Gary Shilling (who, by the way, is predicting that the stock market will fall 50% this year) took the other side in the debate, but I'm not entirely sure how to come to terms with the intellectual force of some of the things he said. For example...

"Gold is pushed around by a lot of things... The IMF said they're going to sell, but not for twenty years... what Chinese peasants do with their money... who knows what the real meaning is?"

"You look at the dollar against the yen, it's been very strong lately. Yeah, against the euro, no."

"If you say the Fed is a monetary phenomenon, then you say those idiots at the Federal Reserve between 1941 and 1945 didn't know what they were doing. They humped the economy supply and created all that inflation. That's nonsense."

NEW YORK (AP) -- The New York Times Co. posted a $648 million loss for the fourth quarter on Wednesday as it absorbed an $814.4 million charge to write down the value of its struggling New England properties, The Boston Globe and the Worcester Telegram & Gazette.

WASHINGTON - The House passed a $463.5 billion spending bill Wednesday that covers about one-sixth of the federal budget as Democrats cleared away the financial mess they inherited from Republicans.

Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial and justly wealthy. But only the first 5 percent of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it.

Thanks to reader Mike Mitchell for the link.

Update... a reader who asks for anonymity thinks the headline for this post should have been "Brad DeLong's Conception of Calorie Rights," and he suggests the following rewrite:

Brad DeLong and other overweight economists earn good money from public institutions and are big eaters and obese. But only the first 50 percent of their calories can be justified as a dietary requirement for healthy living. The other 50 percent would create much more happiness and opportunity if it were provided to starving U.S. citizens or others than if they were to consume any portion of it.

In taking up the subject of the Microsoft Millionaires, but especially the billions of Gates, Allen, and Ballmer, whose wealth is a result of the appreciation of Microsoft's market capitalization, DeLong is proposing the policy of a 95% tax on capital (wealth). As class warfare, this may get some juices flowing, but as economic policy, this puts DeLong's party--the Democrats--in league with Karl Marx, who preferred 100% of the capital to be in the hands of the state. As regards the consequences of such a policy, I'd suggest DeLong's 95% tax on wealth is a distinction without a difference, when compared to Marx's 100% state control.

Most, though not all, of the ... economic numbers that came out this week were ... substantially weaker than expected. Pessimists feel vindicated by the downbeat data. Nouriel Roubini..., who has been forecasting a housing-led recession for some time, ... predicts zero growth for the current quarter. Economists at Deutsche Bank say the same thing.

But that’s still a minority position; most forecasters are still telling us not to worry. So whom should you listen to? And how can you avoid believing what you want to believe?

Maybe the best answer is to look at what the financial markets say. Not the stock market, which is a notoriously bad indicator of the economy’s direction, but the bond market...

Since last summer, when the housing bust became unmistakable, interest rates on long-term bonds have fallen sharply. They’re now yielding much less than short-term bonds. The fact that investors are willing to buy those long-term bonds anyway tells us that these investors expect interest rates to fall. And that will happen only if the economy weakens, forcing the Federal Reserve to cut rates. So bond buyers are, in effect, betting on a future economic slowdown.

How serious a slump is the bond market predicting? Pretty serious. Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. And since even a slowdown that doesn’t formally qualify as a recession can lead to a sharp rise in unemployment, the odds are very good — maybe 2 to 1 — that 2007 will be a very tough year.

Update... Apparently I was unfair to Deutsche Bank. Stupid me -- I made the mistake of believing that Krugman had accurately represented their view. Roubini is an ultra-bear for sure, but reader Shawn Mercer has discovered the truth about Deutsche:

I realize it wasn't really the point of your latest post, but apparently Krugman cannot be trusted even to fairly portray the views of those he claims agree with him. "Economists at Deutsche Bank say the same thing (prediction of zero growth for the 4th quarter)."

