Kudlow Has It Right: Economy, Good; Congress, Horrid

Larry Kudlow tells us in his Townhall column today why the stock market is (finally) showing some movement:

There’s good reason why the NYSE (about 2,500 stocks), the Transportation Index, and the small-cap Russell 2000 are at their all-time peaks. New inflation reports show diminished price pressures, lower tax rates have boosted business, the Fed is nearly done tightening, job-creating profits are surging, consumers are spending, and former rust-belt manufacturing industries are enjoying their best run in twenty years as they participate in the growing global economy.

….. Importantly, today’s strong stock market is also betting that investor tax-cut extensions for capital gains and dividends, the backbone of this recovery, will make it through Congress. “Paygo” legislation, which would force tax hikes to offset investor tax cuts, has been defeated. (I hold that a new Gramm-Rudman-like spending-limit approach would be much more fruitful.)

Kudlow, and the market, had better be right about the so-called tax cut extensions, or you can kiss any further market rallies good-bye (I call them so-called tax-cut extensions because in reality failing to extend would be a tax increase).

He also gives the market credit for prescience on national defense, which I believe is going a bit far.

But he’s worried about the conduct of Congress, and justifiably so:

However, the big “if” in this optimistic stock market scenario is the GOP Congress. If Republicans cannot downsize the budget, tax cuts will be in jeopardy while tax hikes may even become a threat. In the early skirmishing, the GOP Congress is flunking the budget-cutting test.

Last week, the Republican-led Senate stiff-armed President Bush’s call for belt-tightening when it adopted a $2.8 trillion fiscal 2007 budget resolution — an entitlement-filled package that is more than $16 billion higher than the president’s request. The Senate snubbed even modest attempts to slow mandatory spending programs, which Bush had targeted for $65 billion in net savings over five years. Almost all of the proposed amendments sought to increase spending.

….. GOP budget obesity is a huge problem. And it’s not just a tax threat. Politically, a big-spending GOP will demoralize its increasingly frustrated small-government conservative base. These are the folks who can carry the election in November. Without them the GOP Congress will be sunk.

Bingo.