ACCA: U.S. Tax Code Unfair, Complex

Here’s a breath of fresh air, from a survey of international tax professionals:

The U.S. tax system is viewed as less fair and simple by tax professionals than the tax system in Hong Kong, Singapore and Canada, according to a new survey.

An international online survey of its members by the London-based Association of Chartered Certified Accountants found that only Australia and the United Kingdom ranked lower than the U.S. in perceptions of tax fairness and simplicity.

Hong Kong ranked highest on both counts…The U.S. was in fourth place among the six tax systems in terms of fairness and simplicity.

…ACCA head of taxation Chas Roy-Choudhury…believes that low opinions about a country’s tax system have a negative effect on compliance.

"ACCA’s research has found tax evasion can often be linked to a nation’s tax system having too many laws and regulations," he said. "Making the U.S.’s tax system simpler could lead to a reduction of tax avoidance and tax evasion."

The research reveals overwhelming support from all the countries’ respondents to cut back on the volume of laws, directives and regulations to make tax systems less complex…

URL:

http://www.webcpa.com/article.cfm?articleid=29168&pg=ros 

Cowen: The Problem is Ineffective Regulation

Economist Tyler Cowen has penned an important op-ed for the NY Times, arguing against  prevailing opinion that stronger regulation will prevent future crises. Among the key points:

Banks are already subject to myriad regulations and multiple regulators.

Longstanding legislation supported by members of both parties incentivized overinvestment in housing.

Cowen points out that inflation adjusted spending on finance and banking regulation has increased by 43.5% since 1990 (note: this looks like a big number, but translates into a fairly low annualized rate of 2% per year), and he questions how well designed new regulations have been:

…financial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.

Cowen’s recommendation: 

…the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it. Identifying underregulated sectors in hindsight isn’t a useful guide for what to do the next time…In the meantime, if you hear a call for more regulation, without a clear explanation of why regulation failed in the past, beware. The odds are that we’ll get additional regulation but with even less accountability and even less focus on solving our very real economic problems.

We harbor some doubts as to whether quicker regulation of credit default swap and other exotic derivative markets would have been a bad thing–these markets grew to staggering proportions in a relatively short period of time, with strong competitive pressures and little oversight.

That said, we agree with Cowen that demanding a clear explanation of why existing regulations failed, before jumping headlong into new ones, is critical in this election season. In recent statements, McCain has blamed both parties, lax regulators, and greed, and pointed out that the existing regulatory framework was designed for the 1930s. This strikes us as a balanced assessment, especially at the height of campaign season. Obama and Biden have made some similar arguments, although they’re also using the crisis to tie McCain–and all of the current upheaval–to the economic policies of the Bush administration and nothing else. That’s disappointing and a bit silly, but it might make for good campaign strategy. Time will tell.

UPDATE: Economist Reuven Brenner argues in Forbes that imposing mark-to-market accounting rules on assets with no market or thin markets is a bad idea. A former FDIC Chairman offers the same argument in the WSJ, advocating a return to economic valuation (discounted cash flow estimates) for thinly traded assets.

URLs: 

http://www.nytimes.com/2008/09/14/business/14view.html?_r=4&ref=business&oref=slogin&oref=slogin&oref=slogin&oref=slogin 

http://my.barackobama.com/page/community/post/stateupdates/gG5qKN 

http://online.wsj.com/article/SB122178603685354943.html

http://www.forbes.com/home/2008/09/17/market-ratings-accountability-oped-cx_rb_0917brenner.html 

PPI Numbers

Today’s PPI data from the BLS for August showed monthly declines across finished goods (0.9%), intermediate goods (1.0%), and significantly, crude goods (11.9%). The fall in finished goods prices was due to a 4.9% decline in energy prices; food and core finished goods prices were higher.

The crude and intermediate rates were the first negative readings since August of last year, and for crude goods the fall was significantly larger than last year’s. This data would seem to argue against our stagflation thesis, in favor of a plain old contraction without (hopefully) any more significant, policy induced changes in the price level.

