The political gridlock that just was elected to office could make things worse. By definition, gridlock means the status quo is preserved, because nothing can be done to change it. The status quo is a mess, and preserving it is exactly what we don't need. Let's look at some of the key economic issues.
Real estate. The real estate market and its associated mortgage crisis were the origins of the Great Recession. When the credit carousel stopped turning in 2008, trillions of dollars of losses cascaded on banks, investors, homeowners and ultimately taxpayers. Financial crises such as this work themselves out through the allocation and realization of those losses. Losses must be taken by someone or they will continue to hover over the economy, discouraging consumption and investment, and hindering recovery. Over the past two years, some of the losses have been taken, by banks writing down loans and other assets, investors seeing lower prices on mortgage-backed investments, homeowners suffering falling home values, and taxpayers subsidizing all of the foregoing. But there remain tons of unbooked losses, and also the painful problem of what to do with Fannie Mae and Freddie Mac (i.e., to what extent will taxpayers provide future subsidies to the housing market). Liberals can't envision a U.S. housing market without federal support, and conservatives can't stomach perpetuation of such massive subsidies and bailouts. The current chaos and confusion in the real estate market, amplified by the burgeoning foreclosure mess, will continue. The process of loss allocation and realization will continue, but in the haphazard, ad hoc, unfair and lunatic way it now operates. Consequently, real estate and housing will stay sick puppies, dragging on economic recovery.
Fiscal Policy. The Bush tax cuts will be extended for almost everyone. If the Republicans have their way, they'll be extended for everyone. But doing so will conflict with a cherished Republican goal of shrinking federal deficits. In theory, deficits could be reduced by cutting spending. In fact, the newly elected coalition government in the U.K. is taking this approach. But Britain's parliamentary system of government enables such decisive action. America's Constitutional limitation and division of authority acts in the opposite direction, permitting the electorate to choose a chief executive and chambers of the legislature from different parties. Gridlock will preclude major spending cuts. Fiscal policy will remain the mosh pit it is today and deficits will lurch on.
Even in situations where Congress can act, it won't have easy choices. Federally funded unemployment benefits for the long term unemployed will expire at the end of this month. Congress has three weeks to act. Extending benefits would help keep the economy muddling forward. Cutting off benefits would help reduce the deficit (although not by much, maybe a couple billion, which in context is peanuts). But it will also increase the doom and gloom among the electorate. Lengthening the line at the food bank won't spur consumer spending, even if passbook savings accounts pay 0.00001% per annum.
Monetary Policy. The Fed, being somewhat insulated from politics, will continue with monetary policy, and its recent announcement of $600 billion of quantitative easing reflects a clear, if not unanimous, choice to provide more stimulus. Congressman Ron Paul, cynosure of libertarians and Tea Partiers, and soon to be the chairman of the House Subcommittee for Domestic Monetary Policy and Technology, has already announced that he plans to scrutinize the Fed closely, questioning the fundamental premises of its policies and actions. Paul travels leagues farther than mainstream Republicans in challenging conventional monetary policy, subscribing to the gold standard and doubting the wisdom of central banking at all. Chairman Bernanke can look forward to providing the subcommittee with the pleasure of his testimonial company on a regular basis. The Fed's renewed program of quantitative easing will face head winds from the direction of Capitol Hill.
The last industrialized nation to suffer a financial crisis and recession like America's was Japan. The Japanese government reacted indecisively, often sinking into dysfunction because each of its options was painful and it was reluctant to impose the costs of washing the crisis' losses out of the economy. So it allowed the losses to linger, dampening economic recovery to this day. The gridlock soon to settle into Washington could easily lead to similar dysfunction, letting the economic recovery meander. The Japanese central bank lowered interest rates to essentially zero and also conducted quantitative easing. But, in a dark omen for the Fed, monetary policy in Japan wasn't enough.
If the government is capable at all of restoring prosperity, a question not without doubt, it will have to act with unity of purpose and decisive amounts of fiscal stimulus as well as monetary accommodation. That ain't gonna happen. Have an umbrella ready for the next two years because storm clouds are gathering. And recall that old timers who lived through the Depression would often carry a roll of hundreds of dollars in their pockets, simply because cash money felt good. When times are tough, cash talks and just about everything else walks.
Showing posts with label 2010 elections. Show all posts
Showing posts with label 2010 elections. Show all posts
Thursday, November 4, 2010
Wednesday, November 3, 2010
November 2010
This month, the San Francisco Giants, a team few people outside of the Bay Area notice, with a roster of players few people outside of the Bay Area notice, brought home San Francisco's first World Series title. Improving as they progressed through the playoffs, the Giants determinedly won the championship, conceding only one game of the final series to the Rangers. Edgar Renteria, an aging Giants infielder on the verge of retirement, hit the winning home run in the last game, going out like the champion he became. It was a lyrical, magical victory, befitting the golden city by the bay, poetically inevitable and long to be remembered by baseball fans of all persuasions.
And, oh yeah, there were mid-term elections yesterday. As expected, the Republicans took control of the House of Representatives. Not unexpectedly, the Democrats kept control of the Senate. Gridlock is in our future. Then, today, the Federal Reserve announced that it would print $600 billion and use it over the next eleven months to buy long term U.S. Treasury securities in an effort to stimulate the economy. Various Wall Street analysts had prognosticated that the Fed would announce at least $500 billion, which is financial markets speak for saying they wanted more than $500 billion. The $600 billion was a tepid ante up by the Fed. The Dow Jones Industrial Average offered fair commentary, rising 26 points, or less than 0.25%. In spite of all the headlines, soundbites, points and counterpoints, nothing really surprising happened in the world of politics or in the financial markets. Nor will any of it be remembered like the Giants' World Series win.
