Steve Forbes and John Tamny published separate commentaries recently at Forbes Opinions analyzing the electoral defeat of Canadian Prime Minister Stephen Harper to Liberal Party candidate Justin Trudeau on October 18.
Their analysis is sure to run counter to most political pundits who focus more on things such as personalities, turnout, campaign strategies, etc.
Both agree that a weak U.S. dollar was the culprit behind the poor performance of the Canadian economy in recent quarters. But Forbes believes that Trudeau is predominantly indebted to Federal Reserve chairwoman Janet Yellen for his victory. Tamny places most of the blame on the executive branch via the U.S. Treasury's responsibility as the mouthpiece for the dollar. He argues that U.S presidents get the dollar they want and with the administration of George W. Bush desiring a weak dollar, that is exactly what they got.
In an attempt to help pull the U.S. economy out of the 2000-2001 recession and to help boost American exports, the Bush Administration supported dollar weakness. Bush Treasury secretaries Paul O'Neill and John Snow were effective in talking down the dollar during their tenures.
Given the importance of the U.S. dollar to global commerce, the effects of a weak dollar reverberate worldwide. In particular, those nations that are resource-intensive such as Canada, Australia, Brazil, and Russia feel the most pain as commodities are priced and traded in U.S. dollars.
With the dollar falling in value, investors fled productive investment in favor of hard assets most resistant to the devaluation of the currency. Scare investment capital migrated to housing and other forms of real estate and to the production of commodities such as precious metals, nonferrous metals, and petroleum. The resultant boom was widely celebrated as a major boost to economic growth in the affected countries but it eventually proved illusory. The rise in prices tricked investors in thinking such commodities were in short supply when in reality supply and demand fundamentals could not explain such huge price movements. Commodities were not suddenly become scare, it was simply the dollar shrinking in value.
Canada saw a major boom in the extraction of metals and the production of crude oil, specifically from high-cost oil sands in Alberta. However, once the dollar began to strengthen from its 2011 low of roughly 1/1900th of an ounce of gold, the profitability of such resource extraction began to suffer. Investment capital started to flow away from the commodity sector and Canada's economy began a painful adjustment that continues to this day.
Unfortunately for former PM Harper, his political career fell victim to an unfortunate Mercantilist policy decision that was made some 15 years ago by his neighbor to the south.
Wednesday, October 28, 2015
Monday, October 5, 2015
An Analysis of Trump's Tax Plan
In a Wall Street Journal commentary on September 28, Donald Trump provided a relatively brief outline of his plan to reform the tax code. The WSJ's editorial board review of the Trump plan can be found here.
[Trump's truly awful mercantilist trade views deserve greater discussion in a future blog post.]
Trump's plan has a few attractive elements but overall still rates as underwhelming.
The best parts of Trump's plan are the four personal income tax brackets (0%, 10%, 20%, 25%) that hit the top rate for a married couple earning greater than $300,000. A low flat tax of 15% that Steve Forbes has proposed in the past or a consumption tax would be preferable simply because it doesn't punish success with progressively higher rates. Relative to the thresholds proposed by Jeb Bush, Trump's plan is superior. Bush's max rate of 28% begins at only $141,200 for a married couple.
Like Bush, Trump eliminates the death tax, the marriage penalty, and the ongoing absurdity complex alternative minimum tax (AMT).
Trump proposes eliminating deductions and loopholes but fails to get into the specifics in any meaningful way. He does say that the "middle class" will get to keep most of their deductions while those for the wealthiest Americans will be eliminated. Apparently this means the Trump plan will continue to subsidize certain behaviors by allowing deductions on mortgage interest and charitable giving to remain. Social engineering via the tax code is frustratingly difficult to eliminate.
Trump proposes lowering the corporate tax rate to 15%, which is lower than the 20% in the Bush plan. Included is a repatriation rate of 10% for cash returned to the U.S. currently held overseas which is nothing more than a gimmick. The 15% rate will certainly help raise the attractiveness of the U.S. as a destination for investment capital after cuts in recent years by other countries in the OECD rendered the U.S. among the least competitive among the developed nations of the world.
