Suddenly we find ourselves back in the nightmare world of the pregnant chad. And everything was going so well, too.
Whatever you may think of the policies of George W. Bush’s new administration, at least it was clanking along pretty well and the political railroads were running on time. It’s been a pleasant surprise after the weeks of bitter and embittering struggle between Bush and Al Gore after the contested Florida election last November. Now, thanks to Senator Jim Jeffords (R – Vermont… no, wait, that’s D – Vermont), the balance of power has come unbalanced again.
True, even with both the executive branch and both houses of Congress in Republican hands, nothing that was very good for economic growth — and thus for markets — was really happening. Set aside your abstract political convictions for a moment, whatever they may be, and just think about your investments. What would be good for the markets? Bush’s tax cut was too-little-too-late to begin with, even if all you wanted was good old fashioned drop-money-from-helicopters stimulus. If you wanted something really pro-growth, something that would light a rocket under the stock market, you’d need a cut in the capital gains tax. And the Republicans couldn’t even keep their own team together to deliver it.
Senator Judd Gregg (R -New Hampshire) sponsored an amendment to reduce the cap gains tax rate to 15% from 20%. It was defeated 47 to 51. Eight Republicans voted against the Gregg amendment: Lincoln Chafee (Rhode Island), Pete Domenici (New Mexico), Charles Grassley (Iowa), John McCain (Arizona), Mike DeWine and George Voinovich (Ohio), Olympia Snowe (Maine), and — of course — Jim Jeffords.
That said, seven Democrats voted for the Gregg amendment: Evan Bayh (Indiana), Max Cleland and Zell Miller (Georgia), Robert Torricelli (New Jersey), Ron Wyden (Oregon) and — be sure you’re sitting down — Joe Lieberman (Connecticut) and Charles Schumer (New York).
Don’t close your mind to what this means just because you’re hung up on the political angles of capital gains taxation. That’s not the point now. The point is that with the balance of power poised on a knife edge, individuals willing to cross party lines wield enormous power. You can be sure that in the last 24 hours Jim Jeffords has had more that one conversation with the POTUS, and he’s no doubt been led up the high mountain and promised the kingdoms of earth. Someone’s going to have to pay for those promises. And he’s probably not the only one whose been touched by an angel. If Jeffords’ coat can’t be turned right-side-out again, Dubya’s going to need to turn the coat of some Democratic senator. Maybe the simplest way to handle this would just be to do an auction on Ebay.
Read The Theory of Games and Economic Behavior by von Neumann and Morgenstern. You’ll see that this is an iterated prisoner’s dilemma with no stable resolution. And the markets hate it. Because when one man moving at the margin can catalyze the entire power structure of the US Senate, the template is in place for the next man to do it. And the next. And the next.
The markets may like gridlock, but they don’t like chaos. They don’t like the prospect of the US turning into a metastable parliamentary democracy like Italy where governments are re-formed every few months. And that’s where we’re headed.
Don’t tell me that politics don’t matter to markets. Wake up and get real. No business can deliver on long-term plans that mean anything in a world where tax policy, regulatory policy, and trade policy are as unpredictable as the next turncoat senator’s bid for his 15 minutes of fame. Ask any CEO of any company that counts. Job one is politics.
And when politics go dysfunctional, the risk premium in the market has got to go up. That means prices have to go down, until the risks are understood. So until this new destabilizing force is arrested, I’m considering all bets off. It’s time to stop and re-evaluate. Whether or not you do, the markets will.
The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.
