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Sunday, October 31, 2004

 

Will our economy notice any difference?

Does it matter to the economy who wins on Tuesday? Is control of Congress as important as who wins the White House?

To understand where we might go, we have to understand how we got to where we are. The Clinton years saw tremendous productivity gains as PC's and networks replaced mainframes, and outsourcing provided a much cheaper labor supply. Those productivity gains mitigated the impact of the Clinton tax increases, so we enjoyed a Goldilocks economy (not too hot, not too cold) with low interest rates and high employment. However, the end of the second term saw the culmination and bursting of a speculative bubble in corporate stocks, that curtailed the growth period. As business reigned in spending, a mild recession took hold, and was still in progress as Bush took office.

Naturally, Bush recognized that tax cuts were needed and Greenspan recognized that even lower interest rates could help. The recession caused an already low inflation rate to almost turn negative and the Fed had to worry briefly about warding off deflation. Meanwhile unemployment rose somewhat, but despite the Democrat rhetoric, this was always a very mild recession. However by phasing in tax cuts, the slowdown was extended (you can do nothing worse than phasing in tax cuts, which only causes business to delay investment decisions, and consumers to postpone income, until the cuts take place). To further make life difficult for Republicans, a major shift in employment from corporations to smaller businesses and sole proprietorships took place, delaying the reporting of significant job growth in the payroll survey, (though it did show up in the household survey.)

So, at this point, we have a very mild recovery, the Fed raising interest rates to bring the funds rate in line with other rates, and a mildly constructive tax policy. At the same time, the Bush administration has made a number of mistakes on foreign trade (steel, China, etc.) and has done a very poor job of controlling discretionary spending in Congress while money is flowing out the door because of the war. As a result, the economy is good but precarious, and with higher oil prices taxing the rest of the economy, it would not take many mistakes to cause another recession by or before 2006.

Income taxes - the Bush income tax cut was helpful, but I dispute the common wisdom that its main beneficiaries were upper income taxpayers. in reality, they got very little relief because of the AMT. That is why upper income payers continue to increase their share of total taxes paid. Actually, lower income taxpayers, taken off the rolls entirely, and middle income taxpayers did best. But no one did all that great. This issue has been demagogued to death, but it was really not a huge cut. If it had been, the economy would be raging by now.

The worst thing to do now would be to roll taxes back as Kerry wants to do. Any tax increase would be harmful psychologically. However, we need to recognize that until the AMT is changed, any rollback of the cut for the $200,000+ group is largely symbolic, since they are already paying at the AMT rate, and will continue to do so, after all of their tax planning is done. It's just that this is a bad time for an increase.

The tax cut that really helped wealthy America was reducing the tax on dividends. This had a very salutary effect, namely by putting dividends on an equal plane with capital gains and encouraging larger payouts. This would really be a bad one to reverse. I think the dividend tax cut helped the economy more than any of the others.

Health care - the Bush drug prescription plan has been labeled a budget buster, but I doubt it will be as expensive as scored. It's actually a meager benefit versus the cost to subscribers. The problem is that it is a stake in the ground for a new entitlement, and Kerry will want to make the plan much more expansive and expensive. That is a serious threat.

Social Security - Kerry's worst and most cowardly issue. Something will have to be done, and it's just irresponsible to say that we can take care of it in 2025 when the situation will be uncontrollable. You can't promise not to cut benefits or raise taxes. Something has to give, the demographics are too obvious. The Bush plan may help, but it is only a first step. Medicare may be even in worse shape.

The Congress - It's ridiculous to expect Congress to act responsibly, since the nature of politics is to bring back as much money as you can to your district. Bush misplaced his veto pen in the first term and that better not happen again. That having been said, control of Congress is not life or death since the Senate pretty much requires a super majority of 60 to get anything major accomplished. Neither party has any hope of achieving that. However, if the Dems control Congress and the White House, I would not be buying any long term bonds. Congress needs to reintroduce the discipline that Gramm - Rudman spending limits provided.

