Alan Reynolds takes on Martin Feldstein’s recent WSJ editorial at Cato’s blog.
Writing in The Wall Street Journal on April 27–making another last-ditch pitch for a 20% border tax on business imports–Martin Feldstein asserts that unless corporate tax rate cuts are “offset” by tax increases on imports or payrolls then larger projected deficits would crash the stock market by raising long-term interest rates. “The markets’ current fragility,” he writes, “reflects overpriced assets–the S&P 500 price/earnings ratio is now 70% above its historical average–after a decade of excessively low long-term interest rates engineered by the Federal Reserve.”
– – – – –
Feldstein’s latest argument for adding new import or payroll taxes relies on budget deficits pushing up bond yields and thus threatening “overpriced” stocks. Unfortunately, those claims about deficits, bonds, and stocks all rest on faulty theories and nonexistent evidence.
Man on the Margin talks about the gold standard:
Why is the world returning to gold? The effects of the great liquidity flood experiment introduced by Bernanke and exported to the world’s central banks is ending with an economic whimper among seriously bloated and unmanageable central bank balance sheets. The result is global stagnation, unsustainable debt, and income inequality. The productive and middle class decline while the crony, connected, and speculator pilot fish feed off the whale of monetary chaos.
Central banks have no idea how to extricate themselves from their liquidity flood. The Fed is gingerly tap dancing about the idea of normalization without any real clue of how to get there. The current plan is to stop rolling over maturing debt at some point based upon an undefined moving goal post of data determination. The Fed only need shrink its balance sheet by the ridiculous sum of $2.0 trillion, the amount of excess reserves, to regain normalization. Any rise in interest rates during this process will add to the national debt burden that appears unsustainable, absent a return to significant growth rates.
Congressman Pat Tiberi took to the pages of The Columbus Dispatch in Ohio to defend supply-side economics.
I respectfully disagree with the Sunday letter “Supply-side economics do not work” from Corinne Lyman. There is no question that if we raise tax rates on businesses they will invest, produce and hire less. Cutting taxes, reducing burdensome regulation and enacting other pro-growth policies unleashes employers’ abilities to grow, expand and hire. Historical evidence confirms this to be true.
When President Ronald Reagan slashed tax rates and eased burdensome regulations, the economy flourished. After the first tax rate hike of the 1990s, the nation slumped into recession. The effect of President Bill Clinton’s subsequent tax hike was only tempered by the technology boom. The economy really took off when the Republican Congress enacted welfare reform to encourage work, spending reform to balance the budget, and lower capital gains taxes to boost investment.
Happy Independence Day!
Alan Reynolds: Stagnant For Decades, Japan Needs Supply-Side Tax Cuts
Alan Reynolds introduces us to “The Reynolds Model” in this latest post:
I may have discovered “the Fed Model” in March 1991– long before Ed Yardeni gave it that name after July 22,1997. The relationship between the inverted P/E ratio and bond yields was first depicted in the letter below to consulting clients (institutional investors), where I probably should have labeled it the “Reynolds Model.”
I agree with Estrada that it did not work very well before August 15, 1971, when the last remnants of the gold standards were abandoned. The gold standard did not permit the extreme gyrations in bond yields we have seen between Fed Chairmen Volcker and Bernanke. Relatively steady bond yields of 2-5 percent from 1789 to 1970 under a gold standard obviously tell us little about stock market booms and busts at that time. Contrary to Hulbert and Estrada, however, the U.S. relationship between the e-p ratio and the 10 year bond yield remained remarkably tight from 1970 to 2008. From 1988 to 2008, the e-p ratio averaged 4.9 and the 10-year bond averaged 6 percent.
Alan Reynolds in the Wall Street Journal:
How is increasing the price of imported oil and industrial commodities supposed to make U.S. industry more competitive?
Alan Reynolds is in today’s Investor’s Business Daily:
Personally, I’d prefer individual tax rates of 15%, 20%, 25% and 30% with a low flat rate on dividends, capital gains and estates and a 25% rate on corporate profits. But even such a modest move in the right direction would be ruled out if current law could somehow be made permanent.
By partially co-opting the banal Republican talking point about “making the Bush tax cuts permanent” Obama is really trying to cram through his own tax policy proposals from the moribund 2011 budget. He is belatedly pushing the same proposals from the same budget that Obama and a Democrat-controlled Congress have totally ignored since February.
– – – – –
After the dividend tax rate came down, average dividends among the top 1% surged to $52,814 in 2004 and $83,072 by 2007. Reported dividends of the top 1% in 2007 were twice as large as the previous peak in 2000. That can’t be coincidence.
Since 15% of $83,072 is larger than 38.6% of $30,673, even that drastically reduced tax rate on dividends did not significantly reduce average revenues collected from the top 1.4 million taxpayers. But the lower dividend tax clearly did result in high-income taxpayers holding more dividend-paying stocks than ever before in taxable accounts.