While investors wait to see if the Europeans will agree to a major boost in their rescue fund to backstop sovereign debt and the banks who own it, here at home the economic news has turned slightly more positive.
A month ago, significant coincident economic indicators for August for nonfarm payrolls, retail sales, and industrial production all registered zero. It was a bizarre and pessimistic coincidence. Now, a month later, the September figures are coming in better. Not fabulous, but better.
Jobs were revised up 57,000 for August and scored 103,000 in September. That’s way below what’s necessary to make a serious dent in unemployment, but at least it’s moving away from recession.
Retail sales in September gained 1.1 percent while August’s zero number was revised to a three-tenths-of-a-percent increase. Over the past three months, retails sales are rising 7.6 percent at an annual rate, a very decent number that reflects improving car and weekly chain-store sales. As a result, consumer spending after inflation in Q3 will come in at least 2 percent annually. Again, not fabulous, but certainly moving away from recession.
On the supply-side, industrial production came in at only 0.2 percent, with August remaining flat at zero. However, manufacturing increased 0.4 percent after a three-tenths rise in August. Additionally, the production of business equipment surged 1 percent in September after a 1.4 percent August gain, making for a hefty 15.3 percent annual increase over the past three months. That means businesses are investing their profits in new capital equipment.
The bottom line is that the September data could be signaling we’re not on the front end of recession. But the monthly numbers are volatile, and I’m not quite ready to remove the danger sign — especially since consumer incomes are barely rising, and any increases are coming in below the inflation rate.
And speaking of inflation, producer prices surged 0.8 percent in September and are up 6.9 percent over the past year. All that easy money from the Fed, producing an overly cheap dollar, is still circulating enough to keep inflation concerns on the front burner — despite the sluggish economy.
Inside the PPI, consumer goods — a proxy for the CPI — gained 1 percent in September for an 8.8 percent yearly jump. Even taking out food and energy (a silly thing to do), core consumer-goods prices are up 3.6 percent annually over the past three months.
And then of course the Washington message on the left hasn’t changed. Obama and the Democrats are continuing their populist left-wing campaign to tax millionaires and billionaires, beat up on banks and bank profits, and attack the oil-, gas-, shale-, and energy-production miracles that could lift the whole economy if government would only keep out of the way.
It’s not an encouraging sign for animal spirits. Rather, it’s a demoralizing message from the top. Without any serious policy change toward pro-growth tax and energy-regulation reform (or other regulatory barriers for that manner), it’s hard to get excited about the outlook for the economy.
But at least on the tippy-tip margin, the economic numbers are getting a bit better.
The fear level in the market is so high right now that there has to be some solution to the greater problems before we can start to look at bank stocks on a fundamental basis, Rochdale Securities’ Dick Bove told me on The Kudlow Report.
Stocks suffered their worst loss in two weeks on Monday after comments from Germany’s finance minister caused investors to fear Europe’s solution to its debt crisis may not come fast enough. The solution, said Bove, starts with the recapitalization of European banks.
“The problem is you cannot resolve the Greek problem without debt forgiveness, and you can’t give Greece debt forgiveness unless you allow the banks to write-down the Greek debt,” he said. “And you can’t allow the write-down of the Greek debt until you get equity capitalization of those banks.”
According to Bove, that equity recapitalization has to come from the private sector. “I’m talking about the private sector putting the money into those banks to rebuild the capital similar to what happened in the United States in the last crisis here in 2008 and similar to what happened in the United States in the late 1980s, early 1990s,” he said.
Once that debt forgiveness happens, said Bove, the Europeans can start to rebuild their economies.
Herman Cain is the only GOP presidential candidate who wants to kill the tax code. That’s right. Put a knife in it. Junk the entire system. And people are cheering as he rises in the polls in his quest for the nomination.
Cain’s 9-9-9 plan is not perfect. But then again, the good should never the enemy of the perfect.
Republican presidential hopeful Herman Cain’s 9-9-9 plan will add $2 trillion to U.S. GDP, as well as create six million jobs, his economic advisor Rich Lowrie told me on Thursday.
Lowrie also said that under the plan, business investments will increase by one-third and wages will go up by 10 percent. “And if you fold all that growth together,” he said, “federal revenues go up by 15 percent.”
Cain’s 9-9-9 plan would scrap the current tax code and replace it with a 9 percent tax on personal income and corporations, as well as a new 9 percent sales tax.
The controversial plan has helped fuel the Georgia businessman’s sudden surge in the GOP race. A new NBC News/Wall Street Journal poll has Cain leading the rest of the pack among Republican primary voters.
Critics contend the 9-9-9 plan will unleash a new revenue source with its national sales tax and will hurt the middle class. But Lowrie said the sales tax is a replacement tax, not an add-on tax like you’d find at the state level.
“All we are doing is pulling out taxes that are invisible,” he said. “We’re cutting the rates. We’re putting them back in at lower rates. Margin costs will go down and prices will not go up if you have marginal costs that go down.”
Lowrie also rebuffed criticism that the plan was unfair to the middle class. He called the plan fair and efficient.
The payroll tax, he said, will go from 15 percent to 9 percent, and there will be no hidden taxes. “[That] means I pay 9 percent, you pay 9 percent, and if you make a million times more you pay a million times more,” he said.
“We’re trying to strive for transparency,” he added, “and we want to make people aware of just exactly how much in taxes they are paying that is hidden right now.”
I had the pleasure of interviewing Gov. Rick Perry last night on The Kudlow Report. The GOP presidential hopeful said he wants to dramatically increase oil and gas exploration and in the process create more than a million jobs.
“We’re sitting on a treasure trove of energy in this country,” Perry said. “There’s 300 years worth of reserves underneath the land of America and that’s how we are going to get America working again.”
