A Few Tax Policy Suggestions for Our New President

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Three areas that President Obama will have to address during his term in office are the recession, energy and the environment, and the long-run fiscal outlook.    The recession is the most urgent.  But the long-run fiscal outlook will be the most difficult.   Social Security and Medicare would have made addressing the long-run fiscal outlook difficult in any case.  (Did you know that the first baby-boomers are starting to draw Social Security this year?)   The Bush tax cuts of 2001 and 2003 made it worse.  The rapid spending increases of the last eight years made it still worse.   The financial crisis and recession are now making it still worse.  To be clear, fiscal stimulus today is appropriate, given the weak economy.  The trick is to combine it with the minimum damage to future budgets.   
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NOW Are We In Recession?

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Is the United States in recession?   If one looked solely at the adverse shocks that have hit the economy over the last year, one would infer an unusually high probability of a recession.    If one consulted some of the most import economic measures over the last year, one would say the country clearly entered a recession last January.  If one gauged the popular mood, one would hear, “Of course we are in recession !” 

 

The one criterion that has been missing is the one criterion that people most commonly have in their minds as the definition of a recession:   two consecutive quarters of negative growth.   This morning, October 30, the Commerce Department released the advance estimate of GDP for the 3rd quarter.   It showed a decline.   The decline was small:  just 0.3 per cent at an annual rate; and it is only one quarter, not yet two.    But at this point there can be little doubt that we are really truly in recession.  read more

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The Unwinding of the Carry Trade Has Finally Hit Currencies

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Why has the yen strengthened so much this week, even though the Japanese stock market has plummeted?  The financial media have largely got this one right:   the answer is unwinding of the carry trade, and the associated flight to quality, which means flight to yen and dollar (cash and treasury bills).

 

This was to be expected.  It is an unseemly tooting of ones’ own horn, but — earlier this year I wrote in an article in the Milken Institute Review (vol. 10, no. 1, pages 38-45)

“The traditional pattern is most clear with the carry from the yen to the euro:  it has been predictably profitable for the last five years, and this will predictably end soon, as the yen reverses its depreciation against the euro.” read more

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