Supply-Side Obama?
Trust but verify.


Larry Kudlow

The past is not always a prologue to the future. But looking at some of the big winners and losers of 2010 does provide some strong hints of a positive 2011.

The biggest winner last year was the Tea Party, which shellacked President Obama in the election. Mr. Obama becomes the biggest loser. And the economy and stock market will be the beneficiaries.

The elections were the first major step toward restoring free-market capitalism and rolling back big-government controls, planning, and spending. This is a money-politics issue. Stocks roared 20 percent during the second half of last year, as markets sniffed out the huge political change. Post-election, stocks also had a big move, finishing the year at better than two-year highs — going all the way back to pre-Lehman Brothers.

Sure, there were important economic factors involved. Europe didn’t fall apart. The dollar didn’t collapse. And better U.S. economic numbers started coming in. (Double-dip bears also were big losers last year.) But rising political confidence helped, too.

The emergence of Tea Party free-market populism — what I call Reaganomics 2.0 — is hugely bullish for stocks and the economy in 2011.  Recall that in mid-December the Bush tax rates were extended and the earmarked omnibus-spending monstrosity was withdrawn. These were bullish events for producers and investors that may have pulled the curtain down on Obamanomics.

And now it’s fascinating to watch the money-politics dynamic continue. On a recent Sunday talk show, top Obama economic advisor Austan Goolsbee sounded like a Reagan disciple. “You’ve got direct incentives for companies to invest in the country,” he said. And he went on to describe a new Obama economic model that sounds suspiciously supply-side: “The focus has got to be on investment, on exports, and on innovation. . . . The president is firmly in that — planted in that camp — and we are going to grow our way out of this.” (Hat tip to economist Don Luskin.)

As noted, Obama agreed to freezing top marginal tax rates on all personal incomes and on capital-gains and dividend investment. But now there’s major talk that the Obama budget will include a sizable corporate tax cut in return for ending unnecessary loopholes and deductions. Business has been clamoring for this. Hopefully it will include a territorial tax provision to end the double tax on foreign earnings. Equally important, the100 percent business-expensing provision of the recent tax compromise might be made permanent.

Reagan couldn’t have said it any better. Surging business investment from a lower tax cost of capital and higher investment returns is a surefire job creator.

Of course, as the Gipper also would say, trust but verify: We’ll have to see the fine print of any such Obama proposal. Crucially, corporate tax reform must be revenue neutral, not a tax hike. But at this moment I am willing to trust the U-turn of Team Obama toward an incentive model of growth.