Weekend edition: Mundell on global currency; Williams and Moore on benefits for the rich; Woodhill on the unemployment report.

Thailand’s The Nation reports supply-side guru Robert Mundell arguing for a global currency.

In Forbes, Louis Woodhill debunks optimism about the latest unemployment report.

In The WSJ, Walter Williams and Stephen Moore argue for cutting government benefits to the rich, rather than raising taxes:

The much bigger fiscal drain from the wealthy is on the federal expenditure side of the budget ledger: tens of billions each year in grants, loans, subsidies, guarantees and benefits pocketed each year by wealthy Americans as individuals and firms. Any campaign to downsize big government will only succeed if the needed deep cuts in spending are deemed by voters as equitable. In an era of $1 trillion-plus deficits and a $15 trillion national debt, we would like to think that a national consensus could be reached to eliminate handouts to individuals and companies with net incomes above $1 million.

On The Kudlow Report, Stephen Moore discusses the NLRB’s decision to drop its case against Boeing:

 

At America Now with Andy Dean, Cato’s Alan Reynolds discusses his recent WSJ op-ed on the top 1%.

From The Atlas Sound Money Project, Nicolas Cachanosky defends the gold standard.

At The Council on Foreign Relations, Benn Steil refutes Brad Delong’s claim that the ECB will print its way out of the EU’s debt crisis.

On Activist Post, David Redick proposes gold to save the euro (h/t: Ralph Benko).

In Forbes, Ken Rapoza quotes Bretton Woods Research’s Vlad Signorelli on China’s lower inflation and economic weakness.

The WSJ notes the weakening yuan.

On Fox Business, Steve Forbes discusses the European crisis and bailout possibilities:



The WSJ argues Europe won’t restore growth with higher tax rates.

At Cato Unbound, a monetarist, Keynesian, and an Austrian debate whether the economy is caught in a liquidity trap.

Tuesday items: Domitrovic on JFK's early missteps; Kudlow praises the frontrunners' dollar stance; Reynolds rebuts Buffett.

From Forbes, Brian Domitrovic explains that the President’s jobs proposal repeats JFK’s early mistakes.

At Cato, Alan Reynolds explains the President’s plan would mean a $447 billion in tax increases. Also from Cato, Reynolds analyzes the flaw in the President’s home refinancing plan.

At NRO, Larry Kudlow notes the GOP front runners support for a stable dollar.

On The Kudlow Report, David Goldman discusses a possible Greek default:



From IBD, Alan Reynolds rebuts Warren Buffett’s call for higher taxes.

In The Washington Times, Richard Rahn notes regulations that damage the economy.

David Goldman has launched a financial analysis company.

From Alhambra Partners, John L. Chapman notes that New Keynesian Romney advisor Greg Mankiw tellingly omits the dollar from his analysis of weak US fixed investment.

In The Financial Post (Canada), Steve Hanke analyzes the damage done by Basel III’s increased bank capital-asset requirements.

At TGSN, Daniel M. Ryan explains the danger of fiat money (more here).

On Kudlow, James Pethokoukis discusses Rick Perry’s debate performance and Social Security position:

 

At Forbes, Ken Rapoza quotes Bretton Woods Research’s Vlad Signorelli defending the euro.

On NRO, Josh Hendrickson of University of Mississippi argues the Fed should target nominal growth.

From Bloomberg, NRO’s Ramesh Ponnuru criticizes Rick Perry for bashing Social Security.

Monday items: Gordon on growth and debt; The WSJ, Malpass and The NY Sun critique Bernanke; Kudlow sees an ECB rate cut coming.

In The WSJ, John Steele Gordon explains that 1990s level economic growth would cut the deficit down quickly.

The WSJ chides Fed Chairman Bernanke for shifting blame away from his own policies.

At Fox News, David Malpass notes Bernanke’s continued weak dollar policy.

The NY Sun adds its two cents on Bernanke.

On The Kudlow Report, Larry suggests IMF Chief Christine Lagarde supports an ECB rate cut:




In The New Yorker, James Surowiecki advises the ECB to back off its rate increases.

