The 4th quarter GDP came in gangbusters this morning, at 5.7 percent. So what's the matter with stocks? They've been in a swoon for a couple of weeks, and yawned this morning at the GDP numbers.
The answer can only be that the market doesn't see the gangbuster improvement continuing for much longer. What's the problem?
Maybe it's as simple as one word: Taxes. David Malpass looks at the outlook for small business, the engine of growth and, especially, employment growth.
The fortunes of small businesses — perhaps more than any other commercial sector — are tied to rates of taxation on the individual. And individual income-tax rates are set to jump sharply at year-end when the Bush tax cuts of 2003 expire. Put another way, on January 1, 2011, the world’s biggest tax increase ever will arrive on the doorsteps of U.S. small businesses (and a great many others).
President Obama, on Wednesday night, was congratulating himself on high-speed rail in Florida and green jobs. That sort of thing may impress the mainstream media but it doesn't impress the markets. Fancy government infrastructure projects and technology subsidies don't necessarily translate into economic growth. They are, after all, money spent on special interest goodies. If they were such a good idea, then surely business would be right out there doing it without government subsidy.
So you can be pretty sure that government hasn't a clue when it comes to selecting projects that will get the economy going.
No, the likely cause of the market's swoon is taxes, and the radical uncertainty about taxes in the future. The Bush tax cuts are scheduled to expire at the end of 2010. But who really believes that Congress will really let them expire in total? With the prospect of total wipeout in November 2010 I would expect that the Democrats in Congress will suddenly discover that they really believe in the importance of small businesses, and that Joe the Plumber is a real cool guy after all.
Don't forget Joe the Plumber. He is important. Here was a guy who, on the face of it, was a loser. He was a guy that hoped one day to buy a small plumbing business. Sociologists call his type: aspirational. And Joe the Plumber reckoned that President Obama's tax plans were going to hurt him in the business he hoped to buy.
Would Joe Plumbing actually have been hit by Obama's tax plans? Who knows? But he thinks he would get hit, and that is what matters in politics.
Back in the mid to late 2000s the Democrats did a fine job of marginalizing Republicans as bigoted fundamentalists that wanted to subject the US to Biblical morality. Many secular business owners felt embarrassed at being associated with such knuckle-draggers.
But mild embarrassment is a small price to pay when they are raising your taxes by a record amount. Why, you can even get to feeling that those crazy Christians aren't so bad after all.
Anyway, the Massachusetts Miracle was not built upon the votes of fundamentalist Christians. It was built upon independents moving strongly from the Democratic column to the Republican column, and increased enthusiasm among regular Republican voters.
No doubt something will be done to sweeten the pot for businessmen this year. But meanwhile business owners all across America are confused. They don't know what to plan for.
And that is not good news for the economy.
You are correct, the likelihood of increasing taxes and wondering who will get hit hardest is probably the main driver of the financial market's lack of confidence in the economic outlook. Close behind taxes is the equally uncertain regulatory environment. For instance, will US multi-nationals face trade tariff wars and more Sarbox type oversight challenges? The vilification of banks and other private sector businesses does not help either.
ReplyDeleteThe only cause for optimism is the coming Congressional elections in November and the reality that most people have exhausted their enthusiasm for big government. Let's hope that the markets look across the valley to a more balanced environment along the Potomac.