Thursday, January 31, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE BOND INSURANCE STORY...On to discuss what's going on with the monoline insurers will be CNBC's Charlie Gasparino and Joe LaVorgna, chief US economist at Deutsche Bank.

THE MARKETS...Our market panel will discuss and debate all the latest news, trends, and developments affecting investors.

On board:

*Andy Busch, global FX strategist at BMO Capital Markets
*Jim Lacamp, portfolio manager of RBC Dain Rauscher
*David Kotok, co-founder & CIO of Cumberland Advisors
*Quentin Hardy, Forbes magazine Silicon Valley Bureau Chief

GOLD & THE MARKETS...Energy analyst John Kilduff, senior vice president at MF Global, will join our market panel and offer his take on what's going on with gold.

YOUR MONEY, YOUR VOTE...CNBC's chief Washington correspondent John Harwood will offer a report on last night's Republican debate and a look ahead at tonight's Democratic debate between Senators Barack Obama and Hillary Clinton.

STOCK MARKET POLITICS...Our Washington to Wall Street panel will weigh in with its perspective on all the latest.

On board:

*Greg Valliere, Washington strategist at Stanford Policy Research
*Steve Moore, member of the Wall Street Journal editorial board
*Bob Shrum, Democratic strategist
*Douglas Holtz Eakin, former director of the Congressional Budget Office and current economic adviser to John McCain

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Stop & Go Fed

Has the Fed spent too much time tinkering with interest rates? Was Ben Bernanke handed a bucketful of bad molasses from Alan Greenspan? Take a look at the following chart and judge for yourself.


For four years, between 1995-1999, there was basically no change at all in monetary policy. Nothing. Then, all of a sudden, the Fed started raising the fed funds rate in 2000. So, loose in 1999, followed by tightening in 2000.

Then, the Fed put the pedal to the metal in ’01, ’02, ’03, ’04. That was their big GO period.

As we know, in ’05, ’06, and early ’07, the central bank hit the brakes. It had officially entered the STOP camp.

Lately, it’s been one big GO.

Remember, all this Fed tinkering occurred in less than ten years. Stop. Go. Stop. Go. Monetary whiplash.

I prefer monetary stability. And I just can’t help but wonder whether the current Fed chair wasn't dealt a really crummy hand from the Greenspan Fed. It's not Bernanke's fault. All the previous monetary tinkering landed him on the Greenspan shovel brigade. He's cleaning up.

Bottom line: All this Fed fine-tuning can’t be great for the economy.

Wednesday, January 30, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

TODAY'S FED DECISION...Our Fed panel will be aboard to discuss what today's Fed decision means for the markets and the economy.

On board:

*Wayne Angell, former Fed governor
*John Taylor, Stanford University economics professor & former Under Secretary of the Treasury for International Affairs
*Mark Gertler, New York University professor and a policy consultant at the New York Fed

THE MARKETS...Our market panel will offer its perspective on all the latest news, trends, and developments including today's Fed decision.

On board:

*Bill Fleckenstein, president of Fleckenstein Capital,
*Phil DeMuth, investment advisor, Conservative Wealth Management
*Jeff Kleintop, chief market strategist at LPL Financial Services

YOUR MONEY, YOUR VOTE...Pollster Scott Rasmussen will join us for a look at how the political horserace is shaping up in light of last night's Florida primary.

STOCK MARKET POLITICS...Our political panel will discuss and debate all the latest Washington to Wall Street news and developments.

On board:

*Dan Clifton, political strategist with Strategas Research
*John Fund, Wall Street Journal columnist
*Jerry Bowyer, chief economist of BenchMark Financial Network & CNBC contributor

THE FISCAL STIMULUS PACKAGE...Sen. Charles Grassley (R-IA) will lend some perspective on what's going on down in Washington.

Our political panel will weigh in following Mr. Grassley's remarks.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Kudos to Kyl

Sen. Jon Kyl from Arizona is showing uncommon fiscal courage in his decision not to vote in favor of this goofy stimulus rebate package.

Mr. Kyl is a principled conservative man, taking a principled conservative position. Even though he’s the Senate Republican Whip — the #2 man in the caucus — he is going against the tide and standing up for supply-side principles. (Click here to read the transcript from our interview on last night’s Kudlow & Company.)

Mr. Kyl is also pushing to slash the corporate tax rate. In my view, this would be the single best pro-growth measure that Washington could take. Incidentally, John McCain (whom Kyl has endorsed) is also proposing to slash the corporate tax rate. This would lower the cost of capital and grow investment. It would help create healthy businesses, create jobs, and raise real wages. It also would boost the dollar.

The minute such a bill is signed — the very minute — the incentive effects would take place.

Jon Kyl is the strongest conservative thinker in the Senate. He is principled. He is unwavering.

Kudos to Kyl.

Kyl Weighs in on the Stimulus Plan

(Here’s the full transcript from my interview on Kudlow & Company last night with Senate Republican Whip Jon Kyl (R-AZ).)

His thoughts on the fiscal stimulus plan:

I think it’s more of a political, than an economic exercise. I am dubious that the economic value will be that which is purported to be the case. And it could preclude us from doing some more important things that could really stimulate the economy. It’s one of the reasons why when the [Senate] Finance Committee meets tomorrow, I will be offering some amendments that I think would have a more direct impact on our economic growth—such as cutting the corporate tax rate and insuring that American citizens won’t have to pay the Alternative Minimum Tax again this year.

On whether other Senators will be opposing the plan:

I’m not sure what the whip count is on it. I think the more important concern right now is that rather than taking the House version of it, the Senate may well add a great deal of more spending to it. And in effect, allow it to become a Christmas tree-perhaps even to the point that the President couldn’t support it. There’s no telling what happens when this bill gets on the floor and it’s subject to all sorts of amendments.

On whether the plan will balloon the budget deficit:

It could well. First of all, the budget deficit will increase by about $150 billion dollars, because this is not paid for as you know. And so everything that is added to it will increase the deficit even more than that. And there is a concern that when unemployment benefit extensions are added—which they surely will be in the Finance Committee here in the Senate—that the economic effect could go from a potential positive of maybe half of a percent to three quarters of a percent at most, to a negative. And therefore it seems to me that we have got to oppose that part of what’s going to be offered up tomorrow.

On whether the plan could undermine efforts to make the Bush tax cuts permanent:

Well that’s a concern that I have. Now, political people respond to political requirements. And the view right now is: "there may be a recession coming and we don’t want to be blamed for it. So, we’ll do something so that if it comes, at least the blame won’t be on us." The problem is that we might do some harm that then prevents us from some good later on—the precise point you’re making. To the extent that we spend—an odd phrase to use—but that we spend $200 billion dollars here of taxpayer money, that makes it more difficult by that same amount to extend the tax relief that we need to extend at least in 2010, and hopefully we’ll do it sooner.

On the political ramifications of opposing the plan:

We’re not taking a position as a party. We’re each one of us evaluating this on its merits. And we’ll each take our own position. Something I suspect will pass and it will be overwhelming. My goal right now working with Mitch McConnell, our leader, and the majority of our conference, is to try to make sure that this thing does not balloon into this giant Christmas tree that we talked about. But that we can constrain it as close to the House package as possible. And I’m working with my colleagues to try to see that that’s done.

On whether he’ll vote against the plan if it’s not parsed down to his liking:

At this point, I am enough convinced that it doesn’t do the job that it’s intended to do, adds to the deficit, and that there are better things that we can be doing with the money that I would be inclined to vote no.

Tuesday, January 29, 2008

Short the Pessimism

Pessimism has become somewhat of a national pastime of late. I am not buying into it.

In spite of all the recession talk, the U.S. economy continues chugging along. Just this morning, we received news that new orders for durable goods ended Q4 on a very strong note. We had a 5.2 percent gain. That comes out to 22.6 percent annualized growth over the past three months. Meanwhile, unfilled orders, the leading indicator for sector activity, also showed strength with a 2.5 percent gain for December (20.5 percent over 3 months).

These are not recessionary numbers.

And don’t forget: firms have been able to keep up their capex activities because credit is still flowing; business loans are up 21 percent from a year ago, and bank credit (which includes business, consumer, and real estate loans) is up 11 percent. Remember that firms have filled coffers from some very profitable years.