In sum, I look for a recession sometime during the first two years of a Kerry administration. If Bush is re-elected, there is a better chance that we can take a longer view on social security, income tax policy, and other spending. It will require a much more forceful White House to address spending priorities. Otherwise, the recession is coming regardless of who wins.


Thursday, October 28, 2004

 

Interesting Day For Thinking

Today, I ran into a very astute political source, one who has a penchant for calling the races correctly, particularly in New York State, but not only. I asked this source whether Tuesday would be a long night , and the rapid reply was "no, I think it will be over early." This seemed to support my last post, so of course, I had to ask the question I couldn't answer, which is which way is the election breakling? The reply - Kerry.

Well it really could be. We agreed that the polls are totally unreliable at this point. We know that there are a lot of newly registered voters not cranked into polling assumptions. The belief is that the majority will be for Kerry. Another assumption is that the undecideds always break for the challenger. I think that's the basis for my friend's view.

That got me thinking. What will be the decisive elements? What about those assumptions? And, maybe most important, what are the elements of a decisive victory, one that neither losing party would litigate to death?
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The polls still lean Bush. Florida, almost even, still seems to lean Bush. Surprisingly, Pennsylvania leans Bush. And when New Jersey and Hawaii are considered "in play," that's bad for the Dems. Offsetting these are Ohio and Michigan, which Kerry is seemingly winning. Also, Iowa and Colorado are in play, never a good sign for a Republican.
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Conservatives like me don't like to think in terms of groups (as Woody Allen was told in Annie Hall, "it's wonderful being reduced to a cultural stereotype") but it's hard to deny that people still vote in cultural, ethnic, religious and racial blocs. So what could happen that will surprise the Dan Rathers of the world? The elements of a Bush victory are:

Hold Kerry to no more than 75% of the black vote. This is surprisingly possible. Bill Cosby and the hideous Don King provide celebrity support for the President. More important, an emerging and growing Black middle class has had it with being taken for granted by Democrats and with the politics of victimization.

Erase the gender gap - The polls indicate that this has already occurred.

Contest the Jewish vote. Key in Florida and New Jersey, the President has been the most staunch supporter of Israel since Truman. Jews perceived (correctly) that the Clinton administration waffled in its support, as did the Carter administration. Kerry promises to follow in this dubious tradition. Of course, Jews have been reliable Democrats since Roosevelt, and the transition will not be complete for a few more years, but ultimately, the GOP will do better here.

A very strange dynamic is the uneasy alliance between Israel supporting Jews and the Christian Right, who have also been very strong supporters of Israel. But Jews, who tend to be understandably paranoid about civil liberties, don't trust the Falwell/Robertson crowd.

The elements of a Kerry victory:

Completely capture the Muslim vote and Michigan with it. This one seems easy. However, one wonders about Christian/Jewish backlash in states like Michigan.

Turnout - tried and true formula for Dems. However, is the assumption that new voters will be Kerry voters correct? Students on the Coasts and in the Ivy League can be relied upon, but Midwestern students?

The Latino vote -this is the other large new segment. If Kerry captures 65-70% of the Latino vote, Bush is in real trouble in Florida, New Mexico, Arizona, Colorado, etc. And Bush has really underperformed with this segment, surprising in view of his success with Latino's in Texas. You would think that the party strong on legal immigration would do well with Latinos, but they have allowed themselves to be flogged on rights for illegals, and the Dems have simply communicated much better in the community.

Seniors -The Dems have succeeded in protraying the new drug benefit as crummy legislation, which it was. Of course, Kerry doesn't feel it is enough of a benefit. Frankly, it ain't much, though it still costs enough. Bush would have been better off with nothing than with this turkey, and Kerry has scored points with seniors as a result. That could tip Florida and Arizona.
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At a meeting today, one of the attendees quelled election discussion by pointing out that he was absolutely sure who the President would be on November 3rd. When questioned, he responded "George Bush. Of course I'm not sure who the President - elect will be." Lawyers!
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Tonight I watched George Soros speaking at the National Press Club. If I udnderstood his logic, it was: the hallmark of an open society is that no one knows for sure what the total truth is; if someone is so certain of the truth, he (Bush) must be wrong; Kerry has trouble stating his positions because he, like most intelligent people, knows he cannot easily discern the truth, therefore Kerry is the man; and the 50% who don't agree with me are full of it, and I can't see why there are so many of them.