And, oh yeah, there were mid-term elections yesterday. As expected, the Republicans took control of the House of Representatives. Not unexpectedly, the Democrats kept control of the Senate. Gridlock is in our future. Then, today, the Federal Reserve announced that it would print $600 billion and use it over the next eleven months to buy long term U.S. Treasury securities in an effort to stimulate the economy. Various Wall Street analysts had prognosticated that the Fed would announce at least $500 billion, which is financial markets speak for saying they wanted more than $500 billion. The $600 billion was a tepid ante up by the Fed. The Dow Jones Industrial Average offered fair commentary, rising 26 points, or less than 0.25%. In spite of all the headlines, soundbites, points and counterpoints, nothing really surprising happened in the world of politics or in the financial markets. Nor will any of it be remembered like the Giants' World Series win.
Sunday, October 31, 2010
Will a Republican Congress Smack Down the Fed?
Expectations are high that the Republicans will take control of the House of Representatives in the mid-term elections two days from now, and perhaps the Senate as well. Victory celebrations, however, will last only one night. The next morning, the victors, whoever they may be, will face an ornery electorate clamoring for action.
Action will be hard to come by. With a Democratic White House, and the Democrats either controlling the Senate or holding almost half its seats, gridlock is inevitable. Further fiscal stimulus is off the table. Tax "policy" will consist of chaos and lunacy. Congress will regress from its recent productive (albeit controversial) mode to its norm of swapping trash talking soundbites and issuing self-congratulatory press releases, while incessantly searching for the next photo op and more campaign contributions.
The only active part of the government, in regard to economic policy, will be the Federal Reserve. The worst kept secret in Washington is that next week the Fed will renew its program of quantitative easing, possibly beginning with the purchase of $500 billion of Treasury securities. Although Chairman Bernanke and other Fed officials wrap this policy in elegant bureaucratese, it amounts to printing money, pure and simple. Roll the lettuce out of the printing press and move it off the loading dock. Grumpy old skeptics mutter under their breath about inflationary risk, and point to gold's escalating price. But senior Fed officials repeatedly offer solemn assurances that they've got things under control.
Newly elected and emboldened Republicans, especially the ideologues, may see the Fed as a convenient target. It failed to spot the mortgage crisis until things blew up, then bailed out Wall Street at the expense of Main Street, next successfully lobbied for increased power under the Dodd-Frank financial regulatory reform bill, and more recently missed the foreclosure mess. Some conservatives, economists and others, view the Fed's easy money policy as the primary reason for the past decade's asset bubbles, and the Fed's regulatory failings as crucial reasons why those bubbles were so damaging. A few far right wing purists would find the printing of money to stimulate the economy indistinguishable from sorcery.
Majority control of the House would give the Republicans control over committee hearings. Some of them might delight in holding Congressional hearings where they could berate Fed witnesses on C-Span and score points with their constituents. Since the Fed may be the only hope Democrats and President Obama, in particular, would have for a revival of the economy, some Republicans might see advantages to intimidating the central bank. The Fed, by law, is independent of Congress. But the law and political reality don't necessarily correspond closely. The Fed might be subdued by a barrage from Republican/Tea Party evening news headliner wannabes. If that happens, expect a lot of asset classes--stocks, bonds, gold and other commodities--to fall in value. The financial markets now depend heavily on government intervention to sustain prices. As a policy matter, that's not a good thing. But it's not easily undone. If political pressure smacks down the Fed, it could also smack down the markets.
Action will be hard to come by. With a Democratic White House, and the Democrats either controlling the Senate or holding almost half its seats, gridlock is inevitable. Further fiscal stimulus is off the table. Tax "policy" will consist of chaos and lunacy. Congress will regress from its recent productive (albeit controversial) mode to its norm of swapping trash talking soundbites and issuing self-congratulatory press releases, while incessantly searching for the next photo op and more campaign contributions.
The only active part of the government, in regard to economic policy, will be the Federal Reserve. The worst kept secret in Washington is that next week the Fed will renew its program of quantitative easing, possibly beginning with the purchase of $500 billion of Treasury securities. Although Chairman Bernanke and other Fed officials wrap this policy in elegant bureaucratese, it amounts to printing money, pure and simple. Roll the lettuce out of the printing press and move it off the loading dock. Grumpy old skeptics mutter under their breath about inflationary risk, and point to gold's escalating price. But senior Fed officials repeatedly offer solemn assurances that they've got things under control.
Newly elected and emboldened Republicans, especially the ideologues, may see the Fed as a convenient target. It failed to spot the mortgage crisis until things blew up, then bailed out Wall Street at the expense of Main Street, next successfully lobbied for increased power under the Dodd-Frank financial regulatory reform bill, and more recently missed the foreclosure mess. Some conservatives, economists and others, view the Fed's easy money policy as the primary reason for the past decade's asset bubbles, and the Fed's regulatory failings as crucial reasons why those bubbles were so damaging. A few far right wing purists would find the printing of money to stimulate the economy indistinguishable from sorcery.
Majority control of the House would give the Republicans control over committee hearings. Some of them might delight in holding Congressional hearings where they could berate Fed witnesses on C-Span and score points with their constituents. Since the Fed may be the only hope Democrats and President Obama, in particular, would have for a revival of the economy, some Republicans might see advantages to intimidating the central bank. The Fed, by law, is independent of Congress. But the law and political reality don't necessarily correspond closely. The Fed might be subdued by a barrage from Republican/Tea Party evening news headliner wannabes. If that happens, expect a lot of asset classes--stocks, bonds, gold and other commodities--to fall in value. The financial markets now depend heavily on government intervention to sustain prices. As a policy matter, that's not a good thing. But it's not easily undone. If political pressure smacks down the Fed, it could also smack down the markets.