Even in Q4, earnings outside financials are healthy. The latest tally shows that roughly one-third of non-financial companies in the S&P 500 have reported and market-weighted and share-weighted earnings per share are up about 23 percent from a year ago.

I’m not buying into the pessimism. It’s a non-starter. Sure, we may experience some bumps and bruises along the road, from time to time. But in the end, the economic dynamism that lies at the core of this country always seems to come out on top.

The story of America is a story of prosperity, peace, and leadership. That’s not going to change any time soon.

Tuesday Night's Special Lineup

***Kudlow & Company will broadcast live from Washington D.C. once again this evening at 7pm ET.***

THE FLORIDA PRIMARY...We'll begin with a look at what's shaping up down in Florida. On to discuss all the latest will be pollster Scott Rasmussen from Rasmussen Reports.

STOCK MARKET POLITICS PANEL...Our all-star panelists will weigh in with their unique Washington to Wall Street perspective on all the news and developments shaping the markets, Washington, and the economy.

On board:

*Dick Armey, former Republican House Majority Leader
*Steve Moore, member of the Wall Street Journal editorial board
*Dean Baker, co-director at the Center for Economic and Policy Research
*Morris Reid, managing director Westin Rinehart
*Jimmy Pethokoukis, senior writer at U.S. News & World Report
*Steve Landsburg, economics professor at the University of Rochester

ALSO...Senator John Kyl (R-AZ) will also be aboard for a one-on-one interview.

THE MARKETS & THE ECONOMY...Our market panel will discuss and debate all the latest market and economic news affecting investors.

On board:

*Robert Shiller, housing expert/Yale University econ professor
*Don Luskin, chief investment officer at Trend Macro
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

UPDATE: THE FLORIDA PRIMARY...Pollster Scott Rasmussen will return with an update as the latest results come in from the Sunshine State.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Laffer Curve Tutorial

Here's a great new video explaining the theory behind the Laffer Curve. It explores how tax rates, taxable income, and tax revenue are related. It's Part I in a three-part series hosted by Dan Mitchell at the Center for Freedom and Prosperity.

The CFP will eventually release Part II, which will look at real-world evidence of the Laffer Curve, followed by the final video, which will explore how to improve the revenue-estimating process.

Hats off. Good work.

Monday, January 28, 2008

Monday Night's Special Lineup

***Kudlow & Company will broadcast live from Washington D.C. at 7pm ET this evening.***

On tonight's program:

THE STOCK MARKET, POLITICAL LANDSCAPE & MORE...Our Washington to Wall Street panel will discuss and debate all the latest news and developments affecting the stock market and economy.

On board:

*Art Laffer, economist, president of Laffer Associates
*Jared Bernstein, senior economist at the Economic Policy Institute
*Greg Valliere, chief Washington strategist at Stanford Policy Research
*Jerry Bowyer, chief economist of BenchMark Financial Network & CNBC contributor

Our Money Politics panel will stick around for the whole show.

PERSPECTIVE FROM THE SENATE...Joining us to discuss all the latest political news & developments are Sen. Ron Wyden (D-OR) and Sen. Judd Gregg (R-NH).

UPDATE ON IRAQ...Retired four-star General Barry McCaffrey will sit down with us for an in-depth, one-on-one interview on the progress in Iraq.

PERSPECTIVE FROM THE HOUSE...Rep. Artur Davis (D-AL) and Rep. Mike Pence (R-IN) will offer additional perspective on what's developing down in Washington.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Stay Optimistic, Mr. President

Mr. President, in your last State of the Union message tonight, I urge you to stay upbeat and optimistic.

Despite the usual carping by the mainstream media, General Petraeus talked about a newfound sense of hope on which we can build in Iraq. Political progress is afoot there, at both the federal and local levels. I know you’ll stay optimistic on that one.

At home, the economy is not nearly as weak as the Wall Street bears would have us believe. After-inflation income is rising rapidly. Family wealth is at an all-time high. Bank balance sheets are being repaired and corporate cash flows are unusually high. Nearly 150 million people are working in business with a low 5.0 percent unemployment rate. These people understand full well that the Democrats’ attack on corporations is completely wrong.

Hang tough Mr. President on your pro-growth program of low tax rates, overspending vetoes, and the war against proliferating budget earmarks. Stay strong on the free trade agenda. It has become one of the biggest economic stimulants and provides ordinary American families the opportunity to buy the best quality goods at the lowest possible prices from any source in the world. Even small family businesses can sell more of their goods and services to overseas markets.

Despite war, bubbles, oil shocks, and assorted Wall Street miscues, the economy is in its seventh year of expansion. Meanwhile, our nation is in its seventh year of safety from jihadist terrorist attacks.

You have offered important ideas on free market solutions for health, education, and social security. And you have made it clear that faith is a key part of our national life and our daily personal lives.

While all is never perfect, you have delivered on the most fundamental hopes for the nation: peace and prosperity.

America’s greatness is grounded on optimism and freedom. You have spoken loudly in support of these great themes. You have succeeded in far greater degree than the intellectual elites will ever admit.

Stay the course, Mr. President. Stay optimistic.

Friday, January 25, 2008

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET, SOC-GEN'S ROGUE TRADER & MORE...Our market panel will discuss and debate all the latest news and developments affecting investors.

On board:


*Art Laffer, economist, president of Laffer Associates
*Joe Battipaglia, market strategist at Stifel Nicolaus
*Jim Lacamp, portfolio manager of RBC Dain Rauscher
*Roger Lowenstein, financial author & columnist

*Krishna Guha, Chief U.S. Economics Correspondent with the Financial Times will also be aboard.

THE MARKETS & ECONOMY...Joining our market panel with his economic take will be Jared Bernstein, senior economist at the Economic Policy Institute.

STOCK MARKET POLITICS...Our market panel will weigh in with its perspective on all the latest issues affecting investors.

YOUR MONEY, YOUR VOTE...The Politico's Ben Smith will offer insight on the smear campaign against Sen. Obama.

MONEY POLITIC$...On to discuss whether Sen. McCain ought to reject the NYT's endorsement and the economic content from last night's GOP debate are CNBC contributor Jerry Bowyer and Kellyanne Conway, president of the polling company.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Laffer Nails It

Economist Art Laffer has written a very important supply-side article in today’s Wall Street Journal. In “The Tax Threat to Prosperity,” Laffer effectively answers his critics and underscores the particular importance of cutting the top tax rate, which impacts the top 1 percent of income earners.

This is the heart of the Laffer Curve. This is where the surplus revenues come from in response to the incentive effect of reducing that all-important top tax rate.

Of course, this is what is being missed in the whole goofy rebate-stimulus argument that is all the rage down in Washington.

And might I add that this so-called rebate stimulus is having no impact at all on the stock market. This is for the very simple reason that it contains no permanent economic growth effect.

Bravo to my dear friend and mentor Art Laffer.

McCain Should Reject the NYT Endorsement

Jerry Bowyer e-mailed me this morning with a terrific suggestion: Sen. McCain should reject the endorsement of the New York Times. When Steve Moore called me to say Romney did well in the debate last night, he agreed with the idea. Moore said it would generate a great positive controversy.

In my view, rejecting the editorial would underscore Sen. McCain’s efforts to reinforce his bona-fides to Republicans and conservatives.

Remember, Florida is a GOP primary. There are no independents this time. So there are a host of reasons why a McCain rejection of the Times would appeal to Republicans in this crucial primary. It was the Times that ran the despicable MoveOn.org ad (at a reduced rate no less) about Gen. Petraeus allegedly betraying America in the Iraq surge. It was the Times that leaked the foreign wiretapping and surveillance story that helped our enemies.

Of course, the New York Times has always been against the Iraq war and the successful counter-insurgency troop surge. And the Times is always against pro-growth tax cuts.

If Sen. McCain would stand up and say all this, it would cause a stir. But for him, in the fight of his life down in Florida, it’d be a good stir.

Thursday, January 24, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market panel will discuss and debate all the latest news and developments affecting investors.

*Fritz Meyer, senior investment officer with A I M Advisors
*Ben Stein, economist/author/lawyer/actor
*Gary Shilling, president of A. Gary Shilling & Co.
*Brian Wesbury, chief economist at First Trust Advisors

Also...CNBC's Charlie Gasparino will join us with a look at what's going on with the monoline insurers.

