Party Lines

A surprise spike for the November PPI

You can bet the 0.5% jump in November wholesale prices will be on the minds of Alan Greenspan & Co. when the Federal Open Markets Committee meets the week of Dec. 13. The spike reflected both higher energy costs and greater price strength in the 0.2% "core" gain, which leaves out volatile food and fuel costs. On a quarterly basis, the producer price index (PPI) has grown at a 8.1% rate so far the fourth quarter, according to date released by the government Dec. 10. The Federal Reserve now has plenty of evidence to buttress its continuing tightening mode, especially with the dollar falling and the pace of economic recovery still uncertain.

At Action Economics research group, forecasters continue to suspect that inflation in the U.S. is increasing at around a 2.5% annual rate. But there's a risk of the rate moving modestly higher in 2005. All in all, not enough to spook investors just yet. But concerns about inflation will likely accelerate the pace of policy tightening by the Fed on interest rates. All eyes will be on the first three months of 2005, when U.S. inflation figures are seasonally strong, and rising import prices could could fuel inflation fire.

Turnover at Treasury

Given the nature of the White House's domestic agenda, the job of Treasury Secretary is going to be especially important this term. Attempting to reform both social security and the tax code at the same time is beyond ambitious. No wonder the White House apparently has decided to drop a loyal soldier, Treasury Secretary John Snow, from the team and bring in new blood. Today's NYT says the job will likely go to someone like chief of staff Andrew Card, who might be able to sell the plan to Congress. Former Texas senator Phil Gramm and venture capitalist Gerald Parsky are on the list, too.

Weak job report no cause for panic

"The establishment data resoundingly underperformed lofty market expectations for November. But the shortfalls are corrections for prior strength, and do little to alter underlying trends in major labor market aggregates, or the optimistic outlook for the U.S. economy overall.

"Payrolls have posted an average monthly gain over the last three months of 178k, which is just slightly below the 185k average gain for the year as a whole. Civilian employment actually posted a huge 483k gain in November, but its three month average gain of 193k is similar to the payroll figures.

"The bigger picture is 'steady as she goes' for the five-quarter pattern of robust GDP and productivity growth, but more lean growth in hours worked."

For more from Action Economics see BusinessWeek Online.

Democrats: Moving to the left

Joe Trippi, who managed Howard Dean's presidential campaign, argues in the Wall Street Journal that the Democrats must move to the left, revitalize the labor movement, and tap the grassroots to formulate policy. He may be half right. Taking those measures might very well raise the spirits of the party, and it would probably enliven political debate across the country. That wouldn't be a bad thing.

But it's an improbable strategy if the Democrats' goal is to recapture the White House, let alone the House or the Senate. The 2004 election demonstrated the electorate's centrist impulses. Yet Trippi, a Harvard fellow, dismisses the country's vast political center with a sneer: "Very few good ideas come from the middle, and they tend to be mediocre," he says. (What does this mean? Is he suggesting that some good ideas can be mediocre? Or does he simply mean that centrist ideas tend to be mediocre?) And what are good ideas? Well, they tend to be "bold" and "challenge people to make sacrifices for the common good."

Trippi doesn't explain what these bold sacrifices might entail. But unless he's calling for the reinstatement of the draft, or some sort of federally mandated turn-off-your-television week, it's a good bet that these sacrifices will include a tax increase, perhaps one that is stunning in its boldness.

So there you have it: the Democrat's comeback plan. It's based on a liberal from Massachusetts leading the charge for higher taxes. That's a political non-starter.

And Trippi's apparent boredom with the political center is a shame. The boldest ideas are often the most poorly constructed, and doomed to fail. The French revolution, the Soviet revolution, the Chinese revolution were bolder than the moderate American revolution. But the more centrist American approach endured.

Another issue for Commerce

The Commerce Dept. will be at the heart of another crucial item on the White House agenda: tax reform. As our friend David Wyss of S&P explains, U.S. taxes are out of step with the rest of the world. In most countries, taxes are levied where goods are sold. In the U.S., they are collected where goods are produced. So if a company produces something in the U.S. and exports it to Europe for sale, it's taxed twice. That leads to higher prices on U.S. exports. It also cuts into the profit margins of U.S. producers. To make matters worse, companies that produce goods in Europe and export them for sale in the U.S. are essentially except from taxes. As the U.S. embarks on major tax reform, the Commerce Dept. will play a big role in advocating the end of double taxation on U.S.-based producers.

