Sunday, December 3, 2017

A Surprisingly Good Tax Bill

The GOP's tax bill is surprisingly good!  There a number of changes that could make it a better bill, but then it might not pass, given the variety of different views represented within the Republican Senate caucus.

This bill is so much better than current law that it deserves overwhelming passage.  I suspect several Democrats will vote for this on final passage in both the House and the Senate.

Two great things: (i) the dramatic cut in the corporate tax rate from 35 % to 20 % and the immediate expensing of investment expenditures.  These two things make corporations much more valuable.  Who, among Americans, owns these corporations?  The middle class.  The biggest single owner of public corporations are American public school teachers through their pension fund ownership.
So, a cut in the corporate taxes benefits mainly middle class Americans through their pension plans.

(ii) the elimination of state and local tax deductions, caps on mortgage interest (in the House bill, not the Senate bill) and property tax deductions, eliminating AMT (in the House bill, but not the Senate bill), lower rates across the board, eliminating the death tax (in the House bill, but only partially eliminated in the Senate bill), and on and on.  These are great simplifications.  They begin the process of de-politicizing the US tax code.  All of these gimmicks that are now heading to the garbage heap simply reflected the power of powerful lobbyists and made the tax code absurdly complicated.

It is likely that the stock market already knew all of this and that the stock market rally since Trump's electoral victory fully anticipated the passage of a major tax cut.   It is not easy to find another reason for the enormous rally over the past 12 months.

Combined with de-regulation, the passage of this tax cut bill has the potential to usher in a new age of American economic growth.  Three cheers!!!

Monday, November 27, 2017

Growth Speed Up, Stock Market Slowdown, Deflation

We are in for some paradoxes.  Economic growth is already picking up in the US, even though commercial lending is going nowhere.  The stock market seems to have fully anticipated this acceleration of economic growth with the election of Donald Trump.  The key seems to be deregulation more than any other single factor.  The tax cut bill could provide for an even more dramatic boost, certainly long term, to US economic growth.

But, what about interest rates?  What about Fed policy? 

Fed policy has been essentially bankrupt since 2008.  Bernanke's policies never made much sense and have created an absurd Fed balance sheet today.  Far from helping the economy, Fed activity, combined with Dodd-Frank legislation, ensured that the economic recovery would be anemic.  This is the legacy of Obama-Bernanke-Yellen -- pitifully weak economic growth, growing income inequality, a significant decline in workforce participation, and on and on.

Now, there appears to be real progress on getting the American economy rolling again.

Meanwhile, Janet Yellen and other officials are puzzled over why there is no apparent inflation in the economy.  Recall that the only rationale for the Fed to pursue higher rates is reigning in future inflation.  If there is no future inflation, why push rates up?  Just to be ornery?  Or, is there some real reason for Fed policy?

The answer to this paradox is likely that the US economy is experiencing 'expected deflation' not 'expected inflation.'  There is a serious question about whether or not dollars are worth less two years hence than they are today, even if certain commodity prices are inching up.  So many things that once cost huge amounts of money now cost almost nothing.  (Getting a cab in the rain.  In the world of Uber and Lyft, rain transportation is dramatically cheaper than it used to be).

Many things are cheaper today then ever before, mostly related to the dramatic drop in communication costs.  Sending a letter from New York to San Francisco in the mid-1970s required hiring a 'courier,' buying them a round-trip plane ticket and sending them on their way.  Today the cost is zero through email.  Many, many other things are similar.

We don't have the tools to correctly assess this issue.  Economic data collection and theory has not kept up with the digital revolution.

Look at it this way: why were so many investors willing to hold assets that provided little or no nominal return?  Normally, we think of that as an aberration, but it lasted nearly a decade.

What if investors expect deflation in the sense that their money is likely to be more valuable in the future than it is today (because of new product developments perhaps)?  Then nominal rates of zero make perfect sense.

This means the Fed may be embarked upon a policy of raising real rates to absurd level when there really is no need for the Fed to do anything at all, except get out of the way.


Wednesday, November 22, 2017

Janet Yellen's Bizarre Interview at NYU This Week

Presumably, Fed policy of raising rates is supposed to check potential surging inflation.  Janet Yellen, current Federal Reserve Chairwoman has been saying for two years that rising rates are needed to curb future inflation (there is little or no current inflation, so she could only reference the future).

"We expect inflation to move back up over the next year or two, but I will say I'm very uncertain about this."  So said Janet Yellen yesterday in an interview at at New York University.

It gets worse.  "...this year low inflation is surprising because we're essentially [at] full employment," opined Yellen.

Speaking of the absence of any apparent inflationary pressures, Yellen had this to say: "It may be that there is something more endemic or long-lasting here that we need to pay attention to."

So, given all of the uncertainty as to whether any inflation is likely to materialize, why the effort by the Fed, since December of 2015, to raise rates?  Is there a reason?  Or is policy just random in the brave new world of Janet Yellen.

Maybe, oh maybe, we actually have deflation.  Perhaps we no longer measure inflation accurately.  What else could explain investors willingness to place their investments in instruments that earn almost nothing in nominal terms?  It is highly unlikely that investors expect surging inflation, if they are continuing to park substantial amounts of their assets in low-yielding, short term investment vehicles.

But regardless, Yellen's statements reveal what an incoherent Fed policy she and the Board of Governors have been pursued.  Why the rate increases?  Who knows?  It is certainly not the fear of future inflation.  That reason has been discarded by Yellen and her coterie.

