Monday, November 1, 2010
Democrats’ Estate Tax Plan Trips Next Secretariat
Democrats’ Estate Tax Plan Trips Next Secretariat: Amity Shlaes
The estate tax is one topic getting lost in the dust of the midterm races. That’s a pity. This tax, now quiescent, is set to roar back like a stallion in 2011 if lawmakers don’t rein it in with new legislation.
The destruction caused by the estate tax can be hard to capture. This is partly because the family business dynamic, so affected by the tax, is also hard to describe. Nonetheless, if left unchecked, this levy can trip up not only the workings of a family enterprise but also the general economy. An entertaining reminder of this fact is a film in theaters this midterm autumn.
“Secretariat” is about the Chenery family and their horse, who in 1973 became the first Triple Crown winner in 25 years. The film is also about Secretariat, the business, and the struggles all businesses suffered in the high-tax 1970s.
Long before the big red horse with white stockings was born, the Chenerys were pouring what dollars they had into their horse farm, Meadow Stables. Money was often tight, so the family leveraged their non-cash assets. One was the family’s horse breeding expertise. Another was their knowledge of horse markets, including the insight that investors overestimate the importance of the sire in genetic inheritance, while underestimating the mare.
Chris Chenery, who ran the business, offered investors a deal in which they could breed their studs with several of his mares. In lieu of paying a stud fee, Chenery gave investors one of the foals. A coin flip determined which one they got. Secretariat happened to be a reject the Chenerys received because they lost a coin flip over the offspring of Bold Ruler.
The Chenerys’ experience, however, made them confident they had won in losing. For unlike Ogden Phipps, the owner of Bold Ruler, they were familiar with Secretariat’s mother and had seen the foal get on his legs earlier than usual.
Inside Information
Just as in many family businesses, a strong social network enabled the Chenerys to make smart decisions. For example, Chris’s friends helped his daughter, Penny, select the best trainer and jockey for their colt.
But the racehorse almost didn’t become the legend. That’s because the family’s assets -- hard-won knowledge, intergenerational experience, a foal with potential -- were almost dispersed to the wind. After Secretariat had become Horse of the Year, but before he ran his Triple Crown races, Chris died. The patriarch’s death triggered the estate tax. The amount due on Meadow Stables seemed to necessitate liquidation. Avoiding that fate would require losing the focus and resources the farm needed to ready its possible champion.
Overtaxed and Desperate
This trap caused Penny, the new leader of the enterprise, to feel a sense of desperation familiar to other overtaxed businesses of the period. In those years income tax rates were high. So was the capital gains tax. The estate tax was especially burdensome.
“The 1970s was the bad old estate tax days,” Paul Caron, a tax expert at the University of Cincinnati College of Law, said in an e-mail. “The exemption was only $60,000 ($334,000 in today’s dollars) with a 77 percent top rate. Just as the day’s 70 percent top income tax rate spurred all sorts of aggressive tax sheltering activity, the draconian estate tax rates encouraged the wealthy to spend considerable time and money engaging in various strategies to reduce the estate tax bite.”
The fact that one of those tax-escape strategies might have been the purchase of gentlemen farms like the Chenerys’ doesn’t undermine the larger point: navigating tax obstacles stole precious time from more worthy endeavors.
Time-Consuming Distraction
The film depicts Penny as a canny woman who got past those tax traps in the same way that Secretariat bypassed Sham, his strongest competitor. She did it by creating a breeding rights syndicate to raise cash. But this exercise also had costs. The time it required could have been used to breed more Secretariats.
The coming decade, which will see a higher estate tax, income tax and capital gains tax, is shaping up to be a formidable challenge -- one that seems as daunting as surviving all three legs of the Triple Crown.
Democrats who see virtue in the estate tax are doing the equivalent of aborting future enterprises. They deprive businesses of oxygen with their support for capital gains taxes and disregard for contracts.
The Republicans are supposed to prevent a rerun of the 1970s. Several commentators have noticed that there’s something Republican about “Secretariat.” Actress Diane Lane, who plays Penny, evokes a combination of Sandra Day O’Connor (Western horsewoman) and Sarah Palin (moose-hunting politician).
Still, it isn’t clear that the Grand Old Party has the stamina to pass the endurance test that is tax reform. By focusing so much on midterm fury and so little on reform, the party may prove more Sham than Secretariat.
Fed Risks Its Credibility on a Bowlful of Mush
Fed Risks Its Credibility on a Bowlful of Mush: Caroline Baum
It’s all over but the voting.
After all the speeches and the posturing, after the trial balloons and the press leaks, the Federal Reserve probably will announce another round of quantitative easing at the conclusion of its two-day meeting Wednesday.
The Fed embarks on this program with the intention of lowering yields on long-term Treasuries, which in turn will bring down mortgage rates and corporate bond yields. Surely there must be two or three households holding back on a home purchase because the 30-year mortgage rate at 4.2 percent is too onerous.
If QE1, which entailed the purchase of $1.4 trillion of agency debt and mortgage-backed securities (in addition to $300 billion of Treasuries), was about credit easing, QE2 then is about prices. I have yet to hear any Fed official talk about Q, about increasing the quantity of money -- specifically bank reserves -- which is where quantitative easing gets both its name and its heft.
Either the Fed is operating under a misconception about how QE2 will reduce unemployment and raise inflation, or it has failed to communicate the transmission mechanism to the public. Neither is a plus.
About the best thing anyone can say about the well- advertised and anticipated QE2 is that it won’t do much good. The worst thing is that it will inflate asset prices, which we don’t call inflation.
‘Violently Wrong’
Because Fed chief Ben Bernanke has been unwilling to admit the role low interest rates played in puffing up the housing bubble, he sees little risk from further easing, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
At the same time, the Fed’s output gap models, which measure the difference between actual and potential growth and were “violently wrong in 2003 and 2004,” reinforce the majority view that deflation is the real threat, Stanley says.
Then there’s the Fed’s stated tactic of raising inflation expectations to lower real interest rates, a flawed concept even though it has succeeded splendidly in the short term.
In the two months since Bernanke first hinted at QE2 in his Jackson Hole, Wyoming, speech, five-year inflation expectations, the Fed’s preferred measure extrapolated from the yield differential between nominal and inflation-indexed Treasuries, have risen from about 2 percent to 3 percent.
Tortured Logic
So taken is the Fed with the notion that higher inflation expectations are the route to salvation that it has commissioned research on the subject. Last month, three Fed Board economists published a paper claiming that with overnight rates near zero, an oil price shock would be a plus for growth.
The “burst of inflation” from an increase in oil prices stimulates interest-rate sensitive sectors of the economy, the authors claim. (Aren’t higher oil prices a relative price increase unless the Fed prevents other prices from falling?) “In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion,” they write.
Where are the speculators when you need them?
Ten years ago I wrote a column titled, “Fed Chairman Ali Naimi Has a Nice Ring to It,” referring to Saudi Arabia’s oil minister. The piece debunked the idea that oil prices can do the central bank’s job.
Maybe I was wrong. If you believe the research, we should be rooting for one of those old-fashioned oil shocks, circa 1973 and 1979, to fix what ails the U.S. economy!
Flawed Analysis
Raising inflation expectations to lower real long-term rates has two flaws. First, it assumes nominal rates don’t move. (The nominal rate consists of a real rate plus a premium for expected inflation.) Nominal rates could easily rise in sync with inflation expectations, leaving real rates unchanged.
The second reason has to do with the Fed’s credibility: real, expected and long-term.
“Credibility against deflation is tied to credibility against inflation,” says Marvin Goodfriend, professor of economics at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.