Monday, October 25, 2010
Principles the Democrats Should Learn From the Tea Partiers
The stridency of the Tea Partiers should remind Democrats of a crucial fact: America is a nation founded on principles, Constitutional and other principles. The perception that these principles have been violated drives the anger and energy of the Tea Partiers and others similarly disillusioned. People tend to get fired up when they believe matters of principle are at stake, and that's what you see today.
It may well be that big corporate money is being quietly funneled by cynical Republican operatives into key political races. But that money works only if voters can be motivated or swayed by it. The populist outrage over perceived transgression of foundational political principles provides the fuel that conservative corporate funding can inflame.
The lesson for Democrats scrambling in this last week of campaigning is that they cannot just talk about accomplishments--economic stimulus, financial regulatory reform and, yes, health insurance reform--or (accurately) point out that they inherited a grossly mismanaged economy and a horribly misconceived foreign policy from George W. Bush, the worst President since the 19th Century. They can't just make promises; voters no longer have faith in politicians' promises. The Democrats have to talk about how they stand for principles and how they have and will vindicate principles. They need to remind voters that they are the party that promotes opportunity for all, that supports education through action and not just talk, that advances fairness and tolerance, and that protects liberty (after all, it was during the G.W. Bush administration that federal law enforcement and intelligence agencies were discovered to have engaged in questionable electronic snooping on the American public). Many voters in this election will make their decisions based their principles. The Democrats haven't been part of that dialogue, and they will lose many currently undecided votes if they don't talk about principles and take principled stands.
It may well be that big corporate money is being quietly funneled by cynical Republican operatives into key political races. But that money works only if voters can be motivated or swayed by it. The populist outrage over perceived transgression of foundational political principles provides the fuel that conservative corporate funding can inflame.
The lesson for Democrats scrambling in this last week of campaigning is that they cannot just talk about accomplishments--economic stimulus, financial regulatory reform and, yes, health insurance reform--or (accurately) point out that they inherited a grossly mismanaged economy and a horribly misconceived foreign policy from George W. Bush, the worst President since the 19th Century. They can't just make promises; voters no longer have faith in politicians' promises. The Democrats have to talk about how they stand for principles and how they have and will vindicate principles. They need to remind voters that they are the party that promotes opportunity for all, that supports education through action and not just talk, that advances fairness and tolerance, and that protects liberty (after all, it was during the G.W. Bush administration that federal law enforcement and intelligence agencies were discovered to have engaged in questionable electronic snooping on the American public). Many voters in this election will make their decisions based their principles. The Democrats haven't been part of that dialogue, and they will lose many currently undecided votes if they don't talk about principles and take principled stands.
Tuesday, September 28, 2010
Congressional Action in the Lame Duck Session
The mid-term elections in five weeks are likely to produce political deadlock. The Republicans will probably win control of the House and perhaps the Senate. The Dems have the White House. From January 2011 through December 2012, not much is likely to happen in Washington (although you'll need earplugs to save your hearing from all the partisan yammering).
As things are, Congress isn't likely to do anything significant before the elections--it's easier for a candidate to make promises to voters than explain a vote in Congress. There will be one moment for action: the lame duck session that follows the elections. In the last two months of this year, the current 111th session of Congress will have its last hurrah. The Democratic-dominated body will have one final chance to push through legislation it favors. The President will probably sign anything that vaguely serves his agenda, since he's not likely to get his way with Congress again during the remainder of his first term.
A number of Democrats facing re-election contests are momentarily wavering on their party's agenda, such as continued Bush tax cuts for all but the wealthy. After the election, though, some may be lame duck legislators, with nothing to lose by voting their convictions instead of for their survival. Others may see a last chance to serve the needs of supporters.
The Republicans will be in a tight spot. If they block all Democratic initiatives, the Bush tax cuts end on December 31, 2010, and everyone in the U.S. gets a tax increase. The Republicans won't want be tagged with responsibility for that. You can bet the Dems will introduce in the lame duck session a bill continuing the Bush tax cuts for all but the wealthy. They will also introduce the annual fix for the alternative minimum tax (a tax-the-rich measure signed by Republican President Richard Nixon to make sure the wealthy didn't deduct their way to no taxes). The alternative minimum tax isn't adjusted automatically for inflation, so over time it has reached well down into the middle class. It has to be fixed every year so that it hits only the upper middle class (the alternative minimum tax now taxes many millions more than just the wealthy and is a key revenue raiser that no one, Democrat or Republican, has the guts to fix permanently because doing so would cost the government a shipload of money).
The Republicans will have to find a way not to block all tax relief, lest they betray their asserted principles. But they don't have the numbers in the 111th Congress to control legislation. Even though the Republicans squirmed and squealed noisily during the last two years, the Dems had their way with stimulus legislation, expansion of health insurance coverage, and financial regulatory reform. Neither party can afford to allow nothing to happen during the lame duck session. Alternative minimum tax relief is an annual Congressional ritual, and will be accompanied by one or more attempts to extend at least some of the Bush tax cuts. It's impossible to predict how things will turn out. But keep your eyes open because the upcoming lame duck session may be the most important legislative event of the next two years.
As things are, Congress isn't likely to do anything significant before the elections--it's easier for a candidate to make promises to voters than explain a vote in Congress. There will be one moment for action: the lame duck session that follows the elections. In the last two months of this year, the current 111th session of Congress will have its last hurrah. The Democratic-dominated body will have one final chance to push through legislation it favors. The President will probably sign anything that vaguely serves his agenda, since he's not likely to get his way with Congress again during the remainder of his first term.
A number of Democrats facing re-election contests are momentarily wavering on their party's agenda, such as continued Bush tax cuts for all but the wealthy. After the election, though, some may be lame duck legislators, with nothing to lose by voting their convictions instead of for their survival. Others may see a last chance to serve the needs of supporters.
