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More Austerity Would Kill the Rally: Leonhardt


The Dow Jones Industrial Average is hitting nominal all-time highs even as the approval ratings of our elected officials sit at real, all-time lows. While perhaps just a coincidence, investors have to wonder if the loathsome gridlock in DC is actually a tailwind for stocks and, if so, would a deal on sequestration, CR or anything else that could be construed as effective governance bring this rally to a halt.

David Leonhardt, author of the book Here's the Deal and Washington Bureau Chief of The New York Times, says corporate profits are improving at a much faster clip than the rest of the economy — one of the hallmarks of the last four years.

It's not a new point. Much of the President's campaign centered around getting corporations and the rich to "pay their fair share." It made for a nice soundbite, but any resemblance to actual policy is strictly a coincidence.

"The effective taxes that companies pay have declined substantially," Leonhardt notes. Promises notwithstanding, he sees no evidence that it's going to change any time soon. The wealthy are a disjointed collection of people. Raising taxes on them is a walk in the park compared to trying the same thing with corporations and their industry lobbyists.

As Leonhardt sees it, the threat to the market from DC isn't the government doing something, but rather it doing less in the name of austerity. Government jobs have been getting ripped out of the economy for years, particularly at state and local levels. The last thing the economy needs is more cuts now in the name of solving the deficit problem of tomorrow.

"It's not so much that sequestration is huge," Leonhardt says of DC's latest folly, "it's that it's coming on top of a bunch of pre-existing austerity."

The reaction of conservative readers to that particular sentiment is exactly why no compromise solution to our budget is in the cards anytime soon.