However, we think it’s important to keep the year over year numbers in mind, as the significant rise in producer prices will still be feeding through the global price level in coming years:

From August 2007 to August 2008, prices for finished goods advanced 9.6
percent. Over the same period, the index for finished energy goods increased 27.4 percent, prices for finished goods other than foods and energy rose 3.6 percent, and the index for finished consumer foods climbed 9.1 percent. At the earlier stages of processing, prices received by producers of intermediate goods jumped 16.7 percent and the crude goods index surged 38.1 percent for the 12 months ended in August.

We also continue to see longer term inflation risks globally. The staggering amount of assets taken onto the U.S. Government’s balance sheet and the Federal Reserve’s this year, and the additional expenditures and possible investments still in the pipeline, make the temptation to inflate (though it may not be apparent to policymakers that they are advocating such a course) all too apparent. On the other hand, we believe that we’re seeing, for the first time in a century, that U.S. dollar policy is not the only monetary game in town when it comes to global inflation and deflation. Europe’s economies are bearing the brunt of the ECB’s monetary discipline, but at the margin we believe it’s keeping a stronger lid on inflationary pressures in the global economy than would exist if the Fed were the sole issuer of a global reserve currency.

http://www.bls.gov/news.release/pdf/ppi.pdf 

Letter to WSJ by John Cochran

This is only a letter to the editor, unfortunately, but we think it hits on one the most important and underrecognized factors in the current U.S. downturn. It’s from economics professor and business school dean John P. Cochrane (emphasis added):

…it is…important to put these job losses and the failure of the economy to create replacement and new jobs into the context of the failure of Congress to extend supply side, pro-growth tax policy, due to expire in 2010.

A dynamic economy is a creation-destruction process. When tax and regulatory policy is appropriate, the entrepreneurial forces for creation — whether new start-ups or further expansion of successful businesses that are always looking at the future, not backward — dominate the process. Then the economy experiences innovation, economic expansion and job growth, as illustrated by the post-2003 period in the U.S., the nearly 20-year period in the U.S. post-1981, and the Celtic Tiger, Ireland.

In light of the upcoming expiration of the 2003 tax policy, coupled with the on going anti-business political rhetoric that promises policies that could be even more draconian than the pre-2003 policy, it is no wonder that business planners, the creative forces for change, are more willing to cut back current activity, are hesitant to expand, and are unwilling to begin or finance new ventures.

"Multiple Causes for Jobs Data Drop", Wall Street Journal Letters, 9/11/2008

The Hayek-Keynes Debate: Lessons for Current Business Cycle Research by John Cochran and Fred Glahe

IMPORTANT DISCLOSURES:  The foregoing blog post is informational and entertainment purposes only. It does not constitute in any way a recommendation or an offer to buy or sell any security, or to engage in any particular investment strategy. Clients and/or principals of Symmetry Capital Management, LLC may hold long or short interests in any of the securities mentioned.

Symmetry Capital Management, LLC participates in the Amazon Associates program. If you follow a link from our site to a product carried on Amazon.com, and you make a purchase, we earn a 4% referral commission.

Federal Budget Deficit Nears 3% of GDP

For those who are ready to sound the "all clear" for the U.S. economy comes this news–budget deficits in coming years may approach 5% of GDP, and will pose a serious challenge to policymakers. And their actions may in turn pose serious challenges to the U.S. economy.

"Federal Shortfall to Double This Year", Washington Post

Senator Byron Dorgan is quoted as putting all of the blame on Bush and Congressional Republicans, but that’s a tough sale:

In January, congressional budget analysts had estimated the deficit would be only $219 billion by year’s end. By July, however, the White House was predicting that the number would spike to $389 billion because of new spending. Yesterday, the congressional analysts upped it even further, saying the increase over 2007 had been driven equally by two factors.

The weak economy has clobbered corporate profits, halting the growth of tax collections. And spending has jumped sharply, in part because of tax rebates, as well as a hike in expenditures to cover unemployment insurance and deposits of insolvent financial institutions.

