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Lawrence Kudlow
Lawrence Kudlow
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Obama's Pro-Growth Economic Team?


When President-elect Obama had a chance to squash the tax-hike threat once and for all at his news conference Monday, he took a pass and let the question linger for another day. But his new economic Cabinet appointments strongly suggest there will be no tax hikes next year.

Stocks, for one, like what they're seeing from Obama's latest Cabinet selections. On Friday, Obama announced Tim Geithner will be his Treasury man, and on Monday he made Larry Summers his White House economics tsar and named Christine Romer to the top spot in the Council of Economic Advisers (CEA). Stocks rallied 900 points across this stretch.

That's not the end of the stock story. Markets also like the new super-TARP government plan to bail out Citigroup, which effectively guarantees the banking system with a massive insurance-like policy. But markets may also sense a little pro-growth good news in the Obama policy mix.

When asked about tax hikes on Monday, Obama said the debate is between repeal and not-renewal. In other words, repeal the Bush tax cuts in 2009, thereby raising tax rates on capital gains and successful earners, or wait until the Bush tax cuts expire at the end of 2010. Investors want to hear the latter, and Obama said his team will make a recommendation.

Here's my thought on his team. Summers, Geithner and Romer will all recommend no tax hikes in a recession. Maybe for Keynesian reasons; maybe a nod to supply-siders. Obama talked about a liberal-conservative consensus. But what's especially encouraging is the appointment of Romer, who easily could serve as CEA head in a Republican administration (just like Geithner could have been McCain's Treasury man).

About a year and half ago, economist Don Luskin sent me a long article about taxes by Christine and her husband David Romer, who were writing for the National Bureau of Economic Research. From the introduction: "The resulting estimates indicate that tax increases are highly contractionary. ... The large effect stems in considerable part from a powerful negative effect of tax increases on investment."

Later in the article, the Romers write, "In short, tax increases appear to have a very large, sustained and highly significant negative impact on output."

That's what makes the Romer appointment so interesting. In fact, there is no question that Obama's economic team is right of center.

All three are market-oriented. They're also pro-free-trade. Hopefully Summers and Geithner maintain the Robert Rubin King Dollar policy of the Clinton years. And if Romer can stop tax hikes, that will help the greenback even more.

At a minimum, both Romer and Geithner could have served under Gerald Ford or George H.W. Bush. But they may be more pro-growth than that. Romer's study of the damage of tax hikes on the economy and her emphasis on investment are right on target. In a New York Times story, a former Treasury colleague of Geithner's says, "He's no liberal." As for Summers, while he has been mau-maued by Democratic feminists and some of the unions, he is a tough, clear-headed thinker who has for years tried to merge Keynesian and supply-side policies. No mean feat.

Now here's the rub: all this talk about a $700 billion stimulus package. I hate to be the one to pull the plug, but government cannot spend our way into prosperity. The wish list of Democratic spending initiatives includes short-term tax rebates, massive new transportation bills, even more education money, exotic green-technology spending, a big-government embrace of health care and heaps of cash for UAW-Detroit carmakers. None of that will stimulate economic growth.

Economist Paul Hoffmeister has it right: We need to invigorate incentives to produce and invest. Let me take it even further. We need to revive the dormant animal spirits, which have been beaten down by a brutal bear market in stocks, the ongoing housing slump and all the myriad blockages to credit availability. A bunch of new spending won't do the trick. Lower tax rates will.

Government policy must make it clear that new successes will be handsomely rewarded. This will be Obama's greatest challenge. While he may not raise taxes in 2009 — a good thing — he hasn't yet come up with a new bolt of electricity that will hardwire the serious risk-taking that lies at the heart of free-market capitalism. Right now, the missing electric bolt is lower tax rates and greater rewards for new risk investment by investors, successful earners and business.

On the plus side, however, Obama talks optimistically. That's good. He says he's hopeful about our future. And he says he is confident that American spirits will be resilient in this difficult time. That's Reagansesque, Kennedyesque and FDResque. But while FDR's big spending and regulating prevented economic recovery, John Kennedy and Ronald Reagan opted for across-the-board supply-side tax-rate reductions to get America moving again.

To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at



1 Comments | Post Comment
Sir;... I have a simple question for you... How are you going to make capitalism work without consumers??? All this nonsense about supply side or Keynsian economics is bunk... If our whole economy is fired by credit, and not enough is being produced or sold because people do not have the wages, or the wealth to trade for consumer products, then where is your economy??? I will grant you that Mr. Obama is building a cabinet out of the conservative rift faft of the past... Maybe they can explain what they don't understand, that a credit dependent economy is a house of cards... I will grant you that credit is a good way to suck the wealth out of a people, a nation, a government, a society, and even the world; and that people will find themselves driven to slavery by people in distant offices having no need to even offer them a good morning... But you must grant me, that at the end of the day the figures have got to add up, that if you loan to everyone to make sales, -that people can pay back their loans, and still have some life in the balance... For the national debt, and for private debt, all lives must be put on hold... No repairs can be made, and no laws can be enacted that require funding, -nothing taking cash can go forth until the principal is paid down... And we have done this before, and if there is no alternative other than living in the past; we will do it again... But think of the danger... Think of the danger of doing what never worked in the past for any society, of using too much credit with not enough equity or income... Mr. Obama is making a mistake stepping back rather than forward... I think he will limit criticism if he has the opposition in the cabinet...But if he is looking for new ideas on how to make the old failure of capitalism work, he should save his trouble and get into tomorrow in a hurry...Thanks...Sweeney
Comment: #1
Posted by: James A, Sweeney
Sun Nov 30, 2008 10:56 AM
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