As for the all-important capital gains tax, Trump inexplicably doesn't mention it at all in his commentary but details on his website indicate he wants it lowered to 20% for those taxpayers in the highest marginal bracket. This is still disappointing. Given the critical importance of capital investment to the creation of jobs, the optimal capital gains tax rate is zero.
He also seeks to treat "carried interest" generated by successful hedge fund and private equity investors as ordinary income. Carried interest income is created only when these managers are able to successfully invest capital on behalf of their investors. Like the capital gains tax, in a sane world carried interest wouldn't be taxed at all. We want Wall Street's best and brightest allocating scarce capital in pursuit of wealth-enhancing investment opportunities.
Trump does imply that the plan will be "revenue neutral" and not add to the national debt. He therefore keeps alive the tradition of candidates highlighting that their plans ensure the government will not have any less to spend going forward than it does now, as if that is some grand achievement. The true burden of government is the total amount of resources it is able to commandeer from the market-disciplined private sector. As supply-siders, we want the government to have less in the way of those resources to waste.
As I mentioned in my recent review of Bush's plan, what the the U.S. tax code needs now after a long period of subpar economic growth is anything but tinkering around the edges. It calls for nothing short of bold action. Trump's plan simply doesn't get the job done. Sure, it's better than the current Internal Revenue Code, but that's admittedly a very low bar.
[Trump's truly awful mercantilist trade views deserve greater discussion in a future blog post.]
Trump's plan has a few attractive elements but overall still rates as underwhelming.
The best parts of Trump's plan are the four personal income tax brackets (0%, 10%, 20%, 25%) that hit the top rate for a married couple earning greater than $300,000. A low flat tax of 15% that Steve Forbes has proposed in the past or a consumption tax would be preferable simply because it doesn't punish success with progressively higher rates. Relative to the thresholds proposed by Jeb Bush, Trump's plan is superior. Bush's max rate of 28% begins at only $141,200 for a married couple.
Like Bush, Trump eliminates the death tax, the marriage penalty, and the ongoing absurdity complex alternative minimum tax (AMT).
Trump proposes eliminating deductions and loopholes but fails to get into the specifics in any meaningful way. He does say that the "middle class" will get to keep most of their deductions while those for the wealthiest Americans will be eliminated. Apparently this means the Trump plan will continue to subsidize certain behaviors by allowing deductions on mortgage interest and charitable giving to remain. Social engineering via the tax code is frustratingly difficult to eliminate.
Trump proposes lowering the corporate tax rate to 15%, which is lower than the 20% in the Bush plan. Included is a repatriation rate of 10% for cash returned to the U.S. currently held overseas which is nothing more than a gimmick. The 15% rate will certainly help raise the attractiveness of the U.S. as a destination for investment capital after cuts in recent years by other countries in the OECD rendered the U.S. among the least competitive among the developed nations of the world.
As for the all-important capital gains tax, Trump inexplicably doesn't mention it at all in his commentary but details on his website indicate he wants it lowered to 20% for those taxpayers in the highest marginal bracket. This is still disappointing. Given the critical importance of capital investment to the creation of jobs, the optimal capital gains tax rate is zero.
He also seeks to treat "carried interest" generated by successful hedge fund and private equity investors as ordinary income. Carried interest income is created only when these managers are able to successfully invest capital on behalf of their investors. Like the capital gains tax, in a sane world carried interest wouldn't be taxed at all. We want Wall Street's best and brightest allocating scarce capital in pursuit of wealth-enhancing investment opportunities.
Trump does imply that the plan will be "revenue neutral" and not add to the national debt. He therefore keeps alive the tradition of candidates highlighting that their plans ensure the government will not have any less to spend going forward than it does now, as if that is some grand achievement. The true burden of government is the total amount of resources it is able to commandeer from the market-disciplined private sector. As supply-siders, we want the government to have less in the way of those resources to waste.
As I mentioned in my recent review of Bush's plan, what the the U.S. tax code needs now after a long period of subpar economic growth is anything but tinkering around the edges. It calls for nothing short of bold action. Trump's plan simply doesn't get the job done. Sure, it's better than the current Internal Revenue Code, but that's admittedly a very low bar.