 The lead editorial in the WSJ has some more damning datapoints:

The real runaway train is what CBO calls a "substantial increase in spending" that is "on an unsustainable path." That’s for sure…This year alone, federal agencies have lifted their spending by 8.1%, with another 7% raise expected for 2009. There’s certainly no recession in Washington. The CBO says that, merely in the two years that Democrats have run Congress, federal expenditures are up $429 billion — to $3.158 trillion.

The fiscal blowouts have included a record farm bill, notwithstanding record farm income; an aid bill for distressed homeowners, extended unemployment benefits, and more generous veterans benefits. Next up: votes on $50 billion for Detroit auto firms, an $80 billion energy bill, as much as $50 billion for spending masked as a "second stimulus," plus $100 billion or more for the Fannie and Freddie rescue. Rather than sort through priorities, Congress is spending more on just about everything.

One little known area where Congress may take some action is limiting transfer pricing by corporations, a technique by which U.S. corporations lower their overall tax bill. In other words, look for a stealth tax hike on corporations. According to the General Accounting Office (GAO), U.S. multi-nationals face an effective tax rate of roughly 25% on domestic activities, and only 4% on overseas activities. Naturally, they move as much of their intangible assets and activities to offshore tax jurisdictions as the law allows. If Congress cracks down hard enough, expect to see more of corporation’s physical assets and activities depart for friendlier tax climates.

One final thought–looking at these numbers, we have to think that the bond market vigilantes are going to make a return during the next administration.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/09/AR2008090901029_pf.html 

http://www.cfo.com/article.cfm/12080659?f=alerts 

More on Sarah Palin

LATEST POLLING DATA FROM WSJ/NBC 

The front page of the Wall Street Journal is touting the positive impact Sarah Palin is having on McCain’s poll numbers, according to the latest results of a joint WSJ-NBC poll. A key result is that a majority of respondents would be comfortable with her as Vice President despite the reservations being raised about her experience. It also found that 34% of people were more likely to vote for McCain based on his choice of running mate, while only 24% said the same of Obama-Biden. However, the flip side is that 25% were less likely to vote for McCain on that basis, and only 16% were less likely to vote for Obama based on his choice of Senator Biden. That means the net gain is in the neighborhood of 8-9% for both of them. And clearly, Palin is a more galvanizing figure than Biden.

Beyond Palin’s impact and the  statistical tie between the candidates, there are some worrying data in the poll for Republicans. For example, views of the GOP are 40% positive to very positive, and 43% negative to very negative; for the Dems it’s 49% and 33%. However, McCain’s ratings are 50% positive and 33% negative, so the negative view of his party could be a reflection on the Bush presidency (Bush’s ratings were 33% positive and 55% negative; the poll did not ask for views on each party’s Congressional members or performance). Assuming that’s true, the McCain campaign’s "change" strategy is a smart one. The Palin effect appears also to be at work in McCain’s numbers when compared to August: "neutral" dropped by 5%, and "very positive" jumped by 10%. Obama saw a 4% drop in his negative ratings, and a 5% jump in "very positive" to 33%, the highest of anyone in the poll. Palin was second highest with 30% "very positive". The numbers lead us to speculate that (1) Obama is still more likely to win in November and (2) we’ll see a Palin versus Clinton race in 2008 if McCain wins, and in 2012 if Obama wins.

ATTACKS MOUNTING

As predicted, the attack machine has gone after Palin with full force. Among the more interesting and less sensational items is the "Anne Kilkenny letter" that has been ‘viraling’ its way into inboxes everywhere. It’s a sincere perspective from a Wasilla resident who has found herself opposing Palin in various matters. Snopes.com has posted four such letters, two pro, two con, some not yet verified. The Kilkenny letter has some interesting parts, and actually makes Palin seem like a fairly typical politician–it doesn’t really jibe with former NYC Mayor Ed Koch’s claim that Palin is "scary". And for what it’s worth, I have relatives who have been Palin constituents since her mayoral days, and they’re pretty fond of her.

