Thursday, December 08, 2005

Stock Market is Safe...for Now

The lower chamber of the Great Sausage Factory passed the Tax Relief Extension Act today by a vote of 234-197. So don't sell your stocks just yet. The lower chamber must consult with the upper chamber, where there seems to more hostility to the stock market.

Interestingly, Dr. Ed Yardeni's daily email commentary yesterday goes over the doomsday scenario for the US economy that is fast becoming common wisdom on the street. Simplified, it goes like this - the Fed continues raising interests rates and mortgage rates follow, shutting off the cash-out home equity refinancing spigot that has fueled any and all consumer spending, and all goes to hell in a handbasket from there, not just us, but the whole damn world, especially China. (This actually causes instability in China and we have a global political conflagration on our hands, but that is a little off topic...) Anyhew, I don't ascribe to this theory but what I do believe is that a failure to extend the dividend and capitall gains tax cuts will have dire consequences. The big risk to the economy is not raising rates, it is capital-centric tax policy.

As I have blogged before, it will kill the stock market, and as happened at the end of the dotcom bust, tax receipts at the state and federal level will dry up. In 2001, California saw tax receipts plummet and it was almost entirely due to the disappearance of capital gains taxes paid by all those new zillionaires. The resulting fiscal crisis in California was the worst example but states all across the country found themselves in deep yogurt. Of course the real problem is government spending levels, but since monkeys will fly before there will be discipline in that regard, we have to pursue policies that keep the economy humming and extract tax receipts from the increased economic activity. The dividend and cap gains tax cuts have done just that as tax revenue from these activities pours into state and federal coffers. If that all comes to an end, government finances are going to suffer just as states and cities are coming out of their troubles, and we'll be back to where we were in 2002, which is to say, looking for a way out of the mess and having these policy debates all over again.

There is no need to have this debate again when we could be compounding our success to date, creating more jobs and wealth, and increasing our standard of living. What we have going on now is a mini version of the Volcker/Reagan One Two Punch that brought us out of the 1970s malaise, rising rates to stem inflation and pro-growth tax cuts to spur savings work and investment. We've been here before and we know what happens, we just have to have the vision to see it clearly and courage to ignore the doomsayers. Stay tuned.

0 Comments:

Post a Comment

<< Home