In a spirit of Thanksgiving, I’d like to give thanks for Obama’s appointment of Christine Romer to lead the Council of Economic Advisers.  Romer, an economics professor at Berkeley, has published papers that conclude “tax increases are highly contractionary” because of “a powerful negative effect of tax increases on investment.”  As if that weren’t enough music for my ears, there is this one: “In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.”
 
Common sense would seem to help one reach those same conclusions.  When an employer is deciding whether to hire or keep an employee, the increase in revenue from hiring the employee must be weighed against how much it costs to have the employee.  When the government decides to take away more of the revenue that is gained from hiring the employee, the employer will either have to pay the employee less or not hire the employee at all.  It is ludicrous to think that higher taxes won’t have an effect on the expansion of the economy.
 
Economic growth is driven by investment, not consumption.  While consumption is necessary for growth, it is not sufficient.  Churning the same money over and over does not create growth.  Investment that creates productivity creates growth because it makes our money go further than it can now.  This is why Obama’s tax plan is bad for growth.  He wants to take more money away from the investors (the top 5%) and give to consumers (the ones who pay no taxes already).  It is an exchange of investment for consumption, of growth for stagnation, a bigger pie for a smaller piece.

Last 3 posts by Taylor

• Obama's Second Act - Very Very Scary - July 16th, 2010
• No Politics in the Goldman Sachs Enforcement Action? - April 20th, 2010
• Moral Relativity Reigns...except - April 9th, 2010