SOME DEMOCRATS CHANGING TUNE ON PALIN

There are some really interesting thoughts emanating from Democrats on Palin, in that they contrast so heavily with initial reactions to her selection. This may be why the Obama campaign and the Democratic party have appeared to be scrambling for an effective plan of attack.

Here’s Democratic consultant Joe Trippi: 

The McCain/Palin duo will challenge Barack Obama’s claim of "a new kind of politics" and chastise Obama and Democratic Vice Presidential Nominee, Joe Biden, for their "silence" in taking on corruption in their own party in Illinois, Delaware and Washington, DC…

My initial reaction was that in picking Palin, McCain had taken away the argument that Barack Obama wasn’t ready to be President. I now think my initial assessment on that score was wrong. Over time the McCain team will insinuate that if you think a first term Governor isn’t ready for the number 2 slot, are your really sure that a first term Senator is ready for the number 1 spot?

And here’s the former mayor of San Francisco, Willie Brown, offering an astute view of Palin’s strategic implications, as well as a serious dose of respect for her effectiveness by invoking the fighting abilities of Muhammad Ali (thanks to Don Luskin at www.poorandstupid.com):

Suddenly, Palin and John McCain are the mavericks and Barack Obama and Joe Biden are the status quo, in a year when you don’t want to be seen as defending the status quo…From taxes to oil drilling, Democrats are now going to have to start explaining their positions.Whenever you start having to explain things, you’re on defense…Her [acceptance speech] timing was exquisite. She didn’t linger with applause, but instead launched into line after line of attack, slipping the knives in with every smile and joke…she is going to be very, very effective on the campaign trail…If she can answer questions like she handled herself at the convention, Palin will turn out to be the most interesting person in all of politics, and the press will treat her like they treated Obama when he was first discovered.

"OFF RECORD" CONSERVATIVE TRASHING  

In a Jesse Jackson like moment (though they weren’t threatening to turn Senator Obama into a eunech, or to geld any other of their fellow human beings), Republican strategist Mike Murphy and conservative columnist Peggy Noonan offered some fascinating though largely inconsequential remarks "off the air". Murphy claimed that it McCain needed a "blue state" figure, like Lieberman or Romney. He also claimed that the choice smacked of cynicism. Noonan argued that they were trying for a "narrative" but that Republicans had always been bad at those (in our view, Reagan’s candidacy relied heavily on narrative). They also bemoaned that Senator Kay Bailey Hutchinson had been overlooked. These kinds of gaffes are priceless. Political discourse should always be this open.

So why is all of it inconsequential? First, Noonan was editorializing (unofficially), which is her profession, and what she said was not unreasonable, other than the success of the Reagan narrative. Second, it’s precisely because Murphy was McCain’s strategist in 2000 that his comments aren’t worth the bits of storage that recorded them. He did a lousy job then, and it’s clear from the Palin effect since making those remarks that he would be do a lousy job now.

SOME INTERESTING CONSERVATIVE VIEWS

Jay Cost, on his Horse Race blog, offered a well reasoned assessment of Palin and what her selection said about McCain’s strategy:

…I think many people are surprised to discover that McCain intends to carry a positive message into the fall. Many of us had assumed that this election would be a referendum on Barack Obama, with McCain serving as an inoffensive backup for those too uns
ure of the junior senator from Illinois…John McCain clearly does not share this view of the race. By picking Palin, he is signaling that he intends to win this election not just by attacking Obama, but by offering an affirmative message of his own.

Also interesting is a June 4th column by Jack Kelly (linked in Cost’s post) arguing that strategically, Palin was the obvious choice for McCain (his analysis also agreed with ours in that Palin and Jindal were the first and second best choices, respectively):

There is one potential running mate who has virtually no down side. Those conservatives who’ve heard of her were delighted to learn that McCain advance man Arthur Culvahouse was in Alaska recently, because they surmised he could only be there to discuss the vice presidential nomination with Gov. Sarah Palin.