On Forbes, Ralph Benko notes elite attention turning to gold.

At RCM, Bill Frezza explains the economy cannot function properly without sound money.

On Uneasy Money, David Glasner critiques Alan Reynolds’s anti-QE2 argument.

At NRO, Larry Kudlow skewers the idea that rebuilding after destruction is stimulative.

On Kudlow, James Pethokoukis comments on the President’s CEA pick:




A pessimistic report from Britain offers supply-side solutions as the only way out of its economic mess (h/t: Vlad Signorelli).

At TGSN, Ralph Benko quotes John Adams on paper money.

CNBC features an unscientific poll on the gold standard, which as of this writing shows 71% support for a gold-linked dollar.

On Forbes, John Tamny praises Steve Jobs.

Thursday round up: Mixed reviews for the Gang of Six proposal; Taylor says the growth consensus is over; Forbes on returning to the gold standard.

The WSJ expresses cautious optimism about the Gang of Six budget and tax reform deal; in The Washington Post, former G.W. Bush speech writer Marc Thiessen argues the proposal is a $3 trillion tax increase.

At Bloomberg, Richard Rubin analyzes the likely capital gains tax increase in the Gang of Six debt proposal (h/t: Vlad Signorreli).

In The WSJ, John Taylor suggests the growth consensus of the 1980s and ‘90s has been abandoned.

On Fox Business News, Steve Forbes explains how to return to the gold standard:




At Asia Times, David Goldman argues the small business start-up economy is dead, while large companies with global reach continue to grow.

From TGSN, Ralph Benko cites Jude Wanniski on what a currency should do.

At his blog, former FDIC Chairman William Isaac argues mark to market accounting rules played a major role in the 2008-09 recession and financial crisis. According to Bretton Woods Research, “We continue to believe that the MTM [congressional] hearings proved the turning point for financial markets back in March 2009.”

On The Kudlow Report, Don Luskin sounds bullish on the economy:




In The NYT, Ohio University Professor Alonzo L. Hamby provides a good economic history of the US.

At Pajamas Media, Ed Driscoll claims Hollywood doesn’t understand inflation.

Weekend update: Lewis on progressive tax rates; Ferrara defends Social Security accounts; Frank notes the impact of taxing the rich on revenues.

From Forbes, Nate Lewis advocates a progressive tax code that taxes the rich at a low rate.

On Forbes, Peter Ferrara defends Social Security private accounts.

In The WSJ, Robert Frank notes that the problem with taxing the rich heavily is revenues go way down during recession.

On The Kudlow Report, Steve Moore argues GE’s tax bill of zero makes the argument for corporate tax reform:



At Forbes, John Tamny supports the merger of ATT&T with T-Mobile.

In The NYT, Paul Krugman notes that austerity economies have not grown as some predicted.

At New World Economics, Nathan Lewis critiques Murray Rothbard’s version of the gold standard.

On Jim Blasingame’s radio show, Charles Kadlec discusses inflation’s impact on small business:



At Forbes, Kenneth Rapoza cites Vlad Signorelli’s analysis of Portugal and German Chancellor Angela Merkel.

On The Fiscal Times, Bruce Bartlett urges Republicans to accept tax increases as part of a deficit reduction deal.

BWR on growth and the debt.

More great analysis courtesy of Vlad Signorelli at Bretton Woods Research, in partnership with Louis Woodhill. The chart below deserves wide circulation.


Notes on the Growth Scenario
Mar 14 2011

Given the stir our recommended reading "Paul Ryan Is Wrong" created among clients last week, we asked Forbes columnist and Club for Growth Leadership Council member, Louis Woodhill, to elaborate on the growth case in relation to the deficit and public debt from a technical perspective.

Below Louis explains how the CBO's doomsday Alternate Fiscal Scenario emerged. It was unveiled in June 2010 and has become the dominant projection for various studies on the subject, including President Obama's "Debt and Deficit Commission" and is routinely cited by Congressman Paul Ryan. It assumes an average annual growth rate of 2.16%. Woodhill, who is also an engineer and successful software entrepreneur, has done a yeoman's job working through the numbers and constructing a budget model that closely approximates the inputs and outputs of the CBO case. This allows different scenarios to be explored such as if the U.S. economy were to grow close to its historic norm of 3.5%.