What Goodfriend means is, the Fed has “the independence and operational capacity” to fight inflation and deflation via its control over bank reserves. What it doesn’t have is the luxury of overshooting to fight deflation, producing more inflation in the short run, when expectations have been manipulated higher. (While I agree with blogger Mish Shedlock that inflation expectations are “elegant nonsense,” I’m using the Fed’s framework to critique its logic.)
‘Late in Coming’
Almost two years have elapsed since the central bank pushed the funds rate to near zero. In that time, policy makers have failed to explain the framework for fighting deflation, Goodfriend says. Without that framework, it has to take risks with policy.
“The action is premature; the framework is late in coming,” he says of QE2.
It would be better to stabilize inflation expectations in the 1 percent to 2 percent range, the Fed’s implicit target since 1996, and provide a coherent framework for understanding how its actions affect the economy and prices.
Under Bernanke, monetary policy has become enamored with the idea that “communication and expectations adjustment is where all the leverage is,” says Timothy Duy, director of the Oregon Economics Forum at the University of Oregon in Eugene.
If the Fed has failed to communicate its framework for fighting deflation, as Goodfriend says, and if expectations aren’t your cup of tea, no wonder you’re nervous. Bernanke is headed into uncharted waters with no compass, no radar, and no stars to guide him.
The good news is he’s got plenty of fuel. The bad news: His only rations are gruel.
Fed Likely to Announce $500 Billion of Purchases
Fed Likely to Announce $500 Billion of Purchases, Survey Shows
Federal Reserve Chairman Ben S. Bernanke. Photographer: Joshua Roberts/Bloomberg
Nov. 1 (Bloomberg) -- Julia Coronado, chief economist for North America at BNP Paribas, talks about the outlook for the financial markets following this week's meeting of Federal Reserve policy makers and the congressional elections, the state of the U.S. labor market and her expectations for the size of the latest round of quantitative easing by the Fed. Coronado speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
The Federal Reserve will probably begin a new round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.
Policy makers meeting tomorrow and Nov. 3 will restart a program of securities purchases to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week. Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy up to $500 billion or didn’t quantify their forecast.
The varied responses reflect differences among Fed officials over the total amount of purchases needed to bolster the recovery. Policy makers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought $1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high.
“There’s no silver bullet right now,” and central bankers have “very few options left in terms of lowering interest rates,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He predicted $500 billion of Treasury and mortgage-backed securities purchases over the next six months.
Shock-and-Awe Plan
Disagreements among policy makers over whether to incrementally expand the balance sheet or stage a so-called shock-and-awe program of big asset purchases has created confusion among investors over the likely size and duration of any new easing, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.
“There has not been a uniformity of opinion emanating from the multitude of public appearances from Fed officials,” McCarthy said. He predicts the Fed will buy $500 billion of securities over the next six months and was among 13 economists who said the purchases would include mortgage-backed bonds in addition to Treasuries.
New York Fed President William Dudley set expectations for $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.
Dudley put the $500 billion figure “in there and it sounded like he was trying to move it along in that direction,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who predicts the Fed will announce up to $500 billion of purchases by March.
Many Variables
Referring to investor expectations of the central bank’s next move, Rupkey said, “It’s a mess and it’s just because there’s too many variables between the amount and the time period.”
St. Louis Fed President James Bullard said Oct. 21 the Fed should buy $100 billion in long-term Treasuries this month and calibrate subsequent purchases based on the course of the economy. Atlanta Fed President Dennis Lockhart said that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”
Estimates by economists about the duration of a Fed asset purchase program ranged from as short as three months to as long as the end of 2011. Three analysts said the Federal Open Market Committee wouldn’t announce new stimulus.
Favorable Reaction
“It’s highly unlikely that anyone’s going to get all the details right because going into the meeting Fed officials themselves won’t have agreed on all of” them, Jefferies’ McCarthy said. He said he expects the Fed to buy mortgage-backed securities because it would be a positive surprise, and the central bank wants a “favorable market reaction.”
The lack of clarity over the Fed’s plans has played out in the Treasury market, which handed investors a loss of 0.18 percent in October, the first negative monthly return since March, according to index data compiled by Bank of America Merrill Lynch. After falling to 2.38 percent on Oct. 7 from 2.51 percent on Sept. 30, the yield on 10-year Treasuries has since climbed to 2.63 percent, Bloomberg data show.
Not all Fed officials agree the central bank should start new stimulus measures. Kansas City’s Thomas Hoenig, who has already dissented six straight times, said Oct. 25 that he opposes more easing and because it’s “a very dangerous gamble” that may accelerate inflation and create asset price bubbles. Dallas Fed President Richard Fisher and the Philadelphia Fed’s Charles Plosser have also spoken out since the FOMC’s last meeting against more action by the central bank.
Raise Inflation
Chicago Fed President Charles Evans said several times last month that the central bank needs to take action and should buy securities on a large scale to carry out his preferred strategy of aiming to raise inflation temporarily.
“They’re in uncharted waters here, and no one really knows, we’re all guessing” about the size and duration of the easing program and its ultimate impact, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “I haven’t seen anybody out there who has made a convincing case that this is anything but a trivial boost for the economy.”
The central bank last month asked bond dealers and investors for projections of its asset purchases over the next six months, along with the likely effect on yields. The New York Fed, the branch of the Federal Reserve System that implements monetary policy, asked about expectations for the size of the program and the time over which it would be completed, according to a survey obtained by Bloomberg News.
Incremental Tactic
Stanley predicted the Fed will opt for the incremental tactic and announce a program to buy $200 billion of Treasuries by its Jan. 26 meeting.
“They want to preserve flexibility and to have the option of tweaking the pace as they go based on whatever it is that they choose to look at,” Stanley said.
“Clearly the thrust of this is to get long-term rates lower, but when you listen to what they say about it they don’t even plan to get a lot of juice out of what they want to do,” he said. “What does that do for the economy?”
Dudley, who is also vice chairman of the FOMC, said in the Oct. 1 speech that the central bank would probably need to act to address “unacceptable” job growth and inflation.
The U.S. economy expanded at a 2 percent annual rate in the third quarter and inflation cooled, Commerce Department figures showed Oct. 29 in Washington. The report showed the inflation gauge watched by the Fed rose the least in almost two years as retailers like Wal-Mart Stores Inc. and Target Corp. use discounts to lure shoppers.
Raise Expectations
In addition to a new round of asset purchases, policy makers are also considering efforts to boost public expectations that inflation will rise, according to the minutes of the FOMC’s Sept. 21 meeting.
All but two economists predict the Fed will leave the interest rate on excess reserves unchanged at 0.25 percent. Fifteen analysts, including McCarthy, say the Fed will alter the phrase that its benchmark interest rate will stay near zero for an “extended period,” which was introduced in March 2009.
“They’ve been telling us they’ve been considering a change to the ‘extended period,’ so at some point they’re going to do it and this is as good a time as any,” McCarthy said.
The questions were as follows:
1a. At the FOMC’s Nov. 2-3 meeting, will the committee decide to (choose one):
a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities
b) Increase the level of securities holdings through additional asset purchases
Result (56 replies): A, 3; B, 53.
1b. If you answered (b) to the last question, please provide your predictions on the following possible elements of the announcement:
a. The amount of additional purchases announced in billions
of dollars:
b. The length of time for the additional purchases to be
completed:
c. The types of securities to be purchased:
1) Treasuries
2) mortgage-backed securities
3) both Treasuries and MBS
4) other (please elaborate)
Result (53 replies): a) 29 expect $500 billion or more; 7 predicted monthly purchases of $50 billion to $100 billion without specifying a total; 12 predicted up to $500 billion; 5 didn’t specify an amount.
b) 7 predicted monthly purchases with no timeline; 9 predicted up to three months; 17 said between three and six months; 9 said between six months and one year; 5 said through 2011; 6 didn’t specify a pace or timeline.
c) 38 said Treasuries (including Treasury-Inflation Protected Securities); 13 said both Treasuries and MBS (including one that also predicted agency bond purchases); 2 didn’t specify.
