Saturday, May 16, 2009

John Mauldin's Latest

A few excerpts from this week's Thoughts from the Frontline newsletter, "Faith Based Economics":

On America's Fiscal Challenges:

The following headline caught my eye: "Obama Says US Long-Term Debt Load is 'Unsustainable.'" Yet they announced a $1.8 trillion deficit, which is really going to be at least $2 trillion, and are getting ready to pass health-care programs that will mean at least a trillion in deficits for as long as one can project.

How will they pay for it? Even getting rid of the Bush tax cuts will only produce a few hundred billion a year, which is nowhere near enough. They project much lower medical costs in the future, because they assume they are going to figure out ways to cut costs and make medical care more efficient1. As if no one has ever tried that.


You cannot propose massive increases in spending without either creating crushing debt that the markets will simply not allow, pushing interest rates much higher and really slowing growth and hurting the economy. It is a simple fact that you cannot increase the debt-to-GDP ratio without limit.

We found the limit on personal and corporate debt this past year. We pushed the limits until the system crashed. And now the US government wants to basically do the same thing. They are planning to see where the limits on government debt-to-GDP will be. Unless cooler and more rational heads in the Democratic Party prevail, this is not going to be pretty. Sometime in the middle of the next decade we will hit the wall, and it will make the current crisis pale in comparison.

The only way to solve the problem is to grow GDP more rapidly than debt, and for that to happen you have to have policies which are shaped for the growth of the economy or massive savings by consumers. And right now we have neither. Cap and trade is hugely anti-growth. So are high corporate taxes, and Obama is proposing to effectively raise corporate taxes by closing loopholes for income earned outside the US. Much better would be to lower the overall corporate level to a competitive world rate and then require the offshore income to be taxed.

Some Potential Good News about Health Care:

This week I visited the Cleveland Clinic and went through their Executive Health Program (more on that below). I got to visit for several hours with my doctor, Michael Roizen, of YOU: The Owner's Manual fame (not to mention all his subsequent books). They have now sold over 20 million copies, and I highly recommend them.

I have long been a student of medical trends, and long-time readers know that I think the next really big boom will be in the biotech world. I asked Mike what three things he thought would have the biggest impact in the next five years in medicine. What he said gave me hope, because he thinks there may be some advances in medicine that could help solve some of the basic health issues we all face, and at the same time give us some relief from the high and rising costs of medical care. I was aware of most of the research, but did not know that we were as close as it appears we actually are.

Briefly, he feels there are three developments in late-stage trials that could have major impacts. The first is the development of sirtuin, which so far seems to be delaying the effects of diabetes but also seems to work for a host of diseases that are inflammatory in nature (including many heart-related issues). It essentially delays the symptoms for 30-40 years. While the current trials are for very specific diseases, he thinks sirtuin will have a wide applicability and that it could be huge, as inflammation is the cause of a number of diseases. This could prolong useful life and forestall a number of debilitating conditions.

Second, there is a late-stage-three trial due out soon that promises to increase muscle mass. I have been reading about such developments, but was not aware that something might be available within a few years. This promises to help people stay active a lot longer than currently possible, which will be a good thing if we are going to live longer.

And finally, there is a study and trial which shows that DHA may delay the onset of Alzheimer's disease, which eats up a significant portion of US medical budgets.

It would be a sad irony if pending universal health care legislation leads to price controls which dry up the funding for these potentially cost-saving advances.

1Megan McArdle had a good post on this on her Atlantic blog earlier this week, "Medicare is going to bankrupt us, which is why we need universal health care". Excerpt:

Perhaps predictibly, someone showed up in the comments to my post on Medicare and Social Security to argue that liberal analysts have very serious plans to cut Medicare's costs, which is why we need universal coverage, so that we can implement those very serious plans.

I hear this argument quite often, and it's gibberish in a prom dress. Any cost savings you want to wring out of Medicare can be wrung out of Medicare right now: the program is large and powerful enough, and costly enough, that they are worth doing without adding a single new person to the mix. Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.

