Skip to content
BOL Conferences
Learn More - Click Here!

Thread Options
#921770 - 03/13/08 01:23 PM Stagflation Again????????????????????????????????
Pale Rider Offline
10K Club
Pale Rider
Joined: Aug 2002
Posts: 34,318
under the Lone Star
How We Beat the '70s
By MARK BLOOMFIELD
March 13, 2008; Page A18 of the WSJ

With rising oil prices, rising unemployment, and inflation eating away at the economy, a powerful politician pushes for a populist tax hike in Washington.

It sounds a little like the current state of play. But the year was 1978, the push for a tax hike came from President Jimmy Carter, and the tax in question was on capital gains. Mr. Carter wanted to tax capital gains at the same rate as ordinary income -- effectively doubling the rate for many taxpayers.

He didn't get his tax hike, but he did spark a pro-growth insurgency that reframed the tax debate.

The chief insurgent was Republican Rep. Bill Steiger of Wisconsin, who called for cutting the top capital gains tax rate almost in half. From its inception, the 1978 "Steiger amendment" won bipartisan support. In the Senate, Democrat Russell Long (then chairman of the tax-writing committee), Alan Cranston (the second-ranking Democrat) and Republican Clifford Hansen signed up 59 Democrats and Republicans to co-sponsor legislation to cut capital gains taxes.

Within weeks, political and popular support turned in favor of the tax cuts as more people acknowledged that lowering the rates would reward the middle class for saving and investing, not just "fill the pockets of fat cats." Soon the Carter tax increase morphed into a tax cut, bringing the top rate down to 28% from 50%.

What prompted this unexpectedly strong support for lower taxes on capital gains? The tax on capital gains may have been seen as a tax on the rich by some in Washington, but most Americans saw it differently. People believe in the American Dream, the old-fashioned Horatio Alger rags-to-riches story. A tax on capital gains is a tax on the hard work and risk-taking people undertake to build their own wealth.

Mainstream economists know that lower capital gains taxes result in lower capital costs, more saving and investment, and a stronger economy. And ordinary citizens understand that low taxes on capital gains can make it possible for them to buy a new lathe or the newest software, which will give them the chance to compete effectively in today's global economy. Retirement security is also at stake. Low taxes on capital gains allow Americans to build up larger nest eggs.

The 1978 capital gains tax cut was an economic success, as we saw in the 1980s. What followed was a period of fluctuating capital gains tax rates. But a second round of substantial rate cuts came in 1997. Again the result was a clear benefit to the economy. The tax cut was pushed through by Sens. Joe Lieberman (then a Democrat) and Orrin Hatch (a Republican), and it took the top capital gains tax rate to 20% from 28%. President Bill Clinton signed the bill into law. According to a 1999 study by David Wyss of Standard & Poor's DRI, an economic consulting firm, the 1997 tax cut increased GDP, investment and jobs, and raised federal tax receipts.

Today, as in 1978, we are facing pressure to put in place a populist tax increase -- in this case to eliminate "tax breaks for the rich" -- at a time of rising oil prices and signs of rising inflation. This pressure is coming from two presidential candidates as well as Rep. Charles Rangel, chairman of the House tax-writing committee, who is proposing comprehensive tax reform, which in his view includes increasing the tax on capital gains.

But Mr. Rangel, a highly regarded and respected policymaker, is also calling for a full-scale and honest debate on tax policy. This is a debate we should welcome. Let's put the best economists to work and the best research on the table. Let's look at the fact that, as a recent study by the Organization for Economic Co-operation and Development pointed out, nearly half of the 30 countries surveyed do not subject individuals to any tax on capital gains. And let's consider that not keeping our capital gains tax at its current rate (15%) will put us at a disadvantage when competing for global capital.

On Jan. 20, a new president and a new Congress will begin work on a new economic policy. The lessons from cutting capital gains taxes over the past 30 years shouldn't be ignored.

President John F. Kennedy may have said it best in 1963 in a message to Congress: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced in new ventures in obtaining capital, and thereby the strength and potential for growth of the economy."

I couldn't agree more.

Mr. Bloomfield is president and CEO of the American Council for Capital Formation. He served as an aide to the late Rep. William Steiger (R., Wis.).
_________________________
Societies that do not find work in and of itself "pleasing to God and requisite to Man," tend to be highly corrupt.


Return to Top
Chat! - BOL Watercooler
#921848 - 03/13/08 02:37 PM Re: Stagflation Again???????????????????????????????? Pale Rider
buggs Offline
Power Poster
Joined: May 2005
Posts: 8,487
"Whip Inflation Now!"