2. Will the FOMC statement following the Nov. 2-3 meeting include any changes to the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Yes or no.
Results (49 replies): Yes, 15; No, 34.
3. Will the Fed decide at the Nov. 2-3 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.
Results (47 replies): Yes, 2; No, 45.
Angry America
The mid-terms
Barack Obama and the United States are both doing a little better than Americans seem to believe
IT TAKES an effort these days to recall the thrill that surged through the world when Barack Obama was elected America’s president. It was not only that he was the first black person to assume the globe’s greatest office. He seemed to be preternaturally thoughtful, dignified and decent; a man who could heal America’s wounds at home and restore its reputation abroad. Though too many were swept away in a collective longing to see hope triumph over experience, none of it seemed wholly unreasonable at the time. Yes, many thought, he can.
Two years later, the magnitude of the let-down is palpable everywhere; and at home the president is caught in a vice. To many on the left, he is a cowardly compromiser, whose half-baked plans to get America back to work have done little to help those who voted for him, and whose health-care and financial reforms were gutted at the behest of special interests. To many on the right, he seems a doctrinaire spendthrift who has squandered trillions of dollars on wasteful bureaucracy, mortgaging the future while failing to grapple with the present. To centrists who backed him, including this newspaper, he has been a disappointment, his skills as a president falling far short of his genius as a campaigner.
It looks as though an angry America is about to exact its revenge, giving Mr Obama’s Democrats a painful kicking in the mid-terms on November 2nd. The likeliest outcome (see article) is that the Republicans will take back the House of Representatives and make solid gains in the Senate, where, though falling short of majority control, they will effortlessly be able to block any bill they wish. But, in our view, the rage directed at Mr Obama is overdone.
Consider the main reason why Americans are angry: the economy. The slow pace of job re-creation is primarily the result of consumers and companies trying to rebuild their finances. Balance-sheet recessions always take time to recover from. Mr Obama is guilty of promising that the pain would be over sooner than was ever likely. But he did not cause the bust, and he deserves more credit than he is getting for steering America clear of a much worse fate, especially considering the constraints of a political system designed to make big changes difficult. He was right to go for a big, bold and immediate stimulus plan. He has been right to resist, with minor exceptions, calls for a wave of protectionism. He is guilty of having no credible medium-term plan to reduce the deficit. But then nor do the Republicans; and it was they, after all, who oversaw the tax cuts, the entry into two wars and the financial collapse that are the source of most of America’s gigantic deficit.
In other policy areas, too, Mr Obama has got some big things right. He was correct to try to deal with a dreadful system that leaves tens of millions of Americans without access to health cover, though he should probably have postponed doing so until the economy had recovered. In foreign policy, he has made generally sensible decisions about Iraq and Afghanistan. Many of the people he has retained or put in place have done well, including his ex-rival, Hillary Clinton.
So what went wrong? The answer is a series of smaller things—rhetoric, details, execution, even an aloof vagueness—that have cumulatively undermined his presidency. He has made enemies of the businessmen who are needed to drive forward America’s recovery, haranguing them as fat cats and speculators. He has even, as we report here, forfeited the goodwill of America’s most dynamic and entrepreneurial asset. Silicon Valley, which once saw Mr Obama as a promising start-up, now sees him as a bad investment.
His decision to leave details to others has also cost him dearly. By choosing to subcontract the stimulus, health reform and finance reform to the Democratic leadership, he ended up with shoddy bills that Republicans could safely vote against and that many Democrats are now anxious to distance themselves from. A more accomplished president would have controlled that process better, and found ways to make the Republicans offers that they could not refuse. Mr Obama’s macroeconomic soundness has been undermined by the Democrats’ tendency to meddle with microeconomics, leading to a health bill that imposes onerous requirements on business and a stimulus bill larded with pro-union giveaways.
America is now an uncharacteristically uncertain place. Abroad it seems unsure of who its friends and enemies are. At home there are too many imponderables: over how the health bill will play out in practice; over what might happen to energy prices if carbon-pricing is resurrected via executive action; most of all, over what Mr Obama can do about those yawning deficits. People do not like uncertainty; so if Americans are angry, it is hardly surprising.
Mr Obama seems curiously unable to perceive, let alone respond to, the grievances of middle America, and has a dangerous habit of dismissing tea-partiers and others who disagree with him as deluded, evil or just bitter. The silver tongue that charmed America during the campaign has been replaced by a tin ear. Some blame this on an emotional detachment his difficult upbringing forced on him, others on the fact that he has lived all his life among tribal Democrats. Whatever the reason, he does not seem to feel America’s pain, and looks unable either to capitalise on his administration’s achievements or to project an optimistic vision for the future.
Which ought not to be so hard. Despite its problems, America has far more going for it than its current mood suggests. It is still the most innovative economy on earth, the place where the world’s greatest universities meet the world’s deepest pockets. Its demography is favourable, with a high birth rate and limitless space into which to expand. It has a flexible and hard-working labour force. Its ultra-low bond yields are a sign that the world’s investors still think it a good long-term bet. The most enterprising individuals on earth still clamour to come to America. And it still has a talented president who can surely do better than he has thus far.
The European summit
European politics
Charlemagne's notebook
The European summit
The bully in the room?
| BRUSSELS
EUROPEAN leaders came to Brussels complaining about "being bullied into a position" by France and Germany. But even before today's summit started, they seemed to be succumbing to the intimidation.
Nobody likes the German-French call to reopen the treaties of the European Union to enshrine stronger means of imposing fiscal discipline on the 16 countries using the euro. Even more annoying was the way it was made, in a joint communiqué issued from a summit in Deauville just as EU finance ministers were arguing in Luxembourg about when and how to impose financial sanctions on those breaching the euro zone’s budget rules.
To some extent, the French and the Germans are damned if they agree, and damned if they don’t. A deal is criticised as an imposition; a disagreement is denounced as causing paralysis.
Pierre Lellouche, France’s European affairs minister, explained the Deauville deal thus: “It is no diktat, it is a Franco-German present to Europe. Of course it is not aimed at dictating from the big to the small, that is ridiculous.”
Germany won France’s support for changing the treaty on two points. First, they want the EU to have the power to suspend the voting rights of euro-zone members that persistently breach the budget rules. Second, they want to create a permanent financial safety net for the euro zone and a system for restructuring the debt of countries that cannot repay their loans. This would include tough conditions on countries that resort to the fund and losses for bondholders. The idea is to stop both irresponsible borrowing and reckless lending.
Viviane Reding, the European Commission’s vice-president, spoke for many national leaders when she declared yesterday: “Look back at what had to happen with the Lisbon treaty. We needed ten years to bring that treaty into being. So for heaven's sake, I think it would be irresponsible, and I say that again, if we were to reopen the Pandora's box.”
This was not another one of Mrs Reding’s misjudged outbursts of the kind that backfired over France’s treatment of the Romanies. Her boss, José Manuel Barroso, the commission president, said today:
If treaty change is to reduce the rights of member states on voting, I find it unacceptable and frankly speaking it is not realistic. It is incompatible with the idea of limited treaty change and it will never be accepted by the unanimity of member states. And as you know a treaty change requires unanimity. If treaty change is to address the issue of the economic and financial crisis response, we have to discuss what are the ideas.
At a pre-summit meeting today of leaders of the European People’s Party, the centre-right “family” of parties comprising many of Europe’s most important leaders, the signs were that a compromise would emerge: EU leaders would drop the idea of suspending voting rights, and would agree to study the option of a limited treaty change for what is being called a "crisis-resolution mechanism" (don’t call it a bail-out fund).
