This is another sign of growth creeping in.
The States will be fine with a bit more GDP growth, and if they maintain their equity allocations their pension funds will all recover when equity prices double over the next few years.
With strong productivity growth throughout the recession, there is a lot of catch up down the road as the ongoing 8%+ deficits fill the spending gaps and restore the financial equity that will also support a subsequent credit boom that begins with the ‘get a job buy a car’ accelerator.
Unfortunately we still haven’t addressed our energy consumption issues, and we remain highly vulnerable to arbitrary Saudi price hiking.
Nor have we taken sufficient measures to be able to grow GDP without a substantial corresponding increase in energy consumption in general.
But that’s another story, at least for the near term.
Tax Revenue Creeps Up, but Can’t Fill State Budget GapsJuly 27 (Reuters) – State tax revenue is improving, but only slightly, and may not be enough to end steep spending cuts or replace the loss of assistance from the federal stimulus plan that expires in December, according to a report Tuesday.
The National Conference of State Legislatures said states faced a collective budget gap of $83.9 billion when creating their budgets for fiscal 2011, which for most began on July 1.
Officials surveyed by the group, which represents state lawmakers, said revenue was beginning to pick up or at least slow its rate of decline. Nearly every state expects tax collections this fiscal year to surpass last year’s.
“For the first time in a long time we’re seeing some slight improvement in the state revenue situation,” Corina Eckl, the NCSL’s fiscal program director, said in a statement accompanying the report. “But glimmers of improvement are tarnished by looming problems.”
So now you’re saying that the S&P is going to 2200 in two years?? That the Dow is going to 20,000 in two years??? That’s a pretty bold call.
“Pretty bold”? I would have said “extraordinarily bold!” I don’t think there’s a permabull out there with this kind of forecast, is there? Maybe it was said for discussion-fodder!?
Or perhaps it’s the power of positive thinking… Assuming he’ll be elected and be able to quickly influence implementation of a national job guarantee that rapidly employs many millions, leading to soaring GDP and corporate revenues 🙂
Sadly (for me) I’m not yet convinced that the current deficits are “large enough” when so much seems to be accruing to corporate profits, whose claimants on aggregate have the lowest propensity to spend marginal dividends/gains. I’d think there’s a lot of room for further attempted increases in the personal savings rate (which is still near the low end of the historical range). But perhaps Warren has a more realistic outlook on consumer behavior and willingness to resume old habits.
Mike & HBL,
Can S&P gaap earnings include profits of foreign subsidiaries that ‘import’ product into the US? (my hunch is yes). IOW, these imports would add to the external deficit to subtract from US gdp, but would be accretive to S&P earnings so as to make the S&Ps go up. (Im thinking the IBMs, GEs, Oils, etc..)
If so, then the S&Ps have all 1.4T NFAs of the govt sector deficit balances to seek to obtain this year, (not just the 900B or so if you subtract the 500B external deficit from the 1.4T total govt deficit).
I dont know if Im looking at this correctly but the TTM S&P earnings are Ive read $70/share, the consensus forward 12 mo earnings are $90/share. This info is hard to find but I think ttm S&P earnings are 625B (if somebody has professional level S&P data access please correct this), so a 30% EPS increase in the S&P earnings from 70 to 90 would mean the 625B total earnings would have to go to 812B. As the banks are flat on their backs the only NFAs to be had this year are the 1.4T that the govt sector deficit will provide the way I look at it.
Can the S&Ps obtain 812B (or more) of this 1.4T in the next 12 mos.? As long as the govt sector keeps running a 110B/mo deficit these numbers may hold….
Resp,
Congress should be subsidizing the hell out of CNG retrofits for cars.
http://gas2.org/2010/02/04/utah-law-would-make-natural-gas-conversions-8000-dollars-cheaper/
The average daily commute is less than 50 miles a day, so an auxiliary CNG tank in the trunk doesn’t need much capacity to cut petroleum usage tremendously. A retrofitted car would switch back to the gas tank once the CNG tank as depleted (CNG tanks can be refueled overnight off a natural gas line with a home compressor).
