GDP Shock Could Shift GOP's Political Fortune

The economy's resilience could let Republicans grab the "prosperity party" mantle.

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It's news that'll surely get overshadowed by the Federal Reserve rate cut, but the 3.9 percent third-quarter report on gross domestic product that came out a few hours earlier could have huge political ramifications. The report shows the economy is continuing to shake off the housing slump with amazing resilience. Back out the terribly weak housing numbers, and the rest of the economy grew at around a 5 percent clip.

Yes, the economy may slow further but perhaps not enough to substantially boost the unemployment rate. Indeed, the new ADP private-sector job report hints at total net new job growth of around 125,000 for October. And don't forget that incomes continue to grow. Disposable personal income grew at a 4.4 percent clip last quarter and has averaged more than 6 percent a year since 2004.

Instead of recession, we may be closer to an economic reacceleration that could allow the GOP presidential candidate in 2008 to better argue that the Republicans and not Democrats are really the "party of prosperity," the party that kept the economy humming despite the housing slump with two rounds of tax cuts in 2001 and 2003. The GOP nominee would then surely argue that not only do we need to extend the Bush tax cuts but we must cut some more taxes as well to better compete with rising Asia.

Helping this argument is House Ways and Means Committee Chairman Charles Rangel's package to reform the alternative minimum tax, which gives the impression that repealing the Bush tax cuts would be only the beginning for Democrats, who need revenue to pay for new healthcare and education spending. What's more, Republicans could argue that higher capital-gains taxes—which Rangel proposes—would hurt the stock market, the very thing that is offsetting the decline in people's net worth caused by the housing slump.

Again, as top political analyst Greg Valliere noted earlier this week, the AMT bill by Rangel "was a chilling reminder of the Democrats' fervor to raise taxes—and despite polls showing the public favors higher taxes on 'the wealthy,' this issue could become an albatross for [Hillary] Clinton."