File this under " No Shit item of the Day."

Get Ready for Inflation and Higher Interest Rates:



Normally I would quote liberally from Dr. Laffer's editorial as he is one of my favorite economists. However, what i want to discuss this morning is the inflation that we are currently seeing, especially with gas prices. Milton Friedman referred to inflation as "two many dollars chasing too few goods." I believe that we are seeing that in the rising oil prices.

As we can see from the chart above, the money supply has advanced at the fastest rate in the last fifty years. This was necessary according to Friedman. The money quote is at 1:38.

With the precipitous drop in housing prices being the central trigger in a deflationary spiral, Chairman Bernanke followed Friedman's advice and flooded the financial system with capital to maintain some level of price stability. This was a necessary step in halting a crisis that did have the possibility of throwing us into a Depression. However, what we are seeing now, with the Federal Reserve's monetizing of Treasury debt is something I believe will lead to a fairly ruinous situation.

In regards to oil prices, Since September, members of the Organization of the Petroleum Exporting Countries have pledged cuts totaling 4.2 million barrels a day, or nearly 12 percent of their capacity, a record in such a short time.

According to our own Energy Information Administration,

Oil prices rose for the third consecutive month in May, driven in part by expectations of a global economic recovery and future increases in oil consumption. In addition, a weaker dollar and increasing financial market activity are prompting higher prices for commodities, overshadowing weak oil supply and demand fundamentals. The weaker dollar may indicate that economic activity abroad, especially in Asia, is stronger than currently estimated, which would provide an upside risk to the oil price forecast. Downside risks, such as continuing weak demand as indicated by sluggish first quarter 2009 oil consumption data, high inventories, and increased surplus production capacity levels within the Organization of the Petroleum Exporting Countries (OPEC) could moderate the upward price pressure, especially if the global economic recovery is delayed and/or weaker than expected.

Interesting, why would we have a weak dollar. Possibly because
we have increased the monetary base over %100. Too many dollars chasing too few goods. It would seem to me that we have a large problem on our hands that we should get a handle on as soon as possible. An inflationary spike in commodity prices, oil specifically will ground to a halt a real recovery in the economy. It is time to stop the printing presses and suck some of that cash out of the system, it will be painful but a "real" recovery will not happen if we don't. To put a finer point on it , The Federal Reserve is caught between a rock and a hard place. To satisfy the demands of the White House, they need to keep the presses moving and printing dollars to fund the spending spree that the current administration is going on. The Chairman is in a tight spot, as this excellent piece from the American covers:

One has to pity Ben Bernanke as he tries to attain the Federal Reserve’s dual mandate of promoting economic growth while maintaining price stability. For the currency and bond markets are increasingly focusing on the long-run inflationary impact of the Obama administration’s budget, which according to the Congressional Budget Office will double the U.S. public debt-to-GDP ratio from 41 percent in 2008 to 82 percent by 2019. And the markets are also focusing on the Federal Reserve’s newly announced policy of “quantitative easing,” which they fear could be tantamount to monetizing the administration’s ballooning deficit.

Rising oil prices will severely affect economic growth and skew the budget deficit to an even higher percentage of GDP as tax receipts fall. Rough seas ahead my friends.

Soak the Rich, Lose the Rich

In the WSJ today, Art Laffer and Steve Moore make a case that I have made in this space previously.
Of course, Dr. Laffer and Steve Moore do a better job of naming their piece.

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees."

Of course, this is sort of an easy argument to make, as high tax and regulation states are hemorrhaging capital and upper middle class inhabitants. Of course, then this tax burden will fall on the middle class. Of course, here we see another case for a flat tax at the state level. If the Feds won't implicate one, maybe the incubators of democracy will. Of course, people will make the argument that if not for these high taxes to redistribute income, how will the lower classes be affected.

Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services.

They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.

Of course, Dr. Laffer destroys this class warfare rhetoric and puts it into it's place. As always Dr. Laffer is a good read here

Art Laffer "kills" the Death Tax

In The Wall Street Journal Art Laffer, an economist for the Reagan administration and prominent supply-side economist lays out the case for repealing the death tax.

Indeed, from a societal standpoint, inheritance is an unmitigated good. Passing on to successive generations greater health, wealth and wisdom is what society in general, and America specifically, is all about. Imagine what America would look like today if our forefathers had been selfish and had left us nothing. We have all benefited greatly from a history of intergenerational American generosity. But just being an American is as much an accident of birth as being the child of wealthy parents. If you are an American, it's likely because ancestors of yours chose to become Americans and also chose to have children.

When we generally think of the death tax, it is to prevent the Paris Hilton's of the world from inheriting huge sums of money which will be blown on rhinestone encrusted thongs for an army of show dogs. However, this is not the case.

In its most basic form, it's about as silly an idea as can be imagined that America in the aggregate can increase the standards of living of future generations by taxing individual Americans for passing on higher standards of living to future generations of Americans of their choice. Clearly, taxing estates at death will induce people who wish to leave estates to future generations to leave smaller estates and to find ways to avoid estate taxes. On a conceptual level, it makes no sense to tax estates at death.

Study after study finds that the estate tax significantly reduces the size of estates and, as an added consequence, reduces the nation's capital stock and income. This common sense finding is documented ad nauseam in the 2006 U.S. Joint Economic Committee Report on the Costs and Consequences of the Federal Estate Tax. The Joint Economic Committee estimates that the estate tax has reduced the capital stock by approximately $850 billion because it reduces incentives to save and invest, has excessively high compliance costs, and results in significant economic inefficiencies.

Those crazy market oriented supply-siders, how dare they continue to document facts proving that the death tax isn't about revenue, but retribution.

Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that's just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%. I especially like an oft-quoted line from Joseph Stiglitz and David L. Bevan, who wrote in the Greek Economic Review, "Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime." Hurray for Vegas.

That's it, I got it. The government wants us to spend all of our money during our lifetime as a sop to the SEIU. Of course the idea behind the death tax is to square one for the little guy. If our liberal friends cared about raising revenue, they would eliminate the death tax.

Read the editorial here. Well worth the time.