Note (as Cost did) that according to Kelly, a McCain operative was allegedly vetting Palin as early as May or June. And so far, Rick Davis is still playing a prominent campaign role, judging by his media appearances, where he’s been the point man for questions about when she will she give an interview (she was interviewed for CNBC by Maria Bartiromo in the days before her selection was announced–while Bartiromo may not be the hardest hitting interviewer, she’s no Larry King either). Those two facts lead us to think that the "last minute choice, not thoroughly vetted" allegation was indeed a clever (but apparently short lived) tactical ploy by Dems.

THE DUAL NATURE OF LEADERSHIP 

In addition to bringing up Palin’s nickname "Barracuda", Kelly also observed that she was named Miss Congeniality of the Miss Wasilla beauty pageant. That dual nature–to be both loved and feared–serves political leaders well. It’s along the lines of Teddy Roosevelt’s admonition, based on a West African proverb, to "speak softly and carry a big stick" (the rest of that proverb is "you will go far").

There would be more irony to it had that proverb originated in East Africa, as Barack’s visit to his father’s homeland of Kenya as a young man was reportedly a crucible of identity for him. It’s not clear yet how effectively Obama can wield the big stick, though his charm is beyond question. And while he handled Bill O’Reilly pretty well, he still strikes me as a conflict averse person, especially compared to a hockey mom, a/k/a a pit bull in lipstick (though he’s taking some jabs apparently). If I were advising him, I would bring up the idea of letting Michelle Obama, who seems just as tough as Palin, have a few good humored cracks at her along the campaign trail.

ENOUGH HOOLIGANISM–LEARN TO APPRECIATE THE GAME

Both Palin and Obama have "gone far" in a short period of time. They are interesting people with dynamic personalities, obvious leadership abilities, and of course, very different policy ideas and values. The same can be said of Biden and McCain, except that they’ve been travelling for a much longer time. This is all good. The four of them, as well as their campaign teams, embody many of the diverse backgrounds, identities, demographics, and competing values that exist within the U.S. electorate. And with Obama and Palin’s charisma, they can actually make it interesting, unlike some past elections.

It’s sometimes difficult to grant other people the right to differ with you (i.e., to be wrong). It’s always difficult to accept that you yourself might be wrong. But in a complex adaptive system, chances are that we as individuals will be ‘wrong’ much of the time. It’s only when a sufficient number of diverse opinions have been counted that we can have much confidence in an answer to any complicated optimization problem. Understanding that is key to effective participation in any  system, be it a polity or a marketplace. There will always be hooliganism in politics, but personally, I’m going to sit back and enjoy watching this game unfold. It promises to be a great match between two talented lineups.

AN ASIDE ON HOCKEY MOMS 

As a former youth hockey coach and hockey stepdad, I can confirm that as a group, hockey moms display very little conflict aversion. Every year, moms would want to know when their squirt (or midget, mini might, or atom) would be able to start checking (hitting) the other team’s players. I’ve even seen mothers get into fistfights in the stands over their 13 and 14 year old boys on the ice. The boys, whose game had just concluded, stood on the ice watching. I was waiting for them to start banging the plexiglass and cheering them on, but fortunately, more civilzed heads–coaches, officials, and other parents, notably hockey dads–prevailed.  

URLs:

http://online.wsj.com/article/SB122099348086116259.html?mod=hps_us_whats_news

http://s.wsj.net/public/resources/documents/WSJ_NBC_POLL_0908.pdf

http://www.realclearpolitics.com/horseraceblog/2008/09/what_the_heck_is_mccain_up_to.html 

http://www.realclearpolitics.com/articles/2008/06/the_vp_case_for_gov_sarah_pali.html 

http://www.snopes.com/politics/soapbox/sarahpalin.asp 

http://www.politico.com/blogs/bensmith/0908/Koch_backs_Obama_calls_Palin_scary.html 

http://www.realclearpolitics.com/articles/2008/09/dems_shouldnt_underestimate_pa.html 

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/07/BALU12OCMV.DTL

http://www.poorandstupid.com/chronicle.asp 

http://www.theodoreroosevelt.org/life/quotes.htm 

http://www.kenya-advisor.com/barack-obama-and-kenya.html 

IMPORTANT DISCLOSURES:  The foregoing blog post is informational and entertainment purposes only. It does not constitute in any way a recommendation or an offer to buy or sell any security, or to engage in any particular investment strategy. Clients and/or principals of Symmetry Capital Management, LLC may hold long or short interests in any of the securities mentioned.