Perry pledged to “open up all the federal lands and the waters” in his first 100 days in office, which he said will in turn get 1.2 million people back to work.
The Texas governor is unveiling his far-reaching plan today in the hopes of rekindling his presidential bid. A new NBC News/Wall Street Journal survey has the Texas governor — the former frontrunner — in third place behind Herman Cain and Mitt Romney.
In addition to job creation, Perry said the plan will “secure us — from an energy standpoint — from countries that don’t have our best interest in minds.”
To make it work, Perry vowed to pull back on regulations and rebuild the Environmental Protection Agency. And he said he doesn’t need congressional approval.
“I can move unilaterally to open up those lands, to pull those regulations back that are killing jobs, and to rebuild that EPA where it truly is an agency that is about protecting the environment,” he said. “We can get this country energy independent.”
Perry also took the opportunity to address the ongoing debt crisis in Europe, declaring that the EU will not be on the receiving end of any U.S. bailouts if he’s in office.
“If you’re too big to fail you’re too big. And that goes for Europe,” Perry said. “America is not here to bail out people who make bad economic decisions. It doesn’t matter whether you are on Wall Street, whether you’re a General Motors or . . . Greece. If you made bad decisions, you are going to have to live with them.”
Yesterday’s massive 330-point stock market rally was generally linked to an expected Merkel-Sarkozy summit in a couple of weeks to nail down a new European rescue plan for bad government debt and troubled banks. But I think the more immediate cause of yesterday’s rally was the news that European leaders are rescuing the underwater bank Dexia. This bank-rescue mission looks to me like a new model to save all the European banks from the risk of catastrophic meltdown and contagion.
There are some key principles in the rescue — nationalization, good-bank/bad-bank breakup, asset sales, and long-term guarantees of bank deposits and liabilities — that could make Dexia a seminal event if it is saved. And it appears as though the authorities are road-testing the rescue as a model for bigger banks that may be in deeper trouble.
I am especially interested in the deposit and liability guarantees. I think these will be part of a big Euro-TARP capital-injection program based on the EFSF rescue fund of the ECB and IMF. In other words, like the FDIC, Treasury, and Fed guarantees of all bank and money-market funds in late 2008, the Europeans may do likewise as Greece defaults. The rescue funds will then support the banks, probably inject some debt capital or preferred shares, and then with those guarantees have the banks raise private-equity capital in the marketplace as soon as possible.
Dexia looks to me like the first example of the European wake-up. As such, it triggered a big bank-stock rally which led to the overall market rise.
One thing I don’t favor is a bailout of the sovereign countries. Greece should default, at least in a structured way, with large bond haircuts. Portugal, Italy — they should not be bailed out. But the banks will have to be bailed out, as distasteful as that may be, in order to avoid a global catastrophe.
This is where the troika support is necessary, and the principle of guaranteeing all deposits and liabilities will be very helpful.
A final thought: I am persuaded that the ECB should cut rates and move to quantitative easing as part of the solution to the deep financial stresses that are pulling down the European economy. And I have a sneaking suspicion that Ben Bernanke will move to QE if the ECB does, even though it hasn’t worked up to now. Maybe this talk of pouring in money to raise nominal GDP will be the Fed’s new raison d’être.
But if the ECB runs a big QE to pump in liquidity (following the Bank of England), then the dollar is going to keep shooting up, imparting deflationary pressures on the U.S. economy that we cannot afford.
Whether Bernanke thinks in these terms remains to be seen.
Team Obama is out and about mourning a “double-dip recession,” while Fed head Ben Bernanke is warning of a faltering economy. I have described the current economic environment as the front end of a recession.
But Obama’s populist, class-warfare attack on millionaires and billionaires, his new war on bank profits, his linking arms with the protesters occupying Wall Street, and his big-government stimulus plan will surely not solve this crisis.
The September jobs report underscores the economic alarm. The unemployment rate stayed at 9.1 percent. But the rate of marginally unemployed (U6) jumped from 16.2 percent to 16.5 percent. Nonfarm payrolls rose by 103,000 while private payrolls gained by 137,000, small-enough increases to dodge a recession bullet right now. But nearly half those job gains came from the return of 45,000 striking Verizon workers.
Here’s the transcript of my interview with Jack Welch from last night’s Kudlow Report on CNBC:
KUDLOW: We welcome back to The Kudlow Report an old friend, the great, famed CEO Jack Welch.
Mr. Welch, thank you for coming back, sir.
WELCH: Larry, it’s great to be here.
KUDLOW: Let me just begin, as we have all day, luminaries like yourself, the way too soon passing of the brilliant entrepreneur Steve Jobs, what’s your thought on that?
WELCH: Absolutely tragic. I mean, his family has certainly had the biggest loss, but America and the world has lost something. He wasn’t just a genius entrepreneur, he was an executor. He got–people are not giving him enough credit for getting a million or two million or five million to the customer on time with great quality. That’s a real job.
KUDLOW: He was a great retailer and a great marketer you got there.
WELCH: Great marketer. Great–a supply chain manager and a great genius of an entrepreneur. He–to show you his impact, though, I had an experience at home. My stepson’s grandmother called, 85 years old, upset as could be.
WELCH: The kids called from college, two of them. They don’t call when CEOs die.
WELCH: They were so impacted. What this guy did for business, he invented cool.
WELCH: He made cool–most business guys are in suits like you are and I am right now.
WELCH: This guy, though, delivered products that made business cool.
#more#KUDLOW: And he made a better world of it. I think…
WELCH: You know…
KUDLOW: …everybody agrees that his impact was just vastly beyond just being a businessman.
KUDLOW: Just vastly beyond.
WELCH: I mean, he was a true visionary.
