The Wall Street rally we've been seeing is directly related to the optimism on tax cuts that has evolved lately. We haven't doubted that President Bush would get much of what he wanted in his original package, which we did not like that much. The fact that it has been pared back in dollar amount in negotiations with the Senate over the framework of a reconciliation bill is less important than early maneuverings on what will follow next. GOP strategists are now thinking they can get a cut to 15% in the capital gains tax and the pension reforms that passed the Congress last year, only to be vetoed by the President. The basic idea is to put the tax cuts that do not have widespread Democratic support into the reconciliation bill, as these can be passed with only 50 votes in the Senate. A second tax bill that would require 60 votes to make it into law would contain tax cuts more popular with Democrats, those easily identifiable as not benefitting the "rich." An increase in the minimum wage would be folded into this second bill. We're also hearing about a big push by a broad-based business coalition to reform depreciation schedules, to benefit the high-tech sector. There would be yet another bill to get this done, but the details are being held back while business lobbyists work on getting the Bush tax bill out the door, which they hope they can do by mid-June.
I'd been collecting string on this, for a larger overview piece, but decided to give you this as a quick brief, so you will have some appreciation for the rally, especially the recent push in NASDAQ. This does not mean that monetary deflation is not dragging at the markets and the economy. That goes on day in and day out, with no policy change in sight. The tax rally probably has the effect of persuading some that we can avoid a recession, and if there are enough good things happening on taxes and interest-rate cuts, that is certainly possible. It would only drag the adjustment process out longer, though. If the real economy is growing at 5% a year but deflating at 2% over several years, nominal growth is still 3%. I hope to have more detail later this week, for a deeper analytical look.