TCS Daily


McCain Must Talk Growth and Recovery

By Larry Kudlow - October 6, 2008 12:00 AM

John McCain needs a knock-out performance at Tuesday night's presidential debate if he is to keep his hopes alive.

Right now polls paint a dismal picture for Sen. McCain. Rasmussen shows Obama leading 52-44, Obama's highest level ever. (Moving above 50 percent is a key indicator.) The RealClearPolitics average has Obama up 6 points. InTrade shows Obama up by 34 points. It also could be that key states like Ohio and Florida are now up for grabs, while Obama could win in swing states like Virginia and North Carolina. McCain, of course, is moving out of Michigan. The financial crisis and economic downturn clearly have buried Sen. McCain in recent weeks. Some of McCain's supporters think he can turn the page on the economy Tuesday night and instead attack Obama on character and qualifications. That doesn't seem realistic.

The recession economy and the financial crunch are front and center. Folks are asking: Can I get a loan? Will I have a job? Can I keep my house? Unfortunately, Sen. McCain's message overemphasizes government spending cuts, almost to the exclusion of stimulative and expansive tax cuts. This just doesn't seem like the right time for a government spending freeze, at least to the exclusion of other pro-growth policy levers. Sounds like too much root canal. More like Bob Dole than Ronald Reagan.

That's why McCain needs to stress that tax hikes of any kind would be a total disaster during this economic emergency, and that letting folks keep more of what they earn is a recovery prescription. He needs to emphasize the need for across-the-board tax cuts for individuals and businesses. Lower marginal tax rates will reward work, investment, and risk-taking. They also will put money in people's pockets as they keep more of what they earn.

McCain can point to Paul Ryan's modified flat tax with two brackets of 15 and 25 percent. That would be a great message. This is an economic emergency and it calls for strong medicine. This is not the time to take away tax cuts. It's a time to add them. And reducing marginal tax rates would add substantially to taxpayer benefits on a permanent basis with new incentive rewards.

McCain should next talk about a corporate tax cut from 35 to 25 percent as a means of boosting jobs and wages. He should note that study after study shows that roughly two-thirds of the benefit of a corporate tax cut goes to the workforce. A corporate tax cut also is pro-investment and will make this country more competitive. But the key point is that a lower corporate tax rate is a job-creator. McCain must explain that you can't have jobs without healthy businesses that are funded by investment. McCain also should state that the Federal Reserve needs to keep expanding the money supply. Milton Friedman taught us many years ago that the monetary contraction of 1929-32 was a key cause of the Great Depression. So Big Mac should tell Ben Bernanke to stop targeting the federal funds rate and pump up the money supply even more. Right now credit deflation and recession are the problems -- not inflation.

From the beginning of 2007 to the middle of 2008 the monetary base controlled by the Fed has grown only 1.6 percent at an annual rate. The basic M1 money supply has been flat. This amounts to a long-run liquidity squeeze. The credit-crunched economy desperately needs cash. But the Fed is not providing it.

Over the past three months the central bank has stepped up a bit to a 4 to 5 percent growth rate. But that is still way too little in today's confidence-lacking banking environment. Everyone is hoarding cash rather than putting it to work. McCain should highlight this point.

He also should address all the Americans who might be worried about their bank accounts. He should propose that all deposits be guaranteed by the FDIC, at least temporarily. He might also suggest that G-7 central banks guarantee all inter-bank loans for regulated banks. (Hat tip to Wall Street economist John Ryding.) He also should put Obama's tax hikes and trade protectionism in historical context. Under Herbert Hoover, taxes were raised, trade protectionism increased, and the money supply contracted. Sound familiar? Obama's tax hikes and trade protectionism are Hooveresque.

Right now, McCain sounds austere when he addresses the economy. Tomorrow night he must sound expansionary for economic recovery. Tax cuts, free trade, and money growth -- those are the pillars of recovery. An across-the-board tax cut for individuals and businesses will boost jobs at home and our competitiveness worldwide. Free trade benefits both consumers and businesses. The Fed's money supply must keep expanding.

That message gives McCain a fighting chance.

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31 Comments

Be very careful about believing the polls
Obama over polled by several percentage points in several states during the primary. I'm not so sure the average six point margin is real and I don't believe any poll that puts either candidate over 50%. The general consensus is that around 14% are still undecided and all polls that put Obama over 50% include those who claim to be leaning toward one candidate or the other but aren't sure.

Still, Obama can start pricing champagne, he is certainly leading at this point and a good showing in the debate should firm things up considerably for him.

McCain doesn not, however, need a knockout. He needs a solid victory and a financial message that resonates. If he can get to the final debate with the polls generally within the margin of error, he can then give himself a real boost in the final debate.

If McCain is an average of 5 points down or more going into the final debate, he will need to have Obama make a big mistake to catch up; or to find Obama is again over polling all over the place.

I'm not sure I will trust exit polls at all in this race. We might be waiting for the results for a long time. Remember 1948 and 2000!!