Saturday, October 3, 2015
Contra Krugman
Thomas E. Woods, Jr., historian and Senior Fellow of the Mises Institute and Robert Murphy, Research Assistant Professor with the Free Market Institute at Texas Tech University have finally launched Contra Krugman, a podcast intended to deconstruct the weekly New York Times column of Paul Krugman, professor of economics at Princeton University.
Krugman is widely considered the public face of Keynesianism today. His weekly New York Times column is (apparently) quite influential. However, Krugman is arrogant, petulant, casually dismissive of his critics, and often downright nasty.
Whether it's the efficacy of massive government spending as "stimulus", massive tax increases, Federal Reserve manipulation of interest rates, "quantitative easing (QE)", Obamacare, etc., Krugman is a tireless supporter of state intervention in the economy and in the lives of individual Americans.
Woods and Murphy have designed the podcast not to be merely an anti-Krugman forum per se. They intend to provide the listen with a weekly economics lesson from the perspective of the Austrian school, with which both are identified. And what better way to do that than to pick apart Krugman's column.
I embrace much of the Austrian school's free market framework, although I generally disagree with its views on monetary policy. But we are in the same camp that believes the Federal Reserve is a menace to global economic prosperity and the best thing that could be done from a policy perspective is to "End the Fed" and allow a free market in money to take its place.
No one knows Krugman the way Murphy does. He is a true Krugman scholar. He knows things Krugman wrote in past columns better than Krugman himself. He will undoubtedly demonstrate this ability frequently in the course of this podcast series.
Having listened to The Tom Woods Show for some time, I know that it will be done in an informative and entertaining manner. What also makes me happy is this new podcast is sure to get under Krugman's skin in a major way!
You can subscribe to Contra Krugman on iTunes or Stitcher. Let the fun begin!
Krugman is widely considered the public face of Keynesianism today. His weekly New York Times column is (apparently) quite influential. However, Krugman is arrogant, petulant, casually dismissive of his critics, and often downright nasty.
Whether it's the efficacy of massive government spending as "stimulus", massive tax increases, Federal Reserve manipulation of interest rates, "quantitative easing (QE)", Obamacare, etc., Krugman is a tireless supporter of state intervention in the economy and in the lives of individual Americans.
Woods and Murphy have designed the podcast not to be merely an anti-Krugman forum per se. They intend to provide the listen with a weekly economics lesson from the perspective of the Austrian school, with which both are identified. And what better way to do that than to pick apart Krugman's column.
I embrace much of the Austrian school's free market framework, although I generally disagree with its views on monetary policy. But we are in the same camp that believes the Federal Reserve is a menace to global economic prosperity and the best thing that could be done from a policy perspective is to "End the Fed" and allow a free market in money to take its place.
No one knows Krugman the way Murphy does. He is a true Krugman scholar. He knows things Krugman wrote in past columns better than Krugman himself. He will undoubtedly demonstrate this ability frequently in the course of this podcast series.
Having listened to The Tom Woods Show for some time, I know that it will be done in an informative and entertaining manner. What also makes me happy is this new podcast is sure to get under Krugman's skin in a major way!
You can subscribe to Contra Krugman on iTunes or Stitcher. Let the fun begin!
Tuesday, September 29, 2015
ZIRP is the Problem, not the Solution
Richard Salsman, President & Chief Market Strategist of economics consultancy Intermarket Forecasting Inc., has made available a recent research report "ZIRPs Make Credit (and Prosperity) Scarce, Not Plentiful" on RealClearMarkets.
Salsman explains exactly why the Fed's zero-interest-rate policy (ZIRP) has been an utter failure.
ZIRP does not provide economic "stimulus" despite its supporters protestations to the contrary. Like any other price control, ZIRP works by limiting supply, in this case the supply of precious capital needed by the entrepreneur to fund a promising business concept or the management of an existing business looking to finance a new piece of capital equipment, to cite two examples.
The economics is quite basic. Salsman provides an illustrative graph of the supply and demand for credit. If the price of a good (in this case, credit) is held below the equilibrium rate that would exist without central bank manipulation (i.e. in a free market), expect there to be a shortage of credit! This stuff is supposedly taught in introductory microeconomics classes at the college freshman level but is apparently lost on the masterminds over at the Eccles Building.
