Capital Commerce
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Do We Need an Energy "Manhattan Project"?
Continue reading… 14 CommentsCan Big Government really solve the energy crisis? It would be nice to believe that. While America has a much-deserved reputation as the land of free-market-loving entrepreneurs, that doesn't mean Uncle Sam can't occasionally take the lead and achieve some pretty impressive results. Two that quickly come to mind are the Manhattan Project ($20 billion in today's dollars), which developed the atomic bomb, and the Apollo space program ($100 billion in today's dollars), which eventually put 12 men on the surface of the moon. And it's those two examples of successful collective action that many people think should serve as the models for how we deal with our current power problems, whether it's slowing climate change or achieving energy security. As Democratic presidential contender Barack Obama has put it:
There's a reason that some have compared the quest for energy independence to the Manhattan Project or the Apollo moon landing. Like those historic efforts, moving away from an oil economy is a major challenge that will require a sustained national commitment.... Washington needs to get serious about working together to find a real solution to our energy crisis.
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The Strangest Recession in Economic History
Continue reading… 30 CommentsWhat do you call a recession where the economy keeps going up and up, even if a bit sluggishly? Well, my friends, you call that an expansion. And that is what we seem to have right now, despite all the economic doomsaying about a recession or even a Great Depression 2.0. Today, the Commerce Department revised its first-quarter estimate of gross domestic product upward to 0.9 percent from 0.6 percent. That follows 0.6 percent GDP growth in the final quarter of 2007. The revision also makes it more likely that the second quarter will be positive, maybe 1.5 percent, maybe even higher.
Now I went back and checked the numbers for the past 50 years and didn't find a single case of a recession—as calculated by the National Bureau of Economic Research—that started with or contained two straight quarters of positive GDP growth, much less three quarters. In a recent interview with the Financial Times, former Federal Reserve Chief Alan Greenspan admitted he was puzzled that the economy hasn't fallen off a cliff, given the housing crisis, credit crunch, and oil price surge. He told the FT: "A recession is characterized by significant discontinuities in the data.... It started off that way—there was a period of sharp discontinuity from December to March. But then it stopped.... No one knows how this tug of war will end—specifically, whether the financial crisis will end before it drags down the real economy."
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King Coal
Continue reading… 0 CommentsLawrence Kudlow, an all-time Friend of the Blog, highlights the importance of coal as an economic and political factor:
The coal story is so important simply because the U.S. has massively undeveloped coal resources. With 27 percent of the world's coal reserves estimated at 270 billion tons, the U.S. is the Saudi Arabia of coal. And yet cap-and-trade would destroy this critical sector.... Sen. McCain, who favors cap-and-trade, has not yet spoken directly to the coal issue, or for that matter to the various ways that coal and natural gas can be liquefied and turned into clean fuel. But this could be an important political point for McCain.
Definitely read the whole thing. And check this out for everything you wanted to know about coal reserves in the United States.
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The Madness of Bill Gross
Continue reading… 7 CommentsFor a guy who is a professional investor, Bill Gross doesn't seem to believe much in the power or efficacy of markets. In his always entertaining monthly note to clients, the Pimco bond manager—probably the world's most influential—lays out an elaborate theory about how U.S. government statistics understate inflation by at least 1 percent a year and how that mismeasurement has fooled investors for decades. (For Gross, the troubles all go back to—of course—Richard Nixon!) The implications, according to Gross:
If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.... A readjustment of investor mentality in the valuation of all three of these investment categories—bonds, stocks, and real estate—would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.
Me: I have blogged numerous times about why I think the government has been overstating inflation for decades, not understating it. (The Gross Conspiracy does play into its author's Democratic leanings. If he's right, then the past quarter century has been one of the worst since the Great Depression.) But I am more interested in Gross's idea that Mr. Market can be fooled for decades about such a crucial economic indicator. Does he really think investors have been duped since the Nixon era about what their real rate of return has been? Literally breathtaking...
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Doing the Recession Shuffle
Continue reading… 0 CommentsThe pro-recession crowd keeps pushing back when the dark times began. First it was late 2007. Then early 2008. Now more and more it looks as if recession believers are going to have to push the start of the downturn until the second half of this year. Today's stronger-than-expected durable-goods report for April is another sign that the economy continues to expand. This from Global Insight:
The bellwether indicator of capital equipment demand, orders for non-defense capital goods excluding aircraft, was up 4.2% on the month after three straight declines. It is likely that much of this strength is coming from overseas, as the rest of the world is holding up much better than the U.S. domestic economy. The strength of global demand has greatly dampened the extent of the slowdown in manufacturing production, and in the light of today's orders numbers, it will continue to do so.
Me: There is every indication that the revised first-quarter gross domestic product number out tomorrow will be over 1 percent, and right now the 2Q number looks to be over 2 percent. Now remember that growth was 0.6 percent in 4Q. If the economy has been in recession since late 2007, it sure has been a weird one given that the data show the economy to actually be accelerating. The Un-Recession continues.