Suspending voting rights is opposed by many countries, particularly smaller states that fear being bullied by larger ones. In any case, it would be a sufficiently big loss of sovereignty that any treaty including such a provision would have to be put to a referendum in Ireland, where it would probably fall.
A more technical treaty change to create a permanent European crisis-resolution mechanism may be possible to slip through in a “simplified procedure” that allows minor changes to be approved by a vote of member states.
“Today or tomorrow there will be a decision that treaty change is needed,” predicted Jyrki Katainen, Finland’s finance minister, after the EPP meeting, although he did not think such a procedure was actually necessary. His officials circulated a paper arguing that an insolvency process could be set up without treaty changes, mainly by rewriting clauses on bonds issued by European governments. But in the end, said Mr Katainen, leaders will probably feel like they need to make a political gesture to Angela Merkel, Germany’s chancellor.
It is a joyless concession. “It is easy to open a treaty, but it is hard to close it,” said Viktor Orban, Hungary’s prime minister. Fredrik Reinfeldt, the Swedish prime minister, said: “It is very important to say that to resolve Germany’s problem we should not create problems for everyone else.”
The German government wants to amend the treaty because it fears that its constitutional court, which has before it a lawsuit against the current temporary €750 billion IMF-backed fund, will find it to be illegal.
A treaty amendment would seek to reconcile a permanent fund with the existing, but ambiguous, “no bail-out” clause. In any case, Mrs Merkel wants to demonstrate that the German taxpayer will not be made to bear the cost of profligate states.
So whether for legal or political reasons, Mrs Merkel needs treaty change. And these days, in Europe, what Mrs Merkel wants Mrs Merkel almost always gets.
Brazil's presidential election
The Americas
Americas view
Brazil's presidential election
No surprises this time
by H.J. | SÃO PAULO
WITH 93% of the votes for president counted, Dilma Rousseff, the candidate of the ruling Workers’ Party and the chosen successor of the current president, Luiz Inácio Lula da Silva, has defeated José Serra of the Party of Brazilian Social Democracy by 55.5% to 45.5%. Ms Rousseff had never before run for elected office. Her entire political life had been behind the scenes. Little was known of either her politics or her personality. Mr Serra was vastly more experienced and better known. But Lula campaigned beside Ms Rousseff, toured the country with her and was at least as visible in her television advertising as she was. Asked to choose between continuity and experience, Brazilians chose continuity.
So on January 1st Ms Rousseff will become Brazil’s next president, and its first female one. In the end, it was the poor and those in the less-developed northern regions who swung it her way. Richer and better-educated folk preferred Mr Serra, but Brazil has fewer of them.
Ms Rousseff now has some time before she must put together a government—but also the freedom to announce important appointments as soon as she wishes. Her choice of foreign minister will be a clue to whether she intends to rein back on Lula’s foreign-policy adventurism. And her pick for finance minister will show whether she is serious about getting public spending back under control. Despite a strong economy and galloping tax receipts, the government’s spending is rising even faster than its income. Under Lula, Brazil’s central bank was granted de facto independence over monetary policy, which means high interest rates to counter the government’s fiscal laxness—one of the root causes of Brazil’s over-valued currency. A strong, fiscally conservative appointment to the bank’s governership would reassure investors that the new president does not plan to intervene directly to push rates down.
Back in June, when campaigning kicked off, Lula told the nation that without him there would be a void on the ballot papers. He has stood in every presidential election since 1989. To fill that void, he said, he planned to change his name to Dilma Rousseff and run again. Brazilians will soon find out whether Ms Rousseff is her own woman, or just Lula in lipstick.
Technology firms and Barack Obama
Technology firms and Barack Obama
The love affair that technology firms had with America’s president is fading fast
SAN FRANCISCO
PASSING through California on a mid-term campaign swing, Barack Obama made a point of stopping off to see Steve Jobs, the boss of Apple. He also hob-nobbed with executives from Google and other Silicon Valley companies. More than any of his predecessors, Mr Obama likes to pay homage to the titans of technology. They, in turn, have lavished him with praise and political donations. But now many tech folk are worrying out loud that his government is not as serious about supporting innovation as it purports to be.
The tech crowd thought the latest occupant of the White House was one of their own. An enigmatic politician with strong convictions, Mr Obama in many ways resembled the driven young spirits that venture capitalists love to take a punt on. And during the presidential campaign he wowed Silicon Valley with an elevator pitch that envisaged using social media and other technologies developed there to fashion a new and radical political order. Everything from Mr Obama’s addiction to his BlackBerry to his keenness to see maths and science promoted in schools suggested he would be the most tech-friendly president in history. Small wonder, then, that the techies swooned over him.
Nor is it surprising that many of them are now starting to feel badly let down. “There’s a strong feeling that this government really lacks direction,” says Gary Shapiro, the head of the Consumer Electronics Association. Many of its 2,000 members, he adds, are unwilling to invest in new initiatives while there is so much uncertainty about future policy.
That is a familiar refrain. Michael Splinter, the boss of Applied Materials, which makes equipment for the semiconductor industry, is one of several prominent executives who have called on the government to do far more to tackle measures that deter investment. Another source of friction is the reluctance in Washington to reduce hefty taxes on foreign earnings repatriated to America. As many American tech firms make a large share of their revenue and profit outside the country, they are particularly exercised by the government’s reluctance to lighten this burden.
To make matters worse, tech leaders have been outraged by Mr Obama’s willingness to demonise employers for outsourcing work to foreign countries, which is especially popular within the IT industry, and by his grating sermons on the evils of corporate greed. “We’re praised for creating jobs, while being spanked at the same time,” complains Mark Heesen of the National Venture Capital Association (NVCA), which represents funds that invest in technology start-ups.
This may seem like sour grapes. After all, the tech industry has been a big beneficiary of the Obama administration’s efforts to stabilise the economy. The government is investing over $100 billion to spur innovation in everything from renewable energy to health-care IT and electric cars. And it has at least taken some steps which the tech companies have long been lobbying for, including appointing a chief technology officer to promote technology innovations within the federal government, encouraging the Federal Communications Commission to roll out a national broadband plan and stepping up efforts to promote science and engineering skills in schools and colleges.
Tech firms and venture capitalists welcome these initiatives, but are deeply frustrated by a lack of action in other areas. For instance, many cleantech start-ups and their backers were betting that Mr Obama would push through an energy bill that would force America to embrace alternative sources of energy more aggressively. But that came a cropper in the Senate.
Entrepreneurs complain bitterly about the government’s failure to deal with frustrating red tape. Luka Erceg, the boss of Simbol Materials, a start-up that produces lithium and other metals from brines and effluent, reckons he has spent hundreds of thousands of dollars in legal and other fees applying for funds from the federal stimulus package. “There is just too much friction in getting capital to flow,” he says.
Then there is the thorny issue of trade. Some tech firms accuse the government of failing to put enough effort into trade agreements that would help to boost their sales. “We need fair and open markets and that takes a lot of work,” says John Chen, the chief executive of Sybase, an American software firm owned by Germany’s SAP. There are also worries that friction with China over exchange rates and other issues could damage the interests of American tech firms which have Chinese subcontractors and factories.
The tech industry is also concerned about the difficulty of importing skilled labour. Tight visa controls on highly qualified immigrants have been a huge headache for firms such as Microsoft and IBM. And they infuriate venture capitalists, who claim the controls are robbing America of entrepreneurial talent. Demand for visas from skilled workers dipped during the recession, but it is likely to become a problem again as the economy recovers.
