Yesterday, we claimed to be feeling more-Scully-than-Mulder about Obamanomics following his weekend speech. In fact, we felt that the likelihood of a significant market rally had been taken off the table — wrong! Today, after hearing the appointments to Obama’s economic team, and some positive leaks regarding his plans for taxes, we feel a bit better (equity markets have been feeling better since Friday afternoon, though we suspect that much of today’s rally was due to the government’s announced rescue of Citi). We’re not raging bulls on the economy or the stock market, but today’s developments indicate that things could turn out ‘less bad’ than markets feared as recently as last week. From an AP summary (underlining added):
At the news conference, he said he wanted to create 2.5 million jobs by the end of 2010. He also said he wants the legislation to incorporate his campaign ideas for new jobs in environmentally friendly technologies — the "green economy."
As a candidate, Obama also said he wanted to eliminate Bush-era tax cuts on the wealthy. Many economists caution that raising taxes can make a recession worse, and the president-elect said he would await a recommendation from his advisers on whether to follow through on his earlier pledge.
If his "green economy" plank is incorporated into an overall economic recovery plan without dictating terms, that’s positive. And if the worst that he does on taxes is allow some of the Bush rates to expire as scheduled, that’s not as bad as it could have been; it’s also an outcome that has probably been discounted in the markets for some time, ever since it became clear that the Democrats were likely to control Congress and the Executive branch.
The AP article continues:
…there were no plans to balance the tax cuts with an immediate tax increase on the wealthy. During the campaign, Obama said he would pay for increased tax relief by raising taxes on people making more than $250,000.
"There won’t be any tax increases in the January package," said one Obama aide, who spoke on condition of anonymity because the details of the Obama package have not been fleshed out.
Obama could delay any tax increase to 2011, when current Bush administration tax cuts expire.
That’s an important leak, and hopefully it will prove true. Obama also appointed Berkely economist Christina Romer to chair of the President’s Council of Economic Advisers. She and her husband David have done some very important empirical work on taxes and economic performance, and she could be the most bullish CEA chair for financial markets and the economy since Glenn Hubbard circa 2003. Overall, Obama’s economic appointments — Geithner, Romer, Larry Summers, and Melody Barnes — are all left leaning, but reasonably diverse in their views. How much influence Romer will have in shaping tax policy is unclear, but at the very least, the new President will have a voice of reason in his cabinet when it comes to tax policy. Her presence might also improve the odds of positive corporate tax reform, which would be very positive for U.S. financial markets and — if well designed — domestic employment. It’s too early to know, and the sausage making is just getting started, but we’ll be keeping our ear to the ground.
In the meantime, if you own an S&P 500 index fund, it’s worth roughly 13% more than it was at mid day on Friday. Enjoy it. The economy still stinks, credit growth is moribund and will be for some time, and there’s plenty of economic pain still to come. But today it looks like we’re in for less pain than seemed likely just a few days ago, and in the cold, harsh world of financial markets, less pain is seen as a good thing.