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6 Reasons Why Oil Is Ready to Drop
Continue reading… 11 CommentsI think the "oil is in a bubble" meme is gaining strength. Market strategist Ed Yardeni thinks the hysteria may be ready to wane. His reasons:
1) Russia is scrambling to cut taxes on its oil industry to boost investment in new fields and to reverse a looming decline in production.
2) Brazil continues to find more oil offshore in the Santos Basin, a collection of potential oil fields that could be one contiguous megadeposit of crude oil.
3) In the US, Congress may start considering ending longstanding bans on domestic drilling.
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A Pale Ron Paul? Skimpy Agenda for Libertarian Bob Barr
Continue reading… 58 CommentsOver the weekend, the Libertarian Party chose former Rep. Bob Barr as its presidential candidate and professional sports handicapper Wayne Allyn Root as its vice presidential candidate. Now since the Barr-Root ticket has scant chance of winning—though it just might spoil John McCain's chances for victory—you would think its policy proposals would be bold ones with lots of details. Barr and Root are in the persuading business, not the victory business, for the moment, after all, so they need to fully display the power of their ideas. Yet when I hopped over to Bob Barr's campaign site, I didn't find too much of what I was looking for, at least when it comes to economic policy. What does Barr propose? Here is the gist:
The federal government must take the lead in making significant cuts in spending. Focusing on earmarks risks distracting attention from the broader problem of a government wildly wasting the money of hard-working Americans. Tens of billions of dollars in corporate welfare—essentially aid to dependent corporations—should be eliminated. Largesse for middle- and upper-income Americans, particularly so-called "entitlement" programs, must be cut. Billions in so-called defense spending, which protects America's populous, prosperous allies rather than Americans, must be eliminated.
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Some Optimism for the Housing Market
Continue reading… 0 CommentsEconomist Michael Feroli of JPMorgan Chase sees a bit of good news in the housing market:
New home sales rose 3.3% in April to an annual rate of 526,000. Although last month's increase was the first since October of last year, the level remains quite low and is 8.0% below the sales pace of just two months prior. Progress is being made on inventories, but very slowly. Unsold new homes declined 11,000 to 456,000 but remain well above the 300,000 range which prevailed before the housing boom. At last month's sales rate, the months' supply of new homes for sale was 10.6.
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Does America Need Geekonomics?
Continue reading… 2 CommentsGrowth guru Paul Romer expands upon one of my "Five Ways the Next President Can Fix the Economy" via my pal The Curious Capitalist, Justin Fox. And well he should, given that the idea, to create more science grad students, came from him:
Most innovation takes place outside of universities. Most new Ph.D.s start work outside of universities. If we subsidize the supply of graduate students, more people will be doing innovative work outside the university.... The way to get this better match is to provide those subsidies to graduate education as portable fellowships that put the students in control. They could choose types of degrees (perhaps not always Ph.D.) and areas of interest (perhaps entirely new areas) that would prepare them for the many exciting lines of investigation that organizations other than universities will pursue.... From the perspective of political economy, a key practical advantage of providing these subsidies via portable fellowships is that they do not require that some government agency pick winning lines of investigation or favored firms. Nor do they create a private sector special-interest group that will capture the subsidies and direct them in ways that may not serve the public interest.... In contrast, the R&D tax credit, which also avoids the need for the government to pick winners, has created a big recurring lobbying effort, which naturally focuses first on minimizing corporate tax bills, not on maximizing innovating and the rate of growth.
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The Ultimate Flaw in Obamanomics
Continue reading… 23 CommentsHow does Barack Obama want to make Social Security solvent? By raising taxes—specifically by removing the wage cap on Social Security taxes. No talk of cutting spending. What if we applied that high-tax philosophical approach toward entitlement spending in general, paying for the projected rise in spending for entitlements—from 18 percent of gross domestic product to 35 percent in 2082—by higher taxes with no cuts in spending? The good folks at the Congressional Budget Office did the scary math (bold is mine):
With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent. Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.
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Carbon Tax? Cap and Trade? How About Both?
Continue reading… 1 CommentConservatives always fret that if we instituted a replacement for the income tax, like the Fair Tax, without repealing the federal income tax, eventually we would end up with both. I couldn't help thinking about that when I saw this article on the fine WorldChanging site that addresses the issue of whether it's better to have an expensive cap-and-trade system to deal with carbon emissions or an expensive carbon tax. Hey, why not both! Hoo-boy...
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Best of the Blogosphere: May 23, 2008
Continue reading… 2 CommentsJohn Tamny of RealClearMarkets thinks addressing the weak dollar is more important right now than tax policy.
Mark Perry of Carpe Diem looks at the minimal environmental impact of drilling in the Arctic National Wildlife Refuge.
Long Views looks at what San Francisco might look like in 2108. Cool picture.
Arnold Kling of EconLog has a fix for Medicare.