Savers quite simply will not offer up their capital if the expected return (the rate of interest) does not compensate him for the risk taken. According to Jean-Baptise Say (and quoted by Salsman on page two), "...many will prefer to keep their capital inactive, concealed and unproductive...".
If you are the government or a multinational corporation, financing hasn't been a big problem. However, if you are a small- or mid-sized business, the credit spigot is choked. Impossible to know is the number of businesses that never got off the ground for lack of capital investment during the past six years of ZIRP. They are Bastiat's "unseen".
Something so simple is complete lost on central bankers, our Federal Reserve as well as others around the world. They are so wedded to their Keynesian models that they can't even contemplate that their theories, disproved through historical experience, are just plain silly. Please see the quote from Lawrence Summers that Salsman cites beginning on page six. It says it all...and demonstrates just how worthless a Ph.D in economics obtained from Harvard University is these days.
An excellent article by John Tamny of Forbes Opinions entitled, "The Fed's 'Loose' Monetary Stance is Making Credit Tight" is also cited in Salsman's footnotes and can be found here.
Salsman explains exactly why the Fed's zero-interest-rate policy (ZIRP) has been an utter failure.
ZIRP does not provide economic "stimulus" despite its supporters protestations to the contrary. Like any other price control, ZIRP works by limiting supply, in this case the supply of precious capital needed by the entrepreneur to fund a promising business concept or the management of an existing business looking to finance a new piece of capital equipment, to cite two examples.
The economics is quite basic. Salsman provides an illustrative graph of the supply and demand for credit. If the price of a good (in this case, credit) is held below the equilibrium rate that would exist without central bank manipulation (i.e. in a free market), expect there to be a shortage of credit! This stuff is supposedly taught in introductory microeconomics classes at the college freshman level but is apparently lost on the masterminds over at the Eccles Building.
Savers quite simply will not offer up their capital if the expected return (the rate of interest) does not compensate him for the risk taken. According to Jean-Baptise Say (and quoted by Salsman on page two), "...many will prefer to keep their capital inactive, concealed and unproductive...".
If you are the government or a multinational corporation, financing hasn't been a big problem. However, if you are a small- or mid-sized business, the credit spigot is choked. Impossible to know is the number of businesses that never got off the ground for lack of capital investment during the past six years of ZIRP. They are Bastiat's "unseen".
Something so simple is complete lost on central bankers, our Federal Reserve as well as others around the world. They are so wedded to their Keynesian models that they can't even contemplate that their theories, disproved through historical experience, are just plain silly. Please see the quote from Lawrence Summers that Salsman cites beginning on page six. It says it all...and demonstrates just how worthless a Ph.D in economics obtained from Harvard University is these days.
An excellent article by John Tamny of Forbes Opinions entitled, "The Fed's 'Loose' Monetary Stance is Making Credit Tight" is also cited in Salsman's footnotes and can be found here.
Monday, September 21, 2015
Strike Two!
Another GOP debate, another missed opportunity.
Despite the three-hour CNN debate format last week, none of the Republican presidential hopefuls took a swing at Janet Yellen and the Federal Reserve.
Although the debate took place the evening before the Fed decided to maintain its zero-interest-rate policy (ZIRP), the disaster that is the Fed remained a subject apparently unworthy of discussion.
Now I realize that the CNN moderator was unlikely to steer candidates into a discussion of the Federal Reserve's manipulation of interest rates and pursuit of "unconventional" monetary policy, but that doesn't stop the candidate looking to set him- or herself apart from the competition by bringing up the topic.
As I discussed in a previous post, this is an issue just begging to be addressed.
As a professional investor who is essentially required to pay attention to most utterances of voting members of the Federal Reserve's Open Market Committee (unfortunately), I am beginning to sense that even more people are finally catching on that the Fed has absolutely no idea what it is doing. The Fed brass and countless bevy of nameless, faceless Ph.Ds who wallow away in obscurity producing academic studies in Washington, D.C. and the various Fed branches around the country simply will not acknowledge that their models of how the economy functions are utterly worthless.