KUDLOW: Yeah. All right, I appreciate that very much.
Let me come back to some of the current events of the day. President Obama had a lengthy news conference today, over an hour. Among the many points he made, I want to get your take on this, he is endorsing the Senate Democrats’ idea of a 5.6 percent surtax on millionaires. And the president also indicated, however, that other tax increases would still be necessary to fund the budget. Do we need a millionaires tax? Will it help the economy grow? And the whole tax plan, how do you see it?
WELCH: Will this–will this tax be on income or wealth?
KUDLOW: I think it’s going to cover capital gains, dividends and ordinary income, as far as I know, take effect in 2013.
WELCH: Well, look, I think we ought to go back and look at what he’s done so far, Larry. He put a stimulus bill in, $785 billion, whatever it was. It did nothing. Now, let’s look at what he projected. He projected we’d have 6.2 percent unemployment in October 2011. We’ve got 9! Larry, if you’re in a business and you miss by that much, somebody’s calling you in for a chat.
KUDLOW: And, in fact, his whole plan is doubling down. Now…
WELCH: Same plan.
KUDLOW: …the financing, it’s more spending. I don’t want to prejudge it, but it’s more spending, and it’s temporary tax rebates or temporary tax credits. It didn’t work for George W. Bush, it didn’t work for Barack Obama 1. Why should it work for Obama 2? Isn’t there a better way? We all know the economy’s in lousy shape and it’s faltering, as Bernanke said. Jack, with your experience, what’s the better way to grow this economy?
WELCH: I would say you start out with discretionary spending. It’s 1.3, 1.4 billion. Eight hundred and fifty of it’s defense, 450 is total discretionary. Take 25 percent of the 450, that’s $100 million, 90 or so.
Take 5 percent of defense, that’s 50…
KUDLOW: Take it out of the budget?
WELCH: Take it out of the budget.
WELCH: Take–but reduce it, not from projections, actual take it out.
KUDLOW: Level. The level.
WELCH: The level we’re at.
WELCH: Take it down. That’s a billion-three or a billion-five–a trillion-three or a trillion-five over 10 years. That’s one step, OK? Step number two, freeze regulations.
WELCH: Freeze them. This Senator Johnson thing…
KUDLOW: President Obama mocked the Republican freeze on regulations at the press conference today. I just want to put that in. He mocked.
WELCH: He’s shown no ability to lead. Let’s talk about that. But let’s just take this point. Let’s just take freezing regulations until we get unemployment below 6 percent. So, you know, we–just freeze them. The third thing, entitlements. Go after means testing. Lower the age for those below 50. Increase the age till they can get it. Means test. I shouldn’t be getting Social Security. I shouldn’t be getting Medicare benefits at the level I’m getting them. I mean…
KUDLOW: This would provide some confidence, is what you’re saying, right?
KUDLOW: Let me come back to taxes. Is it time to raise the tax rates on the upper income?
WELCH: There’s nothing that says it should.
WELCH: All it is a transfer payment.
WELCH: Take it from one hand, give it the other hand. Doesn’t work.
KUDLOW: And I think a lot of people are skeptical. So you raise taxes on millionaires, which sounds good. `Hey, get the millionaire. I’ll feel better if a millionaire gets hurt.’ It’ll be spent on spending. It won’t be used for debt reduction. Isn’t that the possibility here?
WELCH: Everything’s going to be spend on spending.
WELCH: I mean, they are spenders. They believe government should do more. They don’t believe jobs come from the private sector. They believe government creates jobs. That’s just a fundamental difference.
KUDLOW: So another part of his news conference today, he was asked about the so-called Wall Street Occupiers, the Wall Street protesters, that’s going on around the country and predominantly here but not only here. He expressed a lot of sympathy for that group. And I want to ask you, those guys are against the banks, they’re against financial institutions, they’re against a lot of things to do with capitalism. Are we going to live through a period of kind of left-wing populism where we’re bashing millionaires and billionaires, we’re bashing banks, we’re bashing corporations, we’re bashing Wall Street, we’re bashing, you know, Bank of America for raising its debit card fees. Is that the way this election period is going to go? And how’s it going to affect the economy?
WELCH: Well, that’s all bad news. But it would be solved if we had jobs.
WELCH: I mean, these people have a case. Unemployment at 9 percent. The president promised 6 percent, Larry, in October of ‘11. That’s–nobody goes back and looks at the pledge they made.
KUDLOW: Where did it fail? Where did that plan break down?
WELCH: Shovel-ready jobs. People were ready to go, but we had a couple things wrong. Davis-Bacon wages, that changed the class structure. Buy America. A lot of these jobs–and with a penalty if you didn’t. So a lot of these jobs, they weren’t ready. From the cup to the lip was a much bigger distance. And then to put regulations on top of the stimulus.
KUDLOW: So how do we stop this demoralization, to use Governor Christie’s word? How do we get back to the Steve Jobs optimism, entrepreneurial model of economic growth? It worked for Jobs, it worked for this whole country. How can we preserve that spirit of Steve Jobs?
WELCH: Larry, companies–I just had a review of my 12 companies in the last week–they’re on fire. They’re growing revenues at 7 percent average, the 12 companies. Their EBITDA is up double digits, strong double digits in some cases. This economy doing more with less is not good for jobs because it’s not growing fast enough. It’s growing at a 1 to 2 percent range. We got to get it to 3 to 4, and that’s unshackling this government away from it. When I take out 25 percent of the discretionary spending, the same way we did in GE 20 years ago, guess what it does? You give them a soft landing, you take care of the people who are injured. You–we’ve got a balance sheet to do that. But when they come to work, they don’t come to work and say, `What can I do today?’ It’s when they come to work they cause problem, not the cost of them.