An agenda for Commerce

Kellogg CEO Carlos Gutierrez is going to have a particularly big job running the Commerce Dept. In the past, this post hasn't really been part of the government's core economic team, which includes the Treasury, the Fed, and White House economic advisers. It's been more of a diplomatic position than anything else.

But given the particular challenges that face this economy, that diplomacy is more important than ever. Despite this morning's strong economic data, the U.S. still faces long-term threats to its competitiveness. There are more producers of low-cost, high-quality goods and services popping up around the globe, especially in Asia. To remain competitive, the U.S. needs a cheap dollar. That will help generate jobs, which will reduce the twin deficits, fiscal and trade.

The Commerce Dept. can help persuade other countries to accept a cheaper dollar. "We need someone who is willing to kick other people in the shins, in a nice way," says David Wyss, chief economist at Standard & Poor’s. "The trade deficit must be cured. Other countries must be willing to export less or import more, and they have no desire to do either. That means that the dollar has to be allowed to move to a level that makes that possible," he says.

Gutierrez, 51, looks like a strong candidate for the job. Born in Cuba and raised in the U.S. and Mexico, his international background should help him abroad. And with a compelling personal story--he quit college to sell cereal out of a truck and worked his way up to CEO--he should be able to relate to executives and workers alike. But he'll need all of his persuasive power to get other countries to accept an ever cheaper dollar.

Internet tax ban avoids critical VoIP issue

After a year of squabbling, Congress has finally reinstated its ban on states taxing Internet access. But the new freeze, which is due to last through 2007, ducks some of the most critical issues facing both states and telecommunications companies. The biggest unresolved dispute: Whether states can tax Internet-based telephone calls. That service, known as Voice-over Internet Protocol (VoIP) is expected to dominate the phone business in coming years.

House lawmakers had tried for a year to both make the ban on access taxes permanent and to bar states from taxing VoIP. But resistance from two key GOP senators who are also former governors, George Voinovich of Ohio and Lamar Alexander of Tennessee, scuttled those aggressive plans. As a result, the freeze only applies to dial-up and high-speed access purchased through Internet Service Providers, such as AOL or Verizon. The impact of the renewed freeze is expected to be minimal since no states ever moved to adopt such levies after the Congressional ban expired a year ago.

However, the states’ victory on VoIP may only have bought them time. Aggressive anti-tax lawmakers are likely to push for a ban on VoIP taxes well before 2007. And with a strong new GOP majority in the Senate, their chances of winning are improving. As a result, Alexander is urging governors, mayors and telecom execs to work out a solution. Governors warn that if they are barred from taxing VoIP phone calls, they will lose as much as $20 billion a year in revenues—money that will have to made up by boosting other taxes or by slashing popular programs such as education or health care.

While the tax moratorium debate is often confused with a separate squabble over online sales taxes, the freeze on Internet access taxes has no impact on those sales levies. That debate involves potentially hundreds of billions of dollars in revenues for state coffers. But states remain barred by a series of Supreme Court rulings from requiring out-of-state retailers to collect sales taxes owed by consumers who buy online or though catalogues.

The dollar: a reader responds

Greenspan's unhappy with the decline in the dollar. And a reader takes strong exception to my glass-is-half-full analysis:

"Your pollyanna-ish, cheerleading article is glaring in its lack of supporting evidence which a good reporter avoids like the plague.
"For instance you claim that a devaluation of the dollar might 'increase the goods the US exports' but you don't indicate which goods are these and which are their associated price eleasticities of demand (hint :it has to be higher than one) that would allow that to happen.
"Let me remind you that 1-There is not such automatic relationship between a devaluation and an increase in exports for any economy.This is a myth propagated by mediocre journalists and is nothing but simply badly digested neo-classical American economic theory and empirically pretty discredited by now.2-The US doesn't export a lot of goods susceptible to greater foreign demand such as shoes, clothing, TVs, computers, video games, Play Stations, belts, rings, food items (amazingly the U.S. is becoming a net importer of food now) etc. The biggest export items are heavy industrial capital goods such as elevators, big construction cranes, big trucks, passanger planes, etc., whose demand is more foreign income rather than price dependent.
"Lets stop the cheerleading and start doing some serious research here.
Sincerely
Cristobal Senior
NYC "

The stolen-election myth

David Corn's piece in The Nation should put to rest the paranoid theory that the Republicans stole the presidential election by manipulating electronic votes. It finds the Internet-spawned conspiracy theories wanting. At the same time, he agrees that there were "troubling instances of bad electronic voting." And he concludes, quite rightly, that the entire vote-counting system is in need of overhaul.