Mitt Romney Begins to Capture the Economic Spirit

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Mitt Romney snatched victory from the jaws of defeat in Michigan by unveiling a pro-growth, 20 percent tax-cut plan and by resetting his limited-government spending cuts and entitlement reforms. In other words, he delivered an economic-growth package. It served him well.

It may not have been the only factor in his victory last week, but it put him squarely in the voter zeitgeist. And it may be apocryphal on Super Tuesday in Ohio, where he has come back to dead even after being down double digits.

Now, if former Senator Rick Santorum had stayed on economic message with his tax-cut plan, he would have swept Michigan. But he unnecessarily wandered off the reservation. Women serving in the military; JFK's church-and-state speech; the threat of ruling out contraception -- by veering in these directions he completely undermined his economic message. And he lost because of it.

The most important issue for Michigan voters was the economy, which polled 55 percent, while budget deficits came in second with 24 percent. Romney held an 18 point lead in both categories. Abortion, a proxy for social issues, came in third at 18 percent. As a pro-life social conservative I'm not here to diss the social issues. But the economy remains issue number one.

Of course, there have been improvements in the economic numbers of late. And the mainstream-media pundits are ready to hand the general election to President Obama because of it. But they're way overboard on this game.

The public knows there's a debt bomb coming from Medicare, and that this debt bomb could lead to a huge tax-increase bomb. In fact, Ben Bernanke just warned Congress that the economy could hit "a massive fiscal cliff" by January 1, 2013, as the Bush tax cuts and the payroll tax cut expire. This could knock GDP growth down to 1 percent.

And even with the recent economic improvement, which is threatened by surging oil and retail gas prices, the economic recovery still ranks as one of the lowest on record. GDP growth averaged 2.5 annually over the past two and a half years. Compare that to the Reagan recovery average of 6 percent growth over the same period and a postwar average of 4.6 percent.

I'm not here to badmouth the improving economy. I'm glad of it. It shows the resilience of free-enterprise business. But I am here to question the new conventional belief that it hands the election to Mr. Obama. It's going to take more than that. It's going to take an economic program that can resonate -- such as the revitalized Romney plan.

When former President George W. Bush cut taxes, he always talked about putting more money in people's pockets. That's a demand-side argument. But when Romney delivered his tax-policy speech at the Detroit Economic Club a week ago, he talked about after-tax incentives on the next dollar earned. And he correctly noted the incentive effect of allowing Americans to keep more of what they earn after-tax. This addressed a key question among conservatives: Does Romney get the incentive model of growth? The answer is yes. Romney's 20 percent tax cut brings him back to the Reagan supply side.

His tax-cut plan is not perfect. Instead of retaining all six income-tax brackets, he could have produced a modified flat tax of only two or three brackets, as Santorum has (though the candidates each feature top rates of 28 percent). But Romney also cuts the corporate tax to 25 percent, repeals the alternative minimum tax, abolishes the death tax, and ends the repatriation tax on the foreign earnings of U.S. companies that are brought back home.

It's not a perfect plan, but it's good. It avoids Santorum's industrial-targeting pitfall of a zero manufacturing tax. And it avoids Santorum's expensive tripling of the child tax deduction, which is social policy. When priced out correctly, it would block Santorum's reduced marginal tax rate.

Romney is also besting Santorum on entitlements. GOP budget meister Paul Ryan has praised Romney's entitlement reform for Medicare and Social Security, which would extend age eligibility and create a hybrid of free-market choice and benefit limits to the existing Medicare system. Romney has divulged details of an entitlement reform, whereas Santorum has not.

To be sure, there's more agreement than disagreement between Romney and Santorum on the fiscal issues. Both men are pro-growth. Both are talking about unleashing American technology for the energy revolution. And both own policy slates that are vast improvements over President Obama's big-government, tax-the-rich vision. Romney and Santorum oppose the entitlement state. And each favors the American tradition of opportunity and success.

So it really boils down to a matter of emphasis. My praise for Governor Romney is that he is capturing the economic spirit. My worry about Mr. Santorum is that he is not.


Larry Kudlow is a senior contributor at CNBC, and also co-author with Brian Domitrovic of the new book JFK and the Reagan Revolution: A Secret History of American Prosperity.  

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