Judging from the speech Obama gave following the deal to end the government shutdown, Republicans better get wise to the president’s next fiscal gambit when the three-month stop-gap budget and debt measures come due. As was the case with his hard-line defense of Obamacare, the president likely will be inflexible on ending sequestration budget caps, pushing for massive tax hikes, and permitting only the most inconsequential entitlement reforms.
Obama is interested in busting the GOP in 2014. He’s not interested in true budget restraint or other economic-growth measures.
I interviewed Senate Minority Leader Mitch McConnell on Wednesday night’s Kudlow Report. When I asked him about that day’s shutdown meeting at the White House, McConnell described it as “unproductive.” Here’s a report on the interview by CNBC desk producer Elizabeth Schulze, and the video, too:
Washington is still far from resolving its differences over the fight to reopen the U.S. government.
That’s according to Senate Minority Leader Mitch McConnell in an interview on CNBC’s “The Kudlow Report” following a meeting at the White House Wednesday night.
“It was cordial but unproductive,” McConnell said. “The President continues to maintain privately the position that he has had publicly, which is he doesn’t want to negotiate about the continuing resolution to operate the government or over raising the debt ceiling.”
After a two-hour meeting with President Obama, House Speaker John Boehner, House Minority Leader Nancy Pelosi, and Senate Majority Leader Harry Reid, Sen. McConnell offered no timeline for Congress to pass legislation to end the government shutdown.
“Obama can’t get his way exactly the way he likes it,” McConnell said. “The American people expect us to come together and figure out how to solve this problem and sooner or later, we’re going to do that.”
“The shutdown will end,” he added. “Nobody is in favor of a government shutdown, but these are important principles that we are fighting for, for the American people. We obviously want to continue the operation of the government, but we want to keep it within constraints with the Budget Control Act.”
McConnell insisted on maintaining spending levels under the Budget Control Act, the 2011 law which created sequestration. Tax increases to reopen the government, he said, are off the table.
“We don’t want to walk away from the spending reductions we have already promised the American people for the next two years,” he said. “Ninety-nine percent of the Bush tax cuts are now permanent law. We don’t want to walk away from the permanent tax relief that we achieved New Year’s Eve. “
McConnell shifted the debate to the debt ceiling, saying “America is not going to default on its debts.”
Treasury Secretary Jack Lew has said that the government’s flexibility to continue to fund itself without additional debt will end around Oct. 17.
“Our view is it’s time to talk to eliminate the government shutdown, to find out what conditions need to be attached to raise the debt ceiling so the full faith and credit of the United States continues to be honored,” McConnell said. “But we also need to do something about this enormous debt that has been accumulated during the Obama years.”
In response to President Obama’s insistence on a “clean” budget proposal in an interview on CNBC earlier Wednesday, McConnell said the President’s position is “unacceptable.”
“The President’s position so far is that he wants it clean no matter what,” McConnell said. “I think that’s an unacceptable position for Senate and House Republicans. It should be an unacceptable position for the American people.”
McConnell said the President fails to recognize that the American people elected a divided government under the assumption that both parties would negotiate.
“There will have to be a compromise no matter what the President says today because his party doesn’t control the entire government,” he said. “The American people have frequently elected a divided government. When they do that, they don’t expect us to do nothing, to not talk to each other.”
Senate Democrats, McConnell said, are reinforcing the stalemate in their refusal to negotiate with House Republicans.
“The House has sent over a number of different proposals, including the last one to go to conference and have a discussion about this,” he said. “Senate Democrats voted that down, too. Who’s being unreasonable here?”
On June 9, 2013, Larry Kudlow was awarded an Honorary Doctor of Laws Degree from the University of Rochester and delivered the 2013 commencement speech for the University of Rochester Simon School of Business. Below is the full text of that speech.
Thank you . . . Thank you everyone.
It is an honor to be with you all, to be here with your distinguished leaders, with the Class of 2013 and, for me, returning to my alma mater is an emotional moment.
It has been quite a while, too long, frankly, since I have been back. But I’m honored to be here, with all of you, our graduates, and to have this opportunity to give back to a university that has meant a lot to me. Today, I would like to speak to you about two men, two leaders, who had an important impact on my life and on the life of this nation: Bill Simon, our country’s 43rd Treasury Secretary, and Ronald Reagan, our 40th President of the United States. And I am going to speak to you, briefly, about them within the context of two ideas, which are freedom and liberty. It is often said that commencement speakers are all liberals. Not true. I am offering you a conservative prospective and I hope you will listen and reflect on my remarks.
Let me begin with this point. This is the William E. Simon School of Business. I knew Bill Simon. I knew him very well. I enjoyed a lifelong connection with him before he passed away in 2000, and it leads me to say how proud you should be to have your degree with his name at the bottom. Bill Simon was a great Treasury Secretary within an administration full of, forgive me, too many dopes and economic illiterates. If they had listened to Bill, we would not have had to endure all the bloody, damn hell of stagflation within the early and middle 1970s, when I first started out in the workforce. That is how good Bill Simon was.
After he stepped down as Secretary of the Treasury, Bill wrote two best sellers: A Time for Truth and A Time for Action, and those ideas of freedom and liberty that he championed became synonymous with his legacy. Now, my first memory of Bill began with a phone call at 6:00 a.m. in 1977, when I was staying in a hotel in Denver.
