Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

11
Friday the 13th: Triple Witching Hour for the Government

VICTOR A. CANTO AND ARTHUR B. LAFFER

Visions of translucent spirits, eerie hollow sounds, slippery slimy sensations, and musky fetid stenches have been enjoined in a journalistic witches' brew as news account after news account relates what happened to the U.S. stock market on Friday, October 13, 1987. The truth, unfortunately, is not so dramatic. But the events of that Friday do expose the culprits and the dastardly deed perpetrated.

Senate Majority Leader George Mitchell single-handedly cost working Americans 7 percent of their accumulated pension benefits and precipitated a market retreat that encircled the earth. If allowed to be carried through, his actions will also cost jobs--lots of jobs--in the months and years ahead and will, his protestations notwithstanding, lead to larger deficits.

On Friday, the thirteenth of October, the Senate killed the capital gains tax cut. The fact that it was Friday the 13th had nothing to do with the fall in the stock market. George Mitchell deserves full credit for that. The decline in the stock market was due to the fact that, in a forward-looking market, events alter investors' perceptions and thereby equity valuations. In our own analysis, we estimated that passage of the capital gains legislation would add between 400 to 500 points to the market. 1 We also estimated that approximately half of the gain was already incorporated in the market. Thus, if capital gains legislation did not materialize, the market would have to decline 200 to 250 points (Figure 11.1).

Financial markets recently have corroborated our view. Earlier during the week, when it became likely that Senator Mitchell, through procedural moves, could block the capital gains amendment, the markets started declining. The

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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