Politics & Policy

Rational Exuberance

The investor class is moving into the president's column.

The stock market’s impressive year-end rally has more political content than most observers recognize. And the central market message is this: George W. Bush’s reelection stock is climbing rapidly.

The investor class likes what it sees in the rebounding economy and is moving strongly into the president’s column. In effect, both the rising economy and the rallying markets are voting for Bush.

Investors, and the majority of Americans, also understand that the capture of Saddam Hussein is a huge event — not just a morale booster. It means a significant lift for safety and security as U.S. defense and intelligence forces gain valuable information from the prisoner and his papers. Dominoes are also falling our way in Libya, Syria, and Iran.

Inside-the-Beltway media are giving the Democratic presidential nomination to Howard Dean, an angry and pessimistic left-liberal who is far outside the mainstream of 21st-century American politics. So far outside that independent voters — who will decide the election in numerous key states — are already picking Bush over Dean, according to numerous opinion polls. Translated, there’s a Bush landslide in the making.

Of course, a Dean victory next November would mean a rise in marginal tax rates across the board, even though a tax hike on capital gains and dividends would knock the stock market off stride and pose a tall barrier to the new recovery of business capital goods investment spending. Rapid depreciation write-offs would also be repealed under Dean, another blow to the nascent business expansion.

This is why a Bush reelection is so important to the economy — and most working, saving, and investing Americans know it.

According to the president’s campaign advisors, a new push to expand savings accounts is already baked in the cake of a Bush second term. Lifetime and retirement savings accounts will be included in the new presidential budget released next month. These accounts will accumulate after-tax deposits that will not be taxed again. That means a zero tax rate for capital gains and dividends.

Encouraging tax-sheltered savings is a huge pro-growth step forward from an economy that simply doesn’t save enough. In our modern system of high-tech markets, savings are instantly turned into investments — and this investment process is exactly what fosters capital formation for our nations businesses, both large and small.

Internationally, we rely too heavily on foreign saving and investment, and this negative differential has built up our current-account trade deficit. While there’s nothing inherently wrong with this, it is nonetheless true that a more balanced economy would have a smaller trade gap with less reliance on foreign investors.

New pro-saving tax incentives in a second Bush term could also move us closer to a consumption-based tax system rather than the current arrangement where we are overburdened with investment taxes. This tax-reform movement would dovetail into personal investment accounts for Social Security contributors, another significant shift toward fiscal balance and economic growth. Instead of handing over middle-class savings in the form of payroll taxes paid to Uncle Sam — who then consumes the money — millions of workers would be free to choose a retirement savings plan that would enormously benefit both the individual and the overall economy.

Just as the stock market rally has refunded the pension-plan deficit of big companies like Ford and GM, a market-invested savings-account program would refinance the deficit-ridden Social Security system. In both cases additional savings and wealth are re-channeled through markets into productive entrepreneurship and job-creating business expansion. A two-term Bush presidency can achieve these goals.

Right now, the age-old debate over interest-rate policies from the Federal Reserve is a non-political threat to stocks and the economy. Until recently, the stock advance was held up by concerns of a major Fed tightening in the new year. But Robert McTeer — the hard-headed supply-side president of the Dallas Fed — just stated publicly that he believes inflation pressures are non-existent, meaning painful rate hikes are unnecessary. Numerous other Fed officials have made the same point, but the independent-minded McTeer tipped the market scales away from fears of big interest-rate increases in 2004.

All that said, the economic universe is in proper alignment for a 5 or 6 percent growth rate in 2004. Spurred by low interest rates, low taxes, big profit gains, and remarkable productivity increases, the stock market could rise by 20 percent next year.

Of course, this scenario plays into the president’s hands. But more important, the combination of Dean’s leftism and a return to economic optimism will permit Bush to seek and receive a strong pro-growth policy mandate from the voters.

This is grounds for very-rational exuberance as we move into the new year.

— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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