Sure, he is promising
But, check this dude's blog out: patrick.net

Very sobering -- especially on the part where he states that no matter what the government does, it won't stop home values on the two coasts from plummeting at least 50% from their 2006 peaks.

Baby Boomers
Boomers are beginning to retire and move out and around.

I'm not sure how much this contributes, but boomers are selling, retiring in cheaper, nicer places and liquidating their retirement plans.

Bad time to be a boomer, but they brought it on themselves. Reap what you sow.

Poll Follies
Reminds me of an old "Peanuts" cartoon from my youth, in which Lucy has "volunteered" Linus into running for school president. At one point she comes in and says, "I have the latest poll figures for you," to which Linus responds, "I don't believe in polls." She then starts rattling off all the different polling demographics, which reveal Linus to be leading in every single category. After hearing the litany of statistics in his favor, Linus concludes, "I believe in polls!"

Then there is the "Palin Bounce"
All the polls cited Monday were taken before, during or shortly after the VP debate. Those taken over the weekend and into early this week show McCain down by 3 points or less and the race is again a statistical dead heat.

After Tuesday's debate I expect to see Obama gain again; it is a public perception thing. This is all going to come down to the final debate and the "stelth" voters. How much is Obama over-polling? I guess we will see on November 4!

got to off-set those angry voters I guess
I was very surprised at McCains little proposal. It seems to be an attempt to off-set all those voters who are angry at the bailout of the rich, as the present $700 Billion plan is perceived by many.

Personally, I don't see it happening. I think McCain is hoping that it won't be necessary and/or that congress won't pass such a package. I do think he will keep his word and work on it, I just don't think he really wants it. I think it is also a response to Obama's massive spending promises which are being perceived one reason he is leading.

Actually Joanie, it is time to consider buying. I doubt home prices are going much lower and trying to time a market is very difficult. If one is looking to buy a home the time to begin the search and start the rpocess is now. It usually takes 3 months to a year to find a place, negotiate a price, secure financing and close the deal. Unless the government continues to try and fix the problem, this "crisis" will be over in 6-18 months ad will probably "bottom out" in 3-8 months.

Time to look at buying opportunities!

Is this worse?
We could end up with nobody owning a home. I still don't think we get how bad things really are. I close friend is a VP of a top 5 bank.

He pretty much scared me out of my wits.

Reality Bites
>"People are frightened when they don't understand what's happening. Give them knowledge and they will calm down and be able to focus on a personal course of action, rather than wait for the government to save them."

However true that might be in the theoretical world, the sad fact is that in the functioning world, many people don't WANT to expend energy reading what they "need" to in order to become self-sufficient Libertarian economic gurus. Unfortunately, there is a percentage of the populous (the size of which I won't hazard a guess) who simply would rather have government "save them" because that's what they believe government's function is. You and I might disagree with that belief, but getting everyone ("people") to agree on the function of gov't is a futile endeavor. For the many individuals who adhere to the "leave me the hell alone" philosophy of societal organization, there are plenty of others who prefer that gov't to be their keeper in times of trouble. There is no practical remedy for that.

People don't want to be responsible
Our prosperous society has allowed people to be irresponsible children for their entire life and there are 'leaders' who are eager to 'accept' the power.

"When a group is without a leader, you can often count on a narcissist to take charge, a new study suggests. Researchers found that people who score high in narcissism tend to take control of leaderless groups. Narcissism is a trait in which people are self-centered, exaggerate their talents and abilities, and lack empathy for others."

http://www.physorg.com/news142607754.html#tab

I guess we need responsible individuals who are not narcissists to step up to the plate.

Chavez would be proud
The US government is nationalizing the banking industry and no is complaining.

Those who sacrifice liberty for safety deserve neither.

Disconnect to bad times ahead
Sen. McCain's talking points exhibit a disconnect between the facts and economic history and principles. Instead of honestly stating the latter two, he tosses out nostrums twisted according to a political calculus fashioned to benefit his current political designs. Sum it up, and I don't trust him on economic issues. That's no surprise, though, because I can't name more than five national politicians I do trust on economic issues.

On the other hand, I can't tell the difference between Sen. Obama's positions on economic issues and those of Hugo Chavez. Worse, Sen. Obama will win in November, but the facts and responsibilities of his new office will not offset the messianic hubris that has carried him thus far, which a Democratic Congress will write into the law books.

Things are going to get very interesting in the next four years, I think. Resign yourselves to austerity, my friends, and start going through your budgets to figure out how many frivolities you can shave off your lifestyles. Do it now so that you'll have resources freed up to meet as many needs as you can, assuming there'll be nothing left over to satisfy pure desires.

Returned from the dead
Even though this article is now four days out of date, Kudlow shows imself as being remarkably out of the loop. For instance, he says things like "McCain should next talk about a corporate tax cut from 35 to 25 percent as a means of boosting jobs and wages."

