All Things in Moderation

The Addam’s Family Credo. Those just aren’t pretty words.

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I think it is important to have these graphics in mind when we talk about seizing the initiative on budget.  I believe the various commissions that made recommendations had these graphics in mind.  I believe BHO had these in mind when he made the decision to go after health care costs.  I believe that as long as hospital ERs must take anyone Medicaid will be the single biggest red ink pool in our economy.  I believe that SS OA&S can be self sustaining with modest tweaking, but Medicare is a different story [and why I so opposed single payer].   I believe that we can manage the budget in the long run if we can deal with med costs.  I believe that even if we deal with med costs we must increase revenue.  I think the method for increasing revenue is to go to consumption, VAT, and transaction taxes as a replacement for income and estate taxes while retaining excise and “sin” taxes, and tariffs where appropriate.  Again, a very small [less than one half of one per cent] transaction tax on every transaction raises huge amounts of money because there are so many transactions, and so much more transactional volume than net income volume.  One side effect of the transaction tax is that it would kill day trading, and that would not break my heart, either.

The commissions, and the Select Committee, did/do not have the luxury of immediately moving to consumption and transaction taxation, so in their reality, individual and corporate preferences/loopholes must be closed and nothing less than return to Clinton rates on everyone will make a dent.  And they must find as much to cut as they can, but my optimism is exceeded by my dubiety in that respect.  They seem to have about $200B/yr in cuts in mind, both Ds and Rs, so that is about it.  I hasten to add that personal deductions [tax expenditures, or preferences, or loopholes] do leave @  $1 trillion/yr. in the pockets of homeowners and donors.  We will not get rid of the entire mortgage deduction and the charitable deduction this month, either, and I do not know that we should.

And as to health care, I would not propose to let the needy who cannot pay the bill go without care, either.  So I see the problem and don’t think I can solve it under present constraints, including ones I impose on myself.

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Vital Statistics:

Markets are giving back a little after yesterday’s furious rally. By all accounts, this euro deal does not solve the problem, it just is a downpayment. Sovereign credit default swap levels declined yesterday, but not dramatically. EURIBOR / OIS (an esoteric calculation that measures fear in the banking system) did not tighten yesterday as one would expect. That is a caution flag.

Volatility is a characteristic of bear markets, which is why trading them is so hard. Yesterday’s rally certainly had the feeling of bears throwing in the towel, and maybe some of it was end of the month window dressing. I am still of the view that we are in a secular bear market in equities that started in 2000 and probably has a few years left to run. That said, earnings have been increasing as the equity markets have marked time, and the dividend yield on the S&P 500 is nearly that of the 10-year bond. Yet people continue to sit in the 10-year. Ben Bernake must be tearing his hair out.

In economic data this morning, personal incomes were up .1% in September, while the employment cost index was up .3% for 3Q. Spending was up .6% in Sep while inflation remains subdued. The WSJ has an article this morning discussing the dynamic between incomes and the employment cost index. Wages aren’t rising, but employees are getting more expensive. It has all sorts of effects not only on employment and productivity levels, but also income inequality.

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