Elections Have Consequences - II
Two major developments over the past 24 hours poignantly highlight the fact that "elections have consequences."  First, late last night the House passed the Senate version of the tax deal negotiated by Republicans and President Obama (see article).  As we have expected for many months, but after some final tense moments of doubt, the Bush-era tax rates on incomes and investments have been extended for two years.  Under pressure of an election, Congress has admitted that "lower tax rates are better for the economy than higher tax rates."

Second, late yesterday afternoon, Senate Majority Leader Harry Reid decided he did not have the votes in the lame duck session of a repudiated Congress to pass a $1.1 trillion, earmark-filled, pork-laden omnibus spending bill.  Instead, Congress will most likely pass a continuing resolution to allow government to operate into 2011, so that the newly-elected Congress can have its say on a budget (see article).  The omnibus spending bill needed 60 votes (a supermajority) in order to beat the potential of a filibuster. Normally, this would not be a problem. The Senate would just lard the bill so full of pork for everyone, including the minority party that it could get to 60 votes.  Not this time. No matter how much pork was in the bill, it could not get 60 votes.

So this week, Congress, which tried not to, but in the end must, listen to the voters, has delivered an extension of relatively low tax rates on incomes and investments and seen its liberal spending ways curtailed.  This new policy environment will add juice to an economy that was already in recovery mode.

We have argued for years now that government spending is damaging to job creation.  The bigger the government, the smaller the private sector; the smaller the private sector the fewer the jobs; and the fewer jobs there are, the higher the rate of unemployment.  In other words, a new (lower) path for spending has brightened the economic outlook across the board.  Like 1994/1995, this is great news for stocks.  At the same time, the fear generated by expanding budget deficits and government intrusion in the economy is waning rapidly.  Treasury bonds and gold – the last refuge of those who want to avoid risk – are much less attractive.  Look for interest rates to continue their move to higher levels, while gold falls and equity values continue to climb back above pre-panic levels.
Posted on Friday, December 17, 2010 @ 9:22 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.