Oh really? See if you agree, but by my reading of their research -- U.S. Outlook for 2007, published in December 2006 -- that sounds like a pretty gross exaggeration:

Base-Case. Putting it all together, we think the US econ-omy is in the midst of what will prove to be a "soft land-ing" — a period of modestly below-trend growth that began in the spring of 2006 and may persist through part of 2007, driven primarily by a housing correction. As residential investment stabilizes, perhaps by late 2007, growth is likely to return to trend, as the knock-on effects from the deceleration in home prices prove modest and partly offset by the economy’s other supports. All told, this period of slightly sub-par growth should be enough to ease rates of resource utilization a bit and help contain and possibly edge core inflation lower. That’s especially true if we are correct that some of the run-up in core inflation early in 2006 owed to transitory factors (energy price pass-through, a catch-up in rents) that are fading. Labor compensation may continue to accelerate modestly, but much of this may reflect catch-up to productivity advances of recent years, which were not fully reflected in labor income. Equivalently, competitive pressures may prevent firms from passing through all the acceleration in labor costs to prices.

Risks. We see the risks to this base-case forecast for growth as asymmetric, tilted a bit to the downside. In particular, the housing correction could be deeper and longer-lasting than we anticipate, with greater knock-on effects to consumer spending. If so, the rest of the world may have a harder time skirting the US slowdown, mak-ing it tougher for US exports to improve. Moreover, a sharper slowing in consumer spending could cause busi-nesses to pull back on capital spending, despite strong corporate finances. Finally, financial conditions may not be quite as accommodative as they appear; if part of the reason that real interest rates are low is because of a surplus of desired savings abroad (i.e., a deficiency of aggregate demand abroad), this suggests that the equilib-rium real interest rate may have declined — so today’s level of rates may not be as stimulative as we think. But the risks are not one-sided. The resiliency of the labor market suggests that the economy may not have slowed much below potential at all over the last three quarters of 2006. So rates of resource utilization may not ease much even if recent growth rates persist. This would be espe-cially worrisome for the inflation outlook if some of the pickup in core inflation in early 2006 was already due to high rates of resource utilization (i.e., if not all of it was transitory). Further, we can’t necessarily count on wide profit margins acting as a buffer against inflation pressures should labor costs accelerate further.

Fed policy. If something close to our base-case scenario plays out, the Fed may be hold for much of 2007. In fact, our base-case scenario is very close to what the Fed would like to see happen — a period of modestly below-trend growth, driven primarily by a housing correction, that helps ease rates of resource utilization and edges core inflation lower. The risks around this base-case fore-cast of a steady Fed are tilted slightly to the side of an eventual easing. The funds rate is toward the upper end of what is generally perceived to be the "neutral" range, and the growth risks are skewed to the downside. But for the Fed to cut rates, we would need to see two things: clear evidence that the housing slump was spilling over into consumer spending and especially into the labor market; and clear evidence that core inflation was peaking if not heading lower. In our base-case, we’re likely to see the latter, but not necessarily the former.

The Deutsche people don't sound like "perma-bears" here. Can this a**hole be trusted to tell the truth about anything?!

Our Endangered Right to Privacy is a favorite topic of newspaper editorials and long op-eds. Yet, I don't recall ever seeing anyone point out that the extraordinarily elaborate process of applying for "financial aid" from colleges tramples all over your privacy. This says a lot about the deference paid to the college cartel by the American upper middle class.

As you know, colleges set their sticker prices by picking some absurdly high figure, like $46,732 per year, then discount like crazy, although they call their discounts "financial aid." But, they discount the way economic theory predicts a monopolist would - by perfect price discrimination, setting the profit-maximizing price for each potential customer. You learn in Econ 101 that in the real world, this theoretical result is seldom achieved because firms can't obtain all detail necessary about each customer for setting the perfect price. If your econ professor has...a rogue wit, he will then point out that there is a single exception: American colleges, which insist upon complete financial disclosure from applicants for "financial aid."

``Both sides have to be willing to give up their fixed positions,'' Conrad, 58, said at a Washington press conference last week. ``There needs to be more revenue.''