This is a good sign. As I have stated before, the general public senses something is very wrong with the Fed's conduct of monetary policy. Now if only one of the candidates will be bold enough to take it on.
Of course, I am not the only one writing about the missed opportunity of GOP presidential candidates to highlight destructive Fed policy. Larry Kudlow does so here.
In an excellent "Fact and Comment" essay on Forbes.com, Steve Forbes discusses why the economy will continue to suffer under current Fed policy here.
Despite the three-hour CNN debate format last week, none of the Republican presidential hopefuls took a swing at Janet Yellen and the Federal Reserve.
Although the debate took place the evening before the Fed decided to maintain its zero-interest-rate policy (ZIRP), the disaster that is the Fed remained a subject apparently unworthy of discussion.
Now I realize that the CNN moderator was unlikely to steer candidates into a discussion of the Federal Reserve's manipulation of interest rates and pursuit of "unconventional" monetary policy, but that doesn't stop the candidate looking to set him- or herself apart from the competition by bringing up the topic.
As I discussed in a previous post, this is an issue just begging to be addressed.
As a professional investor who is essentially required to pay attention to most utterances of voting members of the Federal Reserve's Open Market Committee (unfortunately), I am beginning to sense that even more people are finally catching on that the Fed has absolutely no idea what it is doing. The Fed brass and countless bevy of nameless, faceless Ph.Ds who wallow away in obscurity producing academic studies in Washington, D.C. and the various Fed branches around the country simply will not acknowledge that their models of how the economy functions are utterly worthless.
This is a good sign. As I have stated before, the general public senses something is very wrong with the Fed's conduct of monetary policy. Now if only one of the candidates will be bold enough to take it on.
Of course, I am not the only one writing about the missed opportunity of GOP presidential candidates to highlight destructive Fed policy. Larry Kudlow does so here.
In an excellent "Fact and Comment" essay on Forbes.com, Steve Forbes discusses why the economy will continue to suffer under current Fed policy here.
Tuesday, September 15, 2015
Is Capitalism Moral?
Over at Cafe Hayek, Don Boudreaux links to a Prager University video narrated by the excellent Walter Williams, professor of economics at George Mason University.
In just over 5 minutes, Williams explains in a devastatingly simple manner why the free market system is the morally superior form of economic organization.
"In a free market, the ambition and the voluntary effort of citizens, not the government, drives the economy." -Walter Williams
Access the link here.
In just over 5 minutes, Williams explains in a devastatingly simple manner why the free market system is the morally superior form of economic organization.
"In a free market, the ambition and the voluntary effort of citizens, not the government, drives the economy." -Walter Williams
Access the link here.
Monday, September 14, 2015
Jeb Bush Announces Tax Simplification Plan
Jeb Bush announced his tax overhaul plan in an op-ed in the Wall Street Journal on September 9.
My perspective is that any simplification of the byzantine, anti-growth U.S. tax code, short of throwing it away altogether, is a good thing.
But make no mistake, as much as I support any effort to cut taxes, its benefit to the economy still pales in comparison to the prosperity that would be unleashed if the U.S. dollar was relinked to gold. Bush makes no reference to the dollar or monetary policy in his piece. Cue the sigh.
Bush wants to reduce the number of marginal tax rates from seven to three. Disappointing to say the least! Can't we have something bolder? One flat rate perhaps? Progressivity punishes success. How about making the case that the tax code should not contain any disincentives to achievement?
A cut in the corporate tax rate to 20% from 35% is also much too modest. How about just eliminating it altogether? That also does away with the gimmicky one-time tax repatriation benefit he proposes. Let's make the U.S. a magnet for capital investment from around the world. With that investment comes all the benefits we crave such as higher levels of employment, greater productivity, and rising wages.
That said, if the tax must stay then a transition to a territorial system that Bush proposes at least ensures corporate income is taxed in the country that is actually earned. This is a major improvement over current law. The U.S. is the only major developed nation that taxes income without regard to where it is actually earned.