It was Bill and I heard a voice bark into the phone, “Is this Larry Kudlow?” I said, “Yeah.” I mean I’m sorry but it was 6 a.m. in the morning. Well, he was calling from New York, and he said to me, “I just read something you wrote. A friend of mine passed it on. You’re a voice in the wilderness, and I want you to get back here so we can have lunch. I have work for you to do.” Now, mind you, I already had a job at the time. But, again, it was Bill Simon. So, we had lunch, and I got to know him. We played a lot of tennis and paddle tennis together, but here is the key: I got to spend hours with Bill as one of his principal speechwriters when he was out of office.
With Detroit filing for Chapter 9 bankruptcy, everybody knows major root-canal cutbacks are coming. Cutbacks of out-of-control government spending, pensions, and health benefits. Major cutbacks. We know that.
We also know that the downfall of Detroit is again proof positive that the public-union collective-bargaining model has utterly failed. Unions just loot the benefit lock box at taxpayer expense. That was the message of Governor Scott Walker’s victorious crusade in Wisconsin. If any good comes out of the Detroit debacle, it will be the spread of that message across the country.
But there’s another important point here. If Detroit is to truly recover, a growth program of tax-free investment incentives must be part of the process. Specifically, Detroit should be made a tax-free enterprise zone, along lines proposed years ago by the late Jack Kemp.
No matter how many monetary officials try to sugarcoat it with damage control, the fact remains that the Ben Bernanke Fed wants to end its quantitative-easing bond-buying operations over the next year. That was Bernanke’s statement at his last press conference, and I’ve seen nothing to contradict it.
As everyone knows, stocks and bonds collapsed right after Bernanke let the cat out of the hat. Fortunately, markets have stabilized since then. But my hunch is that unless the economy really falls back into a quasi-recession, the Fed is going to go ahead and end its bond purchases.
The central bank will more than likely begin to taper in September. And it will do so based on roughly 175,000 new jobs each month, which is consistent with a 2 to 2.5 percent economy.
But as the Fed implements this policy, there’s going to be a lot more volatility in the financial markets, with significant downside risks for stock prices and upside potential for longer-term interest rates.
In the aftermath of Ben Bernanke’s announced timetable for ending Fed bond purchases, long-term interest rates have jumped up while stock prices have cratered down. As I wrote yesterday, I think the Bernanke plan is premature — especially in a 2 percent economy with falling inflation and inflation expectations.
But just to get a little wonky on the interest-rate story, it’s noteworthy that 10-year Treasury notes have moved up about 70 basis points year to date. Currently they’re around 2.50 percent.
Most of that rate rise — more than 50 basis points — is coming from a jump in Treasury inflation-protected securities, known as TIPS. Now that could be a good thing, as rising real interest rates signify a stronger economy. The trouble is, on balance, it’s real hard to find strong evidence of a stronger economy. Instead, as economist David Goldman has noted, investors are bailing out of TIPS because they’re not worried about inflation — which, by the way, is running about 1 percent.
So selling TIPS bonds has raised market interest rates. And that, in turn, has done considerable damage to the stock market and perhaps will pinch the economy.
But the story doesn’t end there. So called inflation break-even spreads have been narrowing significantly. This includes 10-year TIPS implied inflation, as well as 5-yr 5-yr forward inflation expectations. They’ve all dropped about 60 basis points, which is roughly equal to the rise in real interest rates.
So one could argue — as a warning to Mr. Bernanke — that rising rates is a deflationary event, not a growth event. And if the Fed is too hasty in tapering its bond purchases — and after all, tapering is really tightening — interest rates may continue to rise for the wrong reasons, namely deflation rather than faster economic growth.
There is no doubt that the Fed has got to end its bond purchases and eventually figure a way out of its oversized bond portfolio. In recent months I have commended Mr. Bernanke for producing low inflation, after many of us wrongly predicted higher inflation. But as St. Louis Fed head James Bullard said this morning, the low-inflation trend may be too much of a good thing. And bond-purchase tapering — excuse me, I mean tightening — could generate deflationary impulses that could damage the economy.
As an old gold-watching guy, I am obliged to note that the crash in the gold price is moving side by side with the decline in inflation expectations.
All this is why I believe the Fed should move extremely slowly in shifting policy in our still fragile economy.
Without intending to — and perhaps without even realizing it — the normally cautious Fed head Ben Bernanke may have launched a major tightening policy during his news conference on Wednesday. The de facto policy shift immediately sparked a rout on Wall Street, with stock, bond, and gold prices all plunging. And it’s going to shake up confidence even more, perhaps even slowing the already anemic recovery.
Mr. Bernanke has stumbled into a major policy mistake.
When President Richard Nixon collided with the Watergate scandal he was a very unpopular man. The nation at the time was suffering one of the worst recessions in history, and one of the highest inflation rates, too. So Watergate sunk Dick Nixon, but for good measure, the economy sunk him even more.
Roughly 25 years later, Bill Clinton was impeached because he lied about his affair with Monica Lewinsky. But despite his personal transgressions, he never really lost his popularity. Why? The economy was roaring.
So you might say scandals are less scandalous during prosperity, and more scandalous during recession.
As for the current president, he finds himself with a precariously thin margin. As yet, there is no clear and direct link between President Obama and a trove of political scandals. Not yet. And while he doesn’t have a recession on his hands, not even the president’s strongest supporter believes we’re in some kind of Reagan-Clinton economic boom.