Reader Chris P. wrote: “I am continually astonished that intelligent people continue to defend and extol the virtues of the Keynesian approach. The reason we are in the current intractable situation is from a multi-decade orgy of debt. Stimulus as exhorted by Krugman is just more of the same. Yes, we are eating well, but we are eating our seed corn. Eventually, we will want to plant a crop and will discover that although we ate well in the past, we are now going to starve”.
Here is an attempted rebuttal from a more intelligent economist than your editor who had a chat with Jeremy Siegal, the well-regarded Wharton School professor. He was talking on behalf of WisdomTree, the yield-oriented fund group he advises, as I finished my Weds.
Prof. Siegal, despite forecasting only modest “fiscal drag” from oversaving hitting the demand side, nonetheless called for Pres. Obama to delay by one year tax increases on capital gains, dividends, corporate profits, and wealth (AKA death). This will enable planning by investors and enhance market confidence. The U of Penn Prof also noted that the Obama election platform called for a limit on capital gains and dividend taxes at 20%, up from the Bush 15% level to be sure, but well below what people and their accountants have been worrying about lately.
To be so upbeat on the deficit, Prof. Siegal was full of ideas about how it is overstated. He thinks “we are downing in debt with Medicare” and “we simply cannot do what the program promises.” So he expects that politicians will scale back Medicare commitments, as is perfectly legal. Retirees will simply continue to pay for medical care if they can afford it, as they already before they retire. Means testing, taxing benefits, co-payments, delaying onset of the program, are all options.
As for retirement, Prof. Siegel thinks the fears that they will never see a dime among younger Americans is overdone. “Social Security terms can be changed. It is one of the best-funded government programs.” Again the solution is to change program parameters, as is already being done by boosting the retirement age.
The fiscal drag estimated by JP Morgan, according to Prof. Siegal, is 1-1.5% next year, which will bring down GNP to 3.5 to 4.5%, significantly below a normal recovery. This still is remarkably good growth and he thinks will prevent any “double dip”.
As for stocks, he’s bullish. With below-average price earnings ratios on the market, with a 2% yield on the S&P 500, markets will rise. Both five and ten years after a below-average p/e year, 100% of the periods studied by WisdomTree’s analysts saw markets go up.”The Dow has upside”, he insists.
Of course when Fed chairman Bernanke talks to Congress about the uncertainties and the problem of jobs it does tend to discourage the stock market all the same. That happened before Prof. Siegel held forth. And the fact that higher sales were reported by several companies yesterday made no difference.
Bernard Tan, quoted by David Fuller of Fullermoney.com, did a chart study of all the supposed arguments for a double dip, and found them all unconvincing. Sales and orders are up smartly in both the US and the EU. So why the double-dip talk? Maybe because we can remember how we got caught in the last dip in 2007-8. Once bitten twice shy.
I think we need a double up in stocks because there won’t be a double dip. Of companies which reported to date on Q2, starting with Alcoa, 65 have beaten analysts’ estimates, and only 12 failed to.
According to Reuters, yesterday “Three major manufacturers raised their profit targets for the rest of the year, saying they were confident a rebound in demand for industrial goods would hold.” United Technologies, Textron, and Eaton posted Q2 “results that topped Wall Street’s expectations, easing concerns the economy might be sliding back into recession.”
What of the deficit, with which Chris P. began this chat? If we are truly eating our seed corn we will starve. But before starving like the grasshopper we will print money to bury the ants. Governments will not keep their promises, as Prof. Siegel already suggests. The USA will allow inflation to rise and so will most other countries in the same straits.
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