM | link
Sunday, December 31, 2006THE SOCIAL SECURITY IDIOT FRINGE HAS A RIGHT SIDE AND A LEFT SIDE For almost two years now the Bush administration has let if be known, over and over, that it is willing to put raising taxes "on the table" as a point of debate concerning Social Security reform. As I've covered here several times already (to the great annoyance of some of my conservative friends), some from the Social Security reform movement on the Right are trying to spin that long-standing offer to negotiate into a dark plot to secretly agree with Democrats to raise payroll taxes. Here's reformer Peter Ferrara's fantasy life in print:
The president's staff is negotiating with Congress's new Democratic majority now. My sources on Capitol Hill say the White House has already sold most Senate Republicans on this political loser.Their purpose? First, no doubt, to draw attention to themselves and their preferred (and crackpot) reform schemes, but also to influence the process by forcing Bush to deny that such a plot exists and affirm that taxes won't be raised. Now the same dynamic is coming from the Left,in reverse. Same facts, antipodal spin. From this morning's New York Times editorial page:
Tax increases must be a part of any plausible Social Security reform mix. Unfortunately, the president appears unalterably opposed even to something as overdue as raising the cap on earnings that are subject to Social Security tax.
Posted by Donald L. Luskin at 1:02 PM | link