YOUR MONEY, YOUR VOTE...Joining us live from Boca Raton with a preview of tonight's GOP debate will be CNBC chief Washington correspondent John Harwood.

Also on board...Governor Charlie Crist...Florida's Republican Governor will join us for a one-on-one interview.

MONEY POLITIC$...Our Washington to Wall Street panel will weigh in on all the topics and issues facing investors.

On board:

*Steve Moore, member of the Wall Street Journal editorial board
*Ben Stein, author/economist/lawyer/actor
*Robert Reich, former Clinton Labor Secretary, Cal Berkeley professor of public policy

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

What Is Davos Drinking?

According to the front-page of today’s Wall Street Journal, Bill Gates is issuing a clarion call for a kinder capitalism to aid the world’s poor. Mr. Gates says he’s grown impatient with the shortcomings of capitalism. He thinks it’s failing much of the world, and he’s slated to say as much in a speech later today at the World Economic Forum in Davos, Switzerland.

This from a guy worth around $35 billion. (Give or take a billion.)

It appears Gates is ignoring the global spread of free-market capitalism that has successfully lifted hundreds of millions of people up from poverty and into the middle class over the last decade or so. Think China. Think India. Think Eastern Europe (and maybe even France under Sarkozy). Gates wants business leaders to dedicate more time to fighting poverty. But the reality is that economic freedom is the best path to prosperity. Period.

The Heritage/WSJ 2008 Index of Economic Freedom clearly shows that free-market countries are prospering mightily. Per capita GDP is closely related to, and positively correlated with, market economies. The fact is that free-market economics is spreading like wildfire. State socialism is on the decline. Unsurprisingly, the study also shows that the least-free economies are mired in poverty. We’re talking North Korea, Cuba, Zimbabwe, Iran, and others.

Also noteworthy is Venezuela’s plunge into poverty, orchestrated by the neo-socialist Hugo Chavez. His nation is sinking toward Cuba-type poverty as he attempts to adopt Fidel Castro’s failed economic model.

Check out the charts on economist Mark Perry’s Carpe Diem blog site. They show that the U.S. share of world GDP and its world stock market capitalization are shrinking. This is not a bad thing. It does not mean that America is heading downwards. On the contrary, it means that newly freed economies are heading up.

The reality here is that the rising tide of global capitalism is lifting all boats that employ it. It works. It’s a good thing. It’s the key to unlocking a nation’s prosperity.

So I just have to smile when a billionaire like Bill Gates turns a cold shoulder to the blessings capitalism bestows. Or when his buddy, Warren Buffett, broadcasts the importance of hiking tax rates on successful earners and investors. Look fellas, the command-and-control, state-run economics experiment was tried. It was called the Soviet Union. If you hadn’t noticed, it was a miserable failure.

What’s in the drinking water at this place called Davos?

Wednesday, January 23, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

ROLLERCOASTER MARKETS...Our market panel will discuss and debate today's stock market volatility and other news and developments affecting investors.

On board:

*Andy Busch, global FX strategist at BMO Capital Markets
*Joe Battipaglia, market strategist at Stifel Nicolaus
*Jimmy Pethokoukis, senior writer at U.S. News & World Report
*Rich Karlgaard, publisher of Forbes magazine

THE CREDIT STORY...Joe LaVorgna, chief US economist at Deutsche Bank will be aboard with his take.

A LOOK AT THE INTERNATIONAL MARKETS...Goldman Sachs International vice-chairman Bob Hormats will weigh in with his perspective along with our market panel guests.

YOUR MONEY, YOUR VOTE...Pollster Scott Rasmussen from Rasmussen Reports will give us a quick take on what the polls are saying about the economy and more.

STOCK MARKET POLITICS...Our guests will offer their thoughts on the markets and the various Washington to Wall Street issues affecting investors.

On board:

*Jim Lacamp, portfolio manager of RBC Dain Rauscher
*Michael Metz, chief investment strategist at Oppenheimer & Co.
*Jerry Bowyer, chief economist of BenchMark Financial Network & CNBC contributor

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Today's Market Turbulence

Stock market corrections and economic recessions come and go. It’s the nature of a free economy. Add to that Schumpeterian gales of creative destruction, as technological advances bring down old industries in favor of new ones. Turbulence is part of capitalism. But Tuesday’s turbulence should not dissuade investors from buying stocks for the long-run.

This strategy essentially argues for investing in America, which has produced the greatest prosperity in the history of history. I do not see this changing. Right now the stock markets have corrected by roughly 20 percent -- the first time in about five years that we’ve had a true correction. To me this means there are a lot of bargains out there. In fact, the market averages at these levels represent good bargain prices.

I always recommend buying broad stock market indexes. For example, the Dow Jones Wilshire 5000 or the S&P 500. Owning international indexes also makes sense, including emerging-market indexes. A package like this gives investors good diversification, keeps it simple, and covers the world.

I don’t foresee the overthrow of free-market capitalism, and not even Senator Clinton will bring back state-run socialism. Folks who bought the market in late 1987and held it for twenty years did extremely well. I don’t recommend timing the cycles, and certainly not trading on a daily or short-term basis. The idea is to stay long-term. Younger investors should be 100 percent in stocks. Middle-aged investors should be about 80 percent in stocks. And elderly investors should probably be about 50/50 between stocks and bonds.

Be invested. Be diversified. Use cheap exchange-traded fund indexes. And stay optimistic.

Thoughts on the Stimulus Package

My pal Dan Clifton recently shared some interesting ideas on the the shape of the stimulus package with U.S. News & World Report. Dan is the Head of Policy Research at Strategas Research Partners. He's also a frequent Kudlow & Company guest.

Click here to read the interview.

Tuesday, January 22, 2008

The Fed Did the Right Thing

The Ben Bernanke Fed did the right thing this morning by slashing the fed funds target rate by 75 basis points to 3.5 percent. A lower cost of money will gradually increase the demand for it.

Right now investors are totally risk-averse. There’s still a lot of cash-hoarding going on.

It is essential that the central bank pump in high-power reserves to expand the monetary base. By the way, the base has stopped growing for almost two years as the Fed permitted an inverted yield curve. All this choked off liquidity.

Meanwhile, we’re still waiting for the other international central banks to slash their money rates. Money is a lot tighter than people think it is. I don’t know what they’re waiting for.

As Congress looks at taxes, they should think about the one pressing need in today’s loan-problem story. Namely, asset values are falling. This needs to be stopped. The answer? Eliminate the capital-gains tax both for individuals and corporations. This will spark higher asset values by increasing the after-tax present value of future cash flows. They also should cut the corporate tax rate.

To put it simply, stop the multiple taxation of capital.

Last week Bernanke said the dividend tax-rate cut should be made permanent and that doing so would help the economy in the short-run. Good for him. Abolish the dividend tax altogether. It’s just more double-taxing of capital. Anything Congress does to reduce the cost of capital and raise investment returns will help.

We may be closer to a stock market bottom than many believe. This correction is already about 20 percent. There are a lot of great stock market bargain values. Smart investors always look to the long-run. Don’t worry about timing anything.

The world is not coming to an end. Our free-market capitalist system goes through periodic corrections and cleansings. It’s the natural order of things. Things are going to be okay.

Global Stock Market Tsunami

There's a global stock market tsunami gathering force. It may hit US shores very hard this morning.

Much of this is panic over a US recession threat that has yet to clearly materialize. The world sell-off also vastly over-estimates loan and credit problems among international financial institutions.

In any event, world central banks should immediately reduce rates and add liquidity first thing in the morning, no matter what the time-zone.

Fed head Ben Bernanke should have cut rates 50 basis points last week. He should do it first thing this morning. Then cut rates another 50 basis points on January 30.

Importantly, central banks must work together and cut rates together. They must coordinate to avoid major financial consequences. They must show investors, financiers and business people that they are in charge.

In this deflationary environment, plunging commodities, stocks and credit risk-free government bond yields are all signaling central bankers to take charge. That means lower rates and more money creation.

Pronto.

Sunday, January 20, 2008

Smiling and Optimistic McCain

Sen. John McCain capped off his big win in the South Carolina primary with the single best victory speech of anyone in the campaign season so far. Following his New Hampshire win, Mac gave a boring, stilted, vision-less, down-market talk that pursued him throughout his Michigan defeat.

