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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

Has Bernanke Gotten the Story Right?



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The most important point in Ben Bernanke’s Wednesday press conference was the announcement that the Fed will adjust the amount of monthly bond purchases according to economic conditions. In other words, an improving economy with stronger payrolls and lower unemployment could lead to a decline in Fed bond buying, from $85 billion a month to something gradually lower, so long as the economy keeps looking better.

It won’t happen all at once. The Fed is not convinced that the current economic upturn is truly sustainable. But Bernanke is implying that the Fed may become less easy in the second half of this year, perhaps ending QE in 2014. 

Read my full column here.

Optimism in the Air



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You might not know it from the acrimonious political debate on cable and broadcast TV, or on talk radio, or on websites and blogs. But here’s a counterintuitive observation: Amidst all the negativism out there, I believe optimism is in the air.

That’s right. Optimism.

Sometimes you have to search for it, or read it in the fine print. But I believe the political economy is getting better, not worse. 

Read my full column here.

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Ryan to Kudlow: Budget Defunding of Obamacare Is the Right Thing to Do



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House budget chairman Paul Ryan told me on Tuesday that his plan to balance the budget — in part by defunding Obamacare — is the right thing to do. By including that provision, it appears the proposal will be dead on arrival for the White House and Senate Democrats. But when I asked him if the plan was both good policy and bad politics, he responded, “Do you think we should give up our principles just because we’re submitting a budget? We believe this is a terrible law that will collapse under its own weight.”

Ryan further explained that a big part of his savings plan focuses on stopping the billions of dollars in Medicare now scheduled to be shifted out of the program and into the new health-care-reform system. But he also signaled that he may be willing to compromise on health care and many other parts of his plan.

“Do you start with your best offer when you start a negotiation? This is just the beginning,” Ryan said.

But getting to a balanced budget anytime will soon rely heavily on Republicans winning the battle on repealing large parts of the health-care law. That’s because the biggest savings in the Ryan plan come from cancelling the massive Obamacare expansion of Medicaid. Ryan says that part alone accounts for about $815 billion in savings out of the almost $5 trillion in cuts inside his proposal.

Entitlement reform is also a major focus of the Republican budget proposal. Ryan believes the same kinds of welfare reforms that succeeded in the late 1990s can be seen again, especially in the ever-expanding food-stamp program.

“We see food-stamp reform as part of welfare reform. We want to send it back to the states, and give them more flexibility,” Ryan said.

Ryan also talked about his plans for broad-based tax reform, explaining that lowering the rates and broadening the base is the best way to grow the economy and increase revenues. I agree.

Ryan did admit that he doesn’t expect to get all he wants in any negotiations with the White House. He conceded that he probably won’t be able to get the full $5 trillion in cuts he seeks, and that he would accept a “down payment” on that amount.

Finally, the congressman expressed cautious optimism about the chances of ever making a deal with Team Obama. He was positive, but realistic, about the administration’s new outreach toward Republicans.

“Trust but verify.” That’s how Paul Ryan characterizes the president’s charm offensive of recent days.

Boehner Wants Budget Deals ‘Out in the Open’



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House Speaker John Boehner told me on Wednesday that a long-term deal on entitlements is possible, and also that there’s no good reason for Team Obama to shut down the White House tour. As the mandatory budget cuts continue to take effect, Boehner said he believes the American people still know that Washington primarily has a spending problem.

The speaker insisted that the president still doesn’t understand that spending is the real issue, although he was more optimistic about Obama’s offers to reform entitlements. He also said he believes talk of limiting Social Security benefit increases and “means testing” Medicare to disqualify the wealthiest seniors is for real, and that these items could be a basis for a grand bargain with the president.

But the Republican speaker made it clear that he wants to move budget negotiations out of the backrooms and in front of the broader Congress and the American people.

“The top-down deals haven’t worked out too well,” he said during the exclusive Kudlow Report interview, adding that the process needs to be “more out in the open.” And while he noted that he gets along well with Obama on a personal level, he said the budget process shouldn’t be about their relationship anymore.

The speaker also stepped into the controversy now swirling in Washington over the decision to shut down White House tours because of the sequester cuts. Boehner said, “The president is trying to make it tough on members of Congress. It’s just silly. I want to know who is being laid off at the White House. The Capitol is open for tours. We’ve been planning for this for months.”

