Purple People Vote

Well, here’s hoping that Senator Obama breaks his campaign promise to raise taxes on the wealthy, as that would likely harm an already struggling economy. Larry Kudlow points out in his article, Obama’s Pro-Growth Economic Team? that the Obama economic team is actually right of center and may indicate that he will back away from increasing taxes…

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 form 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 Ms. 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.