KUDLOW: And you’re sending a signal. There’s a confidence signal…
WELCH: Yeah. And we’re going to unshackle business.
KUDLOW: All right. So unshackling business, reforming the corporate tax code, freezing regulations. Some tough spending measures from Jack Welch. Who fits the bill for all this in the Republican presidential primary sweepstakes right now? Who are you backing? Can you tell me?
WELCH: Yeah, I’m backing Mitt Romney. Now, whether or not he takes the whole platform, because I want to drill, too. I want to drill on nongovernment land and I want to get royalties from that that are going to help lower the deficit. And I want to have by 2020 total energy independence not from renewables. I want to still support renewables. You don’t stop that, but I want to really unleash the energy-driven sector in this economy.
KUDLOW: I thought Romney was a greenie. He flirted with cap and trade when he was the governor of Massachusetts.
WELCH: I said he may not follow my whole platform.
KUDLOW: What about–what about Governor Perry. Last question, what about Herman Cain, who’s actually going to appear on the show later?
WELCH: I hope Herman Cain’s serious. I don’t think he’s serious. I think he’s got a book tour he’s on, OK, and…
KUDLOW: Well, I’m going to ask him that.
KUDLOW: OK, I’m going to ask him if that’s the case.
WELCH: Well, that’s one…
KUDLOW: But if he were serious, could you back him?
WELCH: I’m afraid he’s not electable, and I’m afraid–I think–I think Romney, by the way, will have more trouble in the primary than he will in the general.
KUDLOW: So you’re looking for a defeat of Obama?
WELCH: I want to take this administration out. They don’t understand how to create jobs. They don’t understand to grow this–America is on fire. America is still the greatest country in the world. And we have everything going for us except a government that is not supportive of capitalism.
KUDLOW: All right. I hear you. We’ll leave it right there. Mr. Jack Welch, former CEO of General Electric and just a famed businessman and adviser. I’m Larry Kudlow, we’ll be right back.
So, Gov. Chris Christie gracefully, elegantly, and forcefully decided to stay out of the race.
Fortunately, the logic was consistent with past statements these many months that he has a job to do in New Jersey, he can’t leave that job unfinished, and he’s not going to walk away from the people who elected him. He has a loyalty to the state of New Jersey.
In the end, he said, “Now is not my time.”
No one will know that for sure, but if that’s what the governor believes, then he is right. I think he showed a lot of character in his news conference. And Chris Christie is full of good character.
Also, he continues to criticize President Obama. Christie said he has failed the leadership test. On the attack, Christie said, “Make sure President Obama is a one-termer.”
So you can bet Governor Christie will be on the campaign trail fighting to make Obama a one-termer. He’s not going to endorse in the GOP primary yet. But he’ll be on the hustings. I go back to what I think was the key point in Christie’s Reagan Library speech: Obama’s class-warfare, soak-the-rich policies are dividing the country, demonizing success, and sending a demoralizing message.
The stronger-than-expected ISM manufacturing-index reading for September might normally suggest that the economy, at least for now, has dodged a recession bullet. After zero jobs and zero real consumer spending in August, which put the stalled economy on the front end of recession, the ISM number is the first major September reading.
But economist Michael Darda says hold the applause: Inside the ISM, new orders and order backlogs either flat-lined or declined and remain below 50 — the DMZ recession marker on the index.
Darda believes weak data in the U.S., plus the ongoing European crisis, plus the China slowdown, plus widened corporate credit spreads and stressful financial conditions, all point to a declining economy and additional stock market drops.
So just when everyone had concluded the Chris Christie matter — saying “Great speech at the Reagan Library, but he’s not gonna run for president” — the New York Post comes along with a story that says the New Jersey governor is seriously considering a 2012 run. Apparently the Reagan Library experience had a big impact on Christie, and others. He’s now being urged to go for it by Nancy Reagan, Henry Kissinger, former president George W. Bush, and former first lady Barbara Bush.
According to the Post story, even Christie’s wife Mary Pat is warming to the idea.
I don’t have anything to add to this in the way of a forecast. But it does give me a hook to weigh in on Christie’s speech. It was uplifting and inspiring. As many have commented, it was a Reagan leadership speech on exceptionalism, or “earned American exceptionalism,” as the Wall Street Journal editors put it. I agree.
There are a couple a points that I want to emphasize, though.
Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its “Operation Twist.” The market correctly perceives that the central bank’s plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn’t QE3, that’s for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed’s sterilized asset swap actually tightened financial markets.
The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference.
But the real issue is the new FOMC forecast: “There are significant downside risks to the economic outlook, including strains in global financial markets.” That was the killer statement.
It could almost make your head spin. With an economy on the front end of another recession, President Obama’s tax attack on the folks who are most likely to succeed, invest, start new businesses, and create jobs is nothing short of staggering. Only liberal-left class-warfare ideology can explain this.
In his speech on Monday, Obama laid out $1.5 trillion in tax hikes over ten years, aimed almost entirely at America’s well-to-do. This includes $800 billion from rolling back the top rates in the Bush tax-cut plan, $470 some-odd billion to reduce itemized deductions for upper-bracket payers, and — oh yes — a millionaire’s tax called the “Buffett Rule.”
Pause a moment on the Buffett Rule. Almost all of Warren Buffett’s income comes from capital gains taxed at 15 percent. He only pays himself $100,000 a year, which would be taxed at the top rate. Most of his wealth is untaxed as unrealized capital gains. So his effective income-tax rate is lower than his secretary’s.
New York City mayor Mike Bloomberg, in a radio interview on Friday, warned that high unemployment could lead to widespread rioting. That’s right. He actually said that. At a time when European cities have suffered massively from hooliganism, and at a time when U.S. towns like Philadelphia and Kansas City have suffered huge human and commercial tolls from so-called flash riots.