His model in printable excel format is available upon request.

-Bretton Woods Research


Notes on the Federal Deficit, Debt & Faster Growth
March 12, 2011

Concern about Federal deficits and the mounting Federal debt escalated noticeably after the Congressional Budget Office (CBO) released its “Long Term Budget Outlook” (LTBO) on June 30, 2010. One of the cases they presented, their “Alternate Fiscal Scenario” (AFS), became widely cited in various studies and articles. The AFS was the basis for the work done by President Obama’s “Debt and Deficit Commission”, headed by Alan Simpson and Erskine Bowles.

The CBO's AFS predicted financial doom, with “Federal debt held by the public” rising rapidly and steadily until it reached an incredible (and unsustainable) 947% of GDP in 2084, which was the end of the CBO’s forecast period. As bad as this number was, it did not include the ongoing unfunded liabilities of Social Security and Medicare.

What was striking about that budget outlook is that it was based upon a single, very pessimistic forecast of economic growth, averaging 2.16% over the period. No cases were run on the sensitivity of the results to higher rates of economic growth. This was curious, since economic growth is the variable that has by far the largest impact on Federal finances.

On July 11, 2010, Erskine Bowles publicly asserted, "We can't grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem." This statement prompted me to write a piece for RealClearMarkets entitled, “The Conspiracy Against Economic Growth”.

My article was based upon a financial model that I constructed using the CBO's numbers. The latest version of this model has the filename “Growth vs Spending Cuts LRW V6 031111”. The model includes the same dollar amounts of non-interest Federal spending assumed by the CBO alternative fiscal scenario. The model makes it possible to examine the impact upon Federal debt held by the public of changes in four variables: 1) real GDP growth; 2) the Federal “tax take” (taxes as a % of GDP); 3) real interest rates; and, 4) non-interest spending.

As expected, if the assumed GDP growth rate is increased to levels that are historically “normal” for the U.S. (3.5%), the debt/deficit problem goes away, whether or not spending is cut.

To illustrate this point, the following is a chart of the public debt as percentage of GDP for the next 73 years with a 2.16% growth rate as well as with an annual growth rate of 3.5%.

It is important to note that the model does not reflect the fact that higher economic growth would produce higher wages, which would eventually lead to higher Social Security costs. However, it also does not take into account the fact that higher economic growth would lead to lower costs for various “safety net” programs, like unemployment insurance, food stamps, and Medicaid.

Congressman Paul Ryan stated earlier this week on Kudlow & Company that faster economic growth cannot solve the financial problems of Social Security. This does not make sense. As a thought experiment, imagine that we woke up tomorrow and real wages had doubled. This would cause Social Security tax revenues to immediately nearly double, but outlays would rise only with a considerable lag. From this example, it is obvious that there has to be some rate of economic growth that would solve the problems of Social Security.

-Louis R. Woodhill

Thursday items: Kudlow on the market dip; Norquist opposes a deficit grand bargain; Utah's Senate passes the gold-as-legal-tender bill.

At NRO, Larry Kudlow examines the factors behind today’s market dip.

From The Washington Post, Ezra Klein interviews conservative activist Grover Norquist on his efforts to prevent a grand bargain on the deficit that would include tax increases. (H/t: Future of Capitalism.)

On CNBC, Dan Mitchell debates inflation debate in the U.S. and Europe:



At Forbes, Jerry Bowyer suggests it is troubling that more U.S. production occurs overseas.

The Salt Lake Tribune reports the Utah Senate has passed the bill making gold legal tender bill in the state. (H/t: Rich Danker).

On The American Interest, Walter Russell Mead challenges Paul Krugman’s solutions to labor market uncertainty.

