“The purpose of economic policy is growth, jobs, and prosperity,” supply-side founder Art Laffer told me today. As such, Laffer has endorsed Newt Gingrich and the Gingrich 15 percent flat-tax plan, which includes the 12.5 percent corporate-tax reform. “It’s nothing against the other candidates,” Laffer said. “But Newt’s plan is right, and therefore endorsing him is the right thing to do.” Laffer is concerned with the fact that Mitt Romney has no tax-reform plan, and he worries that Romney doesn’t believe in the incentive model of economic growth. “He’s a good man,” Laffer said. “And he would make a good president. But he needs a bold tax plan.”
Art Laffer believes the Gingrich plan would help jolt the economy to 4 or 5 percent growth. And he also is impressed that Gingrich has been talking about King Dollar on the campaign trail along with his supply-side tax strategy.
Was Gingrich actually one of the original supply-siders? Well, no. But he did hang around with Jack Kemp and others during the early 1980s in what became known as the Opportunity Society. So Newt’s bona fides are there.
Laffer also is impressed with Gingrich’s bipartisan abilities. He noted that Newt worked with Bill Clinton during the “Contract with America” 1990s to get welfare reform and a lower capital-gains tax.
What about the inevitable criticism from Obama that a flat tax is a huge tax cut for the rich? “Listen,” Art told me. “We want to make the poor, rich. And you can’t love jobs while hating job-creators.”
Whether Gingrich’s supply-side bus tour and Art Laffer’s endorsement help him in the remaining days of the Iowa campaign remains to be seen. Polls suggest that Newt is a stock still looking for a bottom. His campaign to use federal marshals to haul judges before Congress is way off the economic-growth message and did him a lot of damage. That’s what the latest polls suggest.
Now, if Gingrich can stay on message, and stick with supply-side solutions for growth, jobs, and prosperity, he could still bounce back over the next five days. But he must be disciplined and stay on message.
While Europe still struggles with its debt crisis, things are moving in the right direction in the United States and China, Bob Doll, Chief Equity Strategist at BlackRock, told Larry Kudlow Monday. And he thinks cyclical stocks will reap the benefits.
According to him, a few months ago, “the U.S. was heading into a recession, Europe was falling apart, China was going to have a strong landing and we had a lot of tightening going on.”
Now, the U.S. economy is showing a little growth and China is “a little less bad, maybe eventually good,” Doll said. “I think cyclicals will benefit.”
Stocks tumbled Monday, with the Dow dropping 163 points, after investors soured on a European Union plan adopted last week to enhance fiscal discipline in the euro zone in the hopes of quelling a two-year-old debt crisis.
There will be days like this when the market doesn’t think Europe can rescue its banks in time, Doll said. But he pointed out that it is not a “one way street.” And despite the volatile market, he thinks things are looking a little better.
“I think we are better off today than we were a week ago, but we’re still not where we need to be,” Doll said.
He also added, what’s happening in China is important to the global economy, noting that China’s inflation rate in November fell to the lowest level in more than a year.
“This is a step in the right direction that should allow more reserve requirement reductions.”
Following the GOP debate that nearly the whole world watched on Saturday night, the president on Sunday made it very clear that he will not back off his class-warfare vision in the coming year. Obama told Steve Kroft on 60 Minutes that middle-class inequality will be his big theme, and that somehow successful earners, investors, and small-business owners are to blame.
The president said that while fat-cat incomes went up 200 to 300 percent over the last few decades, middle-class incomes didn’t grow. This is not true, according to James Pethokoukis, whose blog posts citing various studies show that real median income rose at least 40 to 50 percent.
In any case, whatever the exact numbers, it’s still a mystery to me why successful people getting ahead cause anybody to fall behind. The Jack Kemp idea was always to foster a rising tide that would lift all boats. How can this happen if we penalize success and raise top tax rates on work and investment to 50 percent or more? That’s a mystery.
I should think, in a system of democratic capitalism, that more millionaires are a good thing. Show me a system of redistribution, and I’ll show you a system of economic stagnation.
Elsewhere in the interview the president said he did not overpromise on the results of his stimulus package. But actually, according to the original February 2009 stimulus documents, today’s unemployment rate should be close to 6 percent, not 8.6 percent. The president is now backing off by saying economic recovery is a long-term project that will take more than one term and more than one president.