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A Bullish Scenario for the Economy and Market
Continue reading… 5 CommentsThis I could use right about now. Liz Ann Sonders, the chief investment strategist at Charles Schwab, outlines a bullish scenario for the economy and for stocks:
I think it's time to begin discussing a new paradigm that could emerge—with potentially positive implications for both the U.S. economy and stocks. The story goes something like this:
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Wall Street Succumbs to Peak Oil
Continue reading… 21 CommentsIt's interesting that two of the biggest factors driving markets and economic policy right now are scientific theories, those of climate change and peak oil. For the past two years, every time I've chatted with an energy or commodities analyst, I have asked whether he or she believed in peak oil, the theory that global oil production has reached its zenith. The answers have slowly transformed from an outright "No" to "Well..." to "Certainly, investors seem to buy the theory more and more."
Yeah, $135-a-barrel oil will do that to you. I was on CNBC's Kudlow & Co. last night with oil guru Daniel Yergin, who has consistently dismissed peak oil while at the same time consistently missing the continual rise in oil prices. I didn't get a chance to ask him whether he was changing his position. (He seems to have undue faith in the Saudis' oil reserve claims.)
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$200 a Barrel or Bust: the Oil Price Spike
Continue reading… 3 CommentsA few thoughts on the spike in oil prices:
1) Is there a ton of speculation in the price? You bet. (And that has caused plenty of fear in stocks.) But picking the top in a bubble requires more smarts than I have or anyone I have ever met has. Still, that contango situation in oil prices—where spot contracts trade at a lower price than futures—is often a sign of the beginning of the end.
2) What Arjun Murti of Goldman Sachs and oilman turned wind entrepreneur T. Boone Pickens say right now is more important than what anyone in Washington says.
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Sour Fed Outlook Undercuts Obamanomics
Continue reading… 0 CommentsThe first thing I thought of when I read the Federal Reserve's dreary economic outlook—as contained in the meeting minutes released this afternoon (and in the chart below)—is how Barack Obama, if elected, is ever going to pass his big tax hikes on income and investment in that sort of economic climate. That slow growth would also mean higher budget deficits. To me, it seems more like a time to slash spending and taxes.
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Merrill Lynch: Is Hillary Sabotaging Obama?
Continue reading… 6 CommentsThis from David Rosenberg, the North American economist at Merrill Lynch (bold is mine):
Barack Obama moved closer to the DEM nomination after yesterday's victory in Oregon (despite Hillary's resounding victory in KY, Obama went into yesterday's primaries needing just 17 delegates to garner a majority and the way the DEMS allocate votes, he came out with more than 100 new delegates yesterday evening, putting him over the top). We're not going to claim to be political junkies, but all this is highly reminiscent of the intense battle between Gerald Ford and Ronald Reagan back in 1976 that also went all the way to the convention (Ford ended garnering barely more than 52% of the delegates)—and what happened when all was said and done was a Jimmy Carter victory as the GOP was still in healing mode during the presidential campaign (maybe this is why Hillary wants to take this to the finale—Reagan took the White House in resounding fashion in the next election in 1980).
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The Mother of Middle-Class Tax Cuts
Continue reading… 6 CommentsFor a growing number of taxpayers, income taxes really don't matter. Roughly 60 million tax filers, representing 120 million Americans, pay no income taxes, thanks in large part to an increase in various tax credits, deductions, and exemptions. (As a result, the top 1 percent in income now pay around 40 percent of all income taxes.) But it's pretty tough to escape payroll taxes for Social Security and Medicare. Indeed, two thirds of Americans pay more in payroll taxes than in income taxes. So how to give America a payroll tax cut? Here are a couple of options:
1) Extend the retirement age and start indexing benefits to inflation rather than wages. That would leave Social Security overfunded by trillions of dollars, and thus payroll taxes could be slashed.
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Capital Commerce vs. the (In)Curious Capitalist
Continue reading… 0 CommentsIt could have been a blood feud right up there with the Yankees and Red Sox, humans and Cylons, and Luskin, and Krugman. But as much as I tried to whip up a cyberspace cage match with Justin Fox, the economics columnist and Curious Capitalist at Time, Fox just wouldn't bite. See, I recently posted a brief-but-masterful takedown of his cover story "How the Next President Should Fix the Economy" by countering with my own "5 Ways the Next President Can Fix the Economy".
But instead of hitting me across the back with a folding chair—or the journalistic equivalent thereof—Fox calmly critiqued my response in his blog, agreeing with some points, objecting to others. (He even added me to his blogroll—an obvious ruse.) Then again, the whole thing was probably vetted and watered-down by a legion of Time Warner corporate attorneys. I'm pretty sure Fox would have preferred to have given me a nasty forearm shiver, or the journalistic equivalent thereof. Oh well, back to my continued attempts at baiting Robert Samuelson at Newsweek and Lex at the Economist.
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Best of the Blogosphere, May 20, 2008
Continue reading… 14 CommentsHere's what I have been reading:
- Newmark's Door exposes congressional hypocrisy over the idea of a windfall-profits tax on oil companies.
- The Entrepreneurial Mind shows how government, in this case Canada's, has a hard time promoting innovation.
- Carpe Diem says the global economy is actually holding up quite well, despite the credit crunch.
- Café Hayek looks at the potential impact of taxing large university endowments.