John Mauldin, Best-Selling author and recognized financial
expert, is also editor of the free Thoughts From the Frontline
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Anonymous said...

I hate taxes just like everybody else. I do my own taxes and it's a royal 3-day pain in the rear, even while using turbotax. The tax policy here in the U.S. causes me (and others) to do all sorts of crazy things to avoid paying taxes. I've always like two kinds of taxes (1) a flat tax, and (2) USAGE taxes.

I just read the very anti-cap'n'trade comments by CEO of questar. From what I understand of it, it may just be the perfect tax. All at the same time it potentially rewards conservatism, efficiency, good investments and innovation. It's a usage tax. It can potentially be applied at the root of consumption in a nearly flat way!

Anyway, I'm optimistic about it. The current tax policy is a joke.

DaveinHackensack said...


A few things to bear in mind WRT cap & trade:

1) It's not going to replace our current tax system, it's going to be an addition to it.

2) By making energy more expensive, it will chase away energy-intensive businesses such as manufacturing and natural resources extraction. These are the sorts of businesses we need to narrow our trade deficit and create high-paying blue collar jobs here.

3) If you want a flat (or nearly flat - I think we'd always have some sort of standard deduction that would make even a one-rate new tax progressive) usage tax, a better bet would be some sort of national sales tax or value-added tax. If such a tax were set high enough, we could use revenues from it to offset a reduction in the corporate income tax to a more internationally competitive level (e.g., 25%), and possibly a reduction in the payroll tax.

The difference under this scenario versus cap & trade is that, although in both cases Americans may end up paying more for a widget (in the first case because of embedded energy taxes, and in the second case because of the sales or value added tax), under this scenario, businesses are encouraged to make more widgets in the U.S. (some of which they can export), and under cap & trade, businesses are encouraged to make the widgets overseas.

Anonymous said...

Good points. To address your points:

#1 - replace/addition to our current taxes. We are currently being undertaxed. Our gov't is spending way more than they're taking in. We actually pay taxes when the government spends (regardless of when we file our tax return). Most of the population pays little/no income tax. They can pay a usage tax on their carbon consumption!

2. We have ZERO competitive advantage in domestic resource extraction because our remaining reserves are deep, unconventional and/or in difficult to reach places. Other countries like Kazakastan (whatever) have oil within 1 mile of the surface (shallow!?!). Other countries have no ag industry like we have. Other countries have no techy base like we have. Like I said, we shouldn't be trying to compete in that realm since we have no advantage. Spend the capital on something we else.

3. Everything we consume has a carbon footprint. Why not align the efficiency at which we consume carbon with VAT. Let mother nature decide the tax allocation. That way we get two birds with one stone and we spur more innovation in efficiency!

DaveinHackensack said...


Thanks for your response.

1) I agree that America is undertaxed overall (although some of parts of our economy are overtaxed), and I suggested a way to raise tax revenues with a de facto consumption tax in a previous post ("The Undertaxed American Middle Class").

2) Not all of our domestic natural resources are difficult to access, but they need not be easy to access to be worth extracting. As long as the cost of extraction is low enough relative to the market price of the commodity, it's profitable to extract the resource. The more natural resources we can profitably extract in the U.S., the better it is for domestic employment, for our trade deficit, and for our fiscal deficit.

3) Taxing carbon -- particularly when the left continues to obstruct an expansion in nuclear energy -- will handicap our economy, drive more of our remaining heavy industry overseas, and make us poorer. It won't necessarily make us more innovative. You can use less energy by walking or riding a bike: that doesn't increase innovation or make your economy more dynamic. If it did, 1970s-era China would have had a more dynamic economy than today's China. It didn't. Taxing carbon will also will do nothing to dissuade 3 billion people in India and China from burning coal* and oil today. Given that the costs of taxing carbon are so high, our economy and financial system remain fragile, and the benefits of limiting carbon are questionable, it doesn't seem worth the risk to tax carbon now.

*See Freeman Dyson on how India and China need coal to continue their transitions from poverty to middle class.