By the way, Obama told the Today Show’s Matt Lauer in February 2009 that if he doesn’t “have this done in three years, then it’s going to be a one-term proposition.”
Which leads me to this thought regarding the GOP race: Since we basically know what Obama’s vision will be, which candidate will be better at besting Obama and his vision?
It’s going to be a battle between FDR’s 1930s and Ronald Reagan/Jack Kemp prosperity optimism.
It’s now just 29 days until voters head to the polls in Iowa. There's a clear new front-runner in the GOP race for president. The latest in national Gallop poll shows former House Speaker Newt Gingrich soaring to a 15 point lead over Mitt Romney, 37-to-22. Ron Paul and Rick Perry are trailing in single digits.
Joining me now for a first on CNBC interview is the aforementioned GOP front-runner, Newt Gingrich.
Mr. Speaker, welcome. We appreciate it very much.
Mr. NEWT GINGRICH: Thanks. It's great to be here, Larry.
KUDLOW: I want to ask you about Barack Obama on the campaign trail today, or whatever trail he's on. He's pushing his temporary payroll tax cut in order to have a permanent increase on millionaires and billionaires. And he says Republicans who oppose this are discredited, "you're-on-your-own style of economics." You're-on-your-own style of economics.' What is your response to that?
Mr. GINGRICH: I think we all have to recognize that the president is a student of Saul Alinsky. He represents a hard-left radicalism. He is opposed to free enterprise. He is opposed to capitalism. He's opposed to virtually everything which made America great, and he keeps using wild rhetoric that is simply false. I happen to favor keeping the tax cut because I like tax cuts.
KUDLOW: Why is that, though? That's a--you want to finance by higher taxes on millionaires?
Mr. GINGRICH: No. I want to finance it by cutting government.
KUDLOW: Well, that's what they want. They want to finance it with higher taxes on millionaires.
Mr. GINGRICH: But that's--but that's because--look, they know they want higher taxes on millionaires, they just need to know what this week's argument is. But they know what the answer is. My answer is government's too big. We don't have a problem of being undertaxed, we have a problem of being overspent. And so I would cut a tremendous amount out of the federal government. And I would--one of the things that we've developed with Peter Ferrara's help is a block grant program. There are 185 different federal programs to help the low-income American, 185 separate bureaucracies. Put them into two or three block grants, cut out all the federal bureaucracy, send it back to the states. You save hundreds of billions of dollars. The people at Strong America Now have a program on applying lean six sigma to the federal government. You can save, they believe, $500 billion a year through better government.
So my attitude is, I like the lowest possible taxes. If the Democrats want to give me a tax cut on working Americas by--on the Social Security level, fine.
KUDLOW: Yeah, but, Newt Gingrich, I'm going to challenge you on that. You were a close friend and associate of my mentor Jack Kemp.
Mr. GINGRICH: Right.
KUDLOW: We never believed in temporary one-yearlong tax cuts.
Mr. GINGRICH: Right.
KUDLOW: Whatever. They're just rebates. We believed in lower marginal tax rates which would improve after tax incentive to work and invest.
Mr. GINGRICH: I do, too.
KUDLOW: Are you going to sell me that this temporary one-year cut, which did nothing last year except waste money, is going to do nothing this year? Why are you so--why do you favor it?
Mr. GINGRICH: Look, I don't think...
KUDLOW: Why aren't you out there asking for pro-growth tax reform...
Mr. GINGRICH: I do.
KUDLOW: ...across the board?
Mr. GINGRICH: If you go to newt.org and you look at the things I recommend...
KUDLOW: Ah.
Mr. GINGRICH: ...you'll see lots of stuff I favor that's exactly what you believe in. All right? And I like pro-growth tax cuts. Listen, I'm for zero capital gains tax.
KUDLOW: Mm-hmm.
Mr. GINGRICH: I'm for abolishing the death tax. I'm for 100 percent expensing for all new equipment. I'm for a 12 1/2 percent corporate tax rate. I'm for an optional 15 percent flat tax on the--on the Hong Kong model. So I'm happy to match--you know, I was with you and Wanniski and Laffer and Kemp when this game started.
KUDLOW: Mm-hmm. That's...
