What This Election Will Mean for the Economyand Your Wallet
From Lost to 24, any TV junkie worth his TiVo knows to dread two-part episodes. Part 1 tends to be nothing but setupusually with an irritating cliffhanger, to boot. All the real actionbad guys getting their comeuppance and suchhappens in Part 2. It's a good analogy to keep in mind when thinking about the midterm elections and their impact on the economy, business, and financial markets. Part 1, the 110th Congress taking office in January 2007, is likely to see plenty of political machinations about major issues such as taxes and entitlement reform. But expect more reports from blue-ribbon commissions than substantial legislationjust a lot of plot thickening.
For major policy changes, you will probably have to wait until Part 2the 111th Congress that takes office in January 2009, along with a newly minted president. That crowd of politicos will have to figure out what to do with the 2001 and 2003 Bush tax cutsboth scheduled to expire at the end of 2010and Social Security reform. Costs to the old-age benefits program are projected to start rising rapidly in 2010 as more and more baby boomers retire. "The big election is going to be the next one," says analyst Mark Melcher, who writes The Political Forum newsletter and who previously tracked politics for a Wall Street investment firm. You can find more about which way the current races may be going in our Capital Commerce blog.
The Tax That Keeps On Taking
There's the alternative minimum tax, for instance. Created in 1969 to make sure that rich folks with lots of exemptions paid at least some income taxes, the AMT now ensnares more and more middle-class taxpayers each year because it is not indexed for inflation. The tax will hit more than 20 million households next year. But expect another temporary patch to mitigate its worst effects rather than eliminationa huge revenue loseror another major change. "That is really a 2009 type of issue," says tax policy analyst James Lucier of Prudential Securities. "It would involve reshuffling the tax code, and that is not something you do in the second half of a second presidential term, which is more about setting things up for the next administration." Get more information on the dreaded AMT.
So take a lame-duck, though combative, president. And then add in a Congress that is likely to be more divided than the current one, with the Democrats narrowly controlling one or both houses. The next two years? Get ready to hear the "G" word a lot. "I'm sure people are already sick of talking about it," says Greg Valliere, chief strategist at Stanford Washington Research Group, "but if you thought there was gridlock the past two years, wait until you see the next two. I have been talking to a lot of investor groups, and my bottom line is that I don't expect any major changes in macroeconomic policy. ... Now I don't rule out the Dems getting a few things done. But you're also going to see Bush exercise the veto a lot more."