Cheney's optimism, and mine

Larry Kudlow
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Posted: Nov 02, 2006 9:01 PM
Cheney's optimism, and mine

In the last month's run-up to the midterm elections, stocks have been climbing while Republican polls have been falling. Does this mean the markets favor gridlock in Washington, after six years of Republican rule? It's an odd paradigm.

I put this question to Vice President Dick Cheney in Washington this week, during a special interview that aired on CNBC's "Kudlow & Co." His answer was no. He disagrees with the market. The veep strongly believes a Democratic takeover of Congress will spell trouble for both the current low-tax environment and the economy overall.

A rising stock market and sagging GOP fortunes? Cheney would prefer to think the current bull market reflects a strong economy, one that grew out of the Republican tax cuts of 2003. And it's here that he spies a danger:

"I think if Charlie Rangel ends up as chairman of the Ways and Means Committee ... that he doesn't believe there's a single one of the Bush tax cuts that ought to be extended."

A heated Charlie Rangel, in response, actually called the vice president a "sonofabitch." So the battle is joined.

Truth be told, Rangel has said more recently that he has no intention of rolling back the investor tax cuts on capital gains and dividends. But Cheney says: Not so fast.

"If a man like Charlie Rangel were to be chairman of (Ways and Means) ... sitting there with the gavel, all he has to do is not act -- just don't call up the legislation -- and there'll be a big tax increase."

So, Mr. Vice President, will you take a no-new-tax-hike pledge, including any high-tax, pay-as-you-go deals?

"Well, I will," said Cheney, "but the president is the one that obviously has got the pen, and he certainly supports that same proposition."

The vice president described the 15 percent tax rate on dividends and capital gains, the top 35 percent personal tax rate, the reduced marriage penalty and the enhanced child credit as safe with Bush in office. He believes higher taxes are not a worry.

And what about spending? Nancy Pelosi told me last week on CNBC that the Democrats, if they take the House, will push for a balanced budget and spending restraint. She also said tax increases would only be a last resort. I relayed this pledge to Cheney, who found the humor in it: "I don't think she's running on that platform in San Francisco."

But aren't the Democrats stealing the Republicans' bacon on the whole balanced-budget issue? And why haven't Republican leaders called for a balanced-budget target? So far as I know, no one in Congress or the White House has.

Cheney noted that the administration has had to meet some "extraordinary" spending requirements. Yes, they have -- among them the high price of war and security in the long wake of 9-11. But here, supply-side policy once again matters: The deficit has dropped to a low percentage of GDP, historically speaking, thanks to the economic growth and revenues thrown off from the Bush tax cuts. Said Cheney, sounding very balanced-budget minded, "We have done a lot to exercise restraint in terms of spending."

So can we expect two years of Congress and the Executive Branch trying to outdo each other on spending control? Markets won't mind at all.

And what of the outlook for even higher regulations on business? Stories of CEOs backdating stock options fill the financial pages these days. But will this fuel new restrictions on hedge funds and private equity funds?

"I'm reluctant to see additional regulation," the vice president said. "In general ... I think you can make a case that Sarbanes-Oxley went too far."

Pelosi herself said the Democrats want to relieve some of the over-regulatory pressure of Sarbanes-Oxley. More stolen bacon?

Cheney shrugs, "We'll be happy to work with them on it."

The vice president ended our talk by noting how optimistic he is with the elections only days away: He thinks the Republicans will hold the House and Senate. I'm optimistic, too, but for a different set of reasons.

Adding all this up, key Democrats say they won't raise taxes if they take the House -- and if they do try, the president will be there with his veto pen. Think Grover Cleveland, who holds the American record for presidential vetoes. The Democrats also are at least talking spending restraint, as are Cheney and his boss. And not only is the veep saying no to new regulations, there could be bipartisan agreement that Sarbanes-Oxley has gone too far.

This could be the real message of the Goldilocks market: a Reaganesque policy mix of low tax rates, limited spending and less regulation. It would continue the greatest story never told.

Or am I being too optimistic?