Great analysis. What Detroit needs now is huge infusions of cash. Their stock value is approaching that of the Czar's railroad system in 1918. They have no new car orders and they can't meet payroll. What are they going to do with a tax break on profits they're never going to book?

But speaking of infusions of cash, we should congratulate the folks down at TCS. They have obviously encountered some new sugar daddy, and miraculously revived from their long slump of publishing 1-2 articles per month.

Welcome back from the grave, guys. May your soft money booster shot keep more conservative pundits like the estimable Mr Lawrence Kudlow from the poorhouse-- which he certainly would have de-funded had he ever had the chance. :)

Deja vu all over again
As usual, socialism must once again rush to the aid of collapsing capitalism. It's 1933 redux.

Nothing but good times
RB-- Are you sure you're not mixed up? You say "I can't tell the difference between Sen. Obama's positions on economic issues and those of Hugo Chavez."

But isn't it John McCain who's saying that we should buy up all the bad mortgages and adjust them so the little people can stay in their homes, continuing to make payments to the loan holder? And isn't it Obama, aka the Devil, who's saying that makes no sense and is a waste of public money?

For what it's worth, I lean toward the McCain solution here. The real question is how do we set a value on all those supposedly unratable loans? And the answer to that would be easy for any real estate professional-- although not so readily comprehended by a mere politician. You set a buy value at the price at which you could most likely make the loan perform again-- adjusting the new rate and the new loan balance as needed to conform to some practical reality.

And in fact, as of this morning we're doing just that. The talk is of holding a reverse auction, with the government expressing a desire to buy bad paper and all the holders of said paper bidding on lowest competing price. It's that rarest of things, a bright idea.

But the news is this: as of this morning, with the Dow plunging to a new low (8500) and the world's bourses following it overnight to 7-10% drops, I see nothing but good news ahead for all of us (well, for most).

The reason? Socialist Big Government has indicated they will do "whatever it takes", without stinting or counting the change.

That means, in the very best economists' approach, that they will posit new money until all the banks and trading houses of the world fill up with these instant air-dollars. The hemorrhaging will be stopped. The world will be saved. And only the dollar itself will have become a little less tangible.

See? We win!

I got my little green hat with the red star
So, like I am already to sign up. I can't wait.


Me too
I sent in a request for a half billion. I've been feeling a little thin lately, and decided I should restore some confidence. But I haven't heard back from them yet.

I guess Mr Paulson has had lots of requests. It might take him a few days to catch up.

Let the bad times roll
If Sen. Obama and H. Chavez agree on economic issues generally, such agreement does not exclude Sen. McCain and H. Chavez from agreeing on economic issues periodically or Sen. Obama and H. Chavez from disagreeing periodically. So dictates logic - a very usefull tool you'd do well to master and apply whenever practicable.

As to the feds buying up bad mortgages, this was my fear from the outset of the bailout. Banks have the good sense not to become homeowners, but the feds do not. Nor does Sen. McCain. I don't trust him on economic issues, which is why I'm resigned to the very bad economic ju ju on our horizon. No matter how the election comes out, we're screwed.

Regarding the brilliant reverse auction you support, I refer you to human nature. If given the opportunity to lowball with no consequence to the outcome of the negotiation, human nature dictates lowballing. Consequence: The non-performance price will be set to the non-performers' profit instead of their real ability to perform, with the margin favoring the non-performer at the state's expense.

And whence the money to fill this margin? The printing presses, of course. Enter first inflation and then stagflation, or in the worse alternative, a decade plus of crippling deflation à la Japan, depending on how property prices respond to the bailout.

See? We all loose either way, for there is no such thing as a free lunch. Tighten your belt, rb, and put your liquidity in something that won't loose value faster than the cash in your wallet. If the feds start buying up bad mortgages, buy as much real estate as you can. This advice is offered with the utmost good will because I believe you are a good man, your politics notwithstanding.

Cheers.

Isn't the Constitution a contract?
Why should the government care about any contracts when they ignore the prime contract?

The feds bought the mortgage deed and note ...
... which is why they are privy to the contracts and can renegotiate the principle, interest and default terms thereof with the homeowner/debtor.

This is exactly what I was afraid of when the bailout turned from guaranteeing the bad paper against premiums to buying it outright. Congress just can't resist tapping tomorrow's taxpayers for today's goodies, which they pass out with reckless abandon against warm fuzzies and votes.

At least the government is 'buying' and not 'taking'.
There may be some hope, however small.

You guessed right, Joanie!
But I show her how far prices have fallen just since we last seriously looked back in February. That usually gets thing rational real quick.

What burns me is that we will all end up paying for this. I don't mind the government buying preferred stock in banks to re-capitalize them. We the taxpayers will actually come out ahead. But buying bad mortgages...its bad enough Freddie and Fannie continue to do so.

Yeah, but what are they buying with? They take it from someone...
...like you and me.

No Subject
That is all the GOP wanted to do was grow the economy. But somehow, the mainstream media illuminati and left-wing tied Bush to all policies, but none of the elitist to the left-wing.

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