Mr. GINGRICH: But, politically, psychologically, middle-class Americans sitting out here going, `OK, you don't want--you don't want to repeal the Bush tax cuts. You want to keep all those tax cuts. You say don't, don't let them go back up. But now we're going to let taxes go back up on every single working American.' I don't think psychologically you can make that case.
KUDLOW: All right.
Mr. GINGRICH: And so--and so I'd rather say to every single working American, `Not only am I with you, I want to pay for it by cutting out government waste, unlike Obama.'
KUDLOW: But the GOP has got to make that clear.
Mr. GINGRICH: Yeah, exactly.
KUDLOW: I mean, they really have to make--now I want to ask you a related question. I want to stay with President Obama for second. You can see with clarity on the campaign trail, and including this tax proposal which is about raising tax rates on the rich, is the whole election in 2012--if you're the candidate or whoever is the candidate against Obama, is it going to be about class warfare? Is it going to be about the 1 percent vs. the 99 percent?
Mr. GINGRICH: Absolutely.
KUDLOW: And what's your response? How will you rebut that?
Mr. GINGRICH: This is going to be the finest exercise in self-government in your lifetime. We're going to have the candidate of food stamps, the finest food stamp president in American history in Barack Obama, and we have a candidate of paychecks. And I'm going to make a simple case. You want class warfare, fine. You're going to get stuck on food stamps because it's going to kill jobs. You want really high tax rates? Fine. You're going to get stuck on food stamps because it's going to kill jobs. You want to watch America decay and China become the leading country in the world? Obama's got a model for getting you there. It's called Sal Alinsky's entire book.
Now, would you like to create jobs? The kind--I want to get equality by bringing people up. He wants to get equality by bringing people down. You know, Reagan use to have this great line about the British worker who stood by the road with his son or daughter, and a man goes by in a Rolls Royce, he says, `Someday we'll get him out of that car.' American worker stood by the side of the road with his son or daughter. A Cadillac went by and he said, `Someday you'll buy that car.'
KUDLOW: Ah, right.
Mr. GINGRICH: So I want to be the guy who says, `I want to help every American have a better future.' He wants to make sure that he levels Americans down so we all have an equally mediocre future.
KUDLOW: And yet, he is now calling himself a follower of Theodore Roosevelt, Teddy Roosevelt. And you have called yourself a follower of Teddy Roosevelt. And I'm trying to figure out--I know what his message is. Roosevelt did want to raise taxes on the--Roosevelt was a government activist. He was a regulator.
Mr. GINGRICH: Sure.
KUDLOW: But you're not. Why do you say you favor Teddy Roosevelt? And are you actually the conservative candidate that so many people are hoping you are?
Mr. GINGRICH: Well, first of all, there are a lot of different Teddy Roosevelts. He was a very complicated man. And the Theodore Roosevelt as president is very different than the Theodore Roosevelt in 1912 running for president on a very aggressive big government strategy. I like Roosevelt, first of all, because he was for conservation. I liked what he did in saving forests and saving national parks and doing things, caring about the inheritance we give our children and grandchildren of a wonderful country. I like the Roosevelt who is common sense about regulations. We got a food and drug act because back then there were no rules, and people were eating meat that was basically poisonous. People were literally dying from food.
When I was a kid, and we were stationed in Europe--my dad was in the Army—the sense that America actually had clean water was remarkable. I mean, I go anywhere in America, I'm relatively confident the water is good.
KUDLOW: But we don't--we don't lack for regulations.
Mr. GINGRICH: No.
KUDLOW: I mean, it's a different era than TR.
Mr. GINGRICH: But, no, it's a different era. But I'm just saying, but here was a guy who, as a pragmatic person looked around and said, `I want to fix these things. I want to find solutions.' He's also a great American nationalist. I mean, he's the guy who--the modern Navy was in part built by guys like Theodore Roosevelt.
KUDLOW: All right. I'm going to leave it there. Some people are going to say you're a big government conservative, a big government conservative rather than a small government conservative. I mean, why aren't you saying, `I'm a Ronald Reagan conservative.'
Mr. GINGRICH: I am a Ronald Reagan conservative.
KUDLOW: Or, `I'm a Jack Kemp conservative.'
Mr. GINGRICH: Look, I'm...
KUDLOW: I don't want to get stuck up on TR, but I just...
Mr. GINGRICH: Wait a second. Wait a sec--wait a second.
