John Tamny claims that 10-year Federal bonds are overvalued in what may be the oddest NRO oped on record. It is true that the recent decline in long-term interest rates is a conundrum, but the market price for bonds is readily explained by its payout structure over its term compared to market yields on similar bonds. For example – if a 10-year bond is issued today promising to pay $4 per year for 10 years place a face value of $100 at the end of the term and if market yields today are 4%, then this bond’s price today would equal $100. If market yields in a week decline, the market price of this bond will increase. Tamny not only suggests Treasury bonds are overvalued, but he also tries to suggest there is some tie to the price of gold, which I simply do not get.
You might prefer to check out the op-ed from Edward Carter as to what it concedes. Carter admits that government spending during the first term of President Bush did not decline from 18% of GDP to 16.6% of GDP but actually increased as a share of GDP. He also concedes that tax revenues declined as a share of GDP. Yet Carter wants us to believe that fiscal policy will be much more responsible during Bush’s second term. Again, the reasoning for this claim is something I simply do not get.
Update: Let’s compare Carter’s statement “All it required was holding the average real growth rate of federal spending at 1.2 percent a year through 2006” to what President Bush said on February 27, 2001: “We’ve increased spending for discretionary programs by a very responsible 4 percent, above the rate of inflation”. If real Federal spending grew by 4% per year, the spending to GDP ratio would increase – not decline. But one could read this sentence they way Trent Lott did the morning after this State of the Union Address: 4% nominal increase translated into a 1% real increase assuming 3% inflation. But Bush was referring to discretionary spending – not total spending. So it seems the bait-and-switch was on from the very beginning of Bush’s Presidency.
Update II: Michael Darda goes far beyond the claims of Mr. Carter arguing that the Bush tax cuts will increase long-term growth rates by 0.85%. His evidence seems to be some unidentified analysis:
A dynamic analysis of the Bush tax cuts shows that long-run growth could be lifted by 0.85 percentage points as long as the lower-tax schedules on capital and labor remain in place. Ceteris paribus, an additional 0.85 percentage points of growth would augment revenues by $1.5 trillion during the next decade. The rebound in real economic growth since 2003 also suggests the fiscal deficit should fall to no more than 2 percent of GDP during the next year, less than the historical average going back to 1960.
If anyone has a copy of this alleged analysis, let us know.