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October 6th, 2010 12:45 pm
The ‘Congressional Effect’ Strikes Again

Earlier, CFIF profiled Eric Singer of Congressional Effect Management as the foremost proponent of avoiding political risk by investing in the stock market only when Congress it out of session.  In his own commentary, Singer blasts Speaker Nancy Pelosi’s (D-CA) do-nothing-right caucus for failing to address the budget crisis they created:

As the nation watches in horror as its debt begins to grow beyond the point of no return, the Congressional Budget Office continues statically scoring all legislation.

It assumes that if tax rates are raised, taxes received by the Treasury will go up proportionately. It disregards the impact of the extra 10 billion hours it now takes to figure out our taxes.

It ignores the fact that in the face of 1,400 new regulations from health care and financial overhauls (Sarbanes-Oxley had only 16), virtually all businesses will slow down and hoard cash as they try to understand what the new rules might be.

Static scoring assumes that the uncertainty created by the presence of new laws and new regulations does not affect behavior or taxes collected. Static scoring assumes some sucker will always be available to buy our debt no matter how much we waste. Worst of all, it assumes no one will change behavior to reduce taxes.

Every assumption of the static scoring model is demonstrably false. Higher tax rates usually result in lower revenues as people change their actions to reduce their tax burden. This will certainly happen if some or all of the Bush tax cuts expire and the economy continues to sag as a result. The time, cost and restraints of new regulations can choke businesses.

The kind of rampant uncertainty caused by the explosion in federal regulations will continue to slow America’s economic recovery.  Riffing on Singer, maybe after passing CFIF’s ‘One More Vote’ initiative, the country can pass a constitutional amendment to limit the amount of congressional work days.

H/T: Investor’s Business Daily

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