The Republicans will be in a tight spot. If they block all Democratic initiatives, the Bush tax cuts end on December 31, 2010, and everyone in the U.S. gets a tax increase. The Republicans won't want be tagged with responsibility for that. You can bet the Dems will introduce in the lame duck session a bill continuing the Bush tax cuts for all but the wealthy. They will also introduce the annual fix for the alternative minimum tax (a tax-the-rich measure signed by Republican President Richard Nixon to make sure the wealthy didn't deduct their way to no taxes). The alternative minimum tax isn't adjusted automatically for inflation, so over time it has reached well down into the middle class. It has to be fixed every year so that it hits only the upper middle class (the alternative minimum tax now taxes many millions more than just the wealthy and is a key revenue raiser that no one, Democrat or Republican, has the guts to fix permanently because doing so would cost the government a shipload of money).
The Republicans will have to find a way not to block all tax relief, lest they betray their asserted principles. But they don't have the numbers in the 111th Congress to control legislation. Even though the Republicans squirmed and squealed noisily during the last two years, the Dems had their way with stimulus legislation, expansion of health insurance coverage, and financial regulatory reform. Neither party can afford to allow nothing to happen during the lame duck session. Alternative minimum tax relief is an annual Congressional ritual, and will be accompanied by one or more attempts to extend at least some of the Bush tax cuts. It's impossible to predict how things will turn out. But keep your eyes open because the upcoming lame duck session may be the most important legislative event of the next two years.
Sunday, September 26, 2010
Wall Street's Contribution to the Democrats
Business interests evidently are contributing more money to Republicans than they did in 2008. Cash flow to Democrats from people who might pay estate taxes has fallen sharply. But the financial markets have been kind to the Democrats. The stock market has bounced up nicely thus far in September, and bonds continue their improbable two-decade bull market. Gold is flirting with new highs on almost a daily basis. Silver has rallied. Oil has edged down, as it usually does following the end of the summer driving season. But it hasn't edged far. One can hardly find a financial investment that isn't doing okay or better than okay in September.
Republicans might claim that the cheery financial markets are the result of their resurgence. But good news has a thousand parents, and political incumbents generally get some credit when investors benefit. Most of today's boat rockers are middle or moderate income folks living outside the Beltway, who feel they are about to lose the little that they have after years or decades of work. There are about as many investment bankers among Tea Partiers as Zionists in Iran.
The middle of the road voters who will decide the outcome of the mid-term elections will think about their 401(k) accounts as well as their taxes. Five weeks remain until the mid-term elections. October has been an unpredictable month for the stock markets. There is certainly reason to wonder if the markets won't fall. Corporate earnings announcements, set to begin next week, aren't expected to glow. Banks may report lower earnings, from a drop in stock market trading volume. Tech companies earnings could stagnate, as consumer demand has drifted. Trade skirmishing is flaring up. The U.S. is jawboning China about the yuan, and China has slapped tariffs on American chicken parts. Japan is trying to weaken the yen in response to the weakening dollar (something that may affect China and its dollar-linked yuan more than America, since China is Japan's largest trading partner). The European debt crisis is rumbling again. Portuguese and Irish debt are losing favor, and Greece's likelihood of defaulting is growing (although no default appears imminent).
Nevertheless, the financial markets have spent the last four weeks looking at silver linings, not clouds. That's not likely to change, unless something big and bad breaks in October. Otherwise, the financial markets, still holding a 60% stock market gain since the March 2009 low, will give a nice gift to the Democrats.
Republicans might claim that the cheery financial markets are the result of their resurgence. But good news has a thousand parents, and political incumbents generally get some credit when investors benefit. Most of today's boat rockers are middle or moderate income folks living outside the Beltway, who feel they are about to lose the little that they have after years or decades of work. There are about as many investment bankers among Tea Partiers as Zionists in Iran.
The middle of the road voters who will decide the outcome of the mid-term elections will think about their 401(k) accounts as well as their taxes. Five weeks remain until the mid-term elections. October has been an unpredictable month for the stock markets. There is certainly reason to wonder if the markets won't fall. Corporate earnings announcements, set to begin next week, aren't expected to glow. Banks may report lower earnings, from a drop in stock market trading volume. Tech companies earnings could stagnate, as consumer demand has drifted. Trade skirmishing is flaring up. The U.S. is jawboning China about the yuan, and China has slapped tariffs on American chicken parts. Japan is trying to weaken the yen in response to the weakening dollar (something that may affect China and its dollar-linked yuan more than America, since China is Japan's largest trading partner). The European debt crisis is rumbling again. Portuguese and Irish debt are losing favor, and Greece's likelihood of defaulting is growing (although no default appears imminent).
Nevertheless, the financial markets have spent the last four weeks looking at silver linings, not clouds. That's not likely to change, unless something big and bad breaks in October. Otherwise, the financial markets, still holding a 60% stock market gain since the March 2009 low, will give a nice gift to the Democrats.
Wednesday, September 8, 2010
And If the Republicans Win This Fall, Then What?
The polls indicate the Republicans will do well in the fall mid-term elections, likely winning the House and perhaps the Senate as well. Let's assume that happens. Then what?
We will have a Democratic White House and a Congress partially or entirely controlled by Republicans. The government will largely be deadlocked. Even though the economy will still be a sick puppy, little will happen. But the blame for little happening will fall on both Democrats and Republicans. Once in power, the Republicans also have responsibility. If their only platform is to obstruct and criticize, they will have failed in their responsibilities. Voters don't put them in control just to whine and play gotcha politics. The electorate expects action.
Action would mean compromise and bipartisanship. In today's Tea Party-driven, hyper-partisan politics, compromise is the one thing that ain't gonna happen. All the more so since some of the soon-to-be elected Republicans are insurgents within their own party and can't reach agreement even with their own colleagues.