We have our naysayers and prophets of doom in the US, and many of our intellectuals are so caught up in and so well paid by the blue social model that they literally cannot conceive that the radical changes shaking their world should be embraced rather than resisted. But one of the great secrets of America’s historical success is that the voices of nostalgia are weaker here than in other places.

Krugman and many of his colleagues at the Times are, I think, blinded by how good things once were. This is understandable; I felt that way for many years myself and it was only slowly and painfully that I gave up on the blue social model that once looked so good. But the country and the times we live in demand more than angry and ultimately despairing nostalgia from our thinkers and opinion leaders. Let us hope that it comes.

From Project Syndicate, Barry Eichengreen notes that China’s growth may be slowing.

Former FDIC Chairman William Isaac ties the high price of farmland to the undervalued dollar. (H/t: Vlad Signorelli.)

BWR on SOTU.

Courtesy of Vlad Signorelli at Bretton Woods Research:

We have published a new report which can be found at:
http://www.brettonwoodsresearch.com/showx.asp?articleid=6768

SOTU First Thoughts: Republicans Must Do Better


President Obama highlighted his new centrist political strategy last night, which includes support for reducing the corporate tax rate. Unfortunately, he argued that such a reduction must not increase the deficit. The President certainly does not believe in the economic power of increasing incentives for investment. In 2009, the U.S. government raised nearly $140 billion in revenue from the corporate tax. If the government reduced the corporate tax rate to zero, the resultant growth in the economy would, without question, easily pay for the government's $140 billion in annual revenue loss. The growth wing of the Republican Party must counter the White House's misconception here.

And this is why we were so disappointed with Paul Ryan's response last night. Ryan emphasized our country's ‘crushing burden of debt' that ‘no economy can sustain'. We like Ryan, but he is wrong -- economically and politically.

Research by Louis Woodhill shows quite clearly that should the long-term growth rate of the U.S. economy increase just a little bit, to say 3.9%, the federal government could easily afford its current expenditures and long-term entitlement programs.

And the GOP seems to be reverting to its old political mistake that Jude Wanniski identified in his Two Santa-Claus Theory of modern American politics, which has held true for the last century:

For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus....The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation's economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.... It isn't that Republicans don't enjoy cutting taxes. They love it. But there is something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget. Static analysis tells them taxes can't be cut or inflation will result. They either argue for a tax hike to dampen inflation when the economy is in a boom or demand spending cuts to balance the budget when the economy is in recession. [emphasis ours]

Last night could have marked a critical inflection point for the economy and the stock market if Ryan had properly countered President Obama's position on corporate taxes. Instead, he seconded Obama's concern on public finances, and thus, the Dow is up only 30 points this morning. While both parties are far from reaching a Hooverian consensus of deep spending cuts along with tax hikes in an effort to tackle the nation's debt, such rhetorical common ground makes it more difficult to achieve substantive tax reform.

If Republicans are going to focus on spending, they should, as this morning's Wall Street Journal does, focus on the difference between Keynesian stimulus programs by the government and classical economic stimulus that empowers producers in the free market to allocate capital. This was part of what the electorate demanded last November; it was not 'shrinking government' as Charles Krauthammer said last night.

The rest of the voters' message last November was a repudiation of the 2010 healthcare reforms and the Fed's mismanagement of monetary policy. Republicans must improve from here, or the political momentum they enjoyed months ago will fizzle.

Wednesday round up.

On Forbes, Brian Domitrovic likens President Obama’s tax cut shift to JFK’s shift in 1961 away from his Keynesian advisors.

At Human Events, Art Laffer recommends voting for the tax deal, saying liberal focus on class warfare will cost Democrats votes while stimulating their “anti-social retinue of freaks and weirdos.” (Stet.)

On The Kudlow Report, James Pethokoukis discusses the President’s pro-business shift:




At The American Spectator, Jeffrey Lord remembers Jack Kemp’s final advice to Barack Obama.

From last month on Forbes, Reuven Brenner suggests a gold-backed currency will restore investor trust in the economy. Part II is here.

On CNBC’s NetNet, Steve Forbes argues the tax deal is as good as Republicans are going to get.

