The Dems and the Supercommittee Debate

Didn’t our Democratic friends always intend to derail the supercommittee over the top Bush tax rates? You remember that $800 billion revenue number always floating around from the Democratic leaks? Well, that’s the static-revenue estimate of repealing the 35 percent and 33 percent Bush rates. And sometimes that Democratic revenue number moved up to $1.2 trillion. Well, that would include the static-revenue estimate of the 5.6 percent millionaire surtax. Get it?

In an important sense, the whole supercommittee debate from the Democratic side was about taxing the rich. They never went quite as far as Obama’s populist class-warfare rant, at least not publically. But basically this logjam was about so-called tax fairness.

Ironically, when the automatic spending cuts trigger in, Speaker John Boehner will win out. His original vision -- going back to the debt-ceiling debate last summer -- was $1 in spending cuts for each $1 of debt increase. So the sequester will get $1.2 trillion in spending cuts on top of last summer’s $1 trillion.

No it’s not great. We should have done $4 trillion to $6 trillion by reforming entitlements and undergoing pro-growth tax reform for individuals and corporations. But at the end of the day, we dodged a super tax hike and got a couple trillion dollars of lower spending. Not the worst thing in the world.

Junk the Trigger? It's an X-Rated Option

Instead of a super tax hike from the supercommittee, a much better option for the economy and budget-cutting credibility would be to implement plan B, which is the automatic spending-cut trigger known as sequestration.

The Wall Street Journal editorial on the sequester scenario shows a roughly $70 billion budget cut in 2013 and probably more in the future as the budget baseline is pulled down. A $70 billion cut would be one of the largest on record -- maybe the largest. It would show real budget discipline. And it is vastly superior to the economy-killing $500 billion to $800 billion tax hike supported by Democrats who oppose true tax reform that would lower marginal rates and broaden the base.

But both parties are quaking in their boots over the automatic budget-cutting trigger.

I interviewed senator and supercommittee-member Pat Toomey last night on CNBC. He has the best tax-reform plan, which would drop the top rate to 28 percent, bring other rates down, and limit upper-income deductions and exemptions. Unfortunately, Sen. Toomey’s plan does not at this point appear to have bipartisan support.

Nevertheless, Toomey told me that the automatic trigger has big problems. Specifically, he noted that half the trigger would be concentrated on defense. Then he said, “In the very unfortunate event that our committee were not to be successful, and I still hope we will, but if not, then I think we would have a very concerted effort to reconfigure the sequestration.”

Mr. Toomey’s Republican colleagues undoubtedly agree with this reconfiguration. But you can bet the Democrats on the committee will not. So the only way out would be the most irresponsible way out: junking the automatic spending-cut trigger altogether.

And that option would be a disaster for financial markets. Stocks would plunge. Think back to last July and August during the debt-ceiling debate. Junking the trigger would be a fiscal blight and would mean a sure credit downgrade.

For those who worry about the defense problem, leave it to a post-election Congress that could provide a supplemental to add back some defense spending if necessary. All the budget issues will be revisited post-election anyway.

But junking the trigger would be a fiscal calamity for the United States. It’s an X-rated option. Don’t even think about it.

The U.S. Is Stronger than Most Folks Think

You wouldn’t know it from yesterday’s down day in the stock market. But the daily numbers continue to show an economy that is stronger than most folks think.

Today, for example, initial jobless claims fell to 388,000 -- the lowest level in seven months. And the Philly Fed manufacturing index, which translates to 53 on an ISM basis, shows a very strong employment component.

Earlier in the week, the index of industrial production beat estimates with an especially strong reading on business equipment. That spells strong capital-goods investment, itself a job creator.

Retail sales in October also beat estimates, and are rising over 7 percent against year-ago. Both producer and consumer price inflation dropped slightly in October.

Smart economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP for Q4. Another luminary, Joe LaVorgna, thinks GDP could actually be 4 percent for the quarter ending in December.

All these better readings continue to clash with market pessimism over Europe’s debt and banking problems. Today on CNBC, however, St. Louis Fed president Jim Bullard said the European problem will be contained, and that it won’t have much effect on the U.S. economy.

And eminent economist Art Laffer believes the new Italian government run by Mario Monti is putting together a pro-growth economic plan to extend the retirement age of public workers, knock out 300,000 government-sector jobs, overhaul the tax system, and privatize state-owned properties. Laffer believes Monti, the former European commissioner for taxes, favors pro-growth reform and simplification. Laffer also thinks Germany will knock its budget deficit under 3 percent, with spending cuts combined with a small tax cut.

In other words, the European story may not be quite as bad as the bond-market vigilantes believe.

There’s no question that the Eurozone is close to recession, and that many of its members still have massive work to do. They need to live within their means, thwart the social-welfare entitlement system, and curb government-union excess. Plus there’s the need for flatter-tax simplification to promote growth.

But I can’t help but think that whatever the state of decline in Europe may be, it is the U.S. that ultimately will benefit. Despite the class-warfare mistakes coming out of Washington and a weak-kneed supercommittee, political regime change is coming. Meanwhile, the U.S. economy is more resilient and perhaps even stronger than people think.