Return to Top
#922465 - 03/13/08 08:32 PM Re: Stagflation Again???????????????????????????????? buggs
straw Offline
Power Poster
straw
Joined: Nov 2002
Posts: 9,121
The Fed's worst nightmare
Ugly retail sales and a somber forecast from CFOs point to recession, but rising oil and gold prices and a weak dollar show inflation. What's Ben Bernanke to do?
By Paul R. La Monica, CNNMoney.com editor at large
Last Updated: March 13, 2008: 12:48 PM EDT
NEW YORK (CNNMoney.com) -- It's days like today that will make many investors wish they stayed in bed.
And they're not the only ones. Something tells me that Ben Bernanke and the rest of the Federal Reserve's policy-making committee would like to run and hide as well.
Where to begin? Retail sales for February were shockingly weak, with sales falling 0.6% during the month compared to economists' forecasts of a 0.2% gain. Those numbers put dents in the argument that consumers would keep spending in the face of the housing downturn.
Wall Street is also digesting some sobering results from a survey of chief financial officers released by Duke University and CFO magazine late Wednesday.
According to the survey of more than 1,000 CFOs, conducted last week, three-quarters of the respondents said the economy is either in a recession already or will hit one this year, and nearly 90% of CFOs surveyed said they didn't think the economy would rebound until late 2009.
So this means the Fed should slash interest rates at its next meeting on March 18, right? After all, according to federal funds futures, investors are pricing in a 72% chance of a three-quarters of a percentage point cut.
But not so fast.
Gold hit $1,000 an ounce for the first time ever Thursday morning. Oil is slouching towards $111 a barrel. And the dollar hit a 12-year low against the yen and a new record low against the euro. Can you say inflation?
Actually, it's worse than mere inflation. The combination of rising commodity prices and the weakening growth forecast for the economy has people worried about 1970s style stagflation. I hope Bernanke can dig up a pair of old bell bottom pants. Do the hustle!
"Clearly, the Fed needs to switch to Plan B," noted Duke professor Campbell R. Harvey in a release about the CFO survey.
But what is Plan B exactly? It's difficult to figure out just what the Fed can do other than let the credit markets and housing markets work themselves out, and hope the actions the central bank has already taken stimulate the economy at some point.
Time may be the Fed's only ally
Even though the Fed's series of rate cuts since last September - as well as the hundreds of billions in cash and Treasurys that the central bank has pledged to loan capital-constrained financial institutions - have failed to encourage more lending just yet, investors and consumers need to realize there is a lag effect of several months before Fed policy moves have an impact. History shows that Fed easing will eventually work their magic.
Hopefully, the rate cuts will encourage more banks to loosen their lending standards again, and will spur consumers and corporations to start spending more by the end of 2008 or early 2009.
Plus, even though there is a debate about whether the tax rebate checks that consumers will receive in the next few months will really help the economy that much, it's hard to see how the rebates can hurt.
But as I've said earlier this week in this column and numerous times before that, the Fed cannot drop the ball on inflation even if there are more signs of severe economic weakness. On Friday morning, we'll find out how much consumer prices rose in February.
Economists are predicting a 0.3% rise in the headline Consumer Price Index (CPI) number and a 0.2% increase in the so-called core number, which excludes volatile food and energy costs.
If the CPI figures are higher than expected, the Fed may have no choice but to disappoint Wall Street next week and only cut interest rates by a half-point, or perhaps even only by a quarter-point.
A quick fix for the economy is not what's needed. The Fed has to ensure that its actions don't lead to the type of double-dip, or W-shaped recession, that some economists and market strategists are now talking about.
Harvey indicated this could be the longest slowdown since the double-dip of 1979 to 1981. But if the Fed holds firm and doesn't stoke even greater inflation by lowering its key federal funds rate that much further, perhaps there's a chance this slowdown will turn into, at worst, just your garden-variety recession - and not an unwelcome rerun of what happened in the 1970s.

Return to Top
#922477 - 03/13/08 08:42 PM Re: Stagflation Again???????????????????????????????? straw
Jokerman Offline
10K Club
Joined: Nov 2003
Posts: 12,846
Why is it important to remember that Fed monetary policy has a lagging effect, but ok to forget that inflation is measured using lagging indicators?

Return to Top
#922489 - 03/13/08 08:52 PM Re: Stagflation Again???????????????????????????????? Jokerman
doobydoobydoo Offline
Power Poster
doobydoobydoo
Joined: May 2007
Posts: 4,195
Basking in the Cool Weather
Where's old SMokey McPot with his Wiki WIki Wikinomics(thanks AG) when you need him?
_________________________
I'll be in the hospital bar.
Uh, you know there isn't a hospital bar, Mother.
Well, this is why people hate hospitals.

Return to Top
#922605 - 03/13/08 10:08 PM Re: Stagflation Again???????????????????????????????? Jokerman
straw Offline
Power Poster
straw
Joined: Nov 2002
Posts: 9,121
Originally Posted By: Jokerman
Why is it important to remember that Fed monetary policy has a lagging effect, but ok to forget that inflation is measured using lagging indicators?


True, but with commodities rising daily, do you think todays real inflation rate is higher or lower than the lagging indicators suggest?

We are modeling higher inflation, upwards of 6% by year end. What are you guys using for futures?

Return to Top
#922661 - 03/14/08 02:47 AM Re: Stagflation Again???????????????????????????????? straw
Jokerman Offline
10K Club
Joined: Nov 2003
Posts: 12,846
Core to 3 before falling. It's another asset bubble.

Return to Top