Monthly Archives: October 2010

Big Republican win expected. What now?

I fully expect the Republicans to take over the House on Tuesday and possibly the Senate. But what will they do once in power. Here’s my initial suggestion:

The first thing the Republican House should do is repeal 2.3% tax on medical equipment. The whole health-care bill was supposed to make health care more available and more affordable. This tax does the exact opposite.

The second thing Republicans should do is pass a bill permanently extending the Bush tax cuts. All of them! Including the tax cuts on high income taxpayers. They should also eliminate estate taxes. As explained in my previous post, estate taxes hurt Main Street. Additionally, it encourages tax avoidance and evasion while raising very little money for the government, about 0.8% of the federal government’s revenue.

Passing these bills will be both good policy and good politics. Maybe, hopefully, a Democratic Senate (if they hold on) will pass the House’s bills and President Obama will sign them, but I doubt it. But that makes these bills good politics as well. Republicans can claim they worked to make health care more affordable and help the American people. But the Democrats were more interested in government control and not helping the people make ends meet and health care more affordable.

These two bills would not only be a test of the Democrats’ resolve, but also of the Republicans’. I want to see these bills passed by the House without any of the crazy amendments or earmarks that too often get attached to bills. Let’s see if these Republicans really do believe in the Constitution and good governance.

These bills are not the end-all-be-all, but they will be a good start.

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Estate tax destroys small business, encourages corporatism.

The estate tax returns on January 1, 2011. While liberals, anti-capitalists, and haters of the wealthy applaud this development, they do not realize that the tax they favor encourages the corporatism they despise so much.

When the owner of a successful small business or small farm passes away, he would love to leave his profitable business to his children, if they want it. However, with the return of the estate tax, the inheritors of the business will have to turn over to the government 55 percent of the value of the business over one million dollars. Not many business owners have 55 percent of their wealth sitting in cash available to cover the estate tax. The heirs are now left with few choices. The easiest solution for the business owner before his death or the heirs after they inherit the business is to sell the business and the most likely buyer would be a large corporation. Another option would be to close the business entirely, also benefiting the corporation competing with it. Other options include selling part of the business or taking a loan, though these are just short-term solutions that add nothing to the business’s ability to succeed.

As a result, many small businesses are shut down or sold to corporations upon the death of its founder because of estate taxes. Furthermore, this discourages many individuals from starting their own businesses because they know it will be very difficult to pass it on to their children and all their success will end up in the hands of some large faceless corporation.

If we want a nation of entrepreneurs, small business, and a thriving Main Street, we need to permanently eliminate estate taxes. If you want a world where those with brains, energy, and drive are discouraged from developing their ideas and talents, big businesses dominate, and Wall Street is more important than Main Street, we should let the estate tax return as is currently planned. The choice is yours.

OCT 29 UPDATE! A Republican tsunami! My official election prediction for the House of Representatives.

This prediction has been replaced/updated with this one.

In my first analysis of the election, I forecast a Republican gain of 61 seats in the House.

In my second, I created three more sophisticated models and forecasted a GOP gain of 78 House seats. Each time a new Generic Congressional Poll was released, I updated my forecast in the comment section. I will do so again here.

The following is mostly the same text from Sunday’s post with updated polling data.

First, one must predict the vote totals for each party. Currently, RCP’s average of the “Generic Congressional Vote” shows Republicans winning 48.7% to 42.4%, a decline from Sunday’s 49.3%-41.6% margin. I then remove the polls with highest and lowest spread to eliminate outliers (in this case, I am removing one poll showing Republicans up by 14 and one that shows Democrats up by 3). Excluding those two gives us a much smaller range of +3 to +13, though this is much wider than Sunday’s range of +7 to +11, a small ver 4 point range. Removing the highest and lower outlier, Republicans lead Democrats 49.0% to 41.7%, a narrower spread than last week’s 49.8% to 40.6%. Eliminating the undecideds (if they have not decided by now, they are unlikely to vote) gives a two-party vote total of 54.0% for the Republicans (down from 55.1%) and 46.0% for the Democrats (up from 44.9%).

I now have three models to convert vote totals to House seats.