There have been several natural gas explosions in just the last six months. Imagine millions of cars refueling with the stuff every day. A better answer is plug in hybrid electric vehicles (like the volt) that can get most people to and from work without using the gas engine. Build more power plants using natural gas and upgrade the grid(which needs to be done anyway). Much safer and gets us off oil. Eliminate the payroll tax and increase the gas tax to make electricity cost more competitive with gas (and keep energy demand from causing inflation – which is the purpose of taxes – right?).
Why subsidize CNG retrofits? Why not just tax gasoline at an appropriate level and let the market decide which CNG retrofits make sense and which don’t?
What are the externalities that are not being accounted for correctly in gasoline? There’s some pollution from refineries, and maybe a little extra CO2 in the atmosphere (the effect of which is probably small in terms of cents per gallon over natural gas), but I think the main externality is the free protection given to oil tankers by the US Navy. This is an implicit subsidy to gasoline of perhaps $1 per gallon or more, and so the tax should be at least that high.
ESM, if we lived in a rational world, the President would have suggested a gas tax 30 years ago and to sweeten the pot, make it revenue neutral by using it to reduce payroll taxes….
We don’t and he did. Carter proposed this back in the day, it didn’t go over very well with the public. Robert H. Frank wrote about this a few years ago in the Times:
But if higher gasoline taxes would make everyone better off, why are they unthinkable? Part of the answer is suggested by the fate of the first serious proposal to employ gasoline taxes to reduce America’s dependence on Middle East oil. The year was 1979 and the country was still reeling from the second of two oil embargoes. To encourage conservation, President Jimmy Carter proposed a steep tax on gasoline, with the proceeds to be refunded in the form of lower payroll taxes.
Mr. Carter’s opponents mounted a rhetorically brilliant attack on his proposal, arguing that because consumers would get back every cent they paid in gasoline taxes, they could, and would, buy just as much gasoline as before. Many found this argument compelling, and in the end, President Carter’s proposal won just 35 votes in the House of Representatives.
http://www.nytimes.com/2006/02/16/business/16scene.html?pagewanted=print
Well, I’m not surprised that it would have been difficult to pass a huge increase in the gasoline tax when the price of gas had just spiked due to a supply shock.
It should be done incrementally on dips in the price. This has been proposed by many conservatives, including Charles Krauthammer. You can also do the 2 cent per month hike kind of thing, which allows for a smooth transition.
I don’t think this is politically impossible at all. We do have a whole range of taxes on gasoline after all.
Matt,
If S&P earnings can benefit from imports sold to US consumers (to which I don’t know the answer), then a portion of S&P earnings would already be attributable to that effect. And I’m not clear on what you think the driver would be for a significant increase in magnitude of this effect in the next year or two.
FYI, the S&P data you cited is available for free if you register here. (Download Index Data -> Index Earnings). The spreadsheet has multiple tabs.
HBL,
Thanks for the link! 1Q 2010 sp earnings were 175B so forward 12 mo sp earnings of 800B may be a bit of a stretch. But if they buy back some shares with last years earnings (nothing else to do with them now), throw some more domestic US workers out of their jobs (increase productivity) and we can get the financial/housing/automotive sectors up from being flat on their back to perhaps just on their knees….seems like it may be do-able.
Back before the GFC, the max quarterly sp earnings was $213B and that was when the index was around 1500, fall of 2007.
This all can be blown up by a move towards austerity by the govt via tax increases and/or cuts in discretionary spending. Im watching the fiscal trends with Mike, with no increases in bank credit, I want to see at least a $110B monthly fiscal deficit to remain hopeful. For now it looks like the NFAs are there for the taking.