KUDLOW: I just want...
Mr. GINGRICH: Wait a second. I...
KUDLOW: You're a historian, and you're an intellectual historian. You know this stuff.
Mr. GINGRICH: Yeah. But you take a line out of context. I've done a movie on Ronald Reagan called "Rendezvous with Destiny."
KUDLOW: I understand.
Mr. GINGRICH: Callista and I did. We've done a book on Ronald Reagan. You know, I campaigned with Reagan. I first met with Reagan in '74. I'm very happy to talk about Ronald Reagan. And, in fact, I would argue that the 1994 contract was just Reaganism revisited. So I'm very comfortable. If you look at my speeches and things, I drive the left crazy by quoting Reagan.
KUDLOW: All right. We'll leave that one there.
Now, let me ask you some nastier stuff, not coming from me, but I want you to react. Big story at the top of Drudge today. Ron Paul is running ads slamming you, basically. OK? He's calling you hypocritical. He's saying you are an influence peddler for Freddie Mac and for drug companies and pharmaceutical associations. What's your reaction to that? He's running a lot of ads in Iowa.
Mr. GINGRICH: You know, he's got to make up a lot of lost ground. He's going to say something. My reaction is, you know, I'm a 90 percent American Conservative Union conservative, lifetime voting record. I am the only person in your lifetime--the only speaker of the House in your lifetime who has balanced the budget for four consecutive years. I helped craft and pass welfare reform, the largest entitlement reform in your lifetime. Two out of three people went back to work or went to school. I helped pass the first tax cut in 16 years and the largest capital gains tax cut in history. Unemployment dropped to 4.2 percent. In the four years I was speaker, we—11 million new jobs were created. We went from a projected deficit over 10 years of 2.7 trillion when I came in. Four years later when I left, there was a projected surplus of 2.3 trillion over the next 10 years. That's a swing of $5 trillion.
KUDLOW: I think it's all...
Mr. GINGRICH: OK. So my point...
KUDLOW: I think it's all great, and I think it's all factual.
Mr. GINGRICH: OK.
KUDLOW: But I want to ask you, do you regret, in hindsight, do you regret working for Freddie Mac to defend their point of view? Do you regret working for the pharmaceutical companies...
Mr. GINGRICH: Well, I...
KUDLOW: ...working for the drug entitlement, which so many...
Mr. GINGRICH: Wait a second.
KUDLOW: ...tea party, grassroots, conservative Republicans were appalled when George W. Bush pushed through that entitlement. Do you regret working on that side?
Mr. GINGRICH: Let me draw a distinction. First of all, I do no lobbying. I have never done any lobbying. It's written in our contracts that we do not do any lobbying of any kind. OK? I offer strategic advice. I--by--the advice I offered Fannie Mae was in--or Freddie Mac, was, in fact, aimed at how do you help people get into housing, and how do you--and I don't think government-sponsored enterprises are inherently evil. I think they've been bad--these two have been badly run. I favor breaking them up into four or five smaller units each because I think they're unmanageable at their current size. But I don't think the concept of a government-sponsored enterprise, which is as old as the country, is an inherently bad thing.
Second, I was--I was for the drug benefit for a practical reason. When Medicare was developed in 1965, there were no pharmaceuticals that mattered, so they designed a health benefit that didn't take care of pharmaceuticals. We were in a position, and we said to people, `We will give you kidney dialysis for the rest of your life, but we will not help you get insulin.' Now, that's both inhumane, and it's really a bad health policy, and it's stupid fiscally.
KUDLOW: I liked--I loved the health. I love the science. I didn't like the fiscal side of it. It was never paid for.
Mr. GINGRICH: Well, I don't like that, but what we....
KUDLOW: And it pushed--put Bush behind the--I mean, it really helped spawn the tea party. And so I just wonder, in retrospect, would you rather not have been on that side or would you rather have had your own plan, which would have financed it properly.
Mr. GINGRICH: Well, no. I'd--well, first of all, I think we're going to have to reform Medicare. I led the Medicare reform task force in 1996. We saved $200 billion over 10 years. We did it so well that nobody opposed us. I mean, we've never gotten any credit for having saved Medicare in '96, but, in fact, we did. But we did it with AARP being happy and with Clinton not fighting with us; and, therefore, it became a non-event in this city.