Here again, Mr Obama has proved to be a disappointment. Many hoped he would try to convince Congress to separate skilled people from broader immigration issues, but he has been reluctant to do so. Might that change after the mid-terms? Mr Heesen of the NVCA points out that the notion of making it easier for America to attract the best and brightest has already won some bipartisan support. John Kerry, a Democratic senator, and Dick Lugar, a Republican one, have sponsored a proposal to give visas to some immigrants keen to start new businesses.
Tech folk have not given up on Mr Obama altogether. The Valley’s campaign donations to Democrats still greatly outpace those made to Republican candidates. No doubt they are hoping that the first “tech president” will at last live up to their expectations. In a speech in Silicon Valley, Mr Obama reiterated that he wants to create the conditions in America that would give rise to the next Google and the next Hewlett-Packard. But he will have to do much more to convince the tech industry that he really means it.
US: Democrats’ stimulus is an $814-billion flop
US: Democrats’ stimulus is an $814-billion flop – by Deroy Murdock
The Democrat stimulus is a massive, bank-busting flop. Those who foisted this 12-figure folly on the American people should suffer at the polls.
President Obama signed the Recovery Act in February 2009. Budgeted at $787 billion, it rose to $814 billion — a 3.4 percent cost overrun. Absent the stimulus, the White House assured taxpayers, the then-7.6 percent unemployment rate affecting 11.6 million Americans would climb to 8 percent.
Joblessness surpassed 8 percent anyway, shooting to 10.1 percent in October 2009 before settling at 9.6 percent, where it seems stuck today, frustrating 14.8 million job seekers. Unemployment has equaled or exceeded 9.5 percent for 14 months, the longest such stretch since the Great Depression.
The stimulus has done less than nothing. In a forthcoming study, the Congressional Joint Economic Committee’s GOP staff discovered that total non-farm payroll employment fell in 17 of America’s 20 largest metropolitan areas between March 2009 and August 2010. Such jobs only grew in Baltimore, Boston, and — naturally — Washington, D.C. Even worse, in these 20 urban areas, “For every federal government payroll job created (+42,700), 13 private-sector payroll jobs (-556,900) have been lost.” Corresponding state and local governments also shed 522,800 jobs.
Positions “created or saved” by the stimulus have cost taxpayers dearly.
In late September, the White House released “100 Recovery Act Projects That Are Changing America.” This 28-page paper details infrastructure, clean-energy, social service, and other initiatives that “invest in a strong foundation for a 21st century economy.” These ventures, the White House explains, mirror others across the country. “The projects in this report represent just a small fraction of the tens of thousands of projects the Recovery Act is supporting.”
While analyzing these 100 programs, I gave the Obama Administration the benefit of the doubt and simply accepted the claims its paper presented. When the White House said Project 4′s $24.8 million in stimulus money would help GE’s energy-efficient-appliance factory in Louisville, Kentucky create 800 jobs through 2013, I counted all 800 posts today. When Smith Electric got $32 million for 220 direct and indirect jobs in Kansas City, Missouri (Project 66), I tallied them as direct jobs. Likewise, NV Energy’s $137.9 million to create 400 to 500 temporary jobs in Las Vegas (Project 84) counted as 500 full-time slots.
Of the White House’s 100 showcased projects, 90 offer specific employment data. Among these, $7,602,006,850 in stimulus funds “created or saved” 29,957 jobs. Thus, each stimulus position cost taxpayers an average $253,764.
So, Democrats are fighting unemployment by launching jobs at more than a quarter-million dollars apiece. And if the White House’s upbeat assumptions that I accepted are wrong, per-job costs zoom.
Compare this lavishness to the Labor Department’s $27.64 hourly Employer Cost for Employee Compensation. Paying one new staffer for 52 forty-hour weeks would cost an employer $57,491. Hence, private industry could create at least 4.4 jobs for the price of just one stimulus position. By this measure, private companies could have spent the aforementioned $7.6 billion to start 132,230 jobs.
True, 18 of these 90 projects created jobs below this private-sector-cost threshold. Helping a Michigan Boat Manufacturer Expand into Wind Energy (Project 75) generated 163 jobs at $11,656 each.
However, 72 of these 90 projects yielded jobs for more than private industry’s $57,491 cost. In fact, seven projects consumed at least $1 million per-job-created. Broadband Expansion to Rural Communities in Kansas (Project 38), for instance, stimulated 17 jobs at $2.9 million each.
This is just the peak of the pyramid. In May, 2009, Washington Democrats sent $250 stimulus checks to 17,000 prisoners (cost: $4.25 million) and to 72,000 dead people (cost: $18 million). Just last week, President Obama himself dumped ice water all over the stimulus with this startling announcement: “There is no such thing as shovel-ready projects.”
These Democrat gaffes — among innumerable others — recently led Fox Business analyst John Layfield to express an inescapable truth: “This government couldn’t run a one-car parade.”
* Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University.
Argentina Bonds Surge, Stocks Hit Record After Kirchner Death
Argentina Bonds Surge, Stocks Hit Record After Kirchner Death – By Shane Romi
Argentine bonds posted big gains and stocks hit a new record high Thursday as markets anticipated a more business-friendly environment following the death of former president Nestor Kirchner.
While presidents from across the region and supporters filed past Kirchner’s coffin to pay their last respects, Argentina’s Merval Index of leading shares topped a new record, rising 1.17% to 2954.86 points.
The gains were led by power and gas providers amid speculation that the government of President Cristina Fernandez, Kirchner’s wife, may consider easing rate controls following his death.
Power distributors Edenor (EDN, EDN.BA) shot up 5.82% to ARS 2 ($0.50), while Transener (TRAN.BA) jumped 4.31% to ARS1.21
Kirchner, who was president from May 2003 to December 2007, died of a heart attack at the age of 60 in his home province of Santa Cruz early Wednesday. His wife succeeded him in the presidency. However, Kirchner was thought to play an active role in crafting economic policies in his wife’s government that were characterized by heavy state intervention in the economy and hostility toward the private sector.
Many political analysts had expected Kirchner to run in the October 2011 presidential election as a way for the husband-and-wife team to alternate in power and avoid constitutional restrictions on term limits.
Besides stocks, investors also snapped up Argentina’s sovereign debt amid the positive sentiment.
The federal government’s benchmark peso-denominated 2033 discount bond surged 10.36% to ARS175.25, yielding 7.65%.
Meanwhile, the Global 2017 bond, issued in June as part of the government’s debt swap with the holders of defaulted bonds, was 2.41% higher at ARS425, yielding 8.18%.
The Boden 2015, considered a good proxy for measuring the appeal of newly issued government bonds or the government’s ability to sell them, closed 2.17% higher at ARS376.49, yielding 8.56%.
RBS Securities said in a market note that there is more upside to Argentina’s bonds and credit-risk perception if the government were to soften its interventionist policies and address doubts about the veracity of official economic statistics and outstanding debts with the Paris Club.
Meanwhile, the peso closed unchanged at ARS3.958 to the dollar. Analysts expect the government to keep the peso steady over the short term following Kirchner’s death. The Central Bank frequently steps into foreign currency markets to keep the peso trading within a tight band.
Venezuela: Drug Money Funding Chavez, Islamic Terror Groups
Venezuela: Drug Money Funding Chavez, Islamic Terror Groups – by Erick Stakelbeck
Powerful cartels have made a fortune in the drug trade along the U.S.-Mexico border. Now, rogue dictators and Islamic terrorist groups are following their example.
Al Qaeda, Hezbollah and Venezuelan strongman Hugo Chavez differ in many ways, but they share a common enemy — the United States. And according to U.S. officials, drugs help connect and fund the dangerous networks.
Trans-Atlantic Drug Trade
West Africa is the center of their interests in the multi-billion dollar business. The region has become a transit point for cocaine bound for Europe.