Saturday night, the senator gave an uplifting and patriotic speech that highlighted America-first security and freedom against the jihadist enemy abroad and heavyhanded government at home. Focusing on conservative values and pro-growth economics, McCain defended the free market, low taxes, and small government.

In an interview McCain said he would make the Bush tax cuts permanent, cut the corporate tax, and restrain spending. On the so-called stimulus package, he said he would not support a larded up pork-barrel package. This is a well-balanced tax-and-spending-cut message.

It’s a welcome relief from what McCain consultant Charlie Black has been putting out. Black keeps telling interviewers about spending cuts to reduce interest rates. Pure root-canal austerity. Rubinomics. Not true analytically, with rates sinking in the slowdown economy, and not a trace of pro-growth tax-cutting. Every time Black appears, he loses McCain five percent of the primary vote in whatever state he is speaking.

Let Jack Kemp, who just crafted a big corporate tax-cut package for the senator, or Phil Gramm, become McCain’s economic spokesman.

Finally, I really liked Mac’s references to God, country, and service. He told the crowd “I will not let you down, so help me God.” And then he closed with: “God bless you, as you have blessed me.”

With a strong and positive speech, and a big smile on his face, Sen. McCain is going to roll into Florida. If he stays on message, he’ll keep rolling right on to the nomination.

Friday, January 18, 2008

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market panel will discuss and debate today's stock market action and other news and developments affecting investors.

On board:

*Doug Kass, founder & president of Seabreeze Partners Mgmt
*Gary Shilling, president of A. Gary Shilling & Co.
*Don Luskin, chief investment officer at Trend Macro
*Jerry Bowyer, chief economist at Benchmark Financial Network/NRO contributor

THE FISCAL STIMULUS PLAN...Sen. Arlen Specter (R-PA) will join us to discuss his expensing legislation.

ALSO...We'll have a debate on the stimulus plan between Walter Williams, economics professor at George Mason University and Austan Goolsbee, University of Chicago economics professor & top economic advisor to Sen. Barack Obama.

YOUR MONEY, YOUR VOTE...We'll take a look at what's going on in the primary horseraces with The Politico's Jonathan Martin and Chris Frates.

***Our market panel will also weigh in with its Washington to Wall Street take on the current political state of affairs.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Bush Makes the Best of a Bad Situation

President Bush has made the best of a bad situation by applying his so-called tax rebate proposal within the income-tax code, rather than positioning it as new federal spending, like Sen. Hillary Clinton’s $100 billion spending package. He’s going to oppose that. He’s right to oppose that. It’s essential to oppose that.

As I understand it, they’re going to waive the 10 percent bracket which goes up to $15,650. Everybody passes through that bracket. I’m sure upper-end taxpayers will not get any of this relief. Lower-end and middle-end taxpayers will.

In doing so, there will be a very tiny incentive effect, although it’ll only last a year. As I said, the president is making the best of a bad political situation. He had to do “something.” And this is the least harmful thing he can do. It can be classed as income-tax relief, even though there’s no permanent incentive effect.

The better part of the stimulus plan is the inclusion of a business tax cut that will probably be a 50 percent cash-expensing bonus for the depreciation of new equipment, plants, or structures. This is very good. It worked between 2002-07. It recently expired, so it’s a good time to renew it. The Democratic Congress may fight him over this, but the president is willing to join that battle. Good for him.

Senator Arlen Specter has a related bill that would permit full expensing for new investments put into place during the tax years 2008-09. Sen. John McCain has just released an even-better plan that would permanently slash the corporate tax rate from 35 percent to 25 percent. It also would allow both the expensing of equipment and technology investments, and would establish a permanent research-and-development tax credit. By lowering the cost of capital and raising the investment return, this would really be a booster-rocket for economic growth, jobs, and real worker wages.

Supply-side guru Jack Kemp helped pilot this proposal through the McCain camp, and the senator announced it yesterday. Now we’ll see if Democrats are willing to provide some tax incentives for business and accept President Bush’s offer. While Bush did not include a permanent feature for his capital-gains and dividends tax cut as part of his short-run plan, he did make it clear that he intends to pursue this later on.

Incidentally, Fed chair Ben Bernanke suggested yesterday that making dividend tax cuts permanent would provide near-term stimulus by boosting markets. That’s an important golden nugget in his otherwise lackluster presentation. (Hat-tip to Strategas political analyst Dan Clifton for this. I also saw it in the Real Time Economics blog of the Wall Street Journal.)

While none of these short-term fixes are going to expand the economy’s long-run potential to grow, at least President Bush attempted to stay on the supply-side of tax policy in the current Washington panic over the economic slowdown and stock market plunge.

Unfortunately, stocks are falling yet again today. I still don’t know why Bernanke didn’t cut the fed funds rate 50 basis points this week in advance of the January 30 meeting.

Thursday, January 17, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market panel will discuss and debate today's stock market selloff and other news and developments affecting investors.

On board:

*Andy Busch, global FX strategist at BMO Capital Markets
*Bob Stein, senior economist at First Trust Advisors
*Art Laffer, economist, chairman of Laffer Associates
*Mark Skousen, author and editor of Forecasts & Strategies

THE FED & THE ECONOMY...Our economic panel will offer its perspective on Fed Chairman Bernanke's testimony today, interest rates, and what lies ahead for the economy.

*Wayne Angell, former Fed governor
*Art Laffer, economist, chairman of Laffer Associates
*Bob Stein, senior economist at First Trust Advisors

OIL...Dan Yergin, chairman of Cambridge Energy Research will join us with his take.

YOUR MONEY, YOUR VOTE...Pollster John Zogby will update us on all the latest polls, political news and developments on the presidential campaign trail.

STOCK MARKET POLITICS...Our Washington to Wall Street panel will debate all the latest hot button issues including taxes and a stimulus package.

*Jimmy Pethokoukis, senior writer at U.S. News & World Report
*Jared Bernstein, senior economist at the Economic Policy Institute
*Dan Clifton, political strategist with Strategas Research

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Back to the ’70s?

Stocks are having a rough new year, and it doesn’t bode well for the future health of business, the economy, or the country for that matter.

Maybe it’s just a long-overdue correction. But it seems like something else is at work. And since I believe stocks are a key barometer of our nation’s health and wealth, it’s worth paying attention to.

The early primaries, either the day of or the day after, have been greeted with plunging stocks. Soft economic data are greeted by plunging stocks. Ben Bernanke’s testimony today was greeted by plunging stocks.

Year to date, the major averages are down 6 to 10 percent. It’s the same story overseas, where Europe, Asia, Latin America, and even the fast-growing emerging markets have sold off. The Dow Jones world index is down 7.5 percent.

There may be a hundred reasons for all this, including recession and the lack of any inspiring political leadership from Democrats or Republicans. Or maybe the investor class is simply in a bad mood.

But listening to the so-called stimulus plan being discussed in Washington, I must say it sounds like we’re back in the 1970s, when presidents Nixon, Carter, and Ford (you can throw in LBJ, too) conjured up economic policies that were inimical to growth and strongly biased toward inflation. In those days, unemployment and inflation moved up together, instead of moving in opposite directions. This was contrary to what the Keynesian economic fixers advised -- Keynesians like Republicans Herb Stein and Arthur Burns, and Democrats Walter Heller and Charles Schultz.

Here was the problem: In order to fight inflation, policy makers raised taxes. In order to fight unemployment, economists pressured the Fed to rapidly expand the money supply. It wasn’t until Milton Friedman weighed in that people realized the core of the problem: Too much money was chasing too few goods.

When Nixon unhinged the dollar from gold, there was no governor on the U.S. money supply. This monetary expansion substantially increased aggregate demand. And yes, the economy would periodically get a short-term spurt. The problem was that higher tax rates, either through legislation or inflation, stifled producers and investors. So the supply of goods and services was held down while the demand for them was increased. This stagflation raised unemployment and inflation at the same time.

Sound familiar?

What we’re hearing from Washington is cause for Ben Bernanke to gun the money supply and drop interest rates more. At the same time, Congress wants to spend more (either through temporary tax rebates or more spending, or both) and pay for it all with a tax hike at some later date. That tax hike could mean overturning the Bush tax cuts, or new surtaxes on high-end producers and successful earners.