Five Lessons for America from the European Fiscal Crisis

Here's a very timely video on Europe's fiscal crisis, narrated by an Italian student who was an intern at Cato Institute. The text is written by Dan Mitchell, a senior fellow at Cato and a top expert on tax reform and supply-side tax policy.



I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.

This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.

Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.

Super Committee Co-Chair: Tax Hikes Won't Happen

The 12 member congressional “super committee” is still working on a deficit deal, but Co-chairman Jeb Hensarling (R-TX) said on the Kudlow Report that "super" tax hikes will not be part of any compromise.

“We’re facing a jobs crisis and a debt crisis,” he said. “We’re certainly not going to exacerbate one by trying to address the other. Frankly, that’s one of the reasons we are stymied at the moment.”

Hensarling denied any knowledge of what the Wall Street Journal said was a plan for $300 billion in tax revenues up front and $500 billion in tax revenues later.
“As the co-chairman of the committee, I don’t know what agreement you are talking about," he said. "It certainly hasn’t been presented to me.”

The super committee has until November 23rd to agree on a plan to cut the federal deficit. The legislation that established the panel of six Democrats and six Republicans put in place an enforcement mechanism that will trigger automatic cuts if the committee fails to reach an agreement on $1.2 trillion in deficit cuts over 10years.

Hensarling told me that Republicans have gone as far as they feel they can go.
“We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates,” he said.

Hensarling believes they can bring down the top individual tax rate to between 28 and 30 percent and the corporate rate to 25 percent.

"On balance, we think that would be pro-growth," he added. "But, listen, any penny of increased static revenue is a step in the wrong direction. We can only balance that with pro-growth reforms. And, frankly, the Democrats have never agreed to that.”

U.S. Banks Benefiting from European Crisis

Fears over the European debt crisis sent the market lower Monday, with financial stocks leading the way, but Rochdale Securities' Dick Bove said that what’s happening in the euro zone is actually helping banks.

“The irony of what’s going on right now is that the banks are benefiting at the moment from what’s going on in Europe,” he said on The Kudlow Report. “The European banks are selling American assets to American banks at discounted prices which is creating a benefit for the American banks.”

The fact of the matter is banking companies are in pretty good shape, Bove noted.
U.S. banks, however, are flush with cash and therefore there should be no fears over funding issues, Bove said. In fact, he thinks they are overcapitalized.

“If you take all the numbers going back 75 years to when the FDIC was first created,” he said, “we’ve never had this high a level of capital plus reserves as a percentage of assets in the banking industry, ever.”

Plus, deposits are pouring in because when people are afraid of what’s happening in the market, they put their money in the bank.

“The banks have too much liquidity right now, too much capital right now,” he said. “There is no funding issue.”

What banks are Bove’s picks? He likes JP Morgan Chase, U.S. Bancorp, and Morgan Stanley.

One-on-One with Newt Gingrich

The idea of 99 percent of the population versus 1 percent of the rich, which Occupy Wall Street protestors have made their mantra, is just wrong, GOP presidential candidate Newt Gingrich said on “The Kudlow Report” last night.

“I am for 100 percent,” he said. “I think this idea of 99 percent and 1 percent is grotesque European socialist class warfare baloney.”

And President Obama is playing right along with that class warfare by expressing sympathy for the protesters, he added.

“I repudiate anybody who wants to divide Americans and I think that that there is a fundamental destructive quality to this 99 percent idea,” Gingrich said. “I think that it is shameful the president of the United States would engage in class warfare and pit Americans against each other in way which can only be destructive of the fabric of American society.”

The former Speaker of the House, who is set to join the other seven candidates in a CNBC debate Wednesday, has been rising in the polls recently. An NBC News/Wall Street Journal poll on Monday put him in third place. In another survey, he’s just six points behind President Obama in a hypothetical match up.

If elected president, Gingrich plans to jump start the economy and create jobs by taking a page from Ronald Reagan.

The plan, he said, is simple—“lower taxes, less regulation, more American energy and work with the people who create jobs and don’t engage in class warfare against them.”
Gingrich noted that while he was Speaker of the House, he worked with President Clinton on reforming welfare and cutting taxes. But Clinton was a centrist, he said, while Obama is a genuine “radical” who has difficulty negotiating.

The candidate also addressed the sexual harassment allegations plaguing his rival Herman Cain, telling Kudlow that Cain did the right thing by addressing the claims.
“He was clear, he was forceful and he certainly deserves people giving him the benefit of the doubt," he said.

But, he noted, we'll have to wait and see how it plays out. “It’s not over yet,” he added.

Stronger Than We Think?

Is the American economy stronger than we think?