Boehner closed the interview by telling me that he’s “still on a mission,” and that he intends to stick around as speaker for a while. He also announced that he is launching a new comment feature on www.speaker.gov that offers average Americans a chance to weigh in on government spending.

Watch the full interview here (two parts):

No Sequester Catastrophe



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President Obama may be backing away from his doomsday spending-cut predictions as the sequester goes into place. But the new party line is that while there will be no impact in the first few days, there’ll be a slow, downward slump after that.

What, are we to believe that lower spending and smaller government damage the economy? Doesn’t that run counter to virtually every reasonably objective study in recent years — including ones from a number of U.S. academics and the OECD in Europe — that describe how countries with lower government spending grow more, and how countries with higher government spending grow less? 

Read my full column here

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The Pro-Growth Sequester



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The Obama administration is whipping up hysteria over the sequester budget cuts and their impact on the economy, the military, first providers, and so forth and so on. Armageddon. But if you climb into the CBO numbers for 2013, you see a much lighter and easier picture than all the worst-case scenarios being conjured up by the administration.

For example, the $85 billion so-called spending cut is actually budget authority, not budget outlays. According to the CBO, budget outlays will come down by $44 billion, or one quarter of 1 percent of GDP (GDP is $15.8 trillion). What’s more, that $44 billion outlay reduction is only 1.25 percent of the $3.6 trillion government budget.

So the actual outlay reduction is only half the budget-authority savings. The rest of it will spend out in the years ahead — that is, if Congress doesn’t tamper with it. 

Read my full column here

Obama’s No-Growth State of the Union



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By far the best line from this week’s dueling State of the Union messages came from Florida senator Marco Rubio. Nice and simple, and right to the point:

“Presidents in both parties — from John F. Kennedy to Ronald Reagan — have known that our free-enterprise economy is the source of our middle-class prosperity.”

That’s a brilliant summary of pro-growth policies, on the supply-side and in a free-market context.

Kennedy slashed tax rates and held down the budget. So did Ronald Reagan, who borrowed Kennedy’s ideas: smaller government, lower tax-rate incentives, and a thriving middle class, where the economic pie grows ever larger.

In short, the Kennedy-Reagan policies were growth policies.

On the other hand, while President Obama quotes John F. Kennedy, he doesn’t draw the dots to Kennedy’s supply-side tax reforms. He does mention the phrase “tax reform,” but he’s not talking about lowering rates across the board while broadening the base to reduce deductions. Rather, he means penalizing companies that operate overseas and favoring companies at home that do what he wants them to do. 

Read my full column here

There Is No World Currency War



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All this chatter about a so-called global currency war is utter nonsense. All that is happening is the Japanese are wisely taking steps to increase liquidity and depreciate their vastly overpriced yen. They are doing this in order to avoid deeper and deeper deflation. That deflation will sink the Japanese economy for years to come if remedial actions are not taken.

Among all the big economies, none needs quantitative easing more than Japan’s. All the Japanese have done so far is make cheap loans to banks, but with no concerted QE. But QE is coming this spring, when Prime Minster Abe appoints a new Bank of Japan head man.

Mostly through jawboning, the Abe government has lowered the yen in round numbers from about 77 to the dollar to roughly 93 to the dollar. It’s about a 20 percent change. Long overdue. My guess is the yen will wind up around 120 to the dollar as the year progresses.

To suggest that this is inflationary is a complete fantasy. It is aimed at stopping deflation. Over the past three years, nominal GDP in Japan has been roughly flat. In other words, total spending for the economy has been nil. That’s a recession. And a long one at that. (In some sense, Japan needs to recover from a 20-year recession.)

Now, monetary pump-priming is not the only solution for Japan’s economic woes. Supply-side tax cuts would go a long way toward promoting growth. There has been a small corporate tax cut, but more is needed.

Personal tax rates are way too high in Japan. And the Japanese stubbornly insist on all these ineffectual Keynesian deficit-spending policies. They are a complete waste of money and have run up Japanese debt to huge levels.

New fiscal policies are essential to promote growth in Japan. But just as inflation is a monetary phenomenon, so is deflation. And if Japan is going to correct this by adding reserves and depreciating the overvalued currency, this is all to the good.