Tuesday, November 21, 2017

NY Times Outs Itself

If you wonder what drives a newspaper like the NY Times to such absurd policy positions and such poor journalism, look no further than today's editorial: "The Climate Crisis?  It's Capitalism, Stupid."

This absurd editorial argues that the problems of the environment are all due to capitalism, even though capitalist countries are in the forefront of reducing their carbon imprints.  Mainly, non-capitalist countries have emerged as the biggest polluters, totally unable to do anything at all but talk about what they plan to do.  What socialist countries do is pollute.  What capitalist countries do is reduce carbon imprints.  Those are the facts that the NY Times has no interest in reporting.

So, who penned this editorial?  Someone with knowledge of economics or climate science?  Of course not.  That would confuse the subject.  The NY Times does not want to cloud its judgment by any facts.  Instead a "faculty fellow" at Arizona State University whose education is almost exclusively in philosophy is the source of this enlightenment about economics and climate science.

"Don't confuse us with facts" seems to be the motto of the NY Times.  These folks are on a mission, but truth and facts are not part of that mission.  It is all about political propaganda, undiluted with any factual basis.

Monday, November 13, 2017

400 Millionaires Don't Want a Tax Cut! A Simple Solution

The Washington Post has a story today by Heather Long about a letter written to Congress signed by 400 millionaires who do not want their taxes cut.  Why are they writing Congress about this?  The remedy to their dilemna is very, very simple.  Just pay more taxes voluntarily.  There is a line on the 1040 Form that permits such generous taxpayers to pay more than required.  Since they want to pay more, they should simply pay more.  A simple solution.

What their letter doesn't say is that tax rates are largely irrelevant for millionaires, since they are free to choose what income they want to show the IRS.  Such people can usually just borrow what they need to live on and show little or no income at all.  So, what difference does it make to these hypocrites what the rate of taxation happens to be.  You have to have income to pay income taxes.  They know that.  They are experts at avoiding taxation.

That's what the current law allows.  I call this the "Warren Buffett strategem." Opine that you want higher taxes and then shelter your own personal income in such a way as to reduce the amount of income subject to tax to almost nothing.  Then rates don't matter.  These folks are all hypocrites.

Sunday, November 12, 2017

The Economy and the News Media

Silly me.  I tuned in to Meet the Press this morning in order to hear about the GOP tax proposals and the economy generally.  What did I hear? I heard nothing other than bashing the President!  Why?  Mostly because the President recently made nice with Vladimir Putin, something Obama and Clinton clambered over themselves to do when they were in power (remember the 'reset').

Where was the discussion about the tax proposals that have now been introduced in the House and Senate?  Scarcely a word.  The only comment was Chuck Todd's complaints, mostly reflecting the fact that his multi-million dollar compensation package doesn't provide him with as big a tax cut as folks making $ 64,000 in his town of residence.  Boo hoo, Chuck.  Chuck was also very critical of the fact that the House and Senate bills aren't identical.  It is not clear why that is a bad thing, but Chuck doesn't like it.  Too bad Chuck.

But is the media covering the tax proposals?  The answer is no.  To the extent there is coverage, it is almost completely based upon a lack of knowledge or understanding about either the House of Senate bill.

It is worth noting, given the President's trip this week to Asia, that there was also absolutely no mention whatsoever of the Korean nuclear issue or the trade issues with Asia.  I guess Meet the Press doesn't see these matters of any significance.  Certainly not enough to mention them.

Mostly, Meet the Press was primarily devoted to a discussion of the allegations against Republican candidate for Senate, Roy Moore in Alabama.  Interesting. What Chuck Todd and Meet the Press think are important never seems to include an intelligent reporting and discussion of financial or economic matters or issues that relate to war and peace.  Instead, allegations of potential criminal activity by Republicans seems to be the only issue that the media has an interest in.

{The years of bizarre and potentially illegal activity by longtime Democrat fund raiser and close ally of Hillary and Bill Clinton, Harvey Weinstein, was, we know now, systematically covered up by the main stream media.  Quite a double standard by Chuck Todd and Meet the Press}. You can't make this stuff up.

Saturday, November 11, 2017

Please Define the Middle Class

The median family income in New York State in 2015 was $ 60,580.  Manhattan is higher, approximately $ 67,000.

How do you define middle class?  How about using the word "middle."  If that is the case, you can rest assured that zero 'middle class' families in either New York State or New York city are facing a tax hike in the GOP tax bills, House or Senate version.  No one with the median family income in NY State or New York City utilizes itemized deductions, so the elimination of deductability of this or that is completely irrelevant to middle class taxpayers in New York City or New York State.

How about California?  The median family income in California in 2015 was $ 64,000, lower than Manhattan, but higher than NY State.  No one at this income level itemizes deductions, so they aren't going to miss the deductability of anything.

So, who does lose in the high tax states?  The answer is that folks with income above $ 1,000,000 -- the one percenters, even in NY State and California -- whose income is primarily from personal services rendered (meaning actors, actresses, football players, singers, comedians, University presidents, etc.), could see their taxes rise modestly.

But, no one remotely called 'middle class' will see anything but a tax break from the GOP proposals.

It is ludicrous for newscasters on CNN, ABC, CBS, Fox News (Trish Regan, for example) to decry that their own seven figure salaries may get taxed at a higher rate.  Boo hoo.

Anyone remotely middle class in New York and California will get a major tax cut from either of the GOP tax cut proposals.  Middle class folks, properly defined, do not itemize deductions on their federal tax return, even in high tax states. 

Only the truly wealthy and very, very high income taxpayers get a slight gouge from the deduction limitations of these proposals.  But, these rich folks have a loud megaphone to spread misinformation.