A political deadlock may well favor Barack Obama. As the chief executive, he can still pursue his goals through administration policies and executive orders. He will be prominently visible as the commander-in-chief and as the first among equals when dealing with foreign leaders. There remain plenty of problems and threats, foreign and domestic, that will give him frequent opportunities to look Presidential.
Congress will continue to look like a bunch of squabbling idiots, only with a Republican hue. It will become easier for the Democrats to take shots at the Republicans, since legislative control also means accountability. The Republican Party, a morass today with a controversial RNC chairman, no organized leadership structure, and lots of insurgents who each may take their own tacks whenever they feel like it, will struggle. Political advantage will shift toward the Democrats. Barack Obama may well be re-elected in 2012.
It's happened before. Ronald Reagan didn't do well in the 1982 mid-term elections but he was a two-term President. The Clintonian Democratic Party got clobbered in the 1994 mid-term elections, losing control of the House. But Bill Clinton was re-elected in 1996. The Republicans are about to get what they wish for. And they had better beware.
We will have a Democratic White House and a Congress partially or entirely controlled by Republicans. The government will largely be deadlocked. Even though the economy will still be a sick puppy, little will happen. But the blame for little happening will fall on both Democrats and Republicans. Once in power, the Republicans also have responsibility. If their only platform is to obstruct and criticize, they will have failed in their responsibilities. Voters don't put them in control just to whine and play gotcha politics. The electorate expects action.
Action would mean compromise and bipartisanship. In today's Tea Party-driven, hyper-partisan politics, compromise is the one thing that ain't gonna happen. All the more so since some of the soon-to-be elected Republicans are insurgents within their own party and can't reach agreement even with their own colleagues.
A political deadlock may well favor Barack Obama. As the chief executive, he can still pursue his goals through administration policies and executive orders. He will be prominently visible as the commander-in-chief and as the first among equals when dealing with foreign leaders. There remain plenty of problems and threats, foreign and domestic, that will give him frequent opportunities to look Presidential.
Congress will continue to look like a bunch of squabbling idiots, only with a Republican hue. It will become easier for the Democrats to take shots at the Republicans, since legislative control also means accountability. The Republican Party, a morass today with a controversial RNC chairman, no organized leadership structure, and lots of insurgents who each may take their own tacks whenever they feel like it, will struggle. Political advantage will shift toward the Democrats. Barack Obama may well be re-elected in 2012.
It's happened before. Ronald Reagan didn't do well in the 1982 mid-term elections but he was a two-term President. The Clintonian Democratic Party got clobbered in the 1994 mid-term elections, losing control of the House. But Bill Clinton was re-elected in 1996. The Republicans are about to get what they wish for. And they had better beware.
Tuesday, June 15, 2010
Will Wall Street Go Democrat?
Wall Street political contributions are going more to Republicans today than Democrats. That's hardly surprising, considering the bashing the big banks have taken from the Obama administration and the inevitability of greater regulation. This trend, however, may not last. Wall Street has strong reasons to go Democrat in the fall.
The Republican Party has been ambushed by Tea Partiers and is making a hard right turn. Only in California, it would seem, could a billionaire moderate Republican, Meg Whitman, survive a Tea Party onslaught--and that required spending tens of millions of her own dollars. The distinctly populist tone forced on the Republicans will compel them to keep Wall Street at arms length, while clamoring for sharp cutbacks in the deficit spending that may be the primary reason the economy keeps growing. In other words, the Republican policies of "No" and "Hell No" could push the stock market down.
The Obama administration and some Congressional Democrats, however, still see the virtue of big federal budgets. The latest measure is a relief package for overly leveraged states and muncipalities. Some members of Congress, with the administration's support, are maneuvering to extend unemployment benefits and health insurance subsidies for the unemployed. Although not necessarily destined for passage, these measures will if enacted help prop up the economy and the stock market. Of course, the Dems have taken up the populist mantel as well. Financial services regulatory reform is almost a certainty this summer, and BP, which should consider more often taking its point of aim off its own feet, makes an easy target for an administration that needs someone to castigate. But Democratic fiscal proclivities may better serve Wall Street's needs than bug-eyed bashing from blame-casting Tea Partiers.
The Dow Jones Industrial Average jumped 213 points today, on a mix of mostly positive, but some negative, news. A lot of the jump seems due to technically driven trading by market pros. Mom and Pop in Sioux City are still sitting on the sidelines. The market pros and the rest of Wall Street need the big budgets of the Democrats to keep today's liquidity fueled stock market propped up, lest the leverage implosion in Europe and wackos in Iran and North Korea unleash bears. The fall campaigns won't begin in earnest until after Labor Day. At that point, the increasingly populist rhetoric from the right may well lead ever pragmatic Wall Streeters to apply some of their trading strategies to politics and hedge their bets with generous contributions to the Dems.
The Republican Party has been ambushed by Tea Partiers and is making a hard right turn. Only in California, it would seem, could a billionaire moderate Republican, Meg Whitman, survive a Tea Party onslaught--and that required spending tens of millions of her own dollars. The distinctly populist tone forced on the Republicans will compel them to keep Wall Street at arms length, while clamoring for sharp cutbacks in the deficit spending that may be the primary reason the economy keeps growing. In other words, the Republican policies of "No" and "Hell No" could push the stock market down.
The Obama administration and some Congressional Democrats, however, still see the virtue of big federal budgets. The latest measure is a relief package for overly leveraged states and muncipalities. Some members of Congress, with the administration's support, are maneuvering to extend unemployment benefits and health insurance subsidies for the unemployed. Although not necessarily destined for passage, these measures will if enacted help prop up the economy and the stock market. Of course, the Dems have taken up the populist mantel as well. Financial services regulatory reform is almost a certainty this summer, and BP, which should consider more often taking its point of aim off its own feet, makes an easy target for an administration that needs someone to castigate. But Democratic fiscal proclivities may better serve Wall Street's needs than bug-eyed bashing from blame-casting Tea Partiers.