At Alhambra Investments, Joseph Calhoun outlines the need for more pro-growth policies:

It just so happens too that a shift to better economic policy in the US is exactly what the world economy needs right now. Despite the prevailing, overwhelmingly bullish sentiment regarding stocks, commodities and future economic growth, there are a still a lot of potential problems that could derail the rosy view of the world. Europe’s sovereign debt problems - which are really European bank debt problems - have not yet been resolved but the road to recovery could be eased in the short term by a lower value for the Euro. Better US economic policy may speed that process if it means capital flows back to the US. The developing world’s emerging inflation problem would also be eased by a reversal of the hot money flows that are at the root of the problem. Capital and price controls as are being tried - along with some fairly aggressive monetary tactics - in China and other emerging markets are crude tools that are bound to fail unless a more favorable investment environment is crafted in the developed world. Better economic policy here that reduces capital inflows to China, Brazil and other emerging markets not only eases trade frictions but will reduce inflation there while increasing investment here. It is bad US economic policies that are causing many of the world’s economic imbalances not currency manipulation in Asia. Better US economic policy is the only proper remedy.

But the just announced deal on the Bush tax rates is not nearly enough to attract capital back into productive investments. The relative changes in exchange rates between fiat currencies are not the important metric to watch. We will know that policy has truly changed for the better when the price of gold and other commodities fall and then stabilize at lower levels. You want stimulus? What would be the effect on US growth if oil dropped by 50%? Or copper? Or any of a number of other commodities? What if all that capital tied up in gold were to flow into productive investments?

At The Pittsburgh Tribune-Review, Don Boudreaux rebuts trade deficit phobia.

On Bloomberg, Caroline Baum speculates that the left’s opposition to low tax rates stems from a zero-sum worldview.

At NRO, economist Scott Sumner maligns gold-based money in favor of GDP targeting.

From Vlad Signorelli, Bretton Woods Research comments on Richard Holbrooke’s death:

Holbrooke, Afghanistan & the Economy

[According to the surgeon who last spoke with the late, longtime U.S. diplomat Richard Holbrooke, Holbrooke`s last words were, "You`ve got to stop this war in Afghanistan." Certainly, the loss of Obama`s top civilian official dealing with the AF-Pak situation only adds to the looming crisis. Only yesterday, the Washington Post quoted Afghan President Hamid Karzai as saying, "If I had to choose sides today, I`d choose the Taliban."

Yet, while the spotlight is on the Obama Administration and how it will fill the hole left by Holbrooke, the enormous costs of our continued involvement in Afghanistan are passing by with barely a mention in the mainstream press or political establishment. Richard Vague, a Republican and CEO of Energy Plus, points out in a recent oped below that the Administration currently spends $119 billion per year on Afghanistan, whose gross national product is only $14 billion per year. Given such astounding proportions, it may be only a matter of time before the GOP`s fiscal conservatives break their virtual silence on AF-Pak expenditures and excite a national debate next year on the amount of blood and treasure risked during recessionary times. We suspect that some of these anti-Afghanistan fiscal conservatives will emerge from the new Tea Party contingency in Congress. BWR]

Article here.

Thursday items.

On RCM, Louis Woodhill posits the novel theory that the Fed’s Interest on Reserves program caused the 2008 financial crisis.

At Forbes, Econoclasts author Brian Domitrovic explains that the world is desperate for the U.S. to stabilize the dollar.

On The Kudlow Report, U.S. Rep. Paul Ryan (WI) discounts demand side economics and underscores sound money:




On Forbes, Charles Kadlec advocates a gold-based international currency system.

At NRO, Larry Kudlow expresses cautious optimism about the deficit commission report.

Reuters reports the commission’s tax reform options.

Also on Kudlow, James Pethokoukis debates how to pay for the Bush tax rate extension:




The NYT hosts a debate on the gold standard but can’t find a single pro-gold economist.

At IBD, Walter Williams debunks trade deficit paranoia.

From Vlad Signorelli at Bretton Woods Research:

Reports this morning that Obama may have 'conceded' on extending Bush-era tax cuts for upper incomes may have been premature. The National Journal reports that [presidential advisor David] Axelrod clarified his stance around 9am, signaling the White House is still opposed to the idea.