Symmetry Capital Management, LLC participates in the Amazon Associates program. If you follow a link from our site to a product carried on Amazon.com, and you make a purchase, we earn a 4% referral commission.

FP: Candidates’ 10 Worst Ideas

Here’s an interesting assessment of the candidates’ platforms from Foreign Policy. In it, they list what they think are the candidates’ ten worst ideas, and give a brief explanation of why.

"The List: Obama’s 10 Worst Ideas"

"The List: McCain’s 10 Worst Ideas" 

URLs:

http://www.foreignpolicy.com/story/cms.php?story_id=4461&print=1 

http://www.foreignpolicy.com/story/cms.php?story_id=4465&print=1 

Changing Political Fortunes?

The latest USA Today/Gallup poll found McCain-Palin leading Obama-Biden 50% to 46%, and by 54% to 44% among "people most likely to vote". According to Bloomberg:

The surge in enthusiasm following the selection of McCain’s running mate Sarah Palin marks a turnaround from the poll taken just before the Republican convention opened in St. Paul when he lagged by 7 percentage points, the newspaper reported.

The sample margin of error was 3% for both sets of data, which implies that the popular vote could still be close to a dead heat, but that McCain has a statistically significant lead among the "most likely to vote" crowd.

Of course, as John Kerry’s supporters learned in 2004, it’s the electoral count that matters, and the Real Clear Politics page (a great resource for consolidated polling and other data) shows that state polls have Obama leading McCain 217 to 174, with 270 electoral votes needed to win. Florida (27 electors), Pennsylvania (21), and Ohio (20) are the biggest ‘undecided’ prizes at the moment. Michigan (17), North Carolina (15), Virginia (13), Indiana (11), and Colorado (9) are also key undecided states. McCain may be vulnerable in Georgia (15) and Missouri (11), while Obama may be vulnerable in Minnesota (10), Wisconsin (10), Iowa (7), and Oregon (7).

From an electoral point of view–which is the one that counts in the end–McCain still has an uphill battle. However, his fund raising fortunes have apparently improved since unofficially winning the GOP nomination, and his running mate is reportedly going to work on that front as well. Improving poll numbers can only help, which will give their campaign enough additional resources to make things interesting. 

URLs:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHBx.Y8FBBoc&refer=home

http://online.wsj.com/article/SB122065665837205573.html 

http://www.realclearpolitics.com/epolls/maps/obama_vs_mccain/ 

http://www.realclearpolitics.com/epolls/2008/president/us/general_election_mccain_vs_obama-225.html 

http://online.wsj.com/article/SB122083596543108777.html 

Comments on GSE Takeover

Tony Crescenzi of Miller Tabak (from a client note, no link available):

The Treasury’s solution is unlikely to be viewed as a cure-all for the housing problem–the elimination of the excess supply of unsold homes is the cure–but it is one of many things that had to happen in order to fix the housing problem. This means that there will be continued low valuation of mortgage collateral, bank failures, and general angst in the finacial sector, at least until home prices bottom, which I again emphasize depends upon the inventory picture.  The Fannie, Freddie solution merely enables the liquidiation [sic] process to continue; it will not hasten the process.

Michael Darda of MKM Partners (client note, no link available):

…Treasury [is] becoming the "balance sheet of last resort"…What the takeover does — and what the Bear liquation did — is to take a near-term worst-case financial market scenario off the table. Looking ahead, we’re going to need to see a sustained compression in spreads and an easing in lending standards to be confident that the credit crisis is behind us. This may not occur until we get closer to a house price bottom (at least for the major metropolitan markets, which is where most of the pressure is). Getting the credit markets, and thus the economy, back on their feet may take nine months or more (meaning no real recovery until the second half of 2009).

