Bullish Developments in the Beltway?

I’ll preface this post with an admission that the economy is not going to suddenly turn the corner  as a result of the following developments. There’s still massive deleveraging and rising unemployment ahead. But there are some interesting political news bites relating to Congress over the past week that maybe — just maybe — signify a marginally better future for the performance and value of financial assets in the year ahead.

First, House Speaker Pelosi recently talked about enacting permanent tax cuts, preferably before the end of the current session. We suspect that the cuts she has in mind, which sound like lower payroll tax withholding for certain income levels, are simply another way to reallocate the burden of social security and FICA taxes, similar to President-elect Obama’s proposed ‘tax cuts’. While fairness and distribution are legitimate issues in taxation, the productive incentives of such a move would be minimal. On the other hand, her proposal does sound more immediate and efficient than the tax rebates of 2008.

Second, it’s rumored that Sen. Clinton may seek to wrest the role of Senate Majority Leader from Sen. Harry Reid. That could be bullish, as Sen. Clinton strikes us as more of a centralist on economic issues, and is rumored to be open to the idea that our corporate tax code is increasingly uncompetitive (despite her red meat rhetoric of the primary season). And if the WSJ op-ed page is correct in its assertion that PAYGO rules will be suspended (if not forgotten) in the next Congress, it will give pro-growth policies a better chance of passing — albeit at the risk of worsening public finances.

Third, the WSJ editorial staff has endorsed Rep. Paul Ryan as House Minority Leader which, although unlikely to happen, is encouraging because we feel that Ryan is a critically important and literate voice regarding the long term fiscal and economic policy challenges facing the country. It’s also likely that Rep. Eric Cantor, who authored a 2008 bill to lower corporate tax rates, will step into the Minority Whip post which Roy Blount vacated last week.

It also seems to us that President-elect Obama may be more flexible than Presidents Clinton and Carter were, and that the corporate tax issue could thus get some traction, perhaps sooner than thought. It might be wishful thinking, but it wouldn’t surprise us. He’s clearly been able to assess and assimilate differing viewpoints on important issues. And on a related note, the WSJ reported this weekend that John Rogers of Ariel Capital Management, who played a key role in Sen. Obama’s presidential campaign, is expected to be a behind-the-scenes advisor to the new president. We were surprised that the WSJ described Rogers as an "obscure money manager" — he’s a fairly well known value investor, and a smart guy — and it’s encouraging to see him playing a role.

Attention to the corporate tax code — as long as it’s not reminiscent of Rep. Rangel’s harmful utterances of 2007-2008 — would be bullish for asset values. Although again, fiscal prudence shouldn’t be left by the wayside, and the inevitable compromises must be well thought out and designed — in fact, tax cutting in general needs to be better designed than it has been in the past.

URLs:

http://online.wsj.com/article/SB122600310456906045.html?mod=googlenews_wsj 

http://www.clusterstock.com/2008/11/fear-of-a-hillary-coup 

http://online.wsj.com/article/SB122628143512612399.html 

http://cantor.house.gov/061208.htm 

http://online.wsj.com/article/SB122610559597910247.html