Elsewhere around the world, the U.S. dollar has been steady. The dollar-gold price has fallen about $350 and remains in the mid-$1,600 range. The euro-dollar currency rate has been reasonably steady, between 1.30 and 1.40. The dollar itself is hovering around 80 on the DXY index. And on the other side of the world, the Chinese yuan has been fairly stable.

So there is no currency war — just a more sensible Japanese monetary policy.

By the way, it’s no coincidence that a more pro-growth yen decline has helped trigger stock market rallies around the world. 

The Spending Sequester Will Grow the Private Economy — Don’t Back Off



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Today’s report of a 0.1 percent GDP decline for the fourth quarter came as a surprise to most forecasters. But it actually masks considerable strength in the private economy. Namely, housing investment in the fourth quarter jumped 15.3 percent annually, business equipment and software spiked 12.4 percent, and real private final sales rose 2.6 percent. All in, the domestic private sector of the economy increased 3.4 percent annually — a very respectable gain.

And here’s one for the record books: Working ahead of year-end tax hikes, individuals shifted so much money to the fourth quarter at the 35 percent top rate that personal income grew by 7.9 percent annually — a huge number. And there’s more: In order to beat the tax man, dividend income rose 85.2 percent annually. You think tax incentives don’t matter? Guess again.

Now, all this private-sector strength occurred despite the fact that government spending — namely military spending — dropped 6.6 percent. Inventories also lost ground and the trade deficit widened.

But here’s a key point: Military spending has now fallen virtually to its lower sequester-spending-cut baseline. It did so in one quarter by about $40 billion. So the brunt of the impact over the coming years has already been felt. (Normally, as of recent years, military spending has been virtually flat.)

Which leads me to another key point: Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. Lower federal spending, limited government, and a smaller spending-to-GDP ratio will be good for growth. The military spending plunge will not likely be repeated. But by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually pro-growth.

Big-government Keynesians think big spending provides big growth. They are wrong. This has been a 2 percent recovery — the worst in modern times — dating back to 1947. So let’s try something different. Let’s shrink government. Let’s let the private sector breathe and generate entrepreneurship and risk-taking.

Spending is the true tax measure of the economy, according to Milton Friedman, Friedrich Hayek, and others. Even a modest sequester spending cut of maybe $60 billion in 2013, and perhaps more than $1 trillion over ten years (most of which will come from a slower spending growth rate, not real reductions), will be the best thing to inspire business and market confidence as well as international credibility. And it maybe even shave a point or two off the spending share of GDP.

On March 1 the spending sequester is supposed to kick in by law. If Congress wants to help the U.S. economy, the best thing it can do right now is implement this sequester. Then it can round out an even larger growth package, including large- and small-business tax reform and adjustments to stop entitlements from going bankrupt.

Obama’s Declaration of Collectivism



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One of the least remarked upon aspects of President Obama’s inaugural speech was his attempt to co-opt the Founding Fathers’ Declaration of Independence to bolster his liberal-left agenda.

Sure, the president quoted one of the most important sentences in world history: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

So far, so good. But he later connected the Declaration with his own liberal agenda: “ . . . that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedom ultimately requires collective action.” (My italics, not his.)

He fleshed this out with his trademark class-warfare, income-leveling rationalizations. Such as: “The shrinking few do very well and a growing many barely make it.” He also talked about “Our wives, mothers, and daughters that earn a living equal to their effort.” He followed that up with, “The wages of honest labor liberate families from the brink of hardship.”

Here’s what I take away from all this: Mr. Obama is arguing counter to the Founding Fathers that the pursuit of happiness is the pursuit of equality of results, not the equality of opportunity, and that he will do what he can to use government to make everybody more equal in terms of their income and life work.

Read my full column here.

Without Deep Spending Cuts, the Republicans Lose the House in 2014



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Okay, it’s official. According to the Treasury Department, the U.S. debt jumped to $16.1 trillion in 2012 from $14.8 trillion in 2011. That’s a $1.3 trillion deficit for the last year. Remarkable. During President Obama’s first term, the federal debt rose by roughly $6 trillion.

Now, if they are bold, House Republicans will take advantage of these dismal numbers. Bold means bold spending cuts, as in cut spending like there’s no tomorrow. Bold means implementing the $1.2 trillion spending sequester. Bold means an absolute rock-solid commitment to spending cuts. A new Rasmussen survey shows that 62 percent of Americans favor across-the-board spending cuts. That includes every program of the federal government, according to the survey.

