As George W. Bush mounts a strong comeback in the polls, stock market averages are mounting their own stealth recovery. There’s a clear link here. Should the president be reelected, tax-rates on capital will stay low and may even drop some more. Wall Street likes this.
Bush’s concept of tax reform is focused on reducing the multiple taxation of saving and investment. Under current law the same dollar of income is taxed once as work effort, a second time as corporate earnings, a third time as dividends, a fourth time as capital gains, and a fifth time as inheritance. This is a capital killer.
Without capital there is no investment funding for the very businesses — large, small, old, or new — that create jobs. Levying tax penalties on capital, as Sen. John Kerry would do if elected, would curtail the supply of the very seed corn necessary to grow the American economy. Capital is labor’s best friend. JFK understood this, but his Democratic party has long since forgotten.
Kerry’s Europeanized domestic plan would set up tax penalties on capital formation, upward mobility, and the formation of job-creating businesses. For the 90 million-strong investor class, Kerry’s taxes on dividends, capital gains, and the most successful earners are a tax on the stock market — and therefore a tax on economic growth and wealth creation.
On the flip-side, Bush would use personal control, individual responsibility, and tax-free savings accounts to create new wealth for retirement, healthcare, and education. This is his ownership-society vision. It would represent a sea-change in policy. Instead of government-directed solutions, Bush would move the country toward consumer- and investor-based solutions. Government dependency would end.
The stock market is a proxy for the future value of private-sector free-enterprise. So it’s no wonder that share prices are rising along with Bush’s polls. Online pay-to-play trading markets are showing sizable Bush leads. The Iowa Electronic Market has Bush at 57 cents and Kerry at 43 cents. A month ago these contracts were dead even. The Tradesport.com market has Bush at an incredible $63 and Kerry at a dismal $35.
The Gallup poll has Bush ahead 52 percent to 45 percent. More revealing, Gallup shows a major Bush move in key battleground states. In Missouri, Bush is up 14 points. In Ohio and Wisconsin, he’s up 9 points. In Pennsylvania, he’s about even.
Noteworthy is the new horserace in New Jersey. The Newark Star Ledger/Eagleton/Rutgers poll shows Kerry’s lead has shrunk from 20 points to just 4. Why the drop? I have longed believed that voters in the traditionally blue-state region of Connecticut, New York, and New Jersey harbor a lot of secret pro-Bush sentiment since 9/11. Nearly everyone there knows someone who lost a friend or family member in the World Trade Center. Folks in this tri-state area are going about their business each day, but deep down they fear it could happen again.
These voters may not agree with Bush on social policies, but they quietly agree with him on the Patriot Act, which has caught hundreds of terrorists on U.S. soil and has already stopped numerous planned attacks. They may not be thrilled about the messy campaign in Iraq, but they like Bush’s toughness and unyielding single-mindedness in the war and on homeland security. Simply, Bush is giving workers in this Democratic corridor great hope that they’ll return home safely to their families each and every night.
Bush may not win these states, but he will score a much higher popular vote than he did four years ago. Should he show up in the New York area once or twice in the next six weeks, he could conceivably pull off a huge upset.
Of course, measuring stock market performance seems almost insignificant when compared with getting loved ones home safely at night. But the stock market is not only a barometer of future wealth-creation, it has become a measure of future safety and security upon which wealth-creation depends.
In this light, a significant part of the political story is that broad stock averages have gone up 9 percent since mid-August (with growth-sensitive sectors like tech, consumers, financials, industrials, materials, and energy leading the way). The bounce parallels Bush’s recovery in the polls.
All of this undercuts another Kerry argument. There is no Hooveresque economy right now in the U.S. The stock market is predicting continued solid economic growth as far as the eye can see. A full 140 million people are working, a new U.S. record. The unemployment rate is at a historically low 5.4 percent. Businesses are investing and consumers are spending.
The economy may not be perfect. Homeland security may not be foolproof. But the polls and the stock market are predicting a strong Bush victory.
— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.