Resp,
just a small nit picking note to make a different point,
the external deficit ‘subtracts’ from GDP in that GDP is calculated from total sales numbers which include imports.
So they take the total that’s already published, and then subtract the part that isn’t domestic production.
in other words, it’s more nearly correct to say the external deficit ‘is subtracted’ from the total sales calculation
rather than saying ‘the external deficit ‘subtracts’ from GDP which implies to some that imports actively reduce GDP.
Not just “nit-picking.” It’s an important point that could clear up a lot of confusion. I wrote a letter to Caroline Baum many years ago to correct this silly column, but she never responded.
I will tell you what I see at the state level, they are raising property values and property taxes even though property is worth 1/3 to ½ of what it was and people are getting pissed. The government spends like the rest of America, it spends barrowed money and hopes everything stays that way.
If the Dow is going to be at 20,000 and the S&P is going to be at 2200 does that mean gas is going to be $8 per gallon and a loaf of bread is going to be $10?
Only if the minimum wage will be $15.00. 🙂
Since local governments can’t run deficits, that’s how property taxes work… the assessor sets the value for the countywide tax roll and the county commission (or city council) divides that by the next fiscal year’s budget total… and that’s the millage rate.
Its not an income tax and its not borrowed money. At the local level, there are no automatic stabilizers. Even if the budget total is frozen from last year, if property values drop, the millage rate increases to get to the same total. This is really a failure of federal policy, Tsy owns the only printing press, it should be kicking out revenue sharing grants to state and local governments.
Dean Baker says that 1.2 Trillion in annual demand from the housing bubble is gone and not coming back anytime soon. Where exactly is the job growth gonna be coming from to buy a new car? (The new chevy volt is going to cost 40K)
http://www.cepr.net/index.php/blogs/beat-the-press/the-fed-could-try-talking-about-bubbles
Why don’t we have a national jobs program to go out and install billions of solar cells on roofs all over the country. We fix the energy problem and job problem at the same time no?
The new buzz word is “retrofit.” Retrofitting is the least capital intensive, most cost-effective, and benefit-producing step that can be taken energy-wise and environmentally, too.
This is really a no-brainer because the people that were laid off from construction can just be shifted to retrofitting without much retraining at all. They already have the skills and just need to be instructed in the new knowledge and outfitted with the materials and provided with specialized tools as required. Cheap and quick in comparison with other options.
Warren, is time my 401k to go from cash to stocks now?
Thank you.
Oh brother… Drudge up with this headline,
*CBO BOMB: ‘Deficits will cause debt to rise to unsupportable levels’
“Federal Debt and the Risk of a Financial Crisis:
In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards…
http://cboblog.cbo.gov/?p=1249
Its downhill from there.
good place to earn some mmt hearts?
Yes that would be going into the belly of the beat, but alas the Congressional Budget Office blog doesn’t allow comments.
:o)
Not sure if you saw the Times article today about the Put Illinois to Work program. The weaknesses of the plan are obvious, but at least they’re looking in the right direction.
http://www.nytimes.com/2010/07/29/business/economy/29workers.html?pagewanted=all
err, belly of the beast.
:o)
Increases because of increasing tax rates
seems a bit optimistic!
but it all depends on whether public deficits really are high enough to leave enough currency in private hands for a long enough period – and note, as Warren has repeatedly said, those funds and that spending may be concentrated disproportionately among the wealthiest 5%
(any outcome is also affected by whether or not Obama leaves tax rates where they are)
there is no otherwise logical market trend which political maladjustments cannot derail !
for instance, if the Peterson Foundation gets it’s way and has Congress gut Social Security & some automatic stabilizers, the bottom could quickly drop out of any mix of consumer spending (aggregate demand)
Ironic to be calling for cuts in automatic stabilizers at the same time we’re extending them! We need more people to send carefully worded, REASONED comments to David Walker at the Peterson Foundation. Maybe he’ll come around.
http://www.pgpf.org/