So Republicans can persuade the public about bold spending cuts. They can make it their key message and central marketing strategy. If they don’t, they risk losing the House in 2014.

Read my full column here

An Unqualified Jack Lew Will Tax and Spend



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The worst part of the Jack Lew nomination for treasury secretary is not simply that he has no qualifications, standing, or experience in the financial world or international sphere (think G20 and European debt crisis). Nor is it simply that he doesn’t have any seasoned currency opinions (under Obama, the greenback has dropped 10 percent while gold has doubled).

Yes, these are big disqualifiers. But the real problem is that Lew is a left-liberal Obama spear-carrier, whose very appointment signals a sharp confrontation with the Republican House over key issues such as the debt ceiling, the spending sequester, next year’s budgets, and taxes. 

Read my full column here

Cruz: Government Shutdown Is on the Table



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Last week on The Kudlow Report, I asked Republican Senator Ted Cruz if he’d go with a government shutdown if it came to it on the debt-ceiling debate. His answer: “I think we have to be prepared to go so far as to shut the government down — if we don’t get some serious policies to stop the out-of-control spending, to tackle the debt, and to get economic growth.”

It was a bold statement. Watch the full video here:

One Cheer for the Cliff Deal



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One cheer out of a potential three is all anyone can logically give the fiscal-cliff deal. On the day after the bargain was clinched, the stock market gave a 300-point cheer. So be it.

In the short run, extending tax cuts up to $450,000 probably saved us from a recession. If all the tax cuts had expired, we’d have a $500 billion tax hike, plus marginal rate increases, and that would have sunk the economy. So I’m going to bet that the big stock rally was a sign of relief that the final deal wasn’t worse. 

Read my full column here

Don’t Blame Boehner



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When you lose an election you get frustrated. When you’re sitting in a subpar 2 percent economy, and are faced with tax hikes rather than marginal rate reductions, you get even more frustrated. And when you’re staring at $47 trillion in spending over the next ten years, and $8.6 trillion in deficits, your frustration levels climb even higher.

These are among the frustrations that led a number of House Republicans to pull back from Speaker John Boehner’s so-called Plan B. Nobody looked good on the Republican side when Thursday night’s vote fell through. But you have to understand their frustrations. Losing an election is no fun.

I don’t blame John Boehner. His idea is the best compromise currently available. Or put another way, it’s the least-bad option out there. It was even backed by Paul Ryan and Grover Norquist.

Read my full column here

No Cliff Calamity: That’s What Stocks Are Correctly Predicting



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Despite all the media hullabaloo about the fiscal cliff and a potential recession if none of the Bush tax cuts are extended, stock markets have behaved calmly throughout this whole period. In fact, as of this writing today, the Dow is up 100 points.

I’m gonna guess that stocks, in their wisdom, are correctly sniffing that there will be no calamitous falling off the cliff. By that I mean there will be no $500 billion tax hike, which would be an economy killer.

Instead, after speaking with prominent Republican House and Senate members, I have come to believe the following: The GOP knows that Obama has the upper hand in this post-election battle. Therefore, they are preparing a strategic retreat.

Republicans don’t want to be the party of rich people and let Obama maintain his hold on the middle class. Republicans also don’t want to be the party of recession. So if no comprehensive deal is reached by President Obama and Speaker John Boehner, Republicans will not block an extension of the so-called middle-class tax cuts, which are roughly three quarters of the total.

It’s hard to know how this story will work itself out. There may be deals on upper-end tax rates, say 37 percent instead of 39.6 percent. And maybe even some lower tax penalties on capital gains and dividends.

Ideally, the GOP can get solid promises on spending cuts and entitlement reforms in return for a tax package. That tax package may include a dollar limit for tax deductions along with the rise in upper-end tax rates. Entitlement reform is also on the table. And so is a roughly $60 billion 2013 spending cut, which carries over from the across-the-board sequester. That is still possible.

But what is not possible is that House Republicans give up their constitutional prerogative to set the debt ceiling. That is their biggest point of leverage. And that leverage will carry over into 2013 as lawmakers once again attempt an across-the-board effort for pro-growth tax reform (flatter rates, broadening the base), serious structural entitlement reform, and more discretionary spending cuts. This will be the battle royale of next year.

