| The U.S. Special Forces troops who pulled Saddam Hussein out of his rabbit hole may not have realized it, but they were pulling both President Bush and the US economy out of a hole at the same time. Long after the celebration in the streets of Baghdad has ended the president and the country will still be reaping the benefits. Two months ago Mr. Bush was in trouble.
The loss of three million jobs plus the mounting human losses
in Iraq and Afghanistan posed a growing challenge to his reelection
prospects. Bush needed to pull two rabbits out of a hat. His
first win was big job gains in October (+126,000) and November
(+57,000), and the strong (+8.2%) third quarter GDP report. Saddam
was the second rabbit. We are all hopeful the capture of the
Iraqi tyrant will speed the transition to a peaceful, self-governing
Iraq. But it will deliver big benefits to the economy and stock
markets here at home by securing the President's reelection next
November.
Here's why. Capital spending decisions, both here and in Iraq, are being held hostage to the upcoming election. Investors know that next year's
election will determine whether dividend tax rates will be zero,
if President Bush wins, or 40%, if he loses. And it will determine
if the US stays in Iraq or pulls out. Faced with such extreme
outcomes, investors are waiting to make capital spending decisions
until they know the outcome. Until they do the sustainability
of the recovery remains in doubt.
Saddam's capture, coming on the heels of strong
job numbers, is an important boost for the US economy and for
the stock market. Investors will quickly translate these events
into a Bush win next November and expectations that tax rates
will remain low for some time. This will trigger increased capital
spending now that will further accelerate growth.
The stock market will benefit too. Corporate
managers will know they can now make the changes--increased dividend
payouts, special dividends of excess cash, and selling stock
to reduce debt--to adapt their companies to the low dividend
tax rate, without fear of a head fake in the form of a sudden
reversal in the tax cuts. Stock prices have already increased
by more than two trillion dollars since last spring's dividend tax cut. Saddam's
capture, accelerated capital spending, increased dividends, and
recent job gains could easily add another trillion to market
values by this time next year.
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