It hasn’t happened yet, but it does have a ’70s feel to it: Tax the suppliers of new capital, goods, and jobs, and stimulate the demand of everybody else. With all manner of confusion on the campaign trail (especially with Hillary and Obama pledging to tax rich people), and considerable uncertainty about the Republican election outcome, the stock market may be signaling its fear that there is no Ronald Reagan to turn things around.

Reagan, of course, slashed tax rates on producers, thereby igniting aggregate supply, while Paul Volcker curbed the money supply to control aggregate demand. Even more goods were chasing modest expansion in overall money demand.

The Bush White House has some tough calls to make right now. If they press for an across-the-board tax-rate reduction (Bush investment tax cuts plus corporate tax cuts), it would generate the necessary output of goods and services in the years ahead and would permit Ben Bernanke to ease money growth without fears of inflation.

It remains to be seen just who will eventually win this political tug-of-war. But it’s clear that stock markets are not overjoyed at the potential outcome.

Too Much Recession Talk

“There’s too much talk about a “recession” that isn’t there yet. I’m an optimist, as you know Larry. You’re an optimist. And I don’t think we should talk ourselves into a recession. [And] let’s not have stupid policies put in place that would exacerbate a problem…we should [have] a smart discussion on taxes. We should put tax relief there that will actually grow the economy, rather than just make people feel good [temporarily]. And so I do favor [House Ways and Means Committee] Chairman Rangel’s centering of the debate around the corporate tax structure, about expensing, and some investment in the business communities that will help to stimulate more economic growth and provide manufacturing opportunity for people that build the supplies that businesses are going to buy.”
-Andrew Card, former Chief of Staff to President George W. Bush

Wednesday, January 16, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market panel will discuss and debate all the latest news and developments affecting investors.

On board:

*Michael Metz, chief investment strategist at Oppenheimer & Co.
*Steve Forbes, President & CEO of Forbes and Editor-in-Chief of Forbes magazine
*Dennis Kneale, CNBC media and technology editor
*Phil DeMuth, investment advisor, Conservative Wealth Management

A LOOK AT THE FED & THE ECONOMY...John Taylor, Stanford University economics professor & former Under Secretary of the Treasury for International Affairs will join the market panel with his perspective.

YOUR MONEY, YOUR VOTE...John Harris, editor in chief of The Politico will give us an update on the presidential race.

MONEY POLITIC$...Our political panel will debate all the latest Washington to Wall Street issues.

On board:

*Matt Cooper, Washington editor of Conde Nast Portfolio
*Jared Bernstein, senior economist at the Economic Policy Institute
*Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations & Bloomberg News columnist

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Time to Buy Financials?

(Here's a little exchange from last night's Kudlow & Company with Quentin Hardy. He's the Silicon Valley Bureau Chief for Forbes magazine.)

HARDY: Okay Larry, I'm ready for the positive on Citigroup. How'd you like that little fact today?

KUDLOW: Alright, I'll give you the positive on Citigroup. I think this is balance sheet rebuilding and repair. And I think that all these banks -- whether it's Citi, or Merrill, or Bear Stearns -- they're raising capital. They're scoring their losses. Investors who are watching this ought to have some longer-term view than just what the traders are doing. Nobody is smart enough to know [how to time the market]. That's my point.

I'm a guy who looks at the basic fundamentals of the economy. And I see good things happening, including balance sheet repairs. In the money markets, the Libor rate has suddenly fallen below the federal funds rate. The Ted spread has narrowed in these markets. In other words, at the very moment that [some bulls] are jumping ship, the credit spreads are getting narrower in the short-term funding markets. The Fed's decision to ease has been made. And banks are taking significant steps to repair their balance sheets. Even though some people might not be happy with the speed, the reality is things are improving.

[Long-time bear] Dougie Kass comes on the show quite a bit. He said this the other night on this program. He's written it up for The Street.com. He says buy the financials. Yes, BUY. And he works through a lot of the points that I've been making, including the balance sheet repair, and the lack, the diminution, the easing of the credit strains in the money markets. The very things that I was very worried about -- whether it's asset-backed commercial paper, or the Libor problem, [etc] -- now these things are easing. Some of the central bank liquidity activities are taking hold. There's much more to come. Here's my friend Doug Kass -- almost a permabear -- he's saying buy financials.

Tuesday, January 15, 2008

Kudlow 101: Recession Indicators

Here’s a quick snapshot of the official recession indicators. These are from National Bureau of Economic Research. There are four indicators.

Number one (and most important) is employment.


Is a recession at hand? Well, there is an issue here on the households survey. It’s down a million. The payroll survey is fine. It’s the households that is causing some concern.

Next up is industrial production. It’s a crucial indicator.


Here too, there may be a slight issue. We are down from the peak. It’s only about 4/10ths of 1 percent, but it is worth thinking about because it’s when the level of these indicators fall that we could be in for trouble.

The next two look much better.

Let's take a look at real personal income.


No problem there. As you can see, it’s still growing nicely. In real terms, it’s actually up over 2 percent, year on year.

And finally, we have manufacturing and trade, adjusted for inflation.


Again, as you can see, there’s absolutely no problem there. That too, is growing over 2 percent per year.

My point is a simple one: Keep you eye on employment—particularly households—that one is slower. Industrial production is also slower. The levels are giving way. So we are not completely out of the woods.

No, we are not in a recession. Yes, we need to keep our eyes open.

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

YOUR MONEY, YOUR VOTE...We'll get all the latest news out of the Michigan primary and what's shaping up in the 2008 presidential campaign. Joining us will be CNBC chief Washington correspondent John Harwood and The Politico's Jonathan Martin.

THE MARKETS & THE ECONOMY...Our market pros will debate all the latest news affecting investors, including today's soft retail sales report.

On board:

*Andy Busch, global FX strategist at BMO Capital Markets
*Quentin Hardy, Forbes magazine Silicon Valley Bureau Chief
*Jerry Bowyer, chief economist at Benchmark Financial Network/NRO contributor
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

STOCK MARKET POLITICS...Our all-star panel of guests will discuss and debate all the hot-button Washington to Wall Street issues including what's shaping up on the tax front.

On board:

*House Ways and Means Chairman Charlie Rangel (D-NY)
*Andy Card, former Bush White House Chief of Staff
*Leon Panetta, former Clinton White House chief-of-staff
*Steve Moore, editorial board member of The Wall Street Journal

UPDATE FROM MICHIGAN...CNBC'S John Harwood will fill us in live on all the latest news and developments in the Michigan primary.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

A Stimulus Deficit in Michigan

As the soft economy starts to dominate the presidential race, neither Mitt Romney nor John McCain has put out a really strong pro-growth message in Michigan.

In the last moments of the Michigan primary campaign, Romney has chosen to run as a native son, telling voters “I care very deeply about Michigan.” For his Straight Talk Express, Sen. McCain continues to press his hard-line assault on federal spending and bridge-to-nowhere earmarks. He also emphasizes a free-trade message. But neither candidate has put forward a so-called stimulus package as yet.

Sen. McCain has tasked Jack Kemp with pulling together a growth package that will probably include a corporate tax cut. But it is all very much up in the air right now. Phil Gramm has proposed a doubling of the mortgage interest deduction, but key McCain staffers oppose this. Over in the Romney camp, tax strategists Caesar Conda and Vin Webber had hoped to get a stronger supply-side message for Michigan, but the clock ran out.

Meanwhile, the polls show the race to be too close to call. There’s much discussion that Democrats and independents will ultimately decide the issue. Some conservatives grouse at this. But isn’t the reality that in order to win in November, the GOP must attract exactly those independents who walked away in November 2006? And as far as the Democrats are concerned, what about the legacy of the Reagan Democrats? Or for that matter, the George W. Bush Democrats, folks who tend to be Iraq war hawks, cultural conservatives, and strong opponents of federal overspending and earmarks.

In other words, tonight’s Michigan results may tell us a lot about electability come November.

Don’t Ignore Business

Stocks are down 200 points this morning on soft retail sales. But real consumer spending is still going to come in around 2.5 percent at an annual rate in the 4th quarter.

On a calendar year average basis, retail sales rose 4.1 percent in 2007. That’s well below the 6 to 6.5 percent pace of the prior three years. It’s about the same as the 4.2 percent rate in 2003, but well above the 2.4 percent rate in 2002. On a Q4 over Q4 basis, 2007 retail sales came in at 4.9 percent, a wee bit less than the 5.1 percent in 2006.