The Dow Jones Industrial Average jumped 213 points today, on a mix of mostly positive, but some negative, news. A lot of the jump seems due to technically driven trading by market pros. Mom and Pop in Sioux City are still sitting on the sidelines. The market pros and the rest of Wall Street need the big budgets of the Democrats to keep today's liquidity fueled stock market propped up, lest the leverage implosion in Europe and wackos in Iran and North Korea unleash bears. The fall campaigns won't begin in earnest until after Labor Day. At that point, the increasingly populist rhetoric from the right may well lead ever pragmatic Wall Streeters to apply some of their trading strategies to politics and hedge their bets with generous contributions to the Dems.
Monday, March 29, 2010
A 2010 Tax Strategy for the Democrats: Reform the Estate Tax
Barack Obama's political strategy for this year's mid-term elections seems pretty clear. He will take action, working with the Democrats in Congress to enact legislation, and acting as the chief executive where legislative action isn't possible. The recent health insurance reform, adopted with only Democratic support in Congress, is the most obvious example. Legislation for financial regulatory reform is on the move; some sort of bill will probably make it through Congress this year. Obama's recent recess appointments of 15 nominees is another example of his apparent decision to make 2010 a year of action.
The ballooning federal deficit will likely require a tax increase sooner or later. This being an election year, expect a lot of hemming and hawing, and no increase. There is one tax measure--not an increase--that probably could be enacted this year. And if the Democrats try it and are blocked by the Republicans, the Democrats would score political points for trying.
That would be federal estate tax reform. The Bush 43 tax cuts are bizarrely structured to provide for no estate tax in 2010 but a reversion next year to an old $1,000,000 threshold for the imposition of the tax. This anamoly is, like so many things in Washington, a political ploy, this one designed to make the cost of the tax cuts appear lower than they'd have been if the estate tax had been permanently eliminated. This sleight of hand made it easier for Congress to sign off, with the presumption that someone else would fix the problem when the tax reverted back to the $1,000,000 threshold.
Last year, there was general agreement among Democratic and Republican power brokers that reform of the estate tax should revolve around excluding the first $3.5 million of the estate from taxation and imposing the tax on amounts above that level, with the $3.5 million threshold to be adjusted for inflation. However, amidst last year's squabbling over bank bailouts and bonuses, the surge of Tea Parties, faux bipartisanship over health insurance reform, and pandemic adolescent finger pointing by high ranking federal officials and prominent members of Congress, nothing was done about estate tax reform.
For understandable reasons, estate tax reform this year has been shoved to the back part of the back burner that isn't even lit. But a Democratic initiative to enact the $3.5 million compromise that existed last year might work to their political advantage this fall.
Although this year's temporary repeal of the estate tax sounds like a boondoogle for the wealthy, it actually includes a potential unpleasant surprise for many. When the estate tax is in effect, heirs and other recipients of inheritances receive a "stepped up basis" (i.e., a base value of the higher of the original cost of the asset or its value at the time of the deceased person's death). For many assets, like stocks, real estate and collectibles, a stepped up basis means that when the recipient sells after inheriting the asset, income taxes (usually capital gains taxes) will be calculated by subtracting the stepped up basis from the proceeds of the sale to determine taxable gain.
However, when there is no estate tax, heirs and other recipients of inherited assets do not receive a stepped up basis. They get only a "carry over basis" (i.e., the deceased person's basis, which could be much lower than a stepped up basis for assets like stocks, real estate and collectibles). Thus, if they sell, their income tax is calculated by subtracted the carry over basis from the sales proceeds. This will often result in much greater taxes.
A $3.5 million exclusion from estate taxation would benefit the upper middle class, in particular those whose estates run in the range of $3.5 million to a bit above $5 million. These folks (or their heirs, really) might be worse off with no estate tax. Their heirs would get only a carryover basis, and be potentially subject to taxation on much larger gains than they'd face with a stepped up basis. The $3.5 million exclusion would largely shelter upper middle class estates from estate tax, while conferring a stepped basis that would significantly shelter the heirs if and when they sold the inherited assets.
The larger an estate, the more the benefit from a complete repeal of the estate tax. But that is a temporary circumstance, since the estate tax returns with a $1,000,000 threshold in 2011. Then, both the upper middle class and the wealthier are subject to higher levels of estate tax.
At first glance, it might make sense for the Democrats to simply let the estate tax lapse back down to a $1,000,000 threshold. With the growing federal deficit and a middle class core constituency, the Democrats would seem likely to lean toward soaking the rich (and upper middle class). But elections today are all about capturing the independents, the swing voters in between left and right who often outnumber party loyalists on either side. The estate tax matters to many small business owners and farmers, who can accumulate over $1,000,000 in net worth even if their annual incomes are modest. Many professional and managerial couples in the Northeast or the West Coast can exceed the $1 million threshold by owning a suburban home in a good school district and having a 401(k) account or two. These upper middle class folks are often opinion leaders and frequent contributors to political campaigns. Although their numbers aren't large, their influence can be significant.
Estate tax reform would demonstrate that the Democrats aren't focused solely on extracting more from taxpayers. It would be a step toward tax equity, and an acknowledgment that those who have worked hard, saved diligently and perhaps created some jobs are entitled to keep a reasonable amount of their hard-earned wealth. It would align Democrats with the American Dream, the notion that anyone who works hard and lives prudently should have a shot at the brass ring. The $1 million threshold hits anyone who reaches the iconic status of a millionaire. Although $1 million isn't what it used to be, it still conveys powerful symbolism and having the estate tax kick in right when the American Dream is attained is the kind of thing that heats the water at Tea Parties.
