REVIEW: The Curious Case of Anthony Scaramucci’s ideas on Interest Rates, Deflation, and Tax Policy

“ ‘Google before you tweet’ is the new, ‘think before you speak.’ ”~ Jonathan (Jon) Parker, via Joe Newton [Best attribution I can find – Mike].

As a layperson, I have serious doubts about the ‘Big Picture’ economic, tax policy and financial opinions of Anthony Scaramucci. (The Curious Case of Negative Interest Rates, By ANTHONY SCARAMUCCI (NY Times Dealbook), MAY 8, 2015)

Notwithstanding that Mr. Scaramucci is richer, more famous, and better-looking than I am, I still think his premises are flawed or simply wrong, and his conclusions are thus similarly wrong.

My eyebrows first rose when his new definition of “negative interest rates” began to sound a lot like the old concept of “deflation”.

“Negative rates imply that the money in your pocket today will buy more goods tomorrow. Think of money as just another fungible asset: A $20 bill today is still a $20 bill tomorrow or two $10 bills a year from now. Interest rates, on the other hand, reflect the opportunity cost of spending that money today relative to tomorrow. When rates are negative, the $20 bill is still worth four $5 bills in the future, but its utility value (i.e. what it buys) increases with time.”

This is actually a classic example of a deflationary ‘vicious cycle’; not ‘negative interest’.

My doubts were further fed by this absurd-on-its-face statement:

“John Keynes, you see, was actually wrong. His famous utterance, “In the long run, we are all dead,” isn’t true. Like it or not, the long run is upon us, and we are all very much alive (aside from Keynes).”

Mr. Scaramucci obviously misses the point here: In the long run, Mr. Keynes died. In the long run, Mr. Scaramucci will die. That he fails to grasp this point does not bode well for his further ruminations.

Prices may be in some ways related to interest rates, but they are not the same and should not be conflated. Deflation and negative interest rates may go hand-in-hand, but should not be confused.

As an over-simplified example, a 1% “negative Interest rate” (-1% interest) would mean buying a $100 bond which would be worth $99 at maturity, for example.

“Deflation”, on the other hand, is when prices drop due to any combination of lower demand, lower prices for materials and/or labor, currency exchange rate changes, greater competition, or greater business/production efficiencies.

Most economists seem to agree that a modest rate of inflation – about 1 or 2% per year – is actually good for the economy.

But I digress.

In the body of his article, Mr. Scaramucci goes the long way around to point out that the global supply of goods and services exceeds demand. That would be a classic cause of deflation, and could theoretically lead to a ‘vicious cycle’ of global economic decline. The Great Depression is the classic example within the last 100 years.

Mr. Scaramucci then proposes steps which might lead us to a ‘virtuous cycle’ of global growth.

Although we are growing at a faster pace than the rest of the world, we carry a millstone of political sclerosis around our neck, which is holding us back. Without the right political leadership and the right policy execution, we will be stuck. The Fed cannot save us from ourselves. What’s needed? For starters, political leaders must reform the tax code. Taxes ought to:

* Be fairer and simpler and tilted toward pro-growth.

* Include an incentive for corporations to repatriate their overseas earnings.

* Be easier to understand, less influenced by special interests and require less paperwork.

* Be progressive, but also fairer and flatter.

Let us look, line by line, at Mr. Scarmucci’s prescriptions for more economic growth:

* Be fairer and simpler and tilted toward pro-growth.

This is an empty, meaningless statement. Arguably, fairer business taxes would include a minimum tax so that companies like General Electric would actually pay taxes. So what would “fairer, simpler, pro-growth tax policy look like? Mr Scaramucci does not say, but perhaps he’s hinting at a ‘negative business tax’, where the government would pay businesses a ‘negative income tax’ as an incentive; more profits would generate greater government payments.

* Include an incentive for corporations to repatriate their overseas earnings.

Again, Mr. Scaramucci offers no clue what this would look like. Perhaps he is implying a ‘tax-free’ profit repatriation holiday, but lacks the courage to actually say so.

* [Taxes should] Be easier to understand, less influenced by special interests and require less paperwork.

In principal, everyone agrees with this, but the devil is in the details, and Mr. Scaramucci offers no suggestions as to, for example, the special interest oxen he would gore. Is he referring to special tax treatment for oil companies, or tax write-offs for mortgage interest? Shall we tax so-called ‘unearned income’ at a lower rate than wages, or should rich people (and we need a tax-policy definition for that) pay a higher rate comparable to wage-earners on some investment income?

This next ‘suggestion’ is my favorite”

* [Taxes should] Be progressive, but also fairer and flatter.

Really, Mr. Scarmucci? Taxes should be both more progressive and flatter? Do you actually understand the concept behind progressive taxation? Or for that matter, the meaning of flatter (i.e., more regressive) tax rates?

Mr. Scaramucci then sums things up this way:

We will also need labor reform and changes to our health care requirements. I am not trying to make this overly simplistic. But small businesses are so scared of the current labor and health care regulation that they are braking on hiring the incremental employee. We must repair the rampant partisanship in Washington and act.

If we succeed in rebooting government and ending the malaise and bickering in Washington, the economy will grow at a rate that will surprise all of the pundits. A tremendous abundance and innovation lies ahead for the world, but we require legislative and executive reform. Until we make such changes, the specter of global deflation and negative rates will persist like a pox.

That the New York Times would print such vacuous opinions as actual ‘ideas’ is frightening. What editor at the Times thought that this qualified as “All the news that’s fit to print”? Maybe I had not noticed that the Times’ slogan had been changed to, “All the news that’s fit to print and then some”?

As for Mr. Scarmucci’s ideas on the economy and tax policy … He may be really good at making money for himself and others, but let’s hope he’s never up for nomination to the Federal Reserve, or Treasury Department.




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