At the same time, Bush is portrayed as stubborn and inflexible because he is willing to discuss tax hikes, but comes into the discussion opposed to them. Why is one side in this debate entitled to inflexible requirements for the outcome, and the other not? Simple -- there are two reasons. One, because the liberal media is writing the story, so it seems perfectly sensible for the least flexible people to call the most flexible people inflexible. Two, because no good deed goes unpunished -- Bush took the high road and said he would be flexible, so now any expression of his own opinions is used by his enemies as a sign of hypocrisy. God help anyone working on Social Security reform in Washington who actually gives a damn about policy. This crap is nothing but politics.

Update... Rick Gaber says,

While the ten things are all well and good, let's remember the bigger picture:

"If a tax cut increases government revenues, you haven't cut taxes enough." -- Milton Friedman

Another little bit of evidence that the guiding philosophy of the these past 27 years – Reaganomics -- is slipping away. This one concerns stock trading...

If you don’t have both bulls and bears fighting with each other every nanosecond on Wall Street, you don’t have a fair marketplace.

The political pressure to “do something” about some of the practices of short sellers is high and getting more so. The heat is coming from people in both parties, even a smart man like Chris Cox who worked for Ronald Reagan in the White House. Look at his quote:

"This is already a serious issue and it is showing all signs of growing."

Yes, it is a serious issue but many of the allegations presented in the Wall Street Journal article last week on this subject are seriously flawed. Much of this imagined crisis is a misunderstanding of industry practices and procedures. Much of the agitation to “do something” is being generated behind the scenes by companies who hate it when their stock is shorted. Who wouldn’t! Yes, the short sellers can be bastards, or wrong. (No, I don’t represent them.)

If the SEC makes it harder to short a stock, or limits the rights to borrow a stock, or limits the voting rights which now transfer to the borrower, then the SEC will tip the scale away from the bear. Do we want the referee choosing sides and tipping scales?

That is a serious issue which shows all signs of growing.

*Current tax revenues of 18.4% of GDP are now above the historical average;
* The 2006 tax revenues of $2,407 billion were $47 billion above the level projected by CBO before the 2003 tax cuts, and just $58 billion below the level projected by CBO in 2000, before the 2001 tax cuts;
* Capitals gains tax revenues have more than doubled to $103 billion since the 2003 capital gains tax cuts;
* The child credit, 10% bracket, and marriage penalty reduced revenues much more than many of the “tax cuts for the rich;”
* Even if the Bush tax cuts are made permanent, CBO projects revenues will still surge to a record 22.8% of GDP by 2050;
* Letting the tax cuts expire would raise long-term revenues by less than 1% of GDP;
* Historical tax revenues correlate almost perfectly with GDP, and not all with income tax rates;
* Negative GDP, investment, and jobs trends immediately reversed after the 2003 tax cuts were enacted; and
* The Bush tax cuts actually shifted the total tax burden even further towards the rich, according to CBO.

Inflation adjusted tax revenues per capita (less payroll) were 17% higher in 2006 than they were in 2002. When you use % to GDP as the metric, you have ceded that the government should grow its revenues like a private corporation. It also allows the opponents of the tax cuts to claim that anything below the 21% nirvana of 2000 is evidence of “lost revenue” caused by the tax cuts.

Conversely, per capita tax revenue measures capture the fact that the job of the government is to provide services which do not by default grow at the rate of the economy. While it is certainly likely this measure may increase over time, why shouldn’t those who oppose the tax cuts be forced to explain why a 17% increase in real revenue isn’t enough to cover what the government is responsible for?

For conservatives who purport to want to limit the growth of government, I don’t see why this is so hard for them to grasp.

Why, then, emphasize the African-Americanness of these two excellent coaches? Doesn't doing so suggest a patronizing sense of amazement at their accomplishments -- as if to say, who'd have thunk not one but two black men could be at the top of their line of work? Doesn't doing so also suggest a note of self-congratulations for Americans -- as if to say, look how far we've come in giving these men a chance? Aren't we grand in our virtue?

Posted by Donald L. Luskin at 8:42 AM | link    

Monday, January 29, 2007

Posted by Donald L. Luskin at 9:29 AM | link