Geithner, Summers And Romer

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Geithner, Summers And Romer
Brian S. Wesbury and Robert Stein, 11.25.08, 12:01 AM EST
What does the Obama team have in store for us?

Word came in the final hour of trading on Friday that President-elect Obama would tap New York Federal Reserve Bank President Timothy Geithner to be his Treasury secretary. One hour later, the Dow Jones industrial average was up roughly 500 points.

Part of the spike was due to the removal of uncertainty, but we think part of the gain was also due to whom Obama picked. As president at the N.Y. Fed, Geithner is already completely up to speed on the issues surrounding the financial market turmoil rocking the U.S. He will need no "on-the-job" training. In addition, the new Treasury secretary is known for his excellent managerial skills and humility, a rare combination.

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Yahoo! BuzzPerhaps most importantly, Geithner will enter his new job with a comprehensive understanding of how the department functions, having worked his way up from being a mid-level civil servant in the early 1990s under President Bush to the very top international position at Treasury in the late 1990s under President Clinton.

Also, former Treasury Secretary Larry Summers will have a top economic position at the White House at the National Economic Council. This role keeps him in the West Wing and allows him the freedom to take over at the Fed when Bernanke's term expires in January 2010.

In addition, President-elect Obama has chosen Christina Romer to be lead the Council of Economic Advisers. Romer is a centrist economist and often leans a bit to the right on fiscal issues. For example, her research suggests that raising taxes reduces economic growth if the extra revenue is spent rather than used for deficit reduction. (We wonder, also, whether she's a supply-sider. Here are three quotes from two recent working papers, from November 2008 and July 2008: "Tax increases appear to have a very large, sustained and highly significant negative impact on output"; "tax cuts have very large and persistent positive output effects"; and tax cuts do "not have any clear impact on revenues at horizons beyond about two years.")

Perhaps Romer's appointment had something to do with our favorite leak over the weekend, which was that the incoming economic team is seriously considering postponing any tax hikes until 2011. No tax hike on dividends, no tax hike on capital gains, no tax hikes on productive entrepreneurs. This is a huge step in the right direction, and the new team deserves credit for flexibility.

However, it is reported that the Obama administration is pushing a new stimulus package that includes large increases in infrastructure spending and other government programs with the goal of generating 2.5 million jobs. Here, we hope they are very careful. Extra government spending on needed repairs to public infrastructure--roads and bridges, for example--can help raise our standard of living. But creating jobs is another matter.

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Every dollar of extra government spending has to come from the pocket of someone else who would have spent the money. True, the private sector may not spend that money in the short run given recent "risk-aversion hysteria," but we sense that much of the extra government spending will occur long after the hysteria has passed. For example, we highly doubt that more than one-third of any increase in authorized transportation spending would actually lead to outlays in the next 12 months.

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Moreover, we fear federal rules will require paying above-market, union-level wages, meaning fewer jobs are created than could be. If the new economic team is really interested in maximizing employment--and taxpayer value for the money--it needs to review the Davis-Bacon rules that keep wages on public projects artificially high. The goal of 2.5 million jobs also runs counter to a long extension of unemployment benefits, which would undermine the incentive for unemployed workers to quickly accept new positions.

Ultimately, sustained economic growth and job creation must come from the private sector. If there is anything that economic history has taught, it is that.

Brian S. Wesbury is chief economist, and Robert Stein senior economist, at First Trust Advisors in Lisle, Ill. They write a weekly column for Forbes.com.

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