Better late than never. The Fed eased credit policies substantially in January, and stock markets roared in favor of the chairman’s conversion. Today’s market consensus anticipates another 50-basis-point rate cut at the FOMC meeting March 20.
But what’s so puzzling is the fact that stock markets still have slumped badly this month. The NASDAQ index, the most growth-sensitive, risk-taking measure, has fallen back to a two-year low. The broader S&P 500 is now flirting with a true bear-market 20% decline. Even the old-economy Dow Jones index has dropped about 700 points this month. What’s the problem here? Answer. Tax policy. In particular, investors are beginning to take the view that George Bush is bungling the management of his political-centerpiece, marginal-tax-rate reduction plan.
All month long, the president and his top advisors, particularly senior White House staffer Lawrence Lindsey, have been insisting on a $1.6-trillion tax-cut plan. No more, no less. In yesterday’s press conference, his first as the 43rd president, the Texan said, “I am going to resist the Christmas-tree effect of tax policy…. And I will resist the temptation by folks to pile on their pet projects onto our tax cut.”
Bush has made a firm decision to emphasize personal tax relief. Economist Lindsey has been running around Washington telling various business and investor lobbies that they will get no relief beyond lower personal rates. Yet tax-cut fever is spreading throughout the country, according to numerous opinion polls, and as the economy slips perilously close to recession, the demand for tax-cut stimulus will only grow in the weeks ahead. Also, Democratic critics have been badly weakened by Clinton’s Pardongate scandal. Adding that to the frail economy and outsized budget-surplus estimates, the president has considerable political capital.
Why then is Bush forclosing all his options?
His statements at yesterday’s press conference were clear enough to send the stock market down again today. What’s so odd about this political paradigm to limit tax cuts is that the president himself made an excellent statement that the economy could grow in the future well beyond the Congressional Budget Office 10-year estimates, with “good monetary policy, good fiscal policy, good regulatory policy, and good trade policy.”
So while the Texan is hinting at a more dynamic economic growth plan, he nonetheless steadfastly limits his tax-cut options. Political observers are puzzled, the business community is frustrated, and the investor class, which comprised the backbone of Bush’s election totals last November, is beginning to turn negative. It’s almost as though the president is setting himself up for one of two possible political defeats. If the final tax-cut package comes in below $1.6 trillion, it will look like a loss. But if the package comes in above it could show weakness in the Bush armor. Why is he doing this?
Financial commentators continue to blame the market decline on profit warnings. But that’s yesterday’s story. Investors are really looking ahead at the future potential for economic growth and profits in 2002 and beyond. And more and more, folks want to see additional capital-formation incentives in the tax-cut plan that will promote stronger economic growth, productivity, and profits.
Business-community insiders agree with Bush that special-interest, industry-specific tax breaks should be ruled out. But there is considerable support for capital-gains relief, IRA and 401k liberalization (Cardin/Portman), and a reduction in the top corporate tax rate to 25% from 35%. Saving and investment incentives have strong support in both political parties.
Bush advisors hint that a second tax bill later in the year could include some of these measures, including estate-tax relief that would eliminate the death-tax provisions — but merely tax inheritances at the capital-gains tax rate (carried over from the original profit basis). But savvy business lobbyists are skeptical that there will ever be a second bite out of the tax-cut apple. They would prefer one larger tax-cut bill, and believe that support for pro-capital-formation tax cuts beyond the personal-rate reduction exists in the Senate Finance Committee. Democratic Sens. Lieberman and Toricelli are two names that pop up, but there are others as well.
Many believe that Treasury Secretary Paul O’Neill, an ardent foe of the corporate tax, is winking and nodding at suggestions for a bigger tax-cut bill. O’Neill, however, came in to the administration late — after it had already formulated its income-tax-cut gameplan, largely at the urging of Lawrence Lindsey.
In both political and economic terms, shutting the door on the investor class could represent a major Bush political blunder. The more the president campaigns against broader tax-cutting, the more he turns off his political base. Even worse, the more he gives the back of his hand to capital-formation tax-cut add-ons, the worse the stock market performs. And that might lead to exactly the sort of nasty recession the president and his team would greatly prefer to avoid.