Al Qaeda and Hezbollah often provide security for the drugs after they arrive in Africa. But the illegal cargo originates in the Western Hemisphere.
Former State Department official Roger Noriega told CBN News that Venezuela President Hugo Chavez is well aware that drug shipments are flowing from his territory. Noriega was the U.S. Ambassador to the Organization of American States under former President George W. Bush.
“Virtually every flight that goes to West Africa today that is bearing cocaine or other drugs, is coming from Venezuela,” he said.
“We have explicit evidence, and our government has sanctioned Venezuelan officials who have been involved in drug trafficking,” Noriega continued. “So we know that the regime is complicit for years, and that Chavez has to have knowledge and approve of this kind of trafficking.”
“This is a guy who claims to know every time a U.S. Coast Guard cutter comes close to his country or flies close to his territory,” he added. “How can he claim to not be aware of 737s full of cocaine loading up in western Venezuela? He has to know about this kind of trafficking because it is so substantial.”
Noriega also told CBN News that Chavez has longstanding ties to Colombian drug traffickers.
“It’s well established that even before he was president he had ties to the guerillas and these narco-traffickers,” he said. “And he has basically made Venezuelan territory readily available to them to transit cocaine and other drugs.”
‘Port’ Venezuela
Recent reports from both the United Nations and the U.S. State Department revealed Venezuela has become a major trafficker to Europe and elsewhere.
“And it is not only going to West Africa,” Noriega said. “It is going up through the Caribbean and through the central American peninsula on its way to the United States. Chavez’s complicity in drug trafficking is a cheap way for him to wage asymmetrical warfare against his toughest opponents, including the United States.”
An African government official with knowledge of the trans-Atlantic drug trade told CBN News thousands of drug shipments depart each year from northeastern Venezuela en route to West Africa. Some arrive through clandestine flights and others by fishing vessels.
Once they arrive in West Africa, the drugs are transported northward to their final destination of Europe — where demand for cocaine is skyrocketing.
“West Africa is the logical place in which they can bring their drugs to, break them up and then bring them into Europe,” said Rudy Atallah, a former Africa counter-terrorism director for the U.S. Department of Defense and currently the CEO of White Mountain Research.
Atallah told CBN News that once the drugs arrive in Africa, Islamic terrorist groups are often waiting in the wings.
“Al Qaeda basically charges for the passage of the drugs through their territory,” he explained.
Learning from Hezbollah
That territory is commonly known as the Islamic Maghreb, strectching from Morocco to Libya, down to Mali. The area is also home to al Qaeda in the Islamic Maghreb or AQIM.
“There’s a synergy between the drug dealers and AQIM,” Atallah said. “Now, AQIM does not use the drugs. AQIM does not believe in the use of the drugs. But, it’s a way to make money.”
Due to a global crackdown on its funding sources, al Qaeda has increasingly turned to drugs to finance its operations.
Three al Qaeda agents from North Africa recently pleaded guilty to drug smuggling and terrorism charges in a U.S. federal court. They admitted to working with Colombian drug traffickers.
“That access to money gives al Qaeda capabilities in the future to attack soft targets in Africa,” Atallah said. “And the soft targets could be U.S. embassies, Israeli embassies, French, U.K. embassies — all open targets in Africa. Also, targets in Europe.”
Al Qaeda is following the example of its fellow Islamic terror group Hezbollah, which has used drug money to fund operations for years.
“Hezbollah spread all across west Africa, starting from Senegal,” Atallah said. “They have a vast array of connections with the drug dealers. And so, it’s a natural flow where you have facilitations by Hezbollah in Africa to move drugs coming from Latin America to west Africa and up into Europe.”
The drug trade is just one of many revenue streams for Hezbollah in Africa.
“Hezbollah is involved in the diamond trade, they’re involved in gold, they’re involved in every smuggling business you can get your hands on,” Atallah added. “All the money that Hezbollah makes always goes to Lebanon, to southern Lebanon, to support war against Israel, to support their agenda.”
U.S. Turning a Blind Eye?
Noriega said ultimately, the nexus between drugs and terrorism originates in the West, and U.S. officials must be more proactive in fighting it.
“First and foremost, this administration and frankly towards the end of the Bush administration, their policy toward Venezuela was to ignore it,” Noriega explained. “And quite frankly, inaction, inattention, has been provocative.”
CBN News contacted the Venezuelan Embassy in Washington, D.C., for comment on this story, and was directed to a summary paper on the embassy’s Web site.
“The United States is politicizing the fight against drugs… [and] disqualifying the notable efforts and results produced by Venezuela on the issue,” the document stated.
It added that drug seizures in Venezuela have “increased by 40 percent” since the country stopped working with the American Drug Enforcement Agency in 2005.
Venezuela deported two drug trafficking suspects to the U.S. last month, but American officials feel more cooperation is needed.
Sanctions against Venezuela over its drug smuggling complicity were considered under President George W. Bush, but the Obama administration seems reluctant to go in that direction.
US: Voting fraud already marring elections
US: Voting fraud already marring elections – by Deroy Murdock
Election Day is not here yet, but polling problems have already begun. From possibly malfunctioning ballot gear to potential fraud, the 2010 mid-term vote have been marred even before the polls open Tuesday.
Like jurors who deliberate before a trial concludes, some Nevadans who have tried voting early for Republican Senate nominee Sharron Angle instead have seen Democrat Harry Reid’s name appear on their electronic voting machines. Some voters have complained about this apparent glitch, but how many others unwittingly have miscast their ballots? Intriguingly, these machines are maintained in Las Vegas by members of the Service Employees International Union. SEIU gave 95.3 percent of its 2008 campaign contributions to Democrats. SEIU president Andy Stern was last year’s most frequent visitor to the White House.
Daytona Beach City Commissioner Derrick Henry and Genesis Robinson, his campaign manager, face voter-fraud charges. In an apparent re-election tactic, they allegedly completed 92 absentee-ballot applications with the names of Floridians who never requested them or who had moved away.
The return address on 250 absentee-ballot applications in Bridgeport, Connecticut is 1238 North Avenue — a vacant lot.
Bucks County, Pennsylvania officials are investigating 500 apparently fraudulent absentee-ballot applications. Also, the Pennsylvania Voter Assistance Office sent citizens letters encouraging them to apply for absentee ballots. No such office exists. The letter says it was financed by the Pennsylvania Democratic Committee. The committee sees “no evidence of any irregularity or problem.”
“‘Would you like to vote a straight Democratic Party ticket?,” is something being uttered all over Houston in early Texas voting right now according to former Justice Department prosecutor J. Christian Adams. Texas poll workers are asking, Adams wrote Wednesday for Pajamas Media, that the workers avoid such partisan suggestions.
A federal appeals court in Arizona rejected a state law requiring voters to demonstrate citizenship at the polls. Somehow, it’s too much to ask them to prove who they are. Civil rights advocates bellow that voter ID somehow oppresses minorities, especially blacks. If so, may black voters drive to the polls without licenses?
America’s promiscuous use of absentee ballots has become problematic. These once were reserved for people who were traveling on Election Day, bedridden, or otherwise unable to reach the polls.
Just as grooming and grammar slide toward the state of nature, voting also has slouched from a dignified civic activity into something else to do at home in sweat pants, with all the solemnity of microwaving popcorn.
“Wanna vote absentee? Cool! No excuses needed, man.”
As absentee ballots proliferate, so, too will opportunities for repeat voting. Absentee ballots make it easier for non-citizens, non-residents, felons, and even dead people to vote. Nursing home staffers have voted absentee “on behalf of” demented elderly people who believe that JFK occupies the White House.
Physically voting at the polls is a vital exercise in self-government. It also gives election officials a chance to deter or catch cheaters. Voting at home while clad in a towel prevents such scrutiny.