For Bloomberg to come out with this statement is irresponsible and incendiary. But you know what? He’s got a personal agenda. This is a desperate talking point to sell Obama’s jobs plan, which Bloomberg favors as a solution to high unemployment and zero growth.
Thank heavens the House Republicans just passed a bill — the “Protecting Jobs from Government Interference Act” — that would stop the National Labor Relations Board from telling any company where it can or cannot operate in the United States.
Finally, a pro-business signal from Washington. This one inspired by Boeing’s attempt to operate their $750 million South Carolina plant to produce the 787 Dreamliner with at least one thousand workers. The NLRB has alleged that Boeing is retaliating against union workers in the state of Washington by operating a non-union in the right-to-work state of South Carolina.
This is nonsense.
Boeing is actually adding union jobs in Washington State. And if you keep them out of South Carolina, their next stop probably will be China.
Is that what we want?
This is the same NLRB rogue regulator that wants union strike posters displayed in all businesses and is pushing for back-door card check to end the secrecy of union-organizing ballots.
And it is exactly this anti-business bias coming out of the administration that has caused a capital-investment strike by American companies, which are sitting on nearly $2 trillion in cash.
The president should have taken the NLRB into a special presidential woodshed set up in the Oval Office. That’s what Ronald Reagan would have done.
You want to know why this economy could be on the front-end of a recession, with zero jobs? Think anti-business. Think over-regulation.
So I applaud what the GOP has done. Never forget: free-market capitalism is the best path to prosperity.
Is the economy standing on the front end of a new recession? As IMF executive director Christine Lagarde and World Bank president Robert Zoellick warn that the global economy is entering a new economic danger zone, there’s plenty to be worried about right here in the U.S.A.
The August batch of economic stats shows zero jobs and zero retail sales. Industrial production rose slightly to save us from a clean zero sweep, but it was only two-tenths of 1 percent. However, manufacturing registered by the New York Fed and the Philly Fed showed continued declines. Jobless claims continue to rise. On top of all that, consumer prices showed a surprising increase.
So at best, we have a stagflationary stall in the economy, while at worst a recession could take hold.
Even on the profits front, which has been strong, top Wall Street economist Ed Yardeni reports a large drop in the growth of corporate tax receipts, suggesting a major profits slowdown. A Wall Street Journal story reports a profits squeeze from manufacturers. With productivity slipping, unit labor costs paid by business are rising faster than the prices business can get. Echoing that, producer prices are rising much faster than consumer inflation at retail.
The recession call is not conclusive. I’m the first to admit it. And my optimistic instincts rebel against the downturn scenario. But facts are facts. They must be reported. And the numbers aren’t good.
At this stage there’s virtually nothing the Federal Reserve can do. It caused the huge oil shock by depreciating the dollar during QE2. That’s been a killer. Now it’s time for some pro-growth fiscal policy. The Obama stimulus package repeats all the president’s past mistakes: temporary tax cuts, big spending, government planning (think Solyndra), and all these targeted clean-energy and infrastructure plans that spend the public’s money but do not on balance create new jobs — and certainly do not create new entrepreneurial start-up businesses.
House Republicans ought to take a look at the revolt against Obamanomics. All the polls show it. Republican Bob Turner’s dramatic election win in Queens, N.Y., shows it. The voter zeitgeist has turned against the president’s policies. The GOP should rip up the Obama plan and come down with fundamental tax and regulatory reform to generate new economic-growth incentives and roll back the big-government regulatory costs on business.
The force is with the Republican party as the country awaits bold new action to get us out this economic mess.
Watching the two GOP frontrunners in last night’s debate — Mitt Romney and Rick Perry — a couple of policy points jumped out at me.
First, regarding the Fed, both candidates strongly supported King Dollar. This is interesting because monetary policy continues to be a GOP campaign issue. That is rare in politics, but it’s a good thing in the context of today’s sputtering economy and failed quantitative easing.
For Governor Romney, who said he would not reappoint Bernanke in the last debate, this is a switch from April when he defended Bernanke in an interview with me. Last evening, Romney made it clear that “the Federal Reserve has a responsibility to preserve the value of our currency, to have a strong American currency, such that investors and people who are thinking about bringing enterprises to this country have confidence in the future of America and in our currency.”
As for Governor Perry, he too spoke against the devalued dollar and argued for a “sound monetary policy” with a strong dollar. Perry also repeated his charge of a month ago that if the Fed conducts policy for “political purposes” it would be “almost treasonous.” While I personally disagree with Bernanke’s QE2 dollar-depreciation, which harmed the economy, I still believe the word “treasonous” is inappropriate. (I argued this point in an August column, “Perry’s Red-Hot Bernanke Slam.”) But Perry’s push for a reliable King Dollar is spot on.
What is noteworthy about all this is the growing likelihood that a Republican president following the November 2012 election will appoint a new man at the Fed to conduct a new strong-dollar policy. Reagan used King Dollar in his first term to conquer inflation and ignite tax-cut incentives to grow the economy. Bill Clinton used a strong dollar in his second term to spur the economy. But we’ve had a weak-dollar policy during the George W. Bush and Barack Obama years as the economy has badly sputtered.
A second point on the debate: Neither frontrunner outlined a true reform plan for Social Security. So far as I recall, Romney and Perry avoided commitment to extending the retirement age, shifting cost-of-living adjustments, or establishing personal savings accounts. At some point, as the Ponzi issue over Social Security continues, they are both going to have to play their cards and talk specifically about solving the problem.
That said, both leading candidates agree on flatter-tax reform, light regulations, and a strong currency. That’s a pro-growth economic policy mix. Obviously, it’s totally different from what President Obama is offering.
