BWR on SOTU.

Courtesy of Vlad Signorelli at Bretton Woods Research:

We have published a new report which can be found at:
http://www.brettonwoodsresearch.com/showx.asp?articleid=6768

SOTU First Thoughts: Republicans Must Do Better


President Obama highlighted his new centrist political strategy last night, which includes support for reducing the corporate tax rate. Unfortunately, he argued that such a reduction must not increase the deficit. The President certainly does not believe in the economic power of increasing incentives for investment. In 2009, the U.S. government raised nearly $140 billion in revenue from the corporate tax. If the government reduced the corporate tax rate to zero, the resultant growth in the economy would, without question, easily pay for the government's $140 billion in annual revenue loss. The growth wing of the Republican Party must counter the White House's misconception here.

And this is why we were so disappointed with Paul Ryan's response last night. Ryan emphasized our country's ‘crushing burden of debt' that ‘no economy can sustain'. We like Ryan, but he is wrong -- economically and politically.

Research by Louis Woodhill shows quite clearly that should the long-term growth rate of the U.S. economy increase just a little bit, to say 3.9%, the federal government could easily afford its current expenditures and long-term entitlement programs.

And the GOP seems to be reverting to its old political mistake that Jude Wanniski identified in his Two Santa-Claus Theory of modern American politics, which has held true for the last century:

For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus....The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation's economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.... It isn't that Republicans don't enjoy cutting taxes. They love it. But there is something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget. Static analysis tells them taxes can't be cut or inflation will result. They either argue for a tax hike to dampen inflation when the economy is in a boom or demand spending cuts to balance the budget when the economy is in recession. [emphasis ours]

Last night could have marked a critical inflection point for the economy and the stock market if Ryan had properly countered President Obama's position on corporate taxes. Instead, he seconded Obama's concern on public finances, and thus, the Dow is up only 30 points this morning. While both parties are far from reaching a Hooverian consensus of deep spending cuts along with tax hikes in an effort to tackle the nation's debt, such rhetorical common ground makes it more difficult to achieve substantive tax reform.

If Republicans are going to focus on spending, they should, as this morning's Wall Street Journal does, focus on the difference between Keynesian stimulus programs by the government and classical economic stimulus that empowers producers in the free market to allocate capital. This was part of what the electorate demanded last November; it was not 'shrinking government' as Charles Krauthammer said last night.

The rest of the voters' message last November was a repudiation of the 2010 healthcare reforms and the Fed's mismanagement of monetary policy. Republicans must improve from here, or the political momentum they enjoyed months ago will fizzle.

Wednesday update.

In Forbes, Paul Hoffmeister urges Sen. Kyl (R-AZ) to embrace sound money as part of his pro-growth agenda.

On Asia Times, David Goldman mocks Treasury Secretary Tim Geithner’s claim that the U.S. will not devalue the dollar.

At The Kudlow Report, Dick Armey suggests big Tea Party wins will mean less corporate welfare and a sound dollar:



On Gordon Liddy’s radio show, John Tamny discusses gold, oil and the weak dollar.

At Smart Money, Don Luskin predicts higher stock prices.

Bloomberg reports inflation fears are raising Treasury bond yields.

At The Heritage Foundation’s Foundry blog, David Weinberger makes the historical case against raising tax rates in a recession, featuring this amusing clip from “Ferris Bueller’s Day Off”:



Cato’s Dan Mitchell argues against conservative acquiescence to a VAT tax.

In The Washington Examiner, AEI President Arthur Brooks analyzes the top 10 factors contributing to unemployment. Sound money doesn’t rate a mention.

In The WSJ, John Chambers and Safra Catz argue U.S. taxes on foreign income are keeping capital from being repatriated.

On CNBC, David Malpass explains how Fed policy is damaging the economy:



In the UK, Prime Minister Cameron tests Jude Wanniski's Two Santas Theory with budget austerity and tax increases.

From earlier this year in The Washington Examiner, Ralph Benko pays homage to supply-side guru Robert Mundell.

Wednesday round up.

At redblueamerica.com, janmb misrepresents Jude Wanniski’s Two Santa Claus Theory. While Wanniski did argue Republicans should cut taxes in that article, he did not advocate they spend “like drunken sailors and put it all on the national credit card.”

Larry Kudlow argues (with Dan Mitchell's help) that government salaries are part of the reason for the debt crisis.

At Wainwright Economics, John Tamny says the wealth gap is irrelevant.

At themoneyillusion.com, Scott Sumner comments on Steve Hanke's recent item on Estonia and Greece.

The Washington Post expresses surprise that markets still are willing to buy 10-year U.S. Treasury bonds at a 3.3 percent interest rate.

Contrary to conventional wisdom, most supply-siders believe deficits have less to do with interest rates than does the dollar’s value. Larry Kudlow made that point earlier this year.

Therefore, this Bruce Bartlett quote is something of a surprise:

"You can talk about the deficit until you're blue in the face, but we'll only get political traction on meaningful deficit reduction when there is economic pain being caused by the deficit in the form of inflation or high interest rates or both," said Bruce Bartlett, a Treasury Department official in the George H.W. Bush administration who recently wrote an article predicting that the U.S. government will be downgraded in less than a decade.

As Bartlett surely knows, deficits lead to inflation only to the extent monetary authorities choose to devalue the dollar to reduce the debt burden. That's a dishonest course, the stealth equivalent of a default, and it's the opposite of what Alexander Hamilton did after the War of Independence, when he committed the U.S. to repay its large debts in gold-backed dollars. The U.S. similarly committed to repay its enormous World War II debts in gold-backed dollars, which it financed at two percent.

The question is, with gold having risen for nine years and now at $1200, why aren't interest rates higher? Is it the flood of savings from the world's soon-to-be-retired, desperate for safe investments? A central bank Ponzi scheme? The zero Fed Funds Rate? All of the above?

Comments welcome.

Two-Santa Claus Theory.

Jude Wanniski's Two-Santa Theory is back in circulation.

Bruce Bartlett here.

And Nathan Lewis here.