I champion Bush's elimination of certain itemized deductions, including the state and local taxes deduction and the business interest deduction. The deduction for state and local taxes simply subsidizes profligate governments, such as California, New Jersey, and New York. The deduction of business interest distorts business financing decisions by favoring the issuance of debt over equity.
Unfortunately, he preserves the charitable contribution deduction and the worst one of all, the mortgage interest deduction. Americans are incredibly generous people and don't require a taxpayer subsidy to support worthy charities, places of worship, or those in need. The deduction of mortgage interest is bad policy simply because it subsidizes homeownership. The last thing we need is to have even more precious capital sunk into non-productive assets such as housing. It also is unfair to those taxpayers who decide that renting is a better option.
My favorite part of Bush's plan is the elimination of the estate tax. It is a compliance nightmare, raises very little revenue for the government, and is patently unfair.
Bush wants to expand the Earned Income Tax Credit (EITC), a sop to the political left, and is just another form of income redistribution. Persons who do not pay income taxes should not be receiving cash payments from those that do.
Finally, there is no mention of cutting or eliminating the capital gains tax, easily the most destructive tax of all. Capital investment is a vital ingredient to the creation of jobs. The tax code should treat the gains from risk-taking activity as lightly as possible.
In summary, Bush's tax plan has some admirable elements but is unfortunately too timid. It lacks the boldness that would help begin to set his candidacy apart from his main rivals.
Dan Mitchell provides his thoughts in a blog post at the Cato Institute here.
The WSJ's editorial page staff gives the Bush plan a thumbs up here.
My perspective is that any simplification of the byzantine, anti-growth U.S. tax code, short of throwing it away altogether, is a good thing.
But make no mistake, as much as I support any effort to cut taxes, its benefit to the economy still pales in comparison to the prosperity that would be unleashed if the U.S. dollar was relinked to gold. Bush makes no reference to the dollar or monetary policy in his piece. Cue the sigh.
Bush wants to reduce the number of marginal tax rates from seven to three. Disappointing to say the least! Can't we have something bolder? One flat rate perhaps? Progressivity punishes success. How about making the case that the tax code should not contain any disincentives to achievement?
A cut in the corporate tax rate to 20% from 35% is also much too modest. How about just eliminating it altogether? That also does away with the gimmicky one-time tax repatriation benefit he proposes. Let's make the U.S. a magnet for capital investment from around the world. With that investment comes all the benefits we crave such as higher levels of employment, greater productivity, and rising wages.
That said, if the tax must stay then a transition to a territorial system that Bush proposes at least ensures corporate income is taxed in the country that is actually earned. This is a major improvement over current law. The U.S. is the only major developed nation that taxes income without regard to where it is actually earned.
I champion Bush's elimination of certain itemized deductions, including the state and local taxes deduction and the business interest deduction. The deduction for state and local taxes simply subsidizes profligate governments, such as California, New Jersey, and New York. The deduction of business interest distorts business financing decisions by favoring the issuance of debt over equity.
Unfortunately, he preserves the charitable contribution deduction and the worst one of all, the mortgage interest deduction. Americans are incredibly generous people and don't require a taxpayer subsidy to support worthy charities, places of worship, or those in need. The deduction of mortgage interest is bad policy simply because it subsidizes homeownership. The last thing we need is to have even more precious capital sunk into non-productive assets such as housing. It also is unfair to those taxpayers who decide that renting is a better option.
My favorite part of Bush's plan is the elimination of the estate tax. It is a compliance nightmare, raises very little revenue for the government, and is patently unfair.
Bush wants to expand the Earned Income Tax Credit (EITC), a sop to the political left, and is just another form of income redistribution. Persons who do not pay income taxes should not be receiving cash payments from those that do.
Finally, there is no mention of cutting or eliminating the capital gains tax, easily the most destructive tax of all. Capital investment is a vital ingredient to the creation of jobs. The tax code should treat the gains from risk-taking activity as lightly as possible.
In summary, Bush's tax plan has some admirable elements but is unfortunately too timid. It lacks the boldness that would help begin to set his candidacy apart from his main rivals.
Dan Mitchell provides his thoughts in a blog post at the Cato Institute here.
The WSJ's editorial page staff gives the Bush plan a thumbs up here.
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