PIMCO’s Bill Gross in a Reuters interview linked by Forbes:

"By preserving the GSEs (government-sponsored enterprises) in current form — at least for now — and injecting sizable billions of dollars into the mortgage market, mortgage rates should come down, and the housing market will be healthier for it," the manager of the world’s largest bond fund told Reuters. He added that considerable uncertainty remains about the timing of any housing market turnaround and when the bottom in national housing prices will be reached.

Greg Mankiw from his blog: 

I am saddened whenever any private profit-seeking enterprise gets bailed out…Such bailouts sow the seeds of the next financial crisis by fostering expectations of future bailouts and encouraging excessive risk-taking. (And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are. In a capitalist system, you want those extending both debt and equity finance to bear the consequences of the risks they undertake. If the taxpayer is chipping in, someone is being insulated from risk.)…The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.

An opinion from industry figure Joe Garrett on how the takeover could impact origination and aggregation. He predicts that Fannie and Freddie’s new regulator will require them to (1) cut back on underwriting waivers, (2) cut back on fee for volume incentives, and (3) raise rates and tighten lending standards.

If Garrett is right, then the takeover is essentially going to force the supply of mortgage credit to contract at the margin (although Crescenzi pointed out that they’re actually going to increase their portfolios at first, before contracting them at 10%/year starting in 2010). This is a bit like shutting the barn door after the horse has escaped, and as Crescenzi notes, it does nothing to bring the supply of homes into equilibrium. It’s not clear that anything other than the passage of time can. Treasury’s plan is basically an attempt to smooth out and contain the adjustment process, and from the reaction in mortgage backed securities markets, it appears to be working, for now.

Update 9/9/08 – Quote from David Kotok in WSJ story, "Treasury Spreads Mostly Narrow":

The uncertainty is gone about the fate of Fannie and Freddie, but "the fundamental issues of falling house prices and a weak economy don’t get relieved," says David Kotok, chairman and chief investment officer at Cumberland Advisors.

URLs:

http://www.forbes.com/reuters/feeds/reuters/2008/09/07/2008-09-07T224437Z_01_N07440078_RTRIDST_0_FANNIE-FREDDIE-GROSS-URGENT.html 

http://gregmankiw.blogspot.com/2008/09/thoughts-on-gse-takeover.html 

http://mortgagenewsclips.com/2008/09/07/garrett-watts-on-gses-takeover-and-possible-influences-on-new-origination/ 

http://online.wsj.com/article/SB122087883346009897.html 

Some Comparisons of the Candidates’ Economic Policies

Roger Lowenstein of Smart Money has offered a reasonably sober comparison of both candidate’s economic plans. He concludes:

Where do I come out? Taxes were higher in the ’90s, when the economy and the market hummed along, so a tax hike wouldn’t scare me. But a heavy government hand might. Obama must show that federal projects need not turn into boondoggles and that backing worthy causes won’t devolve into anointing political favorites. McCain must show that with policies similar to Bush’s, he can get better results. It’s a debate worth having.

The tax issue is more nuanced than Lowenstein makes it out to be. In the 1990s, the economy did not really start humming until after the 1994 Congressional elections, and while some tax rates rose during the decade, other important rates, such as capital gains, fell significantly. It’s also true that economic upheaval, financial strains, and monetary disasters were occurring outside the United States at the time. Those factors combined to make the U.S. a relatively attractive destination for investment. In the years since, pro-growth policies have expanded dramatically outside of the U.S., which means that the statutory tax rates that still allowed the U.S. economy to hum along in the 1990s will probably not be sufficient in the coming decade.

Another Smart Money article provides a side-by-side analysis of how each candidate’s proposals might affect consumers.