I think you're going to have to rethink all health care. I helped found the Center for Health Transformation. But the two big sidesteps that you had in--that are important in the Medicare bill in 2003 were, we created a Medicare advantage option...
KUDLOW: Yes.
Mr. GINGRICH: ...which really began to allow Medicare to reach in...
KUDLOW: The best part of the bill. The single best part of the bill.
Mr. GINGRICH: Well, and, we also created health savings accounts.
KUDLOW: Yes. Yes.
Mr. GINGRICH: OK. Those two, in my mind, were the beginning of the right direction. And I tried for five years and couldn't get the Bush administration to realize they had begun a transition that would, frankly, have pre-empted the Obamacare approach.
KUDLOW: All right. So the Ron Paul ad also attacks you for your TV ad with Nancy Pelosi on global warning. I interviewed Ron Paul. I said, `Newt has said it was a bad, dumb thing to do. Will you forgive him?' And I think Ron Paul forgave you for that.
Mr. GINGRICH: Good.
KUDLOW: But I am impelled, I have to ask you, regarding Nancy Pelosi, her latest charge...
Mr. GINGRICH: Sure.
KUDLOW: ...that she has new information on your ethics investigation years ago. What's your response to that?
Mr. GINGRICH: Well, first of all, it tells you how political she was on the ethics committee. And it tells you--I called it a Christmas gift. And she can't--if she releases any of it, she has violated the rules of the House. But it also, just a reminder, that committee was extraordinarily partisan. The job of the Democrats was to get Newt Gingrich. They couldn't beat any of our ideas, so they decided to try to beat the messenger. And I think it actually will help people understand what happened in that period and how much of it was partisan.
KUDLOW: She--all right. Granted. But she's saying that she's not going to give unpublished information. She's going to help people cull through the public information. Is there anything in there that you can imagine that's going to pop out?
Mr. GINGRICH: We turned over a million pages of material. We cooperated in every way. They published a report. One of the things that made her mad was I said, at one point in a planning session--this was in the documentary turnover--that, you know, Bill Clinton might well decide to sell out the left and sign welfare reform, and if he did there's nothing we can do about it.
KUDLOW: She didn't like that.
Mr. GINGRICH: Well, she said, `Why would you say that?' I said, `Now, don't be mad at me. It's Clinton who sold you out, not me.'
KUDLOW: But didn't you help cut that deal?
Mr. GINGRICH: Of course I did, because it got us welfare reform.
KUDLOW: All right. Let me go on. Final point. And I appreciate your being here. Mitt Romney. Romney says you don't understand the economy and you can't recover it and grow it because you spent your entire life in professional politics. What's your answer to Mr. Romney?
Mr. GINGRICH: You are the worst possible questioner.
KUDLOW: The worst.
Mr. GINGRICH: You and I worked together with...
KUDLOW: I...
Mr. GINGRICH: ...with Richard Rahn, Jude Wanniski...
KUDLOW: I understand. But I'm doing my job.
Mr. GINGRICH: ...Art Laffer. I'm just saying.
KUDLOW: I'm doing my job.
Mr. GINGRICH: But you're a witness to this. I was part of Kemp's little cabal of supply-siders who, I think, largely by helping convince Reagan and then working with Reagan, profoundly changed the entire trajectory of the American economy in the 1980s. You can make an argument that I helped Mitt Romney get to be rich because I helped pass the legislations that...
KUDLOW: Not a bad argument. Have you ever made that argument to him?
Mr. GINGRICH: I am as of right this minute. Just occurred to me.
KUDLOW: You--you're the incentive models, the lower tax rates, the smaller government and the welfare reform...
Mr. GINGRICH: That's right.
KUDLOW: ...helped make him rich from Bain Capital.
Mr. GINGRICH: He should be thanking me. He should be thanking me because I did the macroeconomic things necessary to make his career possible.
KUDLOW: Yeah. Well, I'm going to get a response on that.
Mr. GINGRICH: I bet you will.
KUDLOW: I want to ask you--regarding Bain Capital, this is a tough time. I mean, the country has turned against Wall Street.
Mr. GINGRICH: Yeah.
KUDLOW: Against the Wall Street bailouts. Because Mr. Romney was successful--and I say God bless him he was successful--can he win as a financial guy, