April 19, 2011

A little less than six months ago this country assumed the Bush tax rates would expire and with it would come a dramatic increase in taxes, across the board. But tax rates were extended "As Is" and other taxes actually fell.  We were also prepared to accept a freeze of all discretionary spending at all time highs.  Instead we have pared that spending by 38 billion, with even more cuts to come.

 By choosing to cut government spending more than we ever have as a nation, we are taking our first step toward facing reality.  The national debate has changed from what government should spend more on, to how government can spend less.  I cannot overstate what a dramatic philosophic change of direction this is.  We are no longer talking about growing government, as much as reducing it.

 

Still before us is the vote on raising the national debt, and under scrutiny is the real cost of allowing such an act of irresponsibility.  Expect a fight over the entitlements Paul Ryan wants to cut, revamp, and dismantle to the tune of some 6 trillion dollars over the next ten years. I am content to let the Tea Party freshmen fight those battles, which I delineated almost a year ago and will continue to support.

 

It is now time to move on to our next big step we need to take as a nation to ensure our return to prosperity and stability—tax reform. Cuts alone will be insufficient to get our house in order. Real tax reform will be needed to go the rest of the way. We need to end all corporate welfare, subsidies, and loop holes in exchange for a lower tax rate for everyone.  Because corporate profits are at all time highs and corporate cash is at record levels, this should be an easy sell. Tax reform with a stress on ending corporate welfare is something I think can be passed with this Congress and this President.  The result would be what every politician wants today—increased revenue.  Anyone who disputes this need only look at the history of every country who has taken this step in the past 50 years.

 

The nation is moving quickly toward fiscal responsibility because we have won the philosophic high ground.  Tax reform would appeal to the majority of American's common sense and sense of fairness and add to this fiscal movement.  But we need more than just government cuts; we need growth policies to win the fiscal battle. There is no way we can cut our way out of debt. We have to grow the economy as well.  The two fastest ways to accomplish this are tax simplification and by increasing free trade with our trading partners around the world.  The first move will aid the second.

 

America is well on its way toward winning market share on the global stage.  Most corporate profits are being generated from business we are doing abroad.  Free trade pacts are being signed and exports have hit an all time high.  But nothing has been done on the tax side.  America has one of the highest tax structures in the world, and could compete even more effectively abroad if we were allowed to unfettered.

 

The most pro-growth tax policy is one that reduces marginal rates to the low competitive tax rates of our competitors around the world. In return for lower rates we should include a cut in all tax breaks, and draft a simple tax that would allow all Americans to pay their taxes without professional help. I would even throw in means testing for Social Security and Medicare to offset challenges from liberals that this is a tax break for the rich.  And if you can't sell that, you shouldn’t be in politics!

 

In past articles I have made the point that it is not a matter of jobs, but productivity that is essential to growth.  That principle applies just as much to the private sector as it does the public sector.  Picturing a million tax preparers out searching for a productive job warms the cockles of my heart as much as thinking of a million bureaucrats seeking honest employment. 

 

Arthur Laffer just wrote an Op ED article for the Wall Street Journal where he pointed out that it costs this nation 431 billion dollars a year to prepare taxes. It costs us a dollar thirty on average for every dollar of taxes we pay to the government. Get rid of the necessity to have taxes professionally prepared, and it would amount to a tax decrease. Tax preparers are quasi-government employees whose only justification for existence is to collect taxes for the government.  Both groups, tax preparers and bureaucrats, are comprised of intelligent and reliable workers that our economy desperately needs to employ productively

 

Yes we will hear screams that this will cause unemployment and hurt the economy, but in the end, most everyone will benefit. It need not be overnight or purposely disruptive, but if the economy is to prosper it needs to happen. Once a bill is passed the transition can begin. 

 

One episode in history that completely refutes the Keynesian contention that reduced employment leads to a falling economy is what happened in 1988 when Bush 1 took office. We had won the cold war and as a result the defense industry was slashed.  Millions of high paying jobs were lost. The economy went into a steep but brief recession and within one year employment began to grow.  Competent, intelligent people, who lost their jobs went into other businesses or created businesses of their own.  A few years later and we were witnessing the greatest boom in our history.  Employment fell to historic lows.  Inflation fell along with interest rates. The market skyrocketed and the dollar soared. 

 

Yet Keynesians of the time continued to preach that we needed jobs “programs” for the unemployed lest we go into a new depression.  None came. The free market was allowed to take over. The result is history.  A transfer of government jobs back into the private sector will work as it always has.  This is the true path to prosperity.

 

One last point, I think it was a mistake to include other non-fiscal measures into the funding bills as the Republicans did in the last budget fight.  For the Tea Party to remain a focused force in politics it must leave issues like abortion, immigration, public television and other peripheral issues out of the debate.  The fact that the Tea Party is only a small fraction of the government yet is now driving the agenda once again demonstrates how powerful ideas are. To move the world the Tea Party needs to stay focused.  Let's not dilute, divide, or fragment that focus again next time.

 

By 2013 this nation needs to be moving toward cuts in entitlements, a decrease in the size and scope of government, a new simpler tax code, stable and sound money domestically and internationally, real healthcare reform, regulatory reform based on private property and the protection of individual rights, and an energy policy free to produce without government help or hindrance. It can be done.

 

Trade Alert and Market Update

 

 

With the fall in resource stocks, many new value opportunities have arisen.  CDE fell from over 37 to under 30.  But I've decided to go a different direction. I bought TCK.  Teck Resources is in zinc, tin, coal and copper. This expands my diversified position in resources.  It just came out with good earnings and good guidance.  It is up over 6% today.  I bought heavy with a stop at 53, 1 point below my buy in, which means I could be stopped out this afternoon.  On the other hand the stock could go to 80.

 
Monday morning brought a zinger from rating agency Standard & Poor's, as they downgraded the debt outlook of the US government to negative. Better late than never.  Most tuned-in observers did that 3 years ago. As far as I'm concerned I think Standard and Poor's needs to be downgraded. But, the good news is it shines an even brighter spotlight on the federal governments need to get its house in order.

 The market fell over 200 points on the news as more and more analysts shaved additional points off their GDP growth estimates of the year. Many were unconvinced about the sincerity of those that have been demanding cuts in spending.  It is becoming clear that real austerity is directly ahead.  It isn't just talk any more.  It is also becoming clear that even more cutting than presently contemplated may need to be done to head off a debt crisis.  Consequently, GDP estimates of the bulls which were running between 4 and 5%, are being cut to under 3.  My forecast from the beginning of the year, which anticipated real cuts, is looking more realistic at a 2.75% rate.

 

Since this week’s post is early, due to the faster than normal news flow, I will only post a market update at the end of the week, and only then if warranted.