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 bailout 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 Mr. 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 Ms. 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 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.
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