Sadly, America’s increasingly Third World voting system fits this increasingly Third World nation. The Land of the Free is mired in the rubble of nearly a decade of Washington-led socialism — “compassionate” under the free-spending, entitlement launching (albeit tax-cutting) Bush-Rove administration and now aggressive under the freer-spending, entitlement launching, and tax-hiking Obama-Pelosi government. The result? Economic stagnation, mounting debt, a self-sabotaged currency, class-warfare rhetoric, and growing corruption. (Transparency International this week ranked the U.S.A. as Earth’s 22nd most honest country, America’s worst showing ever.)
The first step is for the American people to march valiantly to the polls Tuesday and dislodge those who have brought America to her knees. Then, with a new Congress rededicated to limited government, public integrity, accountability, and the rule of law, the American people should demand photo ID at the polls, serious jail time for vote fraudsters, a rollback in absentee ballots and early voting, and other steps to establish voting norms worthy of the Home of the Brave.
* Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University.
Rousseff Vows to Eradicate Brazil Poverty
Rousseff Vows to Eradicate Brazil Poverty Without Overspending
Dilma Rousseff was elected today Brazil’s first female president after she pledged to continue the policies of her mentor Luiz Inacio Lula da Silva and end poverty in the world’s eighth-largest economy. Photographer: Evaristo Sa/AFP/Getty Images
Nov. 1 (Bloomberg) -- Bloomberg's Deirdre Bolton reports on major newsmakers in today's Movers & Shakers. (Source: Bloomberg)
Jose Serra, presidential candidate for the Brazilian Social Democratic Party. Photographer: Jefferson Bernardes/AFP/Getty Images
Dilma Rousseff said her main goal is to eradicate poverty in Brazil while maintaining a lid on spending after being elected the country’s first female president.
Rousseff, who had never before run for political office, won 56 percent of the vote yesterday compared with 44 percent for Jose Serra, the former governor of Sao Paulo state. The former Cabinet chief dedicated her victory to Brazil’s women, and choked with tears as she remembered the legacy left by her mentor, President Luiz Inacio Lula da Silva.
“We’ll care for our economy with complete responsibility,” Rousseff, 62, told supporters in Brasilia. “The Brazilian people don’t accept governments that spend at unsustainable levels and for that reason we will make every effort to improve public spending.”
The yield on the January 2014 interest-futures contract fell 11 basis points, or 0.11 percentage point, to 11.560 percent at 10:20 a.m. New York time, as traders bet Rousseff’s remarks could point to a lower fiscal deficit during her four- year term.
“There is an expectation that the fiscal side is a priority of the new government,” said Eduardo Castro, who helps oversee 100 billion reais ($58.8 billion) in Sao Paulo at Santander Asset Management, Brazil’s fifth-biggest fund manager.
The real was little changed at 1.6986 per dollar.
Rousseff won by promising continuity with Lula, whose policies lifted 21 million Brazilians out of poverty since 2003 and created a record 15 million jobs.
Former Guerrilla
While lacking the charisma of her former boss, who leaves office Jan. 1 with a record 85 percent approval rating, she’ll be helped by the fastest economic growth in more than two decades.
Under Lula’s watch, stocks rose six-fold as the economy expanded at almost twice the pace of the previous eight years and inflation fell by a third from a peak of 17.2 percent.
Rousseff is a former Marxist guerrilla who was jailed and tortured by Brazil’s 1964-1985 military dictatorship. She joined Lula’s Workers’ Party, or PT for its Portuguese initials, on the eve of his election after serving as energy secretary in Rio Grande do Sul state. She served as Brazil’s energy minister and chairwoman of state-controlled oil company Petroleo Brasileiro SA before replacing PT stalwart Jose Dirceu as Cabinet chief.
Rousseff’s candidacy was put in doubt when she announced in April 2009 that she was being treated for lymphoma. Five months later, her doctors pronounced her in “excellent health.”
Tears for Lula
Serra, who also battled Brazil’s dictatorship as a student leader, led Rousseff by as much as 35 percentage points in a Datafolha poll taken March 2008. The 68-year old former health minister’s campaign fell flat as he failed to present an economic program that could persuade voters to abandon Lula.
Rousseff crisscrossed Brazil with Lula over the past year. As president, she said she’ll “knock on his door” regularly for advice. Lula will bring Rousseff to the Group of 20 nations summit this month in South Korea, the president’s foreign policy adviser Marco Aurelio Garcia said.
“The happiness I feel for my victory is mixed with emotions over his departure,” a teary-eyed Rousseff said last night after thanking Lula for her victory. “I know a leader like Lula never will be long from his people, from each of us.”
Maintaining Lula’s economic policies may be insufficient to allow Rousseff to match his successes, which include winning Brazil’s first investment-grade credit rating in 2008.
Tighter Spending
Traders are pushing up borrowing costs for Brazil, which has $957 billion in public debt, on bets that Rousseff will fail to curb spending, forcing policy makers to raise interest rates in 2011.
The interest-rate futures contract due in January 2015, the month Rousseff’s first term would end, yielded 11.64 percent on Oct. 29, a level that suggests traders expect the central bank to raise the benchmark rate almost one percentage point during the next four years, data compiled by Bloomberg show.
“In the short term, fiscal policy is key,” said Roberto Padovani, chief economist at Banco WestLB do Brasil in Sao Paulo. “If there is a clear sign of tighter fiscal policy, interest rates will tend to drop and the currency will be less strong.”
‘Huge Rally’
An early test of her discipline will be the 2011 budget and whether she seeks to raise the country’s monthly minimum wage more than the 5.5 percent to 538.15 reais ($317) proposed by Lula, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. Serra vowed to raise it to 600 reais.
Rousseff last night said social programs and investment Brazil needs would not be reduced. On the campaign trail, she vowed cut net public debt to about 30 percent of gross domestic product by 2014 from 41 percent. Latin America’s biggest economy will grow 7.3 percent this year, the fastest pace since 1986, according to estimates by the central bank.
Investors will scrutinize Rousseff’s cabinet picks for clues to how serious she is about restraining spending, said Marcela Meirelles, an emerging-market analyst with TCW Group Inc., which manages about $110 billion. Returning campaign adviser Antonio Palocci to his former post as finance minister would trigger a “huge rally,” especially in fixed-income assets, she said.
Central Bank President Henrique Meirelles may stay in his post for another six months to ease the transition, she said. Meirelles, arriving at Rousseff’s victory party last night, said “nothing is planned” for him to stay at his job.
Cabinet Picks
“Very early on, this new administration will have to send a signal to the market,” analyst Meirelles said in a phone interview from Los Angeles.
Rousseff will benefit from a majority in Congress. The PT picked up five additional Senate seats in elections last month, bringing to 14 the number of lawmakers it has in the 81-seat chamber. Parties backing the government will control another 35, and in the lower house her coalition got 311 of 513 seats.
Traders are wagering that policy makers, who have kept the benchmark Selic rate unchanged in their past two meetings after raising it to 10.75 percent from a record low 8.75 percent earlier this year, will be forced to resume increases early next year to curb inflation. The central bank will need to boost rates to 12.25 percent next year, according to Bloomberg estimates based on interest rate futures contracts.
“Brazil is going to have an inflationary problem, whether people believe it or not,” said Eric Conrads, who helps manage about $1 billion in emerging-market funds at ING Investment Management in New York. “If you’re getting a bit more relaxed on the fiscal front, you add fuel to the fire. The easy job is over; the hard job is ahead.”
