James Pethokoukis

My pal Larry Kudlow had a great chat with Tim Pawlenty last night on CNBC. And he pressed T-Paw hard on a lack, so far, of a detailed pro-growth agenda:

KUDLOW: Reagan had flatter tax rate reforms. … Let’s have new incentives.  Let’s stop the double tax on capital gains and dividends and estates and savings and investment. Where are the business tax cuts? We need specifics governor. You’ll turn people on with specific growth measures but you don’t have them yet.

PAWLENTY:  Larry, I think have been in the race for all of three business days now. Nonetheless, I agree with what you said. I’ve talked publicly and repeatedly … whether it’s corporate rates, whether it’s individual rates, whether it’s dividends, whether it’s capital gains, whether it’s the death tax, whether it’s capital equipment … we need to take all of those rates and reduce them as far as we can. We need to simplify the tax code, make it pro-growth, make it more transparent and make it friendlier for investment and the deployment of capital.

And then Larry asked him if he was in favor of a 15-17% flat tax. Pawlenty’s response: “Of course, I support a flatter tax rate. I don’t know if we can get to a flat tax in one leap, but moving in a flatter more transparent direction, absolutely.”

Me:  By not pushing bold reform on taxes from the outset, Pawlenty is in danger of negotiating against himself. Now is the time for big ideas. Beyond that, Pawlenty did talk coherently about a strong dollar — maybe creating some sort of commodity link — and applying Six Sigma to the federal government, which is an intriguing notion.

It’s still early, but it seems to me that with current and potential  GOP 2012 candidate all saying kind of the same thing about Obamacare and debt, taxes are a way for Pawlenty to distinguish himself. He’s not going to overwhelm people with his personality, so why not do it with bold ideas, as Kudlow suggests?

One of my favorite blogs, The Supply Side, has a great round-up of an NY conference supply-side economics:

Regarding substance, here are a few notes:

Lindsey predicted the end of fiat money by the end of the decade. He also observed that congressional Democrats lost the House because they lost seniors. He believes Nancy Pelosi plans to win them back in 2012 by aggressively attacking GOP proposals to cut entitlement costs.

Kudlow disputed that the budget deficit represents a “red menace” (Indiana Gov. Mitch Daniels’ description), arguing slow growth was the bigger threat. He noted that one can almost plot the rise of American power in recent decades with gold coming down, and its decline with gold’s rise.

Lehrman explained that the U.S. will never get fiscal deficits under control without monetary reform through a convertible dollar, because the world sells us its goods, then uses the dollars buy up our debt.

Laffer was typically optimistic, saying supply-siders are still winning the tax cut argument and that the rate of growth over the next three decades will exceed the 1980s and ‘90s.

Prof. Mundell argued the route to stronger U.S. growth is making the Bush tax cuts permanent and cutting the corporate tax rate to 15 percent. Explaining his view that exchange rates – set by the U.S. Treasury not the Federal Reserve – transmit inflation and deflation to the domestic economy, he suggested the biggest threat to recovery isn’t inflation but a significant rise in the dollar against the euro later this year. Such a rise would cut off the already-weak expansion and magnify America’s debt crisis.

Or so says Ed Yardeni, who puts the current economic situation in a philosophical perspective:

We are all Austrians now. Over the past few weeks, in Los Angeles, San Francisco, Sacramento, New York City, and London, I’ve run into more and more institutional investors whose economic and financial views either knowingly or unknowingly reflect the influence of the Austrian School of Economics. I am in Zurich today and Geneva tomorrow.  … How do you know if you are an Austrian? Here is a simple test. Answer yes or no to the following question: “I believe that this will all end very badly.” If you agree, then you are probably worried that all the government policies that rescued us from a depression in 2008 and 2009 only postponed the coming wipe-out of debt and the collapse of asset prices–and will actually make the inevitable calamity even worse.

I share these concerns, but I believe that Globalization will save us from such an awful fate. The end of the Cold War marked the end of the greatest trade barrier of all times. The resulting proliferation of free trade liberated billions of people around the world from their lives of quiet desperation. Standards of living are rising rapidly, especially in emerging economies, as prosperity displaces subsistence. Previously immiserated people are less miserable. They are earning enough so that they can both save and have more discretionary income to improve their material well-being. In other words, Globalization is stimulating more growth in incomes, saving, and consumption. Such growth is the best antidote for the grim Austrian prescription of debt deflation.

Larry Kudlow has a strange but oh-so wonderful thought:

The president’s jobs proposal includes a zero capital-gains tax-rate for small-business investors, and full cash-expensing for small-business investment in plant and equipment. These are potentially powerful incentives for the job-creating small-biz sector. They may only last for a year or so, depending on the mark-up. But they are good things in and of themselves, and they suggest that Obama is aware of incentive effects on economic growth.

Sure, the new spending is all wrong. That won’t create jobs, and will only bloat the deficit. But Obama’s language was on the supply-side, even in addition to the tax-cut proposals. He said growth will bring in revenues to cut deficits.

And there’s more. CNBC is reporting that the administration will dedicate $175 billion of TARP money to deficit reduction. This will leave about $140 billion of unused TARP money for spending — or for incentive tax cuts.

Now just think what would happen if a zero capital-gains tax rate were applied economy-wide for all investors. Or if Obama’s new supply-side thinking leads him to leave the cap-gains tax rate right where it is at 15 percent. Are the markets sniffing out a more centrist, pro-growth Obama? The dollar is rising, and gold is falling, so that might be the case. Growth solves inflation, and it can restore King Dollar to its throne. Growth can absorb Ben Bernanke’s free-money balance-sheet cash creation.

Is it possible that we are looking at a supply-side solution to the economy and the deficit?

From Gary Becker:

My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital. Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.

Of course, tax cuts at this moment would add to the deficit and increase the size of the government debt at a time when the debt has already grown rapidly. Tax cuts may also take time before they raise investments and jobs. On the other hand, tax cuts that add significantly to the growth rate of GDP will have only modest, and possibly even negative, effects on the ratio of the debt to GDP while they increase investments and the demand for workers. This seems to me to be an attractive way to approach solutions to the unemployment problem at the jobs summit this Thursday.

From the NYTimes:

“I want us to do everything we can to create the conditions for new, stronger growth,” Mrs. Merkel said Tuesday, laying out her agenda in a speech before the Bundestag in Berlin. “Without growth, there will be no investment. Without growth, no jobs. Without growth, no money for education. Without growth, no help for the weak.”

Indeed, a few prominent German politicians have started echoing the supply-side arguments propounded by former President Ronald Reagan and his economists in Washington in the 1980s and carried forward by the Republican Party ever since.

“Particularly because the coffers are empty we need fair taxes to jump-start the economic engine so that more money flows into state coffers,” the head of the Free Democratic Party, Guido Westerwelle, said in an interview with the German newspaper Bild.

If Germany can do it, why not America? More evidence of the wonder-working power of tax cuts, this time from Robert Barro and Charles Redlick:

The effects of tax rates on GDP growth can be analyzed from a time series we’ve constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.

For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

Me: Along the work of Christina Romer, now head of the CEA, powerful evidence that tax rates matter — a lot.