Small-business jobs in the Labor Department household survey have increased by an average 335,000 in each of the last three months. Kelly Evans of the Wall Street Journal notes that the ADP survey is showing stronger small-business employment. Earlier reports on business-capital investment show considerable strength. Despite all the debt and banking-contagion worries over in Europe, the U.S. stock market continues to creep higher. Initial jobless claims have slipped under 400,000. Oil prices continue to rise, gaining almost $20 over the past few months. Bank loans to businesses are rising in double digits. So is the M2 money supply. And corporate profits have exceeded expectations once again.

No, Washington is not helping. Neither is Europe. China looks shakier and shakier. And we know that consumer real incomes and housing are still problematic.

But let me wonder out loud: Is the American economy stronger than we think?

Will Bernanke Soon Surprise the U.S.?

Will the Federal Reserve’s Ben Bernanke soon follow the European Central Bank’s Mario Draghi? In his first action as Jean-Claude Trichet’s replacement, Draghi cut the ECB target rate by a quarter percent to 1.25 percent from 1.5 percent. It was a surprise.

Given the hullabaloo over Greece’s bailout referendum (which is now dead in the water) and the likelihood of a new Greek government, Draghi’s liquidity addition is a modest but useful antidote to major financial stress and uncertainty in the Eurozone. He’s probably going to cut rates a lot more in view of Europe’s perilous financial and economic situation.

So that leads to this question: Will Bernanke soon surprise the U.S.?

At his news conference yesterday, the Fed head emphasized the ongoing weakness in housing as a key factor in the sluggish economy and high unemployment rate. He openly acknowledged that the door is wide open for a new Fed action to purchase mortgage-backed bonds in order to provide additional support for the weak housing market. This goes beyond Fed actions to reinvest MBS bonds as they mature. In other words, quantitative easing.

Wall Street may be impressed with recent economic data, like the ISMs and other stats that show the economy is not now flipping into recession. But Bernanke is less impressed. The Fed downgraded its 2012 forecast for real growth from 3.5 percent to 2.7 percent. And it raised its unemployment estimate for next year from 8 percent to 8.6 percent by year-end 2012. And despite continued inflation pressures, the central bank essentially kept its inflation target at a low 1.7 percent.

So it’s not unreasonable to suggest that Bernanke is setting the stage for a new round of QE. Growth at 2.7 percent is insufficient to significantly reduce unemployment. And housing remains a big problem. So while the U.S. doesn’t face the kind of financial stress that Europe does, Bernanke may follow Draghi with a U.S. easing move.

One-on-One with Ron Paul

The Federal Reserve is still in quantitative easing mode despite the fact that it announced Wednesday it would hold off any new actions to aid the economy, Republican presidential candidate and Congressman Ron Paul said on the Kudlow Report last night. Take a listen:

One-on-One with Dick Bove

Investors dumping U.S. bank stocks are overreacting to all the European debt crisis speculation, Rochdale Securities’ Dick Bove said last night on the Kudlow Report.

“I think we’ve gone nuts,” he said. “I think these [U.S. bank] stocks are so cheap, that people should be buying them as aggressively as they could.”

The financials led the S&P lower Tuesday after investors fled the market on fears that the European debt deal could fall apart. After conflicting reports on whether Greece plans to hold a referendum on the debt agreement reached last week, the government jumped in to say the vote is on.

But what's happening in Europe should not affect U.S. banks, Bove said, because most have virtually no exposure to the EU. Plus, most banks beat their earnings estimates for the third quarter.

As for the “five big American banks” that do have exposure to Europe, their risk is “not very great at all.”

That’s because Bove believes the EU will not let its banks fail.

“The ECB will do, if you want, a QE2,” he said. “It’s going to save all of the major European banks. It’s already shown its will to do so.”

No Reason for More Fed QE

The Fed is meeting Tuesday-Wednesday on monetary policy. The FOMC statement will be released at 12:30 p.m. on Wednesday, and then Ben Bernanke will have a news conference at 2:15 p.m.

With both real GDP and inflation at 2.5 percent, there doesn’t seem to be much of a case for new Fed quantitative easing. While unemployment is high, that’s a function of regulatory and tax obstacles -- certainly not tight money. Both QE1 and QE2 have failed to bring down unemployment. There’s a lesson there.

The real side of the economy is governed more by tax and regulatory policies that either create new incentives for growth or take those incentives away. And massive spending stimulus threatens higher future tax rates -- a disincentive for growth and job creation.

The monetary-policy lever affects the level of prices and the inflation rate, along with the dollar’s value. But money has no permanent impact on jobs and growth.

Now here are some interesting statistics. Believe it or not, business loans are picking up. According to the Fed, commercial and industrial loans by banks to business have increased 16 percent annually over the last 13 weeks and 11.9 percent annually over the last 26 weeks. So some expansion is going on out there. And that’s what the strong business capital-goods-investment numbers showed in Q3 GDP.

Here’s a second stat. Over the past year, the M2 money supply has grown at 10.2 percent while C&I loans have increased 9.2 percent. So as credit is expanded to business, the deposit base of the banking system is also expanding. And as those $1.6 trillion in excess bank reserves on deposit at the Fed are put to work, credit expansion is going to be that much stronger.