As I said, no one knows how all this is going to play out in the next two weeks. But from the standpoint of the economy and the stock market, a worst-case tax-hike scenario that would sink GDP is not likely to happen.

There will be a deal to extend most of the tax cuts. And while higher tax rates on successful earners, small-business owners, and investors are most definitely not pro-growth, at least the across-the-board tax-hike calamity will be avoided. 

GOP Strategic Retreat?



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Republicans are divided. President Obama won’t budge. And more and more, it looks like the fiscal-cliff deadline of December 31 will be missed.

It’s now clear that Team Obama wants higher tax rates and revenue-raising tax-deduction caps to meet their $1.6 trillion revenue target. Spending cuts and entitlement reforms are vague to non-existent. In fact, it could be that Obama not only rejects the across-the-board budget sequester, but that he actively seeks to raise spending, not cut it.

I guess it stands to reason that if you puff up his $800 billion revenue increase from last year, and double it to $1.6 trillion this year, the money will be spent. The government will grow larger.

All this should be unacceptable to the GOP.

Read my full column here

Herbert Hoover Obama?



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Once again, President Obama dodged the key fiscal-cliff issues at a campaign rally/press conference Wednesday morning. Campaign-style, he argued that the middle-class tax cuts (below $250,000) must be renewed in order to prevent a $2,200 average tax hike from hitting middle-class folks. He added that a middle-class tax hike would cost consumers $200 billion in spending power.

Okay, fine. But no one wants to raise middle-class taxes. That’s not the issue. And even if those numbers are right, they dodge one of the key points in the dialogue between President Obama and House Speaker John Boehner. Namely, what to do about top income-tax rates, which include capital gains, dividends, and inheritance taxes?

The president once again avoided the term “tax rate” in his latest round of fiscal-cliff comments. He basically said, Let’s get this done before Christmas in a fair and balanced way. But what is balance?

Read my full column here

Obama Wants Higher Revenues and Rates



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Right after the election, it was all peaches and cream and conciliatory common-ground language when President Obama met with congressional leaders to discuss the fiscal cliff. Of course, the president campaigned on tax hikes for the rich, by which he meant raising top income-tax rates and extending the Bush tax cuts for incomes below $200,000. And the president’s first meeting post-election was with his union and liberal-interest-group supporters, all of whom want to raise the top rates and then some. But instead, the newly reelected president spoke about “new ideas,” as long as they provided a balance of spending cuts and tax increases on the most successful upper-end earners.

Now, however, stalemate may be just as likely as solution. Why? Well, it was former Bush advisor Keith Hennessey who discovered a big obstacle in all this. Team Obama wants a gargantuan $1.6 trillion tax hike over the next ten years to finance larger government. And Hennessey surmised — and I agree — that the reason the president couched his language in terms of higher tax “revenues” rather than tax “rates” is that he essentially wants both. Raise the top rates and cap or eliminate a number of tax deductions for more revenues. This is going to be a big problem. It could well be a deal-breaker.

Read my full column here.

Richard Fisher: Fed Won’t Catch Markets if U.S. Falls Off ‘Cliff’



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In the event the U.S. goes off the fiscal cliff, don’t expect the Fed to shield markets from the worst. In an interview on The Kudlow Report last night, hawkish Dallas Fed president Richard Fisher told me he’d resist that kind of intervention.

“I do not see us as that kind of safety net,” he said. “There’s got to be a limit. In committee we’d have to decide what kind of limit, but there’s got to be a limit.”

That means if Congress plays partisan politics and a big tax hike kicks in, the first quarter turns negative, and lawmakers continue to scurry around Washington unable to reach a deal, don’t expect a massive bond-buying program.

It’s not coming.

Fisher went on to say that lawmakers have to step up, and if need be he thinks the Fed should force their hand.

“Fiscal authorities must get their act together,” he said. “We can’t just rely on monetary policy — we can’t have a monetary policy of infinity and beyond.”

Fisher added, “The Fed has been carrying the ball. But we can’t carry the ball all by ourselves.”

In short, Fisher is tired of the indecision in Washington. “The more we do at the Fed,” he said, “the more excuses politicians have to do nothing.”

It’s worth noting that Fisher emphasized that these are strictly his opinions and not those of Ben Bernanke.

Watch the full interview here:

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