Republicans would have a hard time opposing estate tax reform. The $1 million threshold is something they rejected with the Bush 43 tax cuts, and they would be compelled to vote in favor of raising it. Certainly, some of them would favor a more dramatic rollback of the estate tax. But others would realize that their outcries over the burgeoning deficit would clash with demands for abolishing the estate tax. Charitable and educational institutions in all Congressional districts, needing endowments now more than ever, would lobby for retaining the tax, putting Republican legislators in the position of damaging local institutions if they favor outright repeal.
Thus, the Democrats would probably secure enough Republican votes that estate tax reform couldn't be filibustered or otherwise blocked. Lifting the threshold would probably cost the Treasury some tax revenues, although the impact is less clear than one might think. Resumption of the $1 million threshold might not benefit the Treasury the most; it could benefit estate planning attorneys the most, along with the finance professionals managing the tax shelters that would blossom if the $1 million threshold took effect. If the Republicans somehow prevented the Democrats from reforming the estate tax, the Democrats could score points in the mid-term elections for trying.
Estate tax reform would position Democrats closer to the political middle, and give them credit for fostering tax equity. It wouldn't directly benefit most voters; only around 2% of estates were subject to estate tax when it kicked in at the $1 million level. But reform would brighten their dreams for their children, whom they hope will face estate tax problems.
The ballooning federal deficit will likely require a tax increase sooner or later. This being an election year, expect a lot of hemming and hawing, and no increase. There is one tax measure--not an increase--that probably could be enacted this year. And if the Democrats try it and are blocked by the Republicans, the Democrats would score political points for trying.
That would be federal estate tax reform. The Bush 43 tax cuts are bizarrely structured to provide for no estate tax in 2010 but a reversion next year to an old $1,000,000 threshold for the imposition of the tax. This anamoly is, like so many things in Washington, a political ploy, this one designed to make the cost of the tax cuts appear lower than they'd have been if the estate tax had been permanently eliminated. This sleight of hand made it easier for Congress to sign off, with the presumption that someone else would fix the problem when the tax reverted back to the $1,000,000 threshold.
Last year, there was general agreement among Democratic and Republican power brokers that reform of the estate tax should revolve around excluding the first $3.5 million of the estate from taxation and imposing the tax on amounts above that level, with the $3.5 million threshold to be adjusted for inflation. However, amidst last year's squabbling over bank bailouts and bonuses, the surge of Tea Parties, faux bipartisanship over health insurance reform, and pandemic adolescent finger pointing by high ranking federal officials and prominent members of Congress, nothing was done about estate tax reform.
For understandable reasons, estate tax reform this year has been shoved to the back part of the back burner that isn't even lit. But a Democratic initiative to enact the $3.5 million compromise that existed last year might work to their political advantage this fall.
Although this year's temporary repeal of the estate tax sounds like a boondoogle for the wealthy, it actually includes a potential unpleasant surprise for many. When the estate tax is in effect, heirs and other recipients of inheritances receive a "stepped up basis" (i.e., a base value of the higher of the original cost of the asset or its value at the time of the deceased person's death). For many assets, like stocks, real estate and collectibles, a stepped up basis means that when the recipient sells after inheriting the asset, income taxes (usually capital gains taxes) will be calculated by subtracting the stepped up basis from the proceeds of the sale to determine taxable gain.
However, when there is no estate tax, heirs and other recipients of inherited assets do not receive a stepped up basis. They get only a "carry over basis" (i.e., the deceased person's basis, which could be much lower than a stepped up basis for assets like stocks, real estate and collectibles). Thus, if they sell, their income tax is calculated by subtracted the carry over basis from the sales proceeds. This will often result in much greater taxes.
A $3.5 million exclusion from estate taxation would benefit the upper middle class, in particular those whose estates run in the range of $3.5 million to a bit above $5 million. These folks (or their heirs, really) might be worse off with no estate tax. Their heirs would get only a carryover basis, and be potentially subject to taxation on much larger gains than they'd face with a stepped up basis. The $3.5 million exclusion would largely shelter upper middle class estates from estate tax, while conferring a stepped basis that would significantly shelter the heirs if and when they sold the inherited assets.
The larger an estate, the more the benefit from a complete repeal of the estate tax. But that is a temporary circumstance, since the estate tax returns with a $1,000,000 threshold in 2011. Then, both the upper middle class and the wealthier are subject to higher levels of estate tax.
At first glance, it might make sense for the Democrats to simply let the estate tax lapse back down to a $1,000,000 threshold. With the growing federal deficit and a middle class core constituency, the Democrats would seem likely to lean toward soaking the rich (and upper middle class). But elections today are all about capturing the independents, the swing voters in between left and right who often outnumber party loyalists on either side. The estate tax matters to many small business owners and farmers, who can accumulate over $1,000,000 in net worth even if their annual incomes are modest. Many professional and managerial couples in the Northeast or the West Coast can exceed the $1 million threshold by owning a suburban home in a good school district and having a 401(k) account or two. These upper middle class folks are often opinion leaders and frequent contributors to political campaigns. Although their numbers aren't large, their influence can be significant.
Estate tax reform would demonstrate that the Democrats aren't focused solely on extracting more from taxpayers. It would be a step toward tax equity, and an acknowledgment that those who have worked hard, saved diligently and perhaps created some jobs are entitled to keep a reasonable amount of their hard-earned wealth. It would align Democrats with the American Dream, the notion that anyone who works hard and lives prudently should have a shot at the brass ring. The $1 million threshold hits anyone who reaches the iconic status of a millionaire. Although $1 million isn't what it used to be, it still conveys powerful symbolism and having the estate tax kick in right when the American Dream is attained is the kind of thing that heats the water at Tea Parties.