Who would have really expected a 300-point stock market plunge on the day after President Obama’s so-called jobs speech?
Yes, worries over new fears of a Greek default ripped through the markets on Friday. As did fears of an al-Qaeda bombing plot on the tenth anniversary of 9/11. But you can’t help but think that at least some of the stock plunge is a signal of no economic confidence in Obama’s plan.
And for that matter, who really expected an unbelievably large $450 billion plan? That’s way more than 50 percent of the original $800 stimulus package in 2009 — which did not work.
Former Massachusetts governor Mitt Romney joined me in Las Vegas yesterday to discuss his new jobs and economic plan. He also shared some thoughts on his new Republican rival, Texas governor Rick Perry.
The video and full transcript follow below.
KUDLOW: North Las Vegas, an international truck dealership, we welcome Gov. Mitt Romney back to the show. Thank you very much.
Governor, zero jobs in August; but actually we haven’t created a net new jobin 10 years in this country. We may be on the front end of another recession. The stock market is plunging. OK. How can you fix that if you were elected president? What’s in your new plan?
ROMNEY: Well, you have to recognize that the world has changed, the economy has changed. We’re still following the old policy, the old strategy. It’s not working anymore. I joked that President Obama is following a pay phone strategy, we’re in a smartphone world. And so what we have to do is recognize that our companies are competing globally. We got to bring our employer tax rates down to be competitive. Bureaucracy regulation and government…
KUDLOW: Corporate. Corporate tax rates?
ROMNEY: Corporate tax rates. Bureaucracy regulation has to be modernized, streamlined. Government has to see itself as an ally of enterprise, not an opponent. We got to open up trade for American goods. The last two and half years, the president sat on his hands with regards to trade. We got to get markets open to American products, push them into those products. We got to clamp down on nations like China that are cheating, stealing our intellectual property. We got to get serious about energy. Look, we’re an energy rich nation. We’re acting like an energy poor nation. Let’s use the energy that we have. The list goes on.
I’ve got 40–excuse me, 59 items that we have to address to get America’s economy structured for the new economy, and that’s going to put Americans back to work.
KUDLOW: All right. A lot of meat on the bones, a lot of topics. Before I can throw–toss is back to Bill Griffith, my colleague, let me just ask you, on the campaign trail you took some flack for saying that corporations are people, but you are sticking to your guns. Can you tell us, we’re the business and financial station, why are corporations people? What are you thinking?
#more#ROMNEY: Well, I hope people understand that when you tax corporations that the concrete and the steel and the plastic don’t pay. People pay. And so when you tax corporations, either the employees are going to pay or the shareholders are going to pay, or the customers are going to pay. And so corporations are people. This old 1960s “We don’t like companies” shtick isn’t working anymore for President Obama. That’s just not the right course. We recognize we want small businesses, middle businesses, even big ones to grow and thrive and hire people. We like business. We’re not anti-business, we’re pro-business in this country.
KUDLOW: All right. Let me go and toss it over to my friend and colleague Bill Griffith up in Englewood Cliffs. Go ahead, Bill.
Larry, thank you.
Governor Romney, we welcome you here. Let me ask you a more market oriented question, if I may. Right now Wall Street is focused sole–to a great degree on what’s going on in Europe as they wrangle with their debt crisis, and they’re doing a lot of soul searching over there on how to restructure the Eurozone to solve that crisis. One extreme is to create what the New York Times labeled the United States of Europe, a central authority. On the other end it would be just to disband the Eurozone altogether. In your view, what would be in the best interest of the US economy and our banking interests here and there for Europe to do? Should there be the central authority or should they disband the Eurozone, or is there something in between?
ROMNEY: Well, I got to be honest with you, it is tough enough to figure out what we have to do for America to continue to lead the world and to put our people back to work and to help the middle class, and so I’m not going to weigh in on what I think Europe has to do. But clearly, their problems are not just temporary, their problems are structural. You have nations that are cobbled together with one monetary policy, despite having very different fiscal policies, and that simply can’t go on on an indefinite basis. And either those nations on the periphery are going to have to adopt fiscal policies that are consistent with those of nations like France or Germany, or myou’re going to see continued stress in the euro. My own view is they have to recognize that, show the world that they do recognize that, that they’ve taken structural change. And on that basis, you’ll get investors to once again have some confidence in the future of the–of the European currency markets.
KUDLOW: All right, let me just pick up. I want to come back to the corporate. You’re going to drop the corporate rate to 25 percent, is that correct?
ROMNEY: That’s correct.
KUDLOW: And what will you do about taxing overseas profits of US companies? A lot of people think repatriation would give the whole economy a shot in the arm.
ROMNEY: Yeah. I’ve been talking about that for a long, long time. As you know, it makes absolutely no sense to say to a company, `If you’ve got money overseas and you keep it there and invest it there, you won’t pay US tax. But if you bring your money home and invest here and create jobs here, we’re going to tax you.’ It doesn’t–that just doesn’t make any sense at all. We got to go to a territorial tax system which says, `Look, you’re going to pay taxes in the territories where you’re competing. We want you to bring money home without having a repatriation tax.’ Let’s get the trillion dollars or so some estimate is parked outside the country back home, creating jobs here. My Democrats friends say, `Well, some companies will just send it out as dividends.’ It’s like, `Yeah.’ And that’ll go to shareholders, and it will go to pension funds and retirees.
KUDLOW: Just terrible things.
ROMNEY: It’s not all bad.
KUDLOW: That would be a terrible thing.
ROMNEY: And they’ll–and they’ll buy stuff. That’s a heck of a lot better than having the government take money from one person and give it to another…
KUDLOW: And it’ll pay for itself.
ROMNEY: Take the–yeah, it’ll pay for itself.