My own take is that moral relativism of this kind, and the kind that sought to put Communism and Capitalism, Arafat and Sharon, etc. etc. on the same level, is just a lazy way out. It says that I am not going to take a stand, I'm not going to sit down and try to work out a strong opinion I am comfortable with, I'm not going to put it on the line. It's the kind of character that can opportunistically win medals one day, and castigate the cause for which he and his comrades ostensibly fought the next. It's Hamlet, Lawrence of Arabia, I see all sides and can't make a decision Jimmy Carter. It's great in the classroom, crappy in the White House.
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In the end, every country gets the leadership it deserves. Look at France (ugh). Look at Australia where the people wisely kept the Howard administration in place. My admiration is for the kids volunteering to serve on the Iraqi police force and the new military, trying to build a new country in times of extreme peril. It's 1776 in Iraq. I feel sorry for the people who can't see it that way.






 

Interesting Day


Tuesday, October 26, 2004

 

Welcome to redwavemusings!

One week to go before the election. Sleep now, it could be a long night Nov. 2. After my prediction four years ago that the election would not be decided for some time after, at least until absentee ballots were counted, I almost hesitate to press my luck this time. However, I am pretty sure that this time we will know the result by bedtime, whenever that is. The popular vote will be another tie, but the battleground states should mostly break the same way, and so the electoral college will be won decisively. The hard part is, which way will they break? The polls suggest Bush, but I don't believe it yet. There are so many unknowns, polling is so imprecise, since cell phones are not polled. It really is too close to know.

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One thing I do know is the stupidest scheme ever devised is "provisional voting." Imagine that anyone can show up anywhere, cast a ballot (even if he is not on that precinct's rolls), and eligibility will be determined later. It's not hard to imagine both parties recruiting legions of folks willing to vote early and often under such conditions. What have they got to lose? People worry so much about someone's vote not counting, but what about the legitimate voters whose votes are offset by people who haven't registered, vote twice or more, or are actually dead? Voter fraud is a major problem in this country. To vote, a person should be registered, show up at the correct polling place (or legitimately obtain an absentee ballot), and ideally, show some ID, at the very least in the form of a verifiable signature.

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George Bush may not be the greatest incumbent candidate, but when you consider the handicaps under which he and his administration have labored, it's a wonder he has a chance at all. Consider, the previous administration left him a recession and burst stock market bubble. He endured half of his first term with an incompotent and renegade Treasury Secretary (partly his fault for hiring him). He has had to deal with a State Department and CIA in virtually open revolt. And 9/11 occurred in his eighth month in office, while still getting organized. On top of that is a media bound and determined to see him defeated.

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It's amazing how the media has been able to spin the 9/11 commission report, considering most have never read it. In the report it states very clearly the connections between pre-war Iraq and Al Queda, yet most people believe it says the opposite.

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Nonetheless, the Bush people have blown their explanation for the rationale behind the war. I don't recall them ever saying that Iraq was attacked because of terrorist connections, though many inferred that (since they wanted to believe that the administration picked the fight) and that view has stuck. The reasons for war actuallywere to remove WMD and a mass murderer willing to use them against us. The CIA said there were WMD, and though this was apparently wrong (either the WMD were destroyed or moved to Syria), everyone on both sides of the aisle believed those reports. Even so, what was wrong with removing a mass murderer? History is replete with instances where mass murderers were allowed to continue their violent ways. We should be proud we took Saddam out, and only regret that we have made some tactical errors in the aftermath. The Bush people should be reminding the electorate of the noble reasons for this war.

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The Kerry doctrine ('we will only go to war when we have to") is an appeasement approach, nothing more. We will wait until we are hit first. Iraq was not a threat (just then). Won't people ever learn? We have lost less than1500 brave men and women in this war so far and that's bad enough. We lost 300,000 in WWII, the direct result of an appeasement philosophy gone terribly wrong.

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