There is no shortage of polls predicting the outcome of the 2006 election. Yet aside from the fact that pollsters can derive any answer they desire based on the way they word their questions, their conclusions — as well as the actual outcome of this election — won’t mean all that much to the majority of voters anyway.
Why? The policies that have led to the current economic environment are why.
President Bush’s tax-rate cuts, in partnership with increased government spending, have produced a combination of strong economic growth, low interest rates, and low inflation. Individual and corporate wealth are at record levels, with corporate earnings growth continuing in the double-digits (a bonus at this late stage of the economic cycle). Add in today’s historically low unemployment, and one wonders why voters would throw out the majority party.
Of course, word is the electorate is not pleased with other aspects of Republican governance. Still, the current cycle of economic success and the policies that created it are unlikely to be reversed no matter what the outcome of the election.
Take fiscal policy. Bush’s tax-rate cuts were supposed to lower tax revenues. Yet tax revenues have been booming and federal and state coffers have been overflowing with corporate and individual tax collections. The fact is that lower tax rates produce rising tax revenues due to the incentives created in a lower-tax-rate environment.
Since tax rates still aren’t punitive, the next Congress could opt to lower the maximum rate to the level created by Ronald Reagan — 28 percent — and tax revenues should continue to expand. On the other hand, any mention of raising tax rates will fall on deaf ears now that the economy is booming and the budget deficit is falling. Why raise tax rates on the “wealthy” when tax collections from the wealthy are booming?
How about monetary policy?
Well, the Federal Reserve has corralled the forces of interest-rate uncertainty and, as a result, has gained influence over inflation and long-term interest rates. What politician is going to question this Fed success?
Remember how big budget deficits were going to cause sky-high interest rates? The latest response of the naysayers to this supposed relationship is that low interest rates, in the face of rising government debt, are caused by a global savings “glut.” Economists cry out that the economy is threatened because Americans don’t save enough, but with world savings so high, a savings glut is keeping interest rates low.
When the Fed is committed to using monetary policy to stabilize short-term interest rates to stem the inflationary psychology, the world is better off and foreigners are likely to continue to invest in U.S. financial assets. The outcome of this election certainly won’t influence monetary policy, inflation, or interest rates.
In the big picture, the global economy is thriving due to the emergence of capitalism as the economic model. Simply, America’s monetary, fiscal, and trade policies are being copied by the growing world economies. As the great majority of politicians (other than the modern-day Smoot-Hawley’s, senators Schumer and Graham) understand the benefits of world trade and low trade barriers, there is little if any chance the U.S. will reverse course and support reduced world trade — no matter what happens on November 7.
By way of the 2006 midterm elections, both political parties will be assessing their chances of winning the White House in 2008; based on the outcome of this election, they will restructure their messages accordingly. After World War II, the British turned their back on Winston Churchill, who saved the world from the Nazis. But they voted him out of office only to welcome him back in a few short years, recognizing their mistake. During the next two years, Americans might have a similar opportunity if the Democrats control one or both houses of Congress and introduce legislation to manage the economy their way.
On the other hand, voters may take a step back and recognize who is responsible for the current good economic times. Enough voters might also realize that there have been no terrorist attacks in the U.S. since September 11, 2001 — some five years ago. If the electorate follows tradition and Republicans retain control of Congress, Republicans will have a two-year window in which to fulfill the promises they made to their constituencies this time around.
Either way things go next Tuesday, I’m staying optimistic.
– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc., and principal of Victoria Capital Management, Inc.