KUDLOW: Yeah. And then some. It’ll pay for itself.
ROMNEY: It’ll do more than pay for itself.
KUDLOW: But I was surprised in your documents that you’re not going for fundamental tax reform for the individual personal tax code. Explain to me. As I understand it, you want to keep the Bush tax cuts in place.
ROMNEY: Yeah. Yeah.
KUDLOW: But you don’t want, for example, Governor Huntsman, your friend and colleague and so forth, he wants to go, what, eight, 14 and 23, and he wants to eliminate most of the deductions. Why did you stay away from fundamental personal tax reform?
ROMNEY: Well, I lay out in our plan that I do want to see down the road a restructuring of our tax system with a broader base and lower rates. But my plan is about getting Americans back to work right away. And the place I’ve targeted is on middle income Americans. The people who have been most hurt by the Obama economy are middle income Americans, and so I say to anybody who’s making under $200,000 a year, we’re going to eliminate all taxation on interest dividends and capital gains for you so that you can save, so that you can invest, so you have more money, so you’re able to care for your kids and their future and your retirement as you think is best. That, for me, is the place we need to move immediately.
KUDLOW: All right, I’m going to sign off here. We’re going to continue with Governor Mitt Romney in a second. I’m going to just toss it back to Bill Griffith on “Closing Bell.” Thank you, Bill.
GRIFFITH: You bet, Larry. Thank you.
And, Governor Romney, thank you for being with us here. And don’t forget, you can see the rest of Larry’s interview with the governor tonight at 7 PM Eastern time right here on CNBC on “The Kudlow Report.”
KUDLOW: All right. Let me continue with you on this issue. Now you’re going to eliminate–I’m sorry–you’re going to abolish capital gains and dividends…
KUDLOW: …for singles earning $200,000 a year, is that correct?
ROMNEY: Or less, that’s correct.
KUDLOW: All right. Now about the top people? Why are you not including them? And I raise this because you’ve got some people who have who have been ankle biting you on this question. They said years ago, in the middle 1990s, you argued that the flat tax–Steve Forbes’ flat tax was a fat cats tax, and George Will rhetorically in a column asked, `What does Governor Romney think? What constitutes a rich person? What constitutes a fat cat? What’s the dividing line?’ Tell us why you made it 200,000.
ROMNEY: You know, there’s nothing magic about a particular dividing line. You pick a point where you’re getting the great majority of Americans. Look, there are many people who think we should have zero tax on capital gains, interest and dividends for everybody, as–the very, very wealthy. But recognize that means that Bill Gates and Warren Buffett would pay no income tax at all. And some people say, `Well, that’s a good thing for growth of the economy.’
KUDLOW: But you’re referring to the capital gains tax?
ROMNEY: And I–yes, exactly.
KUDLOW: And the dividend tax, those are different.
ROMNEY: No. If we eliminated capital gains, all tax for the–for everybody, even those making millions a year on interest dividends and capital gains, then Bill Gates and Warren Buffett would pay no tax at all because their income is overwhelmingly if not entirely capital gains interest and dividends. And so the very, very wealthiest would pay no tax at all. My guess is that the American people would feel that, you know, right now the people that are hurting in this country are not the very wealthy but the middle income folks. And so the place I want to focus my effort and my break and also encourage more investment savings is for middle income Americans.
KUDLOW: So you agree with Buffett then, there should be higher taxes on the upper income people.
ROMNEY: Well, listen, I believe in keeping…
KUDLOW: But would you also tax wealth?
ROMNEY: I believe, Larry, I believe…
KUDLOW: Would you tax wealth?
ROMNEY: Well, of course not. We have right now a 15 percent tax on capital gains. That’s the rate that I would keep in place for now. And what I would say is we would remove the tax for people in middle incomes. Their tax would go to zero. The tax for higher income folks would stay the same.
KUDLOW: All right. Let me move on. You talked about trade and you sort of have a two-edged sword going here in your package. You want free trade deals but you’re very tough on China, in fact, uncharacteristically tough on China. Piracy, counterfeiting, I get that. How can China be brought into the WTO or play by–at an all-out…(unintelligible).
ROMNEY: Well, the people are going to always threaten that if they don’t get their way, they’re going to do something that’s hurtful. And sometimes people get frightened and say, `Oh, I better give them what they want.’ But, you know, we’ve been doing that for a long time and China continues to steal our intellectual property. They hack into our computer systems. They manipulate their currency such that their products have a substantial disin–excuse me, substantial advantage relative to our products in the world. They buy far more–excuse me, we buy far more of their products than they buy from us. Their government doesn’t buy anywhere near the products from America they should be buying.
KUDLOW: How can we force them?
ROMNEY: And so, look, what you say is, `Hey, look, you signed agreements.’
KUDLOW: All right.
ROMNEY: `You’ve agreed to follow certain practices. If you don’t follow those practices, why, then, we’re going to take the corrective actions which are outlined.’
KUDLOW: What would the correction actions be?
ROMNEY: Well, you take a–when you negotiate, you let them know that you’re willing to take whatever action is necessary, and that would include, for instance, if they’ve stolen intellectual property on a particular series of goods that you’re going to put tariffs on their products if they don’t abide by the rules.
KUDLOW: So you agree with Don Trump. Essentially Donald Trump wants to put tariffs on their imports.
ROMNEY: You know, I’m not going to adopt the policies of someone else that I haven’t read. I can tell you that I agree with my policies that I describe in my book, which is to say that in places where people have taken advantage of us and have killed American jobs or are threatening to do so, that we’re not going to sit back and just say, `Oh, we got to do this because we owe them a lot of money.’ We’re going to say, `You know what? We don’t want a trade war, but we’re not going to endure a trade surrender.’