Divided Washington Is What U.S. Economy Needs
Divided Washington Is What U.S. Economy Needs: Kevin Hassett
Chances are good that the power of the U.S. government, squarely in the hands of Democrats the past two years, is about to become divided between the two parties. Modern American history suggests that this is the best of all worlds. With all respect to Abraham Lincoln, a house divided against itself often prospers.
Since 1970, the levers of federal government -- the White House, Senate and House of Representatives -- have been in the hands of one party, whether Republican or Democrat, 30 percent of the time. By most any measure, the U.S. economy has been healthier the other 70 percent of the time.
First let’s look at gross domestic product.
From 1970, median U.S. GDP has grown 3.3 percent in years of divided government (1970-1976, 1981-1992, 1995-2002, 2007- 2008), compared with 3 percent when government was unified (1977-1980, 1993-1994, 2003-2006, 2009-2010).
The effect has been more pronounced in recent years. Since 1981, when Ronald Reagan took office, median U.S. GDP has grown 3.3 percent in years in which the government was divided and 2.8 percent when government was unified. Since 1993, when Bill Clinton took office, the economy has grown 3.6 percent per year when power is split and 2.8 percent in the other times.
How about unemployment? Divided government might be exactly what today’s jobless should be wishing for.
Since 1970, median unemployment has been 6.1 percent under one-party rule, 5.7 percent when both parties have some control. The spread narrows (6 percent vs. 5.8 percent) since 1981 and widens (6 percent vs. 4.9 percent) since 1993.
Stocks Cheer
Equity markets have practically jumped for joy at political division. Since 1970, the Standard & Poor’s 500 Index has increased at a median rate of 13.5 percent per year in divided times and 9 percent per year under one-party rule. That spread grew (14.6 percent vs. 9 percent) since 1981 and even more so since 1993 (19.5 percent vs. 9 percent).
I can think of two plausible explanations for the improved performance of our economy when the federal government is divided.
Under the “politicians are idiots” view, divided governments tend to be gridlocked, and gridlock -- with apologies to Gordon Gekko -- is good. A paralyzed government is a boon to the economy because the changes that politicians contrive tend to be harmful.
Under the “politicians are sensible” view, divided governments produce better lawmaking because only sensible policies can achieve the necessary bipartisan support. When government is controlled by one party, common sense is cast aside as those in power use their muscle to reward friends and punish enemies.
Testing Gridlock
One crude way to cast light on the relative merits of the two views is to test the gridlock theory directly. Does legislative activity tend to grind to a halt when government is divided?
One imperfect measurement, tallying the number of bills passed by Congress and signed by the president, counters the notion that government is paralyzed when divided.
Since 1993, divided governments have passed a median of 241 bills into law each year, while unified governments have passed 210. A similar pattern holds if we expand the sample back to 1970.
This is, of course, not decisive evidence, because the number of passed bills is irrelevant if the legislation is meaningless. (Anybody want to name a post office?) Anecdotally, though, some of the great moments in modern legislation, such as the Tax Reform Act of 1986 and the Personal Responsibility and Work Opportunity Act of 1996, also known as welfare reform, were passed when each party enjoyed some control in Washington.
Impact on Deficit
There is also some evidence that divided governments have been more fiscally responsible, especially recently. The median federal budget deficit as a percentage of GDP has been 2.7 percent since 1970 under both formats of government, slightly lower (3.1 percent vs. 3.4 percent) in divided times since 1981 and even better (1.2 percent vs. 3.4 percent) in divided times since 1993.
That last part shows that the showdown between President Clinton and House Speaker Newt Gingrich offered more than good political theater; it produced some results.
It’s not hard to see how political alignment might influence our leaders’ virtue on deficits: Republicans are attracted to deficit reduction because it constrains the big- government tendencies of Democrats, while Democrats are attracted to it because it constrains the tax-cutting tendencies of Republicans.
Deficit reduction is tough work. It shows that divided government can’t easily be written off as inevitable gridlock.
As President Barack Obama and his team look ahead to the prospect of governing in collaboration with Republicans, they should look at history, and they should take heart. They can still think big, so long as they think sensibly.
Republicans to Win Control of House
Republicans to Win Control of House, Cut Federal Spending, McCarthy Says
Republicans Haley Barbour and Sarah Palin cast the Nov. 2 election as a repudiation of President Barack Obama’s policies and a “political earthquake” that will blow Democrats out of office.
Democrats, in making their closing arguments to voters on the Sunday talk shows, said their party may still keep control of the House of Representatives. If they don’t, voters will expect Republicans to compromise with Obama in order to trim the budget deficit, Democratic National Committee Chairman Tim Kaine warned on NBC’s “Meet the Press” program.
Barbour, Republican Governors Association chairman, said on NBC that “the midterm election is a referendum on Obama’s policies” and predicted that the Republicans will take over the House.
“It’s going to be a political earthquake and the message will have been sent to the left that they blew it,” Palin, former Alaska governor and Republican vice presidential nominee, said on “Fox News Sunday.”
Nonpartisan political analysts, including Charlie Cook of the Cook Political Report in Washington, project the election will cost Democrats the House and several seats in the Senate.
Democrats Fired Up
“Democrats are much more fired up in the last two weeks than people would think,” said Pennsylvania Governor Ed Rendell, speaking on CBS’s “Face the Nation” program.
“It’s not a lost cause,” Representative Chris Van Hollen, head of the Democratic Congressional Campaign Committee, said on Fox. “All these Washington pundits are going to be surprised.”
Republicans need a net gain of 39 seats to win the House. Republicans have a 47 percent to 44 percent edge among likely voters in congressional races, according to a Bloomberg National Poll conducted Oct. 24-26.
Senator John Cornyn, a Texas Republican, said he doesn’t think his party will take control of the Senate in this election.
“We’ll make a lot of headway,” Cornyn said today on ABC’s “This Week” program. “I’m not predicting that we’ll get the majority this cycle. It’ll probably going to take two cycles but there’s certainly the potential there.”
Barbour, governor of Mississippi, said the election is a referendum on Obama’s health care and economic policies that represent the “biggest lurch to the left in American political history.”
One-Term President
Kaine said Republicans, including Senate Minority Leader Mitch McConnell, have a “political and partisan agenda.” McConnell recently told the National Journal that “the single most important thing we want to achieve is for President Obama to be a one-term president.” Rendell said McConnell’s recent “attacks” on the president have “fired up” African American voters in particular.
Kaine said Democratic losses would force House Republicans to vote for unpopular spending cuts and tax increases in order to uphold a pledge to voters to trim the budget deficit by $100 billion next year.
“The Republicans will be forced to govern,” said Kaine. Republicans will face a difficult choice on whether to keep former President George W. Bush’s tax cuts for all Americans or to end them for those earning $250,000 a year or more, as Obama has proposed, Kaine said.
“We’re going to put the Republicans to their word and see if they are willing to reject what they did in the Bush administration,” said Kaine.
Cutting the Budget
Barbour expressed confidence Republicans would honor their promise to cut the budget deficit, saying $100 billion represents just 3 percent of the total federal budget. “It can be done,” he said, without providing specifics.
Minnesota Senator Amy Klobuchar, speaking on CBS, said two potential areas for compromise would be to continue the Bush tax cuts for a year or two for those earning more than $250,000 or immediately end the cuts for those earning more than $1 million a year. “I don’t think that is going to disrupt our economy,” said Klobuchar, a Democrat.
Palin said biased media coverage of the Alaska senate race has hurt Tea Party-backed Republican candidate Joe Miller’s campaign against write-in candidate Republican Senator Lisa Murkowski.
Miller’s campaign has been struggling, creating an opportunity for Democratic candidate Scott McAdams, mayor of Sitka, in the three-way contest.
“That’s sick,” Palin said of the media coverage. “Those are corrupt bastards. That is what’s wrong with the media today when they have their chosen one.”
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