Money & Power

The New York Times has an interesting reader’s comment section today on the homepage asking readers their thoughts on Supply Side Economics, its benefits, drawbacks, and merited claims.  My contention is that supply side economics does work and is largely responsible for much of the prosperity that America has enjoyed over the last 25 years.  I also think that the idea of taxing the rich to pay for all the lofty hopes of spending and fixing social security, medicare and medicaid are sadly misleading.  You see, not only will taxing one segment of the people lead to social, political, and not to mention economic turmoil, but you will not even come close to being able to pay for these programs.  There is simply not enough revenue to be gained by increasing taxes on the wealthiest 1%.  

By the way, please, Hilary, Obama, and even McCain, remember that many of those “individual filers” who are in the highest income bracket are really small businesses, which are responsible for roughly ONE HALF of all job creation in the US over the last two decades.  This is the greatness of America, the entrepreneurial spirit which drives people to open their own shops and have their own staff.  However, increase taxes, and you will see a drop in job creation and even closing of many small businesses who are already hurting.

Now I submit to you the idea that lowering taxes can produce economic stabilization and prosperity, for all.  Not just the wealthy, but ALL Americans.  By lowering taxes, I believe, you can lower the base, increase investment and saving (which makes it ultimately possible to privatize social security with personal accounts that will pay far better), increase job creation, and keep many of the best minds and businesses here in the United States while attracting foreign investors and businesses to the US. 

Lastly, to the NYT reader who said that “Supply side economics is nothing more than a rationale for greed”, I am sorry you feel that way because you fail to realize how much supply side economics and especially capitalism has given you.  Socialism doesn’t work because people are generally rational self-interested decision makers. Read Adam Smith and if you still feel the way you do, then go live in a socialist state, have the same amount of money and property rights as everyone else (i.e. none) and I guarantee you will find yourself getting greedy for a venti Starbucks and the NY Times travel section. 

“Greed is good”

Yesterday, the SEC and CFTC announced an agreement that would bring the regulators ever closer together by integrating their regulatory efforts in an industry looking for innovation in products.  The regulators have designed a framework for sharing information and have established principles for regulatory review of new products that may be permitted to trade as either a commodity future or as a security, or both. 

The agreement also calls for a permanent regulatory “liason” between the two regulators, formal quarterly meetings of staff, and consultation on matters including industry M & A investigations. 

Furthermore, as the Wall Street Journal reported on it, this is an interesting agreement to be made just weeks before the Treasury Department is set to release propsed changes to the financial regulatory system in April.  

Have these agencies put aside their differences and come to an agreement that would create a more effectice and efficient regulatory model?

Is this agreement the first major step toward uiniting the two regulators?

A dear friend of mine recently wrote the following to a group of us noting factual concerns with the state of the economy.  His name and others have been changed in the interest of anonymity.  Thank you.

 “Well, in light of the dreary economic reports we received today, the idea that the Fed is pumping more money in to the system and seems to be on track for an additional 75 basis point cut in the interest rates, and on the back end of President Bush’s top advisor saying we are headed towards “negative growth” (I’m guessing he was just hoping that most Americans wouldn’t associate negative growth with recession) I thought I would take 2 minutes to give my version of the state of the economy.  It is a blizzard in Cincinnati, and I needed an outlet for my recent thoughts on the economy.  To be completely honest, what I figure is that I am by far the least intelligent person on this email so I figure I would just become more enlightened with your reactions to my first grade knowledge of the economy.  Okay, so if you just lay out the “facts” as they stand before us before we digest them they are as follows (I think):
·       increased inflationary concerns
·       “negative growth” possibly for a second quarter in a row
·       a dollar that is on a seemingly endless downward spiral – to never before seen levels
·       commodities including oil, gold, wheat, etc. that – due to our dollar problems – are rising to never before seen levels 
·       we are shedding jobs – maybe shedding isn’t the right term to use – but today’s jobs reports didn’t help
·       decreasing wages for factory workers
·       increasing exports (due to the dollar problems)
·       the US is still operating in a trade deficit
·       we can’t seem to even rely on municipal bonds to trade appropriately – and an $800m in revenue company - Ambac – (very much considered a small company) – is controlling the stock market and the fate of the world’s economy.  Since when did the fact that a company of that size secured $1.5b in capital become “big news”?  I understand the idea of the purpose they serve, but do they really serve as the “backbone” of our economy.
·       The S&P 500 is down almost 11% in the current year
·       A credit crunch that is causing financial institutions to take enormous write-downs (mainly due to Sarbanes-Oxley)
So, what does all of this mean (this is what I am relying on you for).  Here is my basic understanding of what this means to us:
·       Well, lets see – on the surface a weak dollar will increase our exports which will effectively increase demand for our products, causing a shift right in the demand curve.  Combined with lower wages, this is a boon to manufacturing.  But wait, oil and commodities are increasing at an intense rate – which would certainly offset the decrease in wages – and possibly raise input prices overall – causing a shift left in the supply curve.
o       If I understand that correctly, if you factor in the shift right in the demand curve and a shift left in the supply curve – you effectively produce the same quantity at a higher price – is that right?  I guess that leads to the inflation problem we are currently seeing
·       Given our current inflation problems and the weakening dollar – is it the right thing to do to be lowering the interest rates and pumping money in to the system?  I don’t know much, but I thought lower rates, more capital would continue to decrease the value of the dollar and push inflation even higher.  Can we not just freeze the interest rates and ride this out and see where we go from here.  I heard an unbelievable line today from my favorite new TV personality – Larry Kudlow – “monetary policy is like sex – the initial few moments of the act are extremely exciting, but the full effects and backlash will not be felt for another nine months”.  I realize one of the points of lowering the rates is to encourage more lending, and hopefully more spending in the economy.  I think also, the hope is this will trickle down to the housing sector problem – causing lower mortgage rates – however as we have seen, the mortgage rates are not falling, nor are they tied to, the fed funds rate.  While they fell this week – last week they were at four month highs.  Banks have reversed fields and instead of being predatory lenders they have become very picky about who they lend to and at what rates.  So, I ask you, why are we continuing to lower the rates in the face of inflationary concerns and a weaker dollar.  I read that the only thing keeping the dollar viable is that it is the basis for 80% of the daily transactions around the world – if it weren’t for this, we would be the peso.
·       My final question/point before I end this worthless dissertation – is simply to say that I fully understand that the stagflation problems of prior decades were much different and much worse than what we are facing today.  The recession was worse, inflation was much worse – it was a different time.  But, each day I start to hear more and more that makes me feel like we are experiencing “minor stagflation” – I mean truthfully, we are now officially showing negative economic growth and high inflationary concerns.  Is this a bigger issue than people are making it? I will end with another fantastic quote I heard, made famous by Ronald Reagen, when discussing the release of poor economic reports:  “You’ve shown me the manure….now where is the horse.”

My comments follow in the attached comments to this post…