KUDLOW: All right. So tax cuts for corporations. Tax cuts for the middle class, keeping the Bush tax cuts in place, free trade but tough on China, deregulation. You have a big deregulation point.
KUDLOW: Let me ask you this, economics on the campaign trail, it’s getting pretty rough and tumble. Yesterday, once again, Governor Perry slammed you. He said Governor Mitt Romney did not create jobs in Massachusetts and he, Governor Perry, created jobs in Texas. What’s your response to Governor Perry?
ROMNEY: You know, I’m not responding to Governor Perry right here. He’s not here. I’ll probably get the chance to do that at some point. But I’ll talk about my record on that.
KUDLOW: But it must get under your skin?
ROMNEY: Why would I be worried about what other people say? I’ve been in politics now for long enough to not worry about what others are saying, but instead to talk about what I believe.
KUDLOW: Did you create jobs in Massachusetts?
ROMNEY: Well, of course I did. Of course I did. The unemployment rate went down as I was governor of Massachusetts. We were losing jobs every month when I came into the state. We turned that around and created jobs every month. And, you know, I’m proud of the fact that when I was governor, the three of the four years I was there, our unemployment rate was below the national average. You know, each state has some differences. I’m pulling out those differences and we’ll talk about the prospects we have for seeing the entire country have as its leader a person who has not just watched other people create jobs but someone who’s actually created jobs. In 25 years in business and at the Olympics, I created jobs.
KUDLOW: All right, that’s where I was going. OK. You give as good as good as you take. You have charged that Governor Perry is a career politician and that you have spent the bulk of your career in the private sector. Do you understand how the economy works better than Governor Perry?
ROMNEY: You know, I haven’t spoken about Governor Perry, but what I have said is that career politicians don’t know what it takes to get this economy going again, and, you know, evidence number one is what’s going on in Washington, DC. You’re seeing the president come out with more of these stimulus plans. Plan one, two, three, four and five didn’t work. He’s going to do another one that’s going to have the same output because they don’t understand what it takes to get businesses to invest in America and to hire people. I do. I’ve done that. I’ve competed around the world. If people want somebody-if they think the most characteristic of a president is someone who understands how the economy works and is expert in turning around enterprises, then I’m the guy. If there are other measures that they want to select upon, well, maybe I’m not the guy. That’s the choice that they’ll have to make.
KUDLOW: Well, just interesting on these choices. People are kind of freaked out by the debt limitation debate, and there’s a lot of economists who are actually saying that that whole debate, which came right up to the edge of a default and still really didn’t make a dent in our spending and our borrowing, damaged the economy. That what we’re seeing now in a potential double dip is in part caused by that. I want to ask you, is it possible for you and other Republicans to make any common ground at all with President Obama, who gives his jobs speech on Thursday night?
ROMNEY: Well, of course. We’ll see what he has to say in his jobs speech. But I’ve found in my interactions with people on the opposite side of the aisle that we can find ways for us to find common ground. There are a lot of Democrats who realize that spending is too much. But, Larry, you have to understand, back in the days of John F. Kennedy, government at all levels–federal, state and local–consumed about 27 percent of the economy. Today it consumes 37 percent of the economy. And Republicans like me are saying, `Look, that’s too much. We’re not going to keep growing the government.’
KUDLOW: Where would you target it?
ROMNEY: I’d get the federal government down to 20 percent. Right now it’s close to 25. Get it down to 20 percent. We’ve got to cap the amount that the federal government is spending. We can’t let government keep growing and growing because you’re seeing in Washington a class of people, permanent politicians, career politicians who have never worked in the private sector, never really built an enterprise, never signed the front of a payroll check, and they think they know what’s right for America. And they don’t. They need to go home and get a job.
KUDLOW: What about President Obama’s infrastructure bank proposal? He also talks about targeted tax credits. But I want to go into infrastructure bank. Is that the answer to an economy that hasn’t really grown in 10 years?
ROMNEY: Well, I’m afraid we do need to see better infrastructure in this country and we need to encourage the investment in airports, in new flight systems, in highways and bridges. Our bridges are in terrible disrepair. And there are a wide array of ideas about how to do that.
KUDLOW: Could you support a government project bank?
ROMNEY: Well, I…
KUDLOW: It sounds like Fannie Mae.
ROMNEY: I will–look, I don’t want the government getting into more and more enterprises like Fannie Mae and Freddie Mac. I’ll look at ways to see if we can’t get our highway system updated and get our bridges rebuilt. That’s something that we can do. And there–and there–what I want to make sure is that we have revenue streams to pay for it, not just more money coming out of the general fund. And guarantees. Look, this idea of the government guarantees, that that doesn’t cost anything, that’s wrong, as we’ve learned. Government guarantees are real cash and can end up hurting the taxpayers.
KUDLOW: All right, Governor Mitt Romney, we’re going to leave it there. Thank you for visiting us. It’s a warm day here in North Las Vegas, but it’s a great pleasure to have you back. All best on the campaign trail.
I’m Larry Kudlow, folks. We’ll be right back with The Kudlow Report in just a moment.
No sooner had President Obama shocked the political world with a gloomy economic forecast — projecting 9.1 percent unemployment for this year and a reelection-killing 9 percent for 2012 — than the dismal August jobs report arrived showing no gain in nonfarm payrolls. That’s right, no gain at all. Private jobs increased a scant 17,000, while hours worked and wages actually declined.Obama’s economic policies have failed.
Are we on the front end of yet another recession? This report alone suggests that we could be, although other data points disagree. But on the eve of President Obama’s so-called jobs speech, there’s a much bigger question here: Has the U.S. entered into long-term economic decline?
As a quintessential optimist who believes in American exceptionalism, I don’t even want to raise this issue. But the data tell me that I must.