Obama's loss is the economy's gain

These two charts are arguably the most important of all the charts I've shown over the years, since they are predicting what could prove to be biggest political realignment of the American electorate in modern times. It's going to begin in just two months, if not sooner, and it could have an extremely positive impact on the outlook for the economy and the equity market.

Barack Obama's Approval Index, according to the daily Rasmussen survey, yesterday reached a new low of -23, while a record 47% now strongly disapprove of what he's doing. Even the Gallup polls show that a clear plurality of people disapprove. Say what you will—he's out of step with the country, he's inexperienced, he's poorly advised, he's a socialist at heart (my view all along)—he's failing on almost all fronts, and the Democrats are going to pay a huge price for this at the polls. If Obama is going to leave a legacy, it will be that he was The One that galvanized the Tea Party movement, and the Tea Party is the change on the margin that is making all the difference. Obama has left absolutely no doubt about what the Democratic Party stands for—bigger, more intrusive government—and the Tea Party's main objective is to reverse that. Already it's very likely that the Democrats will lose the House (Intrade places the odds of a Republican takeover at 70%), while some (e.g., Dick Morris) are making the bold prediction that they will lose the Senate as well.

This means that at the very least Congress will not pass any more big-government programs, particularly an onerous cap-and-trade bill that would punish the U.S. economy by unilaterally raising the cost of energy and divvying up the proceeds of a carbon tax among politically favored groups and industries. It also means that it is very unlikely that the Bush tax cuts will be allowed to expire at the end of this year. It seems clear to me that most or all of the income tax cuts are going to be extended, for at least a year or two; politicians on both sides fo the aisle realize there is huge discontent with the state of the economy, and nobody is even trying to argue that higher taxes are the solution.

The big issues remaining to be resolved are whether the cuts for "the rich" will be extended or not, and whether and by how much the tax on dividends and capital gains will rise. I'm hoping that good sense prevails, and all of the Bush tax cuts are extended. This would reduce the amount of uncertainty out there by a lot, and that is a lot better than the new "stimulus" package consisting of $50 billion in infrastructure projects that Obama is supposed to unveil tomorrow.

The distressing level of unemployment, the relatively tepid recovery to date, and the obvious failure of $1 trillion dollars of "stimulus" spending to make things better add up to very strong arguments against raising any taxes. The Keynesian approach to "jolting" the economy by throwing money at it has failed, as I and many others predicted. Building a new road or resurfacing an old one does very little if anything to create jobs, but it is one way of retaining union jobs.

A far better approach to stimulate the economy would be to permanently increase the incentives to work, save, and invest. That means making permanent the tax cuts on labor and capital, or at the very least no tax hikes, especially on the fraction of the labor force that is the most productive. Government can't spend money as wisely and as efficiently as the private sector, so we need to let the private sector keep more of the money it earns. That's the only way to help the economy grow. A confidence-boosting, low-tax-extending bill would not only guarantee more growth in the future, it would take effect almost immediately. And supply-side logic says that the "cost" of extending the tax cuts would be almost nonexistent: it's better to charge the same tax rate on a bigger tax base than to raise the tax rate on the same tax base. If Congress really wanted to do something intelligent, they would not only extend the Bush tax cuts across the board, but also lower our corporate tax rate, which is the highest in the developed world. But doing something so logical probably requires a new Congress.

My good friend Russell Redenbaugh puts the financial implications of all this in a nutshell: the likelihood of the Republicans gaining control of the House has put a floor under the market, while the odds of the Republicans winning the Senate define the upside.