Nonetheless, Obama's rhetoric is slowly evolving for the better as he is now conceding that economic growth is at least just as good as tax increases in reducing the deficit. Today, Obama made the point in Seoul that if economic growth increased by "1 percentage point over time that could have as much impact as completely eliminating the Bush tax cuts." And he added, "The single most important thing we can do to reduce our debt and deficits is to grow." Therefore, despite Axelrod's inept comments this morning, Obama seems to be gravitating toward growth solutions, which may spare expiration of Bush-era tax cuts on all.

On Forbes, Rich Karlgaard sees the worst of the recession as past.

From 2007, Art Laffer clarifies the claim that tax rates pay for themselves.

Bretton Woods Research on Fed policy.

The following is a comment from Vlad Signorelli at Bretton Woods Research on The WSJ's recent forum, "What Should the Fed Do Next?" It's available for subscribers here.

--------

The Wall Street Journal has a special oped symposium today devoted to the question about what Fed policy should be going forward given the weak economy and the perception of deflationary risks. Today's monetary experts weigh in, such as John Taylor, Richard Fisher, Rick Mishkin, Ron McKinnon, Vincent Reinhart and Allan Meltzer. Their recommendations range from doing nothing to monetizing more debt (inflating), or reverting to a rules-based interest rate policy like the Taylor Rule. They each get the answer wrong.

The best thing that the Fed could do is to abandon this endeavor of seeking to grow the economy, while maintaining a policy of price stability that is based on highly flawed inflation statistics. Instead, it should adopt a rules-based dollar policy by announcing a plan to target a specific dollar-gold price, perhaps at $850 or lower. By doing so, the inflation-deflation concerns would be substantially mitigated. Then, to address weak growth, Congress should permanently extend low tax rates, and ideally eliminate corporate and capital gains taxes.

This dual approach would solve the stagflation risks facing not only the US but global the economy, which the conventional Keynesians are completely missing. Like the 1970s, their models do not know how to properly diagnose and remedy such an economic predicament because slow growth and inflation are not supposed to happen based on Phillips Curve theory.

Even though the Republican's electoral prospects look outstanding these days, some polls show that the American people still don't trust the GOP to manage all of the country's economic affairs. From our classical economic perspective, we believe the reason lies in the fact that Republicans, despite their relatively better fiscal proposals, have little clue about monetary affairs -- just like most of the politicians and economists involved in our country's economic policymaking. The Tea Party, which sprang up in reaction to the monetary and fiscal response to the financial crisis, is an example of the anger in grassroots America about these modern-day Keynesian failures.

Wednesday round up.

Winning the original analysis of the week prize, Paul Kix suggests a stronger Iraqi dinar enabled the surge's success (H/T to Vlad Signorelli at Bretton Woods Research).

At the Kudlow Report, Kudlow compares foreign growth rates to the U.S.:

At New World Economics, Nathan Lewis discusses The Fourth Turning which suggests the U.S. is in a 20-year "winter" phase.

Steve Forbes interviews Mark Cuban on entrepreneurship.

At Business Insider, Henry Blodget reports lower income tax rates haven't lead to higher savings or investment. The analysis omits what savings and investment would have looked like after the Great Inflation's tax bracket creep without the Reagan tax rate cuts. Also excluded is the impact of capital gains tax rates: higher in 1986, lower in 1996. A third factor is dollar direction: falling during the late 1970s; 2001-2008 similarly corresponds with a falling dollar.

Don Boudreaux rebuts the recurring myth that World War II was a successful example of Keynesian stimulus.

Economics of Contempt lists prominent economic commentators -- many of whom are supply-siders -- who denied a housing bubble was forming.

At Zero Hedge, Tyler Durden notes that the volatile currency market is now at $4 trillion per day, dwarfing equities and Treasuries.

Former Bush speechwriter Michael Gerson provides a demand-side analysis of the tax debate.

Politifake.org offers an Art Laffer motivational poster.