Greg Valliere: The U.S. Political Outlook

Greg Valliere

Three questions dominate the political landscape, according to Greg Valliere, and the big one is what will happen to the Bush tax cuts.  Valliere is the chief political strategist at the Potomac Research Group, and he was a keynote speaker at the Schwab IMPACT conference on Wednesday.  

Despite significant challenges, Valliere said the fundamentals in Washington are “better than they have been in several years.”

We previously reported on Valliere’s forecasts in January 2009, when he predicted (correctly) that the economy would grow in the second half of that year, and (incorrectly) that healthcare reform would be tabled.

The first question Valliere explored was whether there is any “medicine” left to stimulate the economy.  He said markets have already factored in the likely results of the mid-term elections, and he offered an analysis of the post-election fallout.  He also speculated on the fate of the Bush tax cuts.

A double-dip recession, Valliere said, has perhaps 15-20% likelihood, “but we are out of ammunition” to revive economic growth:

No "shock and awe" will be announced at next Wednesday’s Federal Reserve meeting, he said.  Most likely, the Fed will do a “little more” quantitative easing.  There is great dissent within the Fed over the possible benefits of further rate reductions.  The Fed will keep Fed Funds Rate at zero for at least another year.

Additional government spending is now “radioactive,” he said, and nobody wants to endorse it.  TARP, introduced and supported by Republicans, is now viewed as “wasteful and immoral” by both parties.  TARP and the stimulus are considered failures, Valliere said, and this will be a dominant political theme.

The Bush tax cuts will be extended before Christmas, but that is not a new economic stimulus, he said; it just avoids a negative one.  The economy would have to dramatically weaken before support for further tax reductions emerges, and if so it would be a payroll tax cut.

“We better hope we don’t have a double-dip recession,” Valliere said, “because there’s not much Washington can do.”

There are policy options that give him cause for optimism, Valliere said, and they depend on two big factors – the election results and the likelihood of predictability on taxes.  If things work out as he hopes they will, Valliere said it will get businesses to “loosen their wallets.”