November 13, 2002
The Republicans are in charge, so what will change?
Of course, committee assignments in the Senate will be different. This will alter the shape of legislation and the pace of enactment. A bunch of federal judge appointments that were being delayed because the Democrats did not like the presumed bias of the candidates will now move forward. Regulatory oversight will change, mostly toward more pro-business stances.
Interesting tax cutting initiatives that were stalled may now get a full hearing. They include higher loss write-offs by investors (probably to $8250 from $3000 on personal income and then adjusted for inflation), increased tax deferred limits for savings accounts, a wider variety of tax deferred savings opportunities, and some attempt to eliminate the double taxation of corporate dividends.
The President almost certainly will propose to remove the sunset provisions from his omnibus tax cuts and probably will prevail despite the next decade revenue losses that led to the sunset in the first place. My guess is that the President will first try to eliminate the full provision. If not successful, he will then re-introduce legislation to repeal or severely reduce the estate tax.
Will the Democrats use the filibuster to stall these changes? If the President strikes quickly, I do not think so. As the next presidential election year approaches, however, this is an issue that many Democrats may believe can be worked to their advantage and they will filibuster.
The President almost certainly will now prevail on his Homeland Security without union restrictions and on his market based prescription program for the elderly. This will remove these issues from consideration in the next election. As a result, pharmaceuticals can look forward to some increased demand as government provides some purchasing power but little increase in price containment.
The fact that the stock market was so muted in its response to the surprise Republican control (and it was a surprise despite the many close elections that suggested it could happen) implies that not too much will be different despite the changes cited above.
Unfortunately, some Republicans may get the impression that Americans voted to stay the course. While pundits always put too much of their own feelings into their assessments, they probably are close to the mark in talking about a Democrat loss as much as a Republican win.
The electorate is increasingly concerned about the stewardship of the economy. They merely thought that opposition to Republican initiatives by Democrats was not going to get the job done.
Does this mean a change in economic advisors? I should hope so. If I were on the economics team, I would be screaming for moving the 2004 tax cuts forward to 2003. The White House should have initiated the increased write-off for losses and it should be initiating a program to allow loss replacement in 401K plans for low income households.
In other words, plans that have lost more than twice the value of the current annual contribution would spawn a double contribution opportunity until peak values are restored in the account. The additional tax deferred contribution would pass forward to subsequent years until peak retirement plan values are regained.
(As an economist, I also like the shift in tax obligations that occur when market values deteriorate. The control dynamics to an economic system are improved, but that is a subject for an advanced course in economic systems).
I do not begrudge Secretary O'Neill's efforts to redesign the tax codes. I applaud his objective of reducing complexity and shifting taxation from production to consumption without shifting burdens between income classes. However, the first order of business is to have initiatives that complement the Federal Reserve in its efforts to ensure expansion even as housing and autos begin to show signs of exhaustion.
And I must applaud the Federal Reserve on its latest aggressive rate cut. Of course, the Fed must do more (not in rate cutting but in explaining that the steeper gap in rates between short and long term bonds should permit enough additional bank earnings to encourage lending for lower quality corporate customers).
If the banks will not provide the liquidity, then creditworthy corporations must. That is how GE became a powerful provider of corporate capital. Microsoft already announced that it will do the same. If the banks will not lower their corporate lending standards then companies must use their low lending rates to finance their customers, and many are beginning to do just that.