In their fourth-quarter 2012 Quarterly Review and Outlook – today’s OTB – Lacy Hunt and Van Hoisington spell out the consequences of the so-called American Taxpayer Relief Act, as well as the even more egregiously named Affordable Care Act. They quickly conclude that the real effects of the tax increases on both individual taxpayers and the overall economy will be much greater than media reports have suggested.
One of the more interesting impacts is that many corporations, large and small, borrowed multiple billions of dollars to make early or special dividend payments, or paid 2012 bonuses before the year turned over. This, the authors write, “… will cause the fourth quarter national income and product figures to be dramatically overstated and will provide no guide to the prospects for 2013. However … income should show a sharp decline early in 2013.”
They go on to explain the damaging effects of the tax multiplier and the implications for government revenue and debt. The upshot is that our federal deficit will continue to exceed $1 trillion per year and our debt-to-GDP ratio will continue its dangerous climb above the 100% mark – we can expect it to be 107% by the end of the year.
Lacy and Van are deeply concerned, as am I, about the deeply corrosive effect of federal fiscal shenanigans (and Congressional foot-dragging) on economic growth; and they lay out a number of fundamental conclusions, drawn from the work of eminent economists ranging from David Ricardo in the early 19th century right up to Rogoff and Reinhart in the present day, that “strongly suggest that the latest fiscal policy actions will serve to further restrain economic growth. We cannot tax ourselves into prosperity ... We can, however, deficit spend ourselves into poverty.”
We’re going to have to do better, a lot better, if we’re going to restore true prosperity to our economy, and we don’t have a lot of time. This year is crucial.
I am grateful, as always, to Lacy and Van for sharing their work with us. Hoisington Investment Management Company (www.hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4 billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.
I write this note from Athens, having come back from dinner at a fabulous local restaurant (Abyssinia Café – you must get the chicken), courtesy of our local hosts, Antoine Yazbek and Andre Chelhot. The restaurant has a magnificent view of the Acropolis, which is different from the view of that ancient Greek wonder you see from the rooftop bar of the Grand Bretagne. Interestingly, I had drinks (a nice non-alcoholic beer, thank you) with yet another reader, Jeremy Downward, who moved here from Britain a few decades ago, and the deal that launched his investment bank was the buying and selling of the hotel. When he first bought it, the bar was just a room with a view but was not built out. Today it has one of the greatest views from a downtown hotel in the world. And in the summer, when you can sit outside? I have to come back.
And tomorrow Christian Menegatti (of Roubini Economics) and I will tour the Acropolis and new museum with yet another reader, George Drimiotis, who has been kind enough to arrange a number of meetings as well. It has been 25 years since I have walked those ancient steps, and I am looking forward to it. They say the new museum is fabulous.
I will be writing about what I learned this week, not just here in Athens but all over Europe, as I travel to Geneva on Sunday. But the bulk of the letter will be on Greece. This has been a most thought-provoking trip. We have talked to literally dozens of people (business leaders, central bankers, politicians, investment types), including by means of a few ad hoc meetings in the local tavernas in the evenings. The views there were different from those of the central bankers, but there is a rhyme that I will try to tease out for you.
Until Sunday night, have a great weekend. ΏΠΑ! (Opa!)
Your overwhelmed with information analyst,
John Mauldin, Editor
Outside the Box
Hoisington Investment Management – Quarterly Review and Outlook, Fourth Quarter 2012
Tax Consequences: From Gain to Drain
The American Taxpayer Relief Act has lifted the immediate uncertainty of the fiscal cliff. Nevertheless, tax increases that are already in effect from this act, as well as the Affordable Care Act, impose a major obstacle to growth for the U.S. economy in the first half of 2013. The result of these taxes is considerable,…