RateWatch #432 Bush 2.2

November 6, 2004 by Dick Lepre

What's Happening

The BLS Employment Situation Report shows 337,000 more jobs in October.  The Unemployment Rate, however, rose to 5.5%.  Average Hourly Earnings were up 5 cents.  The jobs were broad-based.  Only manufacturing (-5,000) lost jobs.  Service producing was up 272,000. Construction was up 71,000.  Education and Health Services was up 62,000. This stronger than expected report is causing equity buying - impressive after two great post-Bush victory days - and serious Treasury selling.  The 10-year yield as this is written is 4.186%.  This could cause the short-term (week-to-week) techs to turn bearish. One last comment about the jobs report: the real question is "is this a one month anomaly or a trend?"  The answer is:
"no one knows." We shall see.

Bush 2.2

George W. Bush has won a second term and has a somewhat friendlier Congress to boot. 
He will need all the help that he can muster because we are facing some difficult challanges.

Hopefully the vitriol which (I think) started with the attacks on and impeachment of Clinton and continued with the untowardly 2000 election confusion and peaked with the Bush bashing can
be put behind us for our mutual benefit.

Senator Kerry ran a respectable campaign and whether due to the circumstances or to his own strength chose to concede when he just as easily could have become Son of Gore.  Please credit this man for having the good judgement to concede when he could have caused the nation another two weeks of angst.  He exited the election with grace. Contrast him with Al Gore.

I suggest that all Americans get behind Bush and that all Bush supporters stop bashing Dan Rather, Michael Moore, the entertainment liberals and even that Bill O'Reilly stop calling Al Franken "Stewart Smalley". Left-wingers including the idiots who's work graces the op-ed page of the New York Times and more moderate Democrats should tone down Bush-bashing since he won't be running again and recognize that we all live in the same country.  There is much to do and these playground antics must be left behind.

Folks here in San Francisco are in disbelief. Folks in New York City are in disbelief.  Perhaps
residents of California and New York better start realizing that there are a few states in between.

Friday's edition of Slate features a piece which perfectly describes the problem that Democrats have.  It is the same problem that the British tabloid has:  they are convinced that the majority of Americans voted for Bush because they are stupid.  I am going to save that issue for a future newsletter... or two.

We should not look at the election in terms of "winners" and "losers".  We are all in this together.  The next time you hear someone say, "The nation is divided", punch them in the face and say, "You're so right!"  That will serve as a uniting force.  Having different opinions is not the same as being divided. "Divided" is what the U.S. was from 1861-1865.

There are some things that I hear that make me want to kill.  One of them is the use of the word "mandate".  President Bush does not have a mandate, he has a job.  He works for us. People in Washington (and elsewhere) can help, hinder or contemplate the return of baseball to D.C.

An Agenda for Bush 2.2

1) Budget and Taxes

Taxes need to become non-partisan.

Bush's tax cut may or may not have stimulated the economy but there is a systemic error with the
manner in which the Federal Government operates fiscally.  

I suggest that Congress and the President be in charge of spending and that taxes be
controlled by a combination of legislated tax rate bases with increments at the discretion
of the Federal Reserve.

The picture that I see it this:Take the present (or the pre-Bush tax cut) personal income tax rates as the base.  At the end of the fiscal year the Federal Reserve can look at the budget adopted by Congress and the President and the year-to-date tax receipts and decide if it should call for
income surtaxes for the next calendar year. The Fed would be able to mave all rates up by, say, 1 or 2% with some legislated cap above the base rates.

They can weigh the benefits and downside of higher taxes or higher deficit. The Federal
Reserve which is presently in charge of monetary policy would act like a "Rich Uncle" keeping
the family fortune (the nation's economy) healthy. The result is that Congress and the President
control spending but that the Federal Reserve insists that we pay the bill.  Deficits would
only occur if the Fed allowed.  Otherwise taxes need to match spending.

Since the Federal Reserve has shown an ability to manage the nation's debt once it has been
created and manage the economy they should also have a direct influence on taxation.

The above needs to be regarded as a start. There are some issues. The Fed should also be able to affect corporate tax rates as well as personal income tax rates.  There is also a risk here: is it possible that an attempt to de-politicize taxes will wind up politicizing the Fed (think Supreme Court)? Do as many folks have the same confidence in the Fed that I do?  Is the Fed merely on a roll which could turn South post-Greenspan? I don't have all the answers but I believe this to be a solid concept.

