James Pethokoukis

Politics and policy from inside Washington

Why Washington will kill the market (or not)

Mar 23, 2010 13:25 UTC

The wise and wonderful Ed Yardeni gives bullish and bearish Money & Politics scenarios:

Here’s the bullish scenario for stocks: The economy could continue to grow, especially now that the uncertainty is over about how the healthcare system will be overhauled. The resilience of the economy would be attributable to the Profits Cycle. If profits continue to grow solidly this year, as I expect, companies are likely to increase their payrolls and capital spending. Stock prices would continue to rally. A regime change in November would fuel a powerful yearend rally. This is the scenario that I believe is still the most likely to unfold.

Here’s the bearish scenario: The widely expected upturn in employment won’t happen. Instead, job losses could mount again if the Obama administration now pushes ahead with more of its divisive agenda. Much of it is just as controversial as healthcare has been. The President has suggested that he won’t mind if his party loses in November and if he is a one-term president as long as his agenda prevails. On January 25, in an interview with Diane Sawyer on ABC’s “World News,” Obama said, “I’d rather be a really good one-term president than a mediocre two-term president.” He added, “You know, there is a tendency in Washington to believe our job description, of elected officials, is to get re-elected. That’s not our job description. Our job description is to solve problems and to help people.” Spoken like a true community organizer.

Me: In political terms, this is the difference between Democrats a) losing 15-25 House seats and 3 or 4 Senate seats and b) 35+ House seats and 5-Senate seats.

COMMENT

Dividends, share buybacks, M&A and company 2010 guidance are all on the rise, which gooses stocks. That’s what has been driving the market to new highs and it won’t end soon

Health reform is faith-based deficit reduction

Mar 23, 2010 12:38 UTC

Healthcare reformers in Washington are asking America’s creditors to take a leap of faith. The plan is supposed to cut future budget shortfalls. But it depends on politicians following through on cuts and taxes, a deficit commission imposing additional discipline, and untested reforms working as expected. Owners of U.S. government debt shouldn’t bank on it.

The numbers add up on paper, at least according to the nonpartisan Congressional Budget Office. Its estimate for the 10-year cost of reform is $940 billion, with cost cuts elsewhere and new taxes turning that into a $138 billion net reduction in the projected federal deficit over a decade. Go out another 10 years, and the plan racks up another trillion or so in projected savings.

One problem is that despite being nonpartisan, the CBO’s methods are still dictated by Congress. That means Capitol Hill can get away with financial chicanery such as front-loading some tax increases and delaying spending plans — something that can help the numbers work because, in a fixed 10-year period, the tax income is counted for more years than the spending.

And then there are the promised but politically unpalatable fiscal fixes that fall to a future president and Congress. Proposed cuts in federal payments to hospitals, for instance, are delayed a decade. If today’s lawmakers are punting such measures, it’s hard to have any confidence their successors will show any more mettle.

The reformers hope more can be saved if the healthcare plan’s cost-control pilot projects bear fruit and are then widely implemented. But the CBO doesn’t give these projects much credit. And even the White House admits that rising healthcare costs could still threaten America’s finances. That’s one reason why President Barack Obama is keen on a bipartisan, deficit-cutting panel. But its potential efficacy is widely derided by veteran budgeteers.

At least with healthcare an effort is being made to do no fiscal harm. That was not the case with major spending initiatives of the past decade for which balancing cost cuts or tax increases weren’t attempted. But with the U.S. ratio of debt to GDP still on track to double in a decade, it will take a leap of faith for America’s creditors to retain their enthusiasm for Treasury bonds.

COMMENT

This bill is designed as an irrevocable “ratchet” up of Government spending and control.

The Left has calculated that even if it gets kicked out of office, this travesty of a bill will remain in effect, and when they inevitably return, they will ratchet it up further (Public Option, complete takeover, etc.).

Fir the sake of the future of the country, one only hopes they’ve miscalculated and the bill gets thrown out for its myriad areas of unconstitutionality. Or if the Supremes are cowed by the same cabal that so rudely (and incorrectly) treated them at the Shame of the Union address, then this Frankenstein piece of Machiavellian Central Planning may indeed remain in effect and the Decline and Fall of the American Empire will have truly commenced.

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