Early Rally Jude Wanniski January 7, 1999

1. The most important element is the Roth IRA, which has a personal $2,000 limit. This means the Roth IRA people who were at the limit in 1998 can now add another $2,000. This is not a cash-flow argument. By removing the risk of capital gains tax when IRA funds are cashed in the future, the market is encouraged to increase its risk. In her “Market Place” column on the first business page of the NYTimes, Gretchen Morgenson makes a slightly different observation: “...a tendency among investors to change where they put their retirement accounts when they open a new calendar. Though most can make changes in their asset allocation any time, investors often decide to switch investments with the new year.” That’s a cash-flow argument, in that it does not recognize the new risk-structure related to taxation that began with the new calendar year. The Roth IRA is especially valuable to long-term investors who expect the capital gains the market expects of the Internet issues, as opposed to investors who are more security-minded and happy enough to lock in bond yields at current levels.

2. Republicans have finally understood the message of the November elections as disappointment by the electorate with the way the GOP mishandled the politics of budget surplus by postponing discussion of tax cuts to this year. This year is here and for a change the finance committees of the House and Senate seem to be in accord with the budget committees, planning for a $500 billion tax cut over five years. More importantly, House Ways&Means Chairman Bill Archer is bent on cutting the marginal tax rates that enhance the risk structure in order to increase non-inflationary economic growth -- not the relatively meaningless and expensive tax changes favored by the GOP’s cultural conservatives. This morning’s WSJournal editorial “The CBO Choice” is worth reading because it shows how sensitive conservatives have become to the finer points of tax legislation -- and the importance of the director of the Congressional Budget Office. We still keep our fingers crossed that David Malpass, chief international economist at Bear Stearns, will land the job this month.

3. In a smart op-ed in yesterday’s WSJournal, Larry Kudlow of American Skandia Life ascribed the market rally at year’s end to the October 8 Senate passage of the Internet Tax Freedom Act, which mandates a three-year tax moratorium on Internet sales. That surely enhanced the desirability of the tech stocks for the Roth IRA crowd in the surge this week. Last August when I met with Senate Majority Leader Trent Lott, I urged him to get the GOP to promise a doubling of the Roth IRA cap to $4000, and to focus on it and other growth tax cuts in order to pick up seats in November. He and other Senate GOP leaders should have heeded that message.

4. In the several weeks ahead, it is in the interests of the White House to curry favor with the Republicans and the electorate, as the impeachment trial unfolds. My website Memo on the Margin has a comment on the trial today.