40-year model: Regression of House seats vs. vote total for every election since 1968.

8-year model: Regression of House seats vs. vote total for every election since 2002. Because of the increase in partisanship and computerized gerrymandering, there are now many more safe seats.

1994 & 2006 model: In these two mid-term elections, control of the House switched sides against an unpopular President. The same will likely occur this year.

The models produce the following results:

40-year model: Republicans win 257 House seats, gain of 79 seats.

8-year model: Republicans win 241 House seats, gain of 63 seats.

1994 & 2006 model: Republicans win 246 House seats, gain of 68 seats.

Taking a simple average of the three, I now predict the Republicans will win 248 House seats, a gain of 70 seats. On Sunday, I had predicted a gain of 78 seats. So the Generic Congressional Polls moved against the Republicans this week, but only barely.

However, the last poll of the week moved significantly in the GOP’s favor. Individual races, which had been moving against Republicans last week and earlier in this week, have also moved in the GOP’s favor toward the end of the week. I suspect that most of the movement we are seeing is statistical noise and not a change in voters’ opinions. So let’s take an average of my averages over the past week. Doing so, I now predict the GOP will gain 72 seats in the US House of Representatives.

Greece Likely to Default By 2013 according to PIMCO CEO. And the sovereign debt crisis countinues.

I have written a number of times about the sovereign debt crisis. In many of them, I warn “The sovereign debt crisis is far from over. In fact, it is just beginning.”

According to Bloomberg, Mohamed A. El-Erian, CEO of PIMCO, the world’s largest mutual fund company and renowned bond trading firm, warned:

Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden.

It’s in Greece’s interest to default “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness,” El-Erian said at a conference sponsored by the Economist magazine in New York yesterday. Like Latin America’s “lost decade” in the 1980s, “the alternative doesn’t promise growth and employment generation,” he said.

The result of El-Erian’s statement:

Greek bonds slid today, pushing the 10-year yield up 31 basis points to 9.66 percent at 5 p.m. in London, the highest since Oct. 8.

Investors demand 716 basis points, or 7.2 percent, more yield to hold 10-year Greek bonds than they do to hold benchmark German bunds. That’s also the widest spread since Oct. 8.

So again, I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.

Tax and intervention uncertainty killing the economy.

Everybody is talking about the impending largest tax increase in history due on January 1, 2011. In addition to the cost this imposes on the economy, there is the uncertainty this creates. The Giant Wakes writes:

The Bottom Line: Until the uncertainty surrounding the future Federal tax rates is resolved, it will remain yet another factor conspiring to keep businesses sitting in the economic sidelines, waiting for clear signals before committing capital to growth – and, the uncertainty had better be resolved in favor of sustaining the current rates rather than increasing them, if we hope to see an end to the ‘jobless recovery’ and any kind of broad-based improvement in consumer economic circumstances any time soon.

While The Giant Wakes may write about government intervention in a future post within his ten-part series called “Ten Tyrants of Uncertainty,” I thought I’ll jump ahead and add to the discussion.

Which is a bigger deterrent to economic activity: tax uncertainty or the uncertainty of government intervention? When government steps in to bail out one company at the expense of another, economic calculation is thrown out the window. And this does not just apply to corporations where our government may bail out GM thus hurting Ford or give billions to large banks while letting small banks fail. It also applies to each of us an individual. Those of us who are responsible, paying our mortgages each month or not buying a house knowing we cannot afford one, are now paying for those who irresponsibly bought more house than they could afford but whose mortgages have been “modified” by the government.

As a result, we now have a bipolar economy. We have those who have abandoned all risk taking, not knowing what the government will do. And we have those who take extreme risks, believing the government will bail them out if they fail. In the mean time, nobody is taking the reasonable calculated risks that are essential to a productive and profitable economy.

Americans think politicians are corrupt. That’s why the Founders gave us a constitutional republic.

In a recent poll, Americans said they blame politicians and not the system:

Optimism about the American system of government is at a 36-year low, yet most Americans blame the people in office — not the system itself — for all that’s going wrong, according to a new ABC News/Yahoo! News poll.