However, everyone is ignoring a roaring business sales increase of 1.6 percent in November. This is a key recession indicator. And it is rising 13.8 percent annually over the 3 months to November, and 8.7 percent over the past year.

Meanwhile the inventory/sales ratio for business is rock bottom.

Monday, January 14, 2008

Monday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market panel will offer its perspective on all the latest news, trends, and developments affecting investors.

On board:

*Daniel Laufenberg, chief economist at Ameriprise Financial
*Joe Battipaglia, market strategist at Stifel Nicolaus
*Ben Stein, economist/author/lawyer/actor

A LOOK AT THE FED & THE DOLLAR...Bear Stearns chief economist David Malpass will join our market panel with his unvarnished take on what lies ahead.

YOUR MONEY, YOUR VOTE...Pollster Scott Rasmussen from Rasmussen Reports will weigh in with his perspective on all the latest political news and developments.

MONEY POLITIC$...Our political panel will discuss and debate what's going on in the White House horserace, tomorrow's Michigan primary, and other hot-button issues.

On board:

*Greg Valliere, chief Washington strategist at Stanford Policy Research
*Austan Goolsbee, University of Chicago economics professor & top economic advisor to Sen. Barack Obama
*Jimmy Pethokoukis, senior writer at U.S. News & World Report
*Ben Stein, author/economist/lawyer/actor

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Democrats Were Wrong on the Troop Surge

"...When President Bush announced the surge of troops in support of a new counterinsurgency strategy a year ago, Barack Obama, Hillary Clinton and Democratic Congressional leaders predicted failure. Obama, for example, told Larry King that he didn’t believe additional U.S. troops would “make a significant dent in the sectarian violence that’s taking place there.” Then in April, the Senate majority leader, Harry Reid, asserted that “this war is lost, and this surge is not accomplishing anything.” In September, Clinton told Gen. David Petraeus that his claims of progress in Iraq required a “willing suspension of disbelief.”

The Democrats were wrong in their assessments of the surge. Attacks per week on American troops are now down about 60 percent from June. Civilian deaths are down approximately 75 percent from a year ago. December 2007 saw the second-lowest number of U.S. troops killed in action since March 2003. And according to Lt. Gen. Ray Odierno, commander of day-to-day military operations in Iraq, last month’s overall number of deaths, which includes Iraqi security forces and civilian casualties as well as U.S. and coalition losses, may well have been the lowest since the war began.

Do Obama and Clinton and Reid now acknowledge that they were wrong? Are they willing to say the surge worked?...." -Excerpt from "The Democrats’ Fairy Tale," a NYT op-ed by Bill Kristol

Friday, January 11, 2008

Are We All Democrats Now?

Peace and prosperity are age-old winning campaign issues. Reduced marginal tax rates have stood the test of time. They are an effective economic stimulant, creating permanent incentives to work and invest and sufficient fire power to expand the economy’s long-run potential to grow.

And yet the estimable David Brooks, writing in today’s New York Times, says the Republicans need a new economic model. He writes, “Supply-side economics had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy.”

With respect, I do not agree. Deserting the 100-million-plus investor class, as Brooks suggests, would be economic and political folly.

In today’s innovative high-tech world economy, where the global spread of free-market capitalism is the single biggest growth factor, saying “the entrepreneur is no longer king” is just plain wrong. New technologies and new companies are springing up everywhere, and it is precisely this Schumpeterian process that is the single-biggest driver of jobs, incomes, prosperity, and wealth creation.

The targeted tax credits that David Brooks supports have no impact on incentives or economic growth. However, slashing marginal tax rates (as Rudy Giuliani and Fred Thompson propose) has the maximum economic-growth impact.

Incentives matter. We have learned that economic behavior responds quickly to changing tax rates. Practically all of Eastern Europe has moved to a flat tax. This Reaganesque trend has spread to Asia. If the U.S. switches to small-ball tax credits to subsidize workers, we will become increasingly uncompetitive and will lose the global race for capital and growth.

Without new capital to finance new businesses, job creation and consumers will lag further and further behind. It must pay, after-tax, to take risks and invest. New capital is essential for technology and productivity. This is the source of real wage gains. And this is why tax penalties on capital should be eliminated.

Unwittingly, however, many in the GOP fold are drifting toward a Keynesian demand-side model that ignores incentives and will reduce economic growth in the decades ahead. If the GOP abandons supply-side tax reform and instead opts for targeted tax credits or subsidies, Republicans will sound just like Democrats. Meanwhile, the Chinese, Indians, and Eastern Europeans will forge ahead with dynamic growth and capitalism that will leave us in the dust.

The current White House will have a hand in this, too. President Bush’s new tax proposal to “pre-fund” temporary income-tax cuts is nothing more than an ineffectual demand-side nostrum. In fact, there is very little difference between Bush’s tax-rebate plan and the plans proposed by senators Clinton and Obama.

Are we all Keynesians now? Are we all Democrats now?

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS AND THE FED...Our market guests will discuss and debate all the latest news and developments affecting investors.

On board:

*Don Luskin, CIO of Trend Macrolytics
*Doug Kass, president of Seabreeze Partners
*Jimmy Pethokoukis, U.S. New & World Report columnist
*Art Laffer, CEO of Laffer Associates and former Reagan economist

PRESIDENTIAL POLLS...pollster John Zogby will give us the latest on the upcoming Michigan and South Carolina primaries.

MONEY POLITICS...a debate about President Bush's stimulus package and the tax proposals of the presidential candidates.

On board:

*David Frum, political consultant, former Bush speechwriter
*Steve Moore, WSJ editorial board member
*Morris Reid, managing director Westin Rinehart

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Thursday, January 10, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market guests will discuss and debate all the latest news and developments affecting investors.

On board:

*Ed Yardeni, president of Yardeni Research
*Jim Lacamp, portfolio manager of RBC Dain Rauscher
*John Browne, editor of Moneynews.com

THE FED & THE ECONOMY...Our guests will discuss Ben Bernanke's speech and the economy.

On board:

*Lyle Gramley, former member of the Fed's Board of Governors
*Brian Wesbury, chief economist at First Trust Advisors

YOUR MONEY, YOUR VOTE...an exclusive interview with Republican presidential candidate Rudy Giuliani.

BLOOMBERG '08?... Mort Zuckerman, editor-in-chief of U.S. News & World Report, will discuss the possibility of New York Mayor Mike Bloomberg's run for president.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

McCainnomics: The Gramm Interview

(The following is a transcript from my interview earlier this week with former Texas Senator Phil Gramm. As I recently wrote, Mr. Gramm is a “a strong, zealous, free market advocate…staunch free trader, a tax cutter, budget cutter and entitlement reformer.” He also happens to be GOP presidential hopeful John McCain’s top economic advisor.)

Kudlow: Senator Gramm it is great to see you. Thanks for coming on the show.

Gramm: Thank you.

Kudlow: Alright. Senator Gramm, let me ask you this: As you, and Mr. McCain, and everybody head into Michigan, which is one week from tonight—Michigan boasts the first in the nation unemployment rate, 7.4 percent—let me ask you, will Senator McCain alter or expand with some new economic policy proposals going into Michigan?

Gramm: Well, I think the main thing Michigan needs to do is to stop spending and stop taxing. I think McCain is going to go into Michigan and talk about dramatic reforms of training and unemployment insurance. I think he’s going to present a coherent and new program. And I think he’s going to talk about the obvious fact: And that is, if we had combined the Bush tax cuts with fiscal restraint, we would have a surplus today. And we could be cutting taxes again. We could be eliminating the dual taxation of dividends. We could be providing more incentives for jobs growth and opportunities. But because we let spending get out of control, now we find ourselves with big deficits and we find ourselves with a shaky economy.

Kudlow: But in fact, in fact, the deficits have come down substantially. I think you would agree that’s a factoid. I mean, what are they 1.5 percent, almost 1 percent of GDP. So let me ask you. You’ve outlined an interesting plan. Will Senator McCain, are you proposing to Senator McCain, a broad based spending reduction plan, along with tax reform to grow the economy and keep the size of government contained? Are you going to unveil some new ideas on those fronts?

