Economy & Budget

As I sat in the Bloomberg studio, listening to Barack Obama’s stem-winder of a speech, listening to his lilting promises of spending more money on education, on healthcare, on programs for the poor and programs for the middle class, on foreign aid, on program after program, I wondered where he was going to get the money. And then it dawned on me. He is going to get it from me, and from hundreds of thousands of people like me.

His spending plans are ambitious, as are his plans for tax increases, while his reform plans are, shall we say, a bit thin. OK, let’s not kid ourselves. His idea of reform is to bring one-party Democratic government back to Washington. His agenda is good for traditional Democratic constituencies like labor, government bureaucrats and trial lawyers, but not very good for anybody else. Read more...

According to The Wall Street Journal, “Federal Reserve Chairman Ben Bernanke on Tuesday put the U.S. dollar squarely on the Fed's radar screen, saying its slide against other currencies has led to an ‘unwelcome’ rise in U.S. inflation and may be a factor in inflation expectations. Bernanke also suggested that the Fed is unlikely to lower official interest rates further, though his remarks suggested that — barring a further rise in inflation expectations — the Fed probably won't contemplate higher rates until there is more stabilization in home prices.”

Well, thank God somebody has started to talk about fixing the precipitous decline in the dollar. Read more...

Armstrong Williams questions if any of the presidential hopefuls will be able to bring our country back to prosperity.

During a recent Institute for Education/INFO forum, David Rubenstein, co-founder of the Carlyle Group, discussed both the economy and bananas — often in the same sentence. Rubenstein himself is quite humble and self-deprecating for a man on Forbes’s Top 400 Wealthiest People list, and much more sober than expected when diagnosing the economy.

Rubenstein first quoted Hollywood producer Bo Goldman, saying that “nobody here knows anything” when discussing economic issues. He also related a story about Alfred Kahn, an adviser to Jimmy Carter, who used the “R word" (recession) during the 1980 campaign before being asked to stop. Kahn acquiesced and instead began saying, “We are approaching a banana,” since no reporter would write that in his or her column. Somewhat like the chastened Kahn, Rubenstein was hesitant to use the “R word.” Read more...

When introducing David Rubenstein, the co-founder of the Carlyle Group, at yesterday’s Institute for Education/INFO breakfast, I was not quite sure how to refer to him. Is he a mogul? Is he a tycoon? The title I eventually settled on was the one I read in Gerry Seib and John Harwood’s new book, Pennsylvania Avenue: Profiles in Backroom Power. They referred to David as a private equity pioneer. That sounded perfect. Rubenstein said jokingly that he was a bit intimidated by that title since he did not want to ruin it for “future pioneers of private equity.”

Rubenstein characterized his business as a balance between fear and greed.

Once it was demonstrated that private equity firms could make incredible profits, banks started lending money to them fearlessly. This made it very easy for private equity firms to get loans. Read more...

The easiest thing to do in Washington is to increase spending. (The second easiest thing is to increase taxes, but we’ll talk about that later …) Until a few years ago, the one stopgap measure to hold lawmakers in line on spending was a budget — a blueprint of priorities that drew the line in the sand in the name of the American taxpayer. But let’s be honest, the Republican majority in the late ’90s sort of ruined all that. Faced with a seminal moment of truth to do the right thing and restore fiscal discipline once they resumed the majority, Democrats, too, are withering like prepubescents at a Miley Cyrus concert.

The latest profile in buffoonery was on display last week, when Democratic Senate leaders reported the budget resolution may be pushed back again. Let’s not forget that federal law stipulates a budget must be resolved by March. There must have been a good reason to postpone resolution of a $2 trillion budget, right? Sure … Congress wanted to first spend more through the war supplemental. Now, I’m not saying we should nix funding for the war. But how about actually following the playbook that families practice every day — know how much you have and don’t spend more than that! Read more...

Sen. Barack Obama (D-Ill.) seriously underestimates the impact of taxes on the economy and the federal budget. If elected president, and if he were to raise the capital gains tax as promised, the response of investors would be to sell prior to the anticipated capital gains rate increase or not sell at all.

When selling prior, you get the lower capital gains rate, and afterwards a higher capital gains rate. For example, if you have realized capital gains of $1 million, selling now will cost you $150,000 in federal taxes at a 15 percent tax rate. If you sell after Obama wins the White House, you will have a 25 percent tax rate, or $250,000 tax bite. Read more...

The gas tax holiday took a hit tonight, as Hillary Clinton got creamed in North Carolina and barely edged out a victory in Indiana. John McCain should learn this lesson, drop the idea and move on to talking about the deeper problem behind the steep increase in gas prices, which is the declining value of the dollar.

McCain and Clinton tried to tag-team Barack Obama on this issue. But that played to Obama's argument that he is the authentic candidate who is willing to speak truth to power. Read more...

Brian Wesbury, a Chicago economist, has a great op-ed in The Wall Street Journal today, entitled “Déjà vu: The Fed’s Interest Rate Dilemma,” that is the best explanation I have seen about what is happening to the dollar and how to fix it.

Wesbury’s theory is that easy monetary policy has devalued the dollar and made bad situations in the energy and food sectors much worse. “Since 2001, and especially since September 2007 — when the Fed starting cutting rates in response to credit market issues — excessively easy monetary policy has driven oil and other commodity prices through the roof.”

Wesbury goes on to say: “The good news is we’ve been here before, and we know — well, at least 1980s Fed Chairman Paul Volcker knows — how to get out of this mess. Loose money in the 1960s and 1970s drove up the price of everything. A barrel of oil, which sold for $2.92 in 1965, rose to $40 in 1980. Most people believed that rising commodity prices indicated that the world was running out of resources … In 1980, then-Fed Chairman Volcker lifted the Fed funds rate significantly above GDP growth and held it there long enough to end inflation. This policy instigated a steep decline in oil prices, and drove a stake through the heart of stagflation.” Read more...

When Republicans were in the majority and Democrats were in the minority — not that long ago — just about every April, gas prices would rise uncomfortably, and the Democrats would charge the oil companies with collusion.

The Republicans would react by hauling oil company executives before the Congress, and then badger them about the high costs of filling up the tank.

Inevitably, Red Cavaney from the American Petroleum Institute would educate the members of Congress about the laws of supply and demand, about how the biofuel mandates that Congress put on the industry increased the prices, and about how there aren’t enough refineries to refine the crude oil. Read more...