Jim McTague of Barron’s offered his analysis and opinion in late August in "Dueling Visions":

In McCain and Obama, the electorate is presented with dueling visions of what shape the economy, and particularly the nation’s tax structure, should take. Obama’s stated belief is that the best way to revitalize America is by raising taxes on the rich and redistributing wealth to the poor and middle class. McCain, in contrast, would retain all of President Bush’s tax cuts, including those for the wealthy, and cut corporate taxes markedly, with the aim of boosting investment in businesses and creating jobs.

Whichever concept prevails will have profound implications for the economy over the next decade. And, if Obama’s plan prevails, it could well be for the worse. While both candidates’ proposals have their pros and cons, Obama’s appears to have a few too many cons. There’s no question about that if you happen to be in the top 1% of income-tax payers. According to the nonpartisan Tax Policy Center, the Obama plan would boost the average tax bill for that group by $93,709, to $652,890. McCain’s plan would reduce that group’s average by $48,862 to $510,319…

It’s almost as if Obama wants to repeat the mistakes of Herbert Hoover. During the Great Depression, Hoover raised the top marginal rate to 63% from 25% and hiked corporate taxes, too, says Michael Aronstein, chief investment strategist at Oscar Gruss & Son in New York. The moves siphoned needed investment capital out of the markets and into the hands of bureaucrats, delaying the turnaround.

Of course, taxes aren’t the only part of Obama’s and McCain’s economic programs, and the economy isn’t the only issue in the election…It is Barron’s policy not to endorse candidates. We do, however, see taxes as a crucial issue for the economy and markets, and Obama’s positions have troubling implications.

In an op-ed for the New York Times, economist Greg Mankiw offers a somewhat troubling conjecture on the likely outcomes of tax policy (the dividend tax rate, specifically) under Obama and McCain:

Senator Obama…has not been coy about wanting to use the tax code to redistribute income more aggressively…When all of Senator Obama’s proposed tax increases on the rich are added up, the top marginal rate on wage income would be nearly 50 percent.

But for dividend income, Senator Obama has proposed only a modest increase in the top tax rate, to 20 percent from 15 percent…

In light of Senator Obama’s stand, the politics of dividend taxation may take some surprising twists. Senator John McCain wants to maintain the current tax rate of 15 percent on dividends (while cutting the corporate tax), but it is a good bet that if Senator McCain is elected president, while Congress remains Democratic, Congress won’t give the Republican president what he wants. They would instead let the Bush tax cuts expire, returning the dividend tax for high-income taxpayers to about 40 percent.

By contrast, if Mr. Obama is elected, Congressional Democrats will be less likely to balk at his proposed 20 percent dividend tax rate and thus embarrass the new president from their own party.

This leads to one of the great ironies of the political season. On the issue of dividend taxation, Barack Obama may be the candidate with the best chance of preserving George Bush’s legacy.

This is something we’re sure Obama’s people will be happy to hear! Here’s the most important line from his op-ed: "Whenever taxes, rather than true costs and benefits, drive the allocation of resources, the economy shrinks below its potential." A top marginal tax rate approaching 50%, plus raising the social security cap, plus state and local income taxes, will put the marginal tax rate on high income earners at levels not seen since the 1930s. And the impact, of course, will not be proportional. Those who have the savvy and resources to lower the impact or avoid it altogether will do so, and plenty of effort, talent and expertise will be invested in finding and exploiting loopholes.

What Mankiw is saying, essentilly, is that the upcoming election is a choice between different but rising levels of economic inefficiency. As we wrote yesterday, we’re becoming more pessimistic by the day about the next few years of economic performance.

 
URLs:

http://www.smartmoney.com/smartmoney-magazine/index.cfm?story=september2008-presidential-election&split=0 

http://www.smartmoney.com/consumer/index.cfm?story=20080904-mccain-obama 

http://setup2.barrons.com/article/SB121944470588164921.html?mod=Barron’s+Cover+-+Main

http://www.nytimes.com/2008/09/07/business/07view.html?ex=1378440000&en=4714b7da11d86f01&ei=5124&partner=permalink&exprod=permalink