While I agree that politicians are corrupt, I don’t agree that this is the problem we are now facing. The real problem is the system of government we have. We have left our the republican roots of our Constitution and become too democratic.

If you study the history of free society and its descent, you will see one corrupt politician after another. You will discover the demagogues of ancient Greece, the tyrants of Rome, the totalitarians of the twentieth century, and the many corrupt politicians in our own history.

Our Founding Fathers knew that we too would have our fair share of corrupt politicians, just as all societies do. Not trusting government to corrupt, power-hungry men, the Founders established a constitutional republic for us in which “ambition must be made to counteract ambition.” [Madison. Federalist #51.]

In ancient Rome, there were three power centers: the people, the aristocracy, and the monarchy. Rome balanced these three powers with the people, often called the mob, the Senate representing the aristocracy, and the magistrates acting similar to monarchs.

Our Founders created a similar balance between the three. The House of Representatives are the people. The Senate is the aristocracy as they were originally chosen by the states, not directly elected. And the President acts like a monarch, especially in war time when he is very similar to the temporary dictators of ancient Rome.

The Founders also established a balance of powers between the federal government and the states, designed to prevent either one from becoming too powerful:

This balance between the National and State governments ought to be dwelt on with peculiar attention, as it is of the utmost importance. It forms a double security to the people. If one encroaches on their rights they will find a powerful protection in the other. Indeed, they will  both be prevented from overpassing their constitutional limits by a certain rivalship, which will ever subsist between them. [Hamilton speech to New York Ratifying Convention]

Few today would argue that the states act as a check on the power of the federal government. With the power of the military, federal court system, and printing press (enabling federal government to spend nearly unlimited amounts of money whereas states can’t print money to pay off debts), states are powerless to stop any federal tyranny.

Additionally, in 1913 the Seventeenth Amendment provided for direct election of Senators. Prior to that, Senators were elected by their state legislatures. Not only did this direct election reduce the power of the states even further, it also removed the Senate’s aristocratic nature and made it democratic, little different from the House of Representatives.

Thus, the balance of powers has been severely weakened as the states can no longer check the federal government and the Senate has become another tool of the power. In effect, we have become a federal democracy.

Democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths. [Madison. Federalist #10.]

It should be no surprise then that we are now living in such turbulent times.

UPDATED! A Republican tsunami? My official election prediction for the House of Representatives.

This prediction has been replaced/updated with this one.

I have added new models to my previous prediction of a Republican gain of 61 seats in the House.

First, one must predict the vote totals for each party. Currently, RCP’s average of the “Generic Congressional Vote” shows Republicans winning 49.3% to 41.6%. However, you clearly see two outliers, one to the upside (Gallup LV Lower Turnout) and one to the downside (Newsweek). Excluding those two gives you a pretty tight pack varying from +7 to +11, a small 4 point range versus the huge 20 point range if you include the two extreme polls. Based on these five closely-packed polls, Republicans lead Democrats 49.8% to 40.6%. Eliminating the undecideds (if they have not decided by now, they are unlikely to vote) gives a two-party vote total of 55.1% for the Republicans and 44.9% for the Democrats.

I now have three models to convert vote totals to House seats.

40-year model: Regression of House seats vs. vote total for every election since 1968.

8-year model: Regression of House seats vs. vote total for every election since 2002. Because of the increase in partisanship and computerized gerrymandering, there are now many more safe seats.

1994 & 2006 model: In these two mid-term elections, control of the House switched sides against an unpopular President. The same will likely occur this year.

The models produce the following results:

40-year model: Republicans win 268 House seats, gain of 90 seats.

8-year model: Republicans win 247 House seats, gain of 69 seats.

1994 & 2006 model: Republicans win 253 House seats, gain of 75 seats.

Taking a simple average of the three, I now predict the Republicans will win 256 House seats, a gain of 78 seats.

* Again, I will update these numbers as new polls come in. But if you look at the polls on RCP over the last month, Republicans have been consistently in the lead by 8 or 9 points. Barring some late breaking change in this election, I don’t expect these number to change much. But who know how accurate the polling is this year? We won’t know for certain until November 2.