Gramm: I think the answer to both is yes. I’m for John McCain because I think he has character. And I think character is important in a president. It was for Washington. It was for Reagan. I think he has a moral authority as commander-in-chief that no one else has. And we need that. And I’m for him because I know he will veto spending bills. I know he will stop the spending spree. I know he will make the Bush tax cuts permanent. And I know he’ll start addressing other things in the tax code that need to be improved.

Kudlow: Will Senator McCain get behind a corporate tax cut? Take a state like Michigan. There’s a new study out by the U.S. Treasury, which confirms a Congressional Budget Office study. If you slash the corporate tax rate, get it back into equilibrium with the low European rates, 60 percent of the benefits, at least, would accrue to the wage earners and the workers, which seems like a Michigan message and a national message. Are you advising Mr. McCain to cut the corporate tax?

Gramm: I think it’s something that’s being looked at. I think my primary focus, I think the Senator’s primary focus—which is the important thing, he’s going to be the candidate, not me—I think his primary focus is going to be to end this deficit, and do it quickly. And to make the Bush tax cuts permanent.

I think we’re being hurt by several things. I think we’re being hurt by the fact that there’s uncertainty about the tax code. We have repealed the death tax and yet I would guarantee you that almost all of your listening audience is still engaged in activities that are costly and inefficient trying to avoid a tax they believe is coming back. We don’t know what the capital gains tax rate is going to be, three years from now. We don’t know what the rate on dividends is going to be. We don’t know what the top rate is going to be. And 85 percent of the income taxed at that rate comes from small businesses. So I think there’s tremendous uncertainty.

I think we could do a lot more in deregulation. Earlier you were talking about that we have deregulated. The plain truth is we have had a growth in regulation—especially in the financial sector. We have lagged behind the rest of the world. We’ve done less privatization than any other major country in the world in the last few years. There’s a lot that can be done.

Kudlow: We’re going to leave it there. Senator Phil Gramm, I hope you’ll come back and give us a progress report on the McCain economics plan. It’s good to see you, sir.

Gramm: Well listen, if he wins, you’ll just be able to look at the economy and it’ll give you the report.

Rudy on Kudlow & Company

America's mayor Rudy Giuliani will be joining me for a one-on-one interview on tonight's Kudlow & Company. We'll discuss his new, Reaganesque, supply-side tax plan.

Please join us at 7pm ET on CNBC.

Wednesday, January 09, 2008

GOP Presidential Hopefuls, Taxes & the Economy

Exit polls in New Hampshire revealed an interesting economics split between Sen. John McCain and Governor Mitt Romney.

54 percent of voters believe that reducing the budget deficit is the highest priority for the next president, while 44 percent believe in cutting taxes. Of the deficit cutters, McCain boasted a 20 percent lead over Romney, 46 to 26 percent. Of the tax cutters, Romney led McCain by 10 points, 37 to 27.

By the way, the most important issue for the country for Republican voters according to the New Hampshire exit poll was the economy at 31 percent, trailed by the war in Iraq at 24 percent. Illegal immigration came in at 23 percent with terrorism following behind at 18 percent.

But as far as the economy is concerned, McCain led Romney, 41 to 21 percent.

Although McCain voted against the Bush tax cuts in 2001 and 2003, Romney was not in favor of them either while he was Governor of Massachusetts. Noteworthy is the fact that McCain favored the Reagan tax cuts during the 1980s, while Romney indicated a lack of support for the Reagan program during his unsuccessful 1994 Senate run against Ted Kennedy.

Hard-line tax cutting strategists like Cesar Conda and Vin Weber have been working to position Romney as a supply-side tax cutter during the current campaign. And according to the New Hampshire results, this is paying off among many Republican voters.

Nevertheless, McCain’s message of cutting federal spending and eliminating budget earmarks is hitting home. More and more voters seem to be increasingly worried about excess government spending. McCain is the favorite on this issue.

McCain’s supply-side credentials have been boosted by Jack Kemp’s endorsement earlier this week, as well as the Arizonan’s campaign message that he will work to make the Bush tax cuts permanent.

Senator McCain is also arguing that if the Bush tax cuts had been accompanied by stronger spending restraint, then there would be plenty of budget room for across-the-board tax cuts today. Incidentally, the Bushies are preparing a very weak-kneed temporary tax cut plan right now that as yet, has no big bang supply-side cuts such as slashing the corporate tax rate.

Meanwhile, the McCain campaign is looking carefully at a possible corporate tax cut proposal, as well as eliminating the dividend tax altogether as a means of ending the double tax on corporate profits.

The Romney campaign is preparing its own tax cut plan expected to be delivered in Michigan on Monday. (Michigan of course is a liberal paradise with overtaxing, overspending, and over-unionizing. It boasts the first in the nation unemployment rate at 7.4 percent.) The McCain people also expect to unveil some new economic policies in Michigan which would include a strong free trade component. As one McCain insider told me, “John is the strongest free trader in the country today, but never seems to get much credit for it.”

Meanwhile, Rudy Giuliani today unveiled a strong across-the-board tax cut plan that would get rid of the death tax, reduce capital gains and dividends to 10 percent, and then index them to inflation. The former New York City mayor would drop the corporate rate from 35 to 25 percent, along with an expansion of tax-free savings accounts. He will also look at an optional tax plan with three rates of 10 percent, 15 percent, and 30 percent.

It is good to see aggressive tax cutting strategies on the Republican campaign trail. This includes the flawed, but still prominent, Fair Tax proposal from Governor Mike Huckabee.

It’s too bad that the White House is not reaching out to Charlie Rangel to slash the corporate tax rate. It could be paid for in static terms by abolishing all the corporate tax loopholes, subsidies, and various K-Street earmarks.

More to be revealed on taxes.

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market guests will discuss and debate all the latest news and developments affecting investors.

On board:

*Ben Stein, author/economist/lawyer/actor
*Joe Battipaglia, Stifel Nicolas market strategist
*Dennis Kneale, CNBC media and technology editor
*Jerry Bowyer, chief economist at Benchmark Financial Network/NRO contributor

A LOOK AT IRAN...We'll discuss the situation in Iran with Ken Timmerman, Executive Director of the Foundation for Democracy in Iran, and author of "Countdown to Crisis: the Coming Nuclear Showdown with Iran."

YOUR MONEY, YOUR VOTE...Larry Sabato, director of the Center for Politics at the University of Virginia, will offer his perspective on all the latest in the presidential horserace.

DEBATE: FISCAL STIMULUS PACKAGE...The Wall Street Journal's Steve Moore will square off with Ross Eisenbrey from the Economic Policy Institute. Ben Stein will also be aboard.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Obama, Bernanke & Wall Street

Some very good points on last night’s Kudlow & Company from veteran Wall Street to Washington analyst Greg Valliere. Greg is the Chief Strategist at the Stanford Washington Research Group.

Kudlow: Is the stock slide economics? Is the stock slide politics? Or is the stock slide a combination of the two?

Valliere: It’s probably a combination of the two, Larry. I think the markets are beginning to worry that Ben Bernanke is just too nice a guy. He’s not tough enough with all of these crazy hawks, another one of whom made a speech today that made no sense at all.

Part of it is politics. Frankly Larry, I thought you went a little easy yesterday on your show with Obama’s chief economic advisor. You know, Obama is not the second coming of Adam Smith. He may be a little bit better than Hillary. But as his advisor told you last night, capital gains taxes are going up. Obama will raise taxes.

So I think when you combine Bernanke’s timidity and the political climate, that’s not a good story for Wall Street.

Tuesday, January 08, 2008

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

***MONEY POLITIC$ IT'S YOUR MONEY, YOUR VOTE***

We'll begin tonight's show with a special report on all the latest news and developments from New Hampshire.

Our Washington to Wall Street panel tonight:

*Jared Bernstein, economist at the Economic Policy Institute
*Rich Karlgaard, publisher of Forbes magazine
*Jimmy Pethokoukis, senior writer at U.S. News & World Report
*Greg Valliere, chief Washington strategist at Stanford Policy Research

INTERVIEW WITH PHIL GRAMM...The former Texas senator will be joining us live from Nashua, NH. We'll discuss presidential hopeful John McCain and much more.

