Art Laffer Makes Sense. (And That Ain't Good.)
On January 1, 2011, the Bush tax cuts will expire, raising income taxes dramatically, restoring the estate tax, re-imposing the marriage penalty, and hiking the tax on capital gains--as one economist I know informally calculated, on the first day of next year the nation will suffer the biggest one-time tax hike in American history. How come, I've been wondering, markets haven't reflected this? How come in recent months the Dow has proven, all things considered, reasonably strong?
In the Wall Street Journal this morning, Arthur Laffer provides the answer:
Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year and into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be an next year, 2011, income will be lower than it otherwise should be.
Christina Romer may yammer on all she likes about the intricacies of aggregate demand and Keynesian multipliers, but what's going on here is what always goes on: Human beings responding--perfectly straightforwardly--to tax incentives.
Now take a deep breath. After the artificial surge this year, Laffer concludes,
The result will be a crash in tax receipts....If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.
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May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Art Laffer is the epitome of a "[h]uman being[] responding - perfectly straightforwardly - to tax incentives." He picked up and relocated to Tennessee, a zero income tax state.
I am an attorney specializing in labor and employment law, so people often ask me when I think the unemployment numbers are going to improve. (The question, of course, carries an unspoken assumption that things are going to improve.) Laffer's take is probably as good an explanation as any I've encountered. One additional point I make is the element of uncertainty. Even under the best circumstances, hiring is a costly proposition - salary, benefits, overhead, taxes, etc. The administration refuses to clarify whether they will maintain these costs, reduce them (hah) or - as everyone expects - make them worse. No one wants to be caught with a bloated payroll if they think costs per employee will skyrocket because of federal mandates. The administration refuses to calm these fears or state its intentions. Even if their plan is to raise these costs (heaven forbid), they could at least own up to it so employers can factor those numbers in. Until employers have some certainty (preferably good news), gains will be in ones and twos, not thousands.
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Sure, taxation reduces the marginal utility of labour by reducing its productivity.
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
There is a very disquieting undercurrent of news/opinion (of which Laffer is only a small part) that things are not as they appear.
Yes, some signs are strong, and things appears as they normally do during a recovery. And why not? We are essentially entering the beginnings of a recovery out of the recession. After all, most recoveries are usually only a matter of time.
But unfortunately, as Laffer points out, that normal recovery is about to have its legs cut out from underneath it by a confluence of tax hikes and preemptive corporate action because of those hikes and the general uncertainty of what govt regulatory imposition might come next.
Reading missives like Laffer's, and reading between the lines in other places, like for instance Ricochet's "Stimulus Uber Alles", "The Euro is Toast", "That Horrible Jobs Report", can make one feel downright pessimistic.
Perhaps I am over-reacting but I keep thinking I need to move my IRAs entirely into cash, and wait until Feb 2011 when hopefully a new GOP Congress passes the retroactive re-establishment of the 'Bush Tax Cuts', and some sanity/stability returns to the country side.
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Charles, dollar cost averaging suggests that if you aren't retiring soon, you would be well served to leave your money in an index fund, and cash in when Obama leaves office. No matter how bad he is, he can't completely destroy the US economy, so buying low means a rally in 3 or 5 years.
Unless, of course, he really IS that bad....
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Charles - Be careful about moving your IRAs into cash, especially if that cash is in dollars. You never know when the administration just may decide to inflate its way out of debt!
Can you make diamonds part of your IRA portfolio? Anyone else have any serious/unusual/humorous suggestions to hedge against inflation? Didn't David Bowie somehow securitize his future royalties? How about taking a short position on newsprint?
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
If the WORST really comes, you won't be wanting cash...or gold...or diamonds. You'll be wanting bread and bullets.
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Where is Larry Summers? When Obama first came to power, he appointed Summers and Gates to important positions, and some of us who hadn't joined the Cult of the Pantleg Crease (sounds like a Hardy Boys title) breathed a little sigh. Maybe he's not actively destructive, we might have been heard to think.
That quickly went by the boards. And Larry seems to be sleeping during most of the meetings. Is this a psychological urge to distance himself from catastrophe, or some sort of medical condition? I suspect narcolepsy.
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
A gentleman from the National Federation of Independent Businesses was just on CNBC, and he said that small businesses are "still in recession" and "not contributing tot he growth of the economy". In a poll of small businesses the item of most concern to them as "weak sales", but the second most concerning item was "uncertainty about the economy and policy, they don't know what is going on....and are not willing to commit the funds [for expansion/growth]".
So, yet another source to buttress the arguments of Laffer and others...
May '10
Re: Art Laffer Makes Sense. (And That Ain't Good.)
Multiple problems are likely to come to a head in the near future.
Taxes will increase dramatically next year. When Israel strikes Iran or war breaks out in the Middle East in some other way, the price of oil will rise and shipping costs with it. Obama's moratorium is about to cause great turmoil in the Gulf Coast oil industry (some smaller companies will go under) and he plans to tax them more, thereby compounding the problem of gasoline prices. Europe's debt troubles can only be prolonged so long before a nation like Greece or Spain collapses, which will severely strain others with high debts.
It's harder to be optimistic when I view everything at once. And I'm sure Democrats have more surprises for us before November. But economics is not my strong point.