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Leading into 2004 President Bush was plagued by what many called the first ‘job loss recovery’ on record. However, strong economic growth has finally compelled corporations to start hiring, and there is renewed speculation that voters will award Bush another 4-years if the US economy is still strong come November. With this in mind, the million dollar question – constantly being asked by anti-Bush billionaire George Soros - is will the US economy still be strong in November?
Growth Now -- Deficits Later
The U.S. government is running deficits today and projected to battle deficits well into the future (CBO). Why not laugh at these forecasts because some miraculous revenue generating tax cut scheme will somehow, someway, pad government revenues in the future? Why indeed…
As per the Laffer curve, there are only two tax rates that will always collect the same amount of revenue – 0% and 100%. Understanding this concept is simple enough; no tax would be collected if the tax rate was 0%, and no one would report/earn any income if they knew the government was going to take all of it. With this in mind, there is only one point – the ‘maximum point of revenue’ (John C. Calhoun 1842) – that is most desirable to policy makers.
Since Art Laffer sketched a curve on a napkin in the 1970s his namesake has been manipulated to suit the pre-contrived conclusions of many analysts. For example, Lawrence Kudlow states, “the Laffer Curve says, in clear terms: Tax something more, get less of it; tax something less, get more of it.” In fact, and if you ignore the historical biases of Art Laffer, the Laffer curve suggests that lower government taxes will sometimes produce greater revenues but sometimes less. Similarly, the curve also suggests that higher taxes could produce more government revenue, but could also – given that higher taxes could stifle economic activity – produce less.
The point to be taken from the Laffer curve isn’t that it can help procure fail-proof tax policies, but that politicians and economists can point to the curve to help concoct their supply-side doctrines: the logic being that the government can always achieve greater revenues in the future if tax cuts stimulate and/or broaden the government’s revenue base. And while supply-side economics is a topic of intense ridicule – many analysts argue that no tax cut scheme can purge the looming deficit crisis in America - it is nonetheless true that supply-side stimulatory efforts are a powerful political tool. Suffice it to say, with the US economy expanding, jobs being created, and the election only months away, no Democrat is laughing at supply-side theories today.
What Will The US Economy Look Like In November?
Following an optimistic Manpower Employment Outlook Survey (released in mid-June), Challenger, Gray & Christmas, Inc.. (which historically tracks job cuts but recently began monitoring corporate hiring plans) said last week that hiring plans slumped by 31% in June (from May), and that fewer new jobs are expected in the second half of 2004 as compared to the first half. From Manpower’s optimist outlook to the weaker than expected payrolls/CG&C reports -- this is an example of how the jobs outlook in America can quickly change. Not being stupid, Democrat’s are obviously encouraged by this potentially negative turn of events for the US economy.
Along with the slack jobs reports (weekly jobless claims have also been on the rise and the conference board’s help wanted index hasn’t budged since March 04) a flurry of other reports – including Chicago PMI, auto sales, and the ISM Services Index - have arrived below expectations in recent weeks.
Ridding Deficits from the Investor’s Consciousness is a form of Art
Earlier this year economist Bruce Bartlett said ‘there is no reason to believe that it [the deficit] threatens either the economy or Mr. Bush's reelection prospects’. However, in the same sentence Bartlett also warned that “The deficit will have to be dealt with after the election’. Why only deal with the potentially deadly US deficit after the election? Bartlett, a Republican, didn’t really specify. Also earlier this year, Soros, Krugman, and Rubin lead an anti-deficit charge that caught all of the headlines. This charge is over, but could quickly resume under the right set of circumstances.
Suffice it to say, when the US economy is expanding strongly and creating jobs the deficit debate goes from being front page to last page news. Thank supply-sider Art Laffer – advisor to Reagan - for this turn of events.
When O'Neill objected that further tax cuts would compound the emerging fiscal crisis, Cheney barked, "Reagan proved deficits don't matter."
But Beauty is in the eye of the beholder
With tax cut schemes arriving seemingly one after the other, it is improbable that Bush has been trying to achieve the maximum point of revenues. Rather, what is more likely the case is that Bush adopted policies aimed at stimulating the US economy now (and dealing with the deficit when?). These are the policies that Reagan approved in the early 1980s, and that Bartlett and Kudlow applaud now. In other words, ‘deficits don’t matter because some miraculous revenue generating tax cut scheme will somehow, someway, pad government revenues in the future.’
But alas, with over 50% of Federal debt currently held in the hands of foreigners, and government deficits projected by some to hit 6% of GDP, the ‘deficits don’t matter’ mantra could be put to the test.
The Soros Factor
Bartlett included an alternative scenario is his comments earlier this year. It went as follows:
“If there is a stock market crash, like those in 1987 and 1989, some time before the election, the deficit could indeed become a hot political issue that the Democratic candidate might be able to exploit…If I were a conspiracy theorist, I could imagine George Soros, a billionaire currency trader known for his hatred of George W. Bush, triggering such an event. He has the wherewithal to do it and over the years has been greatly enriched by currency crises in various countries.”
Will Soros aim to dash Bush’s reelection bid by wreaking havoc in the US markets before November? Despite his hatred of Bush, the answer is probably no. However, Soros certainly wouldn’t be shy about making larger bets against the US dollar should he see an opportunity; an opportunity that may arrive if the US recovery continues to show signs of stalling.
Granted, predicting how Soros type speculators will react to economic developments is difficult to do, but the fact remains that many intelligent and wealthy individuals do not subscribe to ‘deficits do not matter’ ideologies. Rather, many intelligent and wealthy individuals are equating Bush’s policies as inspiring not a sustainable economic recovery, but an inevitable day of reckoning.
In sum, the wildcards of Iraq/terrorism aside, Bush’s reelection hopes may ultimately bubble down to a handful of key economic reports: the performance of the US economy will set the tone of the deficit debate going forward. It is important to remember that US government deficits are not only an election issue, but an investment issue. Unless the jobs continue to arrive, Bush will be out, and Soros will end up laffing all the way to the bank.
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