Also on board:

*Lanny Davis, former Special Counsel to President Clinton
*Kellyanne Conway, president of the polling company
*Rep. Artur Davis (D-AL)
*Ben Stein, author, economist, lawyer, actor

CNBC chief Washington correspondent John Harwood will finish out the show with a report from Manchester, New Hampshire.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Tonight’s Winners Might Actually Be Losers

The role of independent voters in tonight’s New Hampshire primary results may be more complex than many pundits recognize.

For example, many have already cited the John McCain factor, where a wave of independents voting for Obama could damage Sen. McCain’s victory chances. (Though John Fund thinks the Republican establishment is now lining up behind McCain.) But if Romney wins among the Republicans — yet loses to McCain overall — the former Massachusetts governor could declare victory.

Remember eight years ago when McCain won in New Hampshire, Michigan, and elsewhere. George W. Bush still won the majority of Republican votes. Bush played that card effectively as he marched towards the eventual GOP nomination.

So in other words, McCain could actually win with a small margin tonight, but Romney could effectively declare victory on the Republican front.

Hillary is in the same boat. She could get clobbered by Obama, due to surging independents voting for the Illinois senator. But she could still conceivably declare victory if she gets a plurality of Democratic votes. And that would be used to justify her staying in the race, probably until the bitter end, including the convention.

I wish I had a better handle on who exactly these independent voters are. I’ve always assumed that they lean liberal. But I’m not sure. There may be a larger-than-expected pool of disaffected Republicans and Democrats who are voting independent.

But what’s so interesting about New Hampshire this year is that it’s possible that the potential losers — namely Hillary and Mitt — could conceivably declare themselves winners on the basis of winning a plurality of their own party’s registered voters. And the potential winners — Obama and McCain — could find themselves scratching their heads tomorrow morning, wondering what exactly they have won.

Monday, January 07, 2008

Monday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our market guests will discuss and debate all the latest news and developments affecting investors.

On board:

*Ken Heebner, co-founder of Capital Growth Management
*Morris Reid, Westin Rinehart managing director
*Gary Shilling, president of A. Gary Shilling & Co.
*Jerry Bowyer, chief economist at Benchmark Financial Network/NRO contributor

INTERVIEW WITH JACK KEMP...The former congressman and leading supply-side economic advocate will join us to discuss his pledge of support to Senator John McCain in his White House bid, taxes, and more.

Messrs. Bowyer & Reid will join in the discussion.

MONEY POLITIC$...Our political panel will weigh in with its Washington to Wall Street perspective on the 2008 presidential race and all the latest hot-button issues.

On board:

*Austan Goolsbee, University of Chicago economics professor & top economic advisor to Sen. Barack Obama
*Scott Rasmussen, president of the polling firm Rasmussen Reports

ECONOMIC STIMULUS PACKAGE...On to debate are The Wall Street Journal's Steve Moore and Jared Bernstein from the Economic Policy Institute.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Kemp Is a Coup for McCain

Jack Kemp has endorsed Sen. John McCain for president. This is a very interesting and significant endorsement. Kemp was one of the founders of the Reagan supply-side tax-cutting movement. And of course, he’s been a prominent free-market advocate for economic-growth policies for several decades.

I have not yet reached Jack for details of his thinking on the McCain endorsement.

The former-Buffalo, New York, House member/Housing secretary and 1996 GOP vice-presidential candidate would surely be able to relieve doubts about Sen. McCain’s tax-cutting intentions should he become president. While Sen. McCain has been criticized for voting against the Bush tax cuts of 2001 and 2003, it is important to recall that the Arizonan did vote for the Reagan tax cuts back in the 1980s.

McCain has steadfastly maintained on the campaign trail that he would preserve the Bush tax cuts on capital gains, dividends, and personal incomes that are set to expire in 2010.

Kemp would join former Sen. Phil Gramm as key McCain economic advisors. As I noted in an earlier post, Phil Gramm is the quintessential free-market advocate. He spent a career in the House and Senate limiting government spending, taxing, and regulating.

Both Kemp and Gramm are strong free-trade supporters. Gramm was also the original sponsor of the Reagan tax-and-spending cuts back in 1981 in the Gramm-Latta bill reported out of the House. That bill incorporated Jack Kemp’s original proposal to slash personal tax rates by 30 percent across the board.

Down through the years, Jack Kemp has been a tireless advocate of economic growth through supply-side tax reform and free trade. Getting him on board is a real coup for Sen. McCain.

Friday, January 04, 2008

I’m Sticking with 2.0

Despite Friday’s soft jobs number, I do not believe we are heading into a recession. Any slowdown in the U.S will be very short-lived. I’m sticking with Goldilocks 2.0.

Payroll jobs rose a mere 18,000 for December. But we had a 115,000 jobs gain in November and a 159,000 gain in October. And with Friday’s ISM non-manufacturing business barometer coming in strong, December payrolls might be revised upward. Still, it’s just one soft month. On a year-on-year basis, non-farm payrolls increased 1.3 million, or roughly 1 percent. Aggregate hours worked increased 1 percent annually in the fourth quarter, producing at least 2 percent real growth for the quarter.

Yes, the Goldilocks economy is a bit softer than I’d like. But that’s why the Fed needs to deliver a 50 basis point rate cut at its January 30 meeting. Back in 2000-01, when the economy was slowing markedly, the Fed obsessed about inflation. It’s the same story again. The money supply hasn’t grown in a few years while inflation over the next couple years is poised to go way down. Meanwhile, the yield curve is still inverted in the Treasury markets, a key signal that rates are too high.

A 50 basis point cut would help businesses, consumers, and mortgage owners. It would make the cost of money cheaper and expand the overall liquidity base of the economy. The reality is that the economic weakness is coming from the business side. Domestic business profits are falling at about a 6 percent clip. They’re due to fall some more in the fourth-quarter data. We’re witnessing high energy and raw-material prices cause unit costs for businesses to rise faster than prices. Business inflation is only 1.5 percent. So this is a business slowdown.

The key thing to remember is that businesses drive the economy. Businesses create jobs and incomes for consumers to spend. Today’s John Edwards/Mike Huckabee anti-business populism sounds more like William Jennings Bryan than Adam Smith. It’s absolutely crazy. They attack Wall Street and investors, which is another way of attacking capital. Without capital investment, there will be no new business, no new jobs, and no middle class.

Some folks argue that rising inflationary pressures would offset these benefits. But that’s nonsense. I disagree with the link between Fed rate cuts and inflation. Inflation is the most overrated issue out there right now. Even when you factor in energy, headline inflation in 2007 is going to come in below the prior year while 2008 inflation should be even lower than that.

As for this notion that consumers are tapped out, take a look at disposable income. After inflation, it is rising better than 2 percent. Strong income gains of 3.7 percent for hourly earnings are running 1 percentage point ahead of the headline PCE (personal consumption expenditures) measure. As it happens, car sales numbers were strong this week. They’re running 3.6 percent at an annual rate, ahead of the third quarter. Meanwhile, the holiday sales season has surprised on the upside.

So let’s not get our feathers all aflutter over one month’s jobs number. Look at the broad picture. Over the long run, American-style free-market capitalism remains the single best path to prosperity. And while today’s Goldilocks economy may be a little softer than desired, she remains alive and well. A little help is all she needs.

Right now the single best thing President Bush and Congress can do is slash the corporate tax rate for large and small businesses. Bush can reach out to Charlie Rangel and move the corporate tax to 25 percent from 35 percent. Then, instead of taxing successful capitalists as an offset, corporate-tax subsidy loopholes, special provisions, and other corruption-inducing K-Street tax earmarks can be eliminated.

A middle-class tax cut to help families and small businesses would also be welcome. This can be done by collapsing the three middle-income tax brackets of 15 percent ($15,650), 25 percent ($63,700), and 28 percent ($128,500) into one 15 percent bracket. These brackets apply to small-business owners who may be suffering the high costs of energy and raw materials. The biggest weakness in the jobs report is the household survey which is comprised of these owner-operated small businesses. Household job increases have slumped to only 262,000 over the last year, compared to a 1.3 million increase for larger corporations.

Essentially, a major cut in the corporate tax and a simplification of the middle-income tax brackets makes good sense for long-run tax reform. It would help the current softening of the economy and increase America’s long-run potential to grow. This is a good plan for President Bush as well as the GOP candidates on the campaign trail.

Just because Goldilocks is alive and well, it doesn’t mean she can’t use a bit of help.