The key sentence is: Taxes need to become non-partisan.  During the Presidentialdebates I kept thinking, "Why are these two guys discussing taxes?  They should butt out."

2) Energy

We need to take seriously the issue of energy independence. Fission reactors, basic physics
research for controlled fusion, and hydrogen as an energy storage medium.  Our goal should be
to not import a single barrel of oil 20 years from now.

This is expensive but needs to be regarded as a capital expense.  Deficit spending here may reap a large return.

Also, we need to have the vision to persist even if oil drops back to $25/bbl.

3) Iraq

We have two gigantic tasks here.  One is to restore Iraq to political and physical/economic
health.  It is nearly impossible to assess the depth of this task until Iraq has elections
and we see if the populace accepts a new government.

The second issue is the broader war on terror. There is an underlying issue which is really
not being addressed.  Iraq is, in its own strange way, a consequence of the War on Terror.  But the concept of the War on Terror is, I think, ill-conceived.  This is, in essence, an ideological
conflict. The enemy is planning a war that will last 100 years.  We are not going to win the War on
Terror with mere military solutions. We are only going to win this by a combination of intellect
and emotion.  What we have is not merely a failure of intelligence but a failure of intellect. The enemy is a stateless confederation.  We cannot direct our efforts against states.  We need to understand Islamic extremism and defeat it at the roots. We need media outlets to stream
propaganda which counters the forces that inculcate terrorism. We need to give support to schools in Muslim states and assure ourselves that these children are not being taught to hate.  We need to bring as many capable young people from these states to the West to be given higher educations so that they may become leaders.  This is not about converting them from Islam.  It is about creating an intellectual counterforce to radical Islam.

We also need to educate more Americans in the culture of the Islam and the nations of the
middle-East.  One thing that I fear is that the small set of Americans who bother to study
this culture tend to be sympathetic to it thinking of the U.S. as the "big bad wolf".

4) Alliances

I do not believe that our alliances with our traditional allies in Western Europe are in extremis.  I would give Bush credit for something during the recent campaign.  He did not spend much time dissing Europe or the U.N.  Bush could have said, "Hey, this whole darn Iraq thing is the fault of the U.N. and now we poor Americans have to go in, clean up the mess and pay the bill." He (or someone in his administration) realized that we still need to work with the U.N.

If we can achieve some military and political success in Iraq the the U.N. and our European
allies will see the wisdom in joining us.

5) Education & Jobs

Thew government doe not create or destroy jobs.  Business does this.

Apart from what business does, education is the key to the jobs market.   If folks lose jobs that are not going to come back then the government should help to train or educate them for the jobs that are here.

53 percent of working-age people in Los Angeles have poor literacy skills.  We are not educating
America for the good jobs that are here.  What will transition immigrants to high paying jobs
is no different now than it was during the 20th century - a good education.

We should also be prepared to lure citizens of other nations who have excellent educations
and entrepreneurial skills here.  The "global economy thing" is here and it is serious. We can be like small-market baseball teams and complain about free-agency or we can be like the New York Yankees and start signing free agents.  Part of the success of the dot-com boom was achieved through H1 and H2 visas.  If there are not Americans to fill the jobs let foreign guest workers do the work here.

6)  Health Care

Health care expenses out of control.  One problem is something that the Federal government
can do little about.  The present health care system is troubled by the following problem:  many employees get benefits from their employer and have little co-payment expense.  This is a strange 4-party system: employer, employee, insurance carrier and health care provider. Individuals have too little incentive to maintain their health.  The demand for health care outstrips the supply and the price goes up.

The government can get involved by enacting legislation that encourages health:  education to totally discourage smoking, alcohol consumption, drug use and obesity.  I am thinking big taxes on tobacco products, alcohol, and unhealthy fattening foods.  The sources of ill health should be taxed so as to provide health care for the damages wrought. The purpose of the tax is both to recoup expense and to discourage these bad habits. This would eliminate some demand for health
care services and, presumably, lower the price.

I admit that this is an inchoate solution but my thesis is only this:  it makes no sense to discuss health care for everyone or health care for some or health care benefits for workers until we can control the cost of the commodity. We can best control the cost by increasing the supply and/or lowering the demand.

7) Social Security

From my perspective this topic is not even open for discussion.  The age at which social security
and Medicare kick in needs to be raised to as high as 70.  The President and Congress can
appoint a commission who will recommend to them that this is the only possibility thus softening the political impact.

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