Republicans would have a hard time opposing estate tax reform. The $1 million threshold is something they rejected with the Bush 43 tax cuts, and they would be compelled to vote in favor of raising it. Certainly, some of them would favor a more dramatic rollback of the estate tax. But others would realize that their outcries over the burgeoning deficit would clash with demands for abolishing the estate tax. Charitable and educational institutions in all Congressional districts, needing endowments now more than ever, would lobby for retaining the tax, putting Republican legislators in the position of damaging local institutions if they favor outright repeal.
Thus, the Democrats would probably secure enough Republican votes that estate tax reform couldn't be filibustered or otherwise blocked. Lifting the threshold would probably cost the Treasury some tax revenues, although the impact is less clear than one might think. Resumption of the $1 million threshold might not benefit the Treasury the most; it could benefit estate planning attorneys the most, along with the finance professionals managing the tax shelters that would blossom if the $1 million threshold took effect. If the Republicans somehow prevented the Democrats from reforming the estate tax, the Democrats could score points in the mid-term elections for trying.
Estate tax reform would position Democrats closer to the political middle, and give them credit for fostering tax equity. It wouldn't directly benefit most voters; only around 2% of estates were subject to estate tax when it kicked in at the $1 million level. But reform would brighten their dreams for their children, whom they hope will face estate tax problems.
Sunday, December 13, 2009
How the Tea Parties Are Helping the Democrats
With the Tea Parties surging as the loudest manifestation of populist outrage, many Republicans are crowing and a few have already proclaimed victory in the fall 2010 Congressional elections. Tea Partiers are trying to organize on a national level, although the very attempt to organize is exposing schisms among them. Republican power brokers, struggling with demands for ideological purity, blanch at the thought of the partying hordes. The worst case scenario for them is the possibility of a takeover by a heresy-hunting rabble that marginalizes the party. In the smoothly disciplined corporate world of mainstream Republicanism, the rank and file are supposed to provide votes and funding, not ideas and commentary.
Unnoticed amidst the shouting and spouting is how the Democrats have moved quickly to strengthen their positions. President Obama is ramping up troop levels in Afghanistan, seeking to justify war even as he receives the Nobel Peace Prize. He's much more cautious than a year ago about what to do with the inmates at Guantanamo. By all indications, he's got nary a peep about the rapidly disappearing public health insurance option. His Wall Street centric economics policy team has suddenly discovered the joys of helping small business and creating jobs.
Congress, too, is trying to get right with the electorate. A turbocharged push on health care reform has resulted in serious action; a bill will probably reach the President well before the 2010 elections. As popular anger at Wall Street has mounted, financial regulatory reform was approved this past week by the House. The big banks are p.o.'d, something that will play well on Main Street.
A crucial factor in today's political mosh pit is that the Democrats control the White House and both chambers of the legislature. Unusually, they can muster 60 votes in the Senate and overcome Republican attempts to filibuster. Thus, the rarest of all circumstances exists in Washington: a government that can actually get things done. And it is.
President Obama and Congress are shifting back toward the middle, accommodating the independents who put them in power. The President's Afghanistan strategy is particularly revealing. By authorizing more troops, he undermines the charge of being soft on terrorism. He has persuaded America's allies to furnish about 20% of the additional troops, thus avoiding the international irritation of W's go-it-alone policies. The 18-month time frame for beginning withdrawals conveniently falls after the fall 2010 elections, so voters won't feel as if they are voting for or against the war. Hopefully, the President's Afghanistan policy will produce something approaching a victory in the war. It is clearly designed to help win the 2010 elections.
Dismayed liberals in the Democratic Party have a lot to say, but not that much they can do. Indeed, their complaints complete the portrait of a President and Congress for the broad electorate.
Some Democrat losses in the Congressional elections of 2010 wouldn't be surprising. The dominant party always loses something in mid-term elections. But Republican proclamations of triumph are premature. If the President and Congress retake the political middle, the Democrats will be able to sit back and watch as the Savonarolas of the right burn their fires hotter and hotter.
Unnoticed amidst the shouting and spouting is how the Democrats have moved quickly to strengthen their positions. President Obama is ramping up troop levels in Afghanistan, seeking to justify war even as he receives the Nobel Peace Prize. He's much more cautious than a year ago about what to do with the inmates at Guantanamo. By all indications, he's got nary a peep about the rapidly disappearing public health insurance option. His Wall Street centric economics policy team has suddenly discovered the joys of helping small business and creating jobs.
Congress, too, is trying to get right with the electorate. A turbocharged push on health care reform has resulted in serious action; a bill will probably reach the President well before the 2010 elections. As popular anger at Wall Street has mounted, financial regulatory reform was approved this past week by the House. The big banks are p.o.'d, something that will play well on Main Street.
A crucial factor in today's political mosh pit is that the Democrats control the White House and both chambers of the legislature. Unusually, they can muster 60 votes in the Senate and overcome Republican attempts to filibuster. Thus, the rarest of all circumstances exists in Washington: a government that can actually get things done. And it is.
President Obama and Congress are shifting back toward the middle, accommodating the independents who put them in power. The President's Afghanistan strategy is particularly revealing. By authorizing more troops, he undermines the charge of being soft on terrorism. He has persuaded America's allies to furnish about 20% of the additional troops, thus avoiding the international irritation of W's go-it-alone policies. The 18-month time frame for beginning withdrawals conveniently falls after the fall 2010 elections, so voters won't feel as if they are voting for or against the war. Hopefully, the President's Afghanistan policy will produce something approaching a victory in the war. It is clearly designed to help win the 2010 elections.
Dismayed liberals in the Democratic Party have a lot to say, but not that much they can do. Indeed, their complaints complete the portrait of a President and Congress for the broad electorate.
Some Democrat losses in the Congressional elections of 2010 wouldn't be surprising. The dominant party always loses something in mid-term elections. But Republican proclamations of triumph are premature. If the President and Congress retake the political middle, the Democrats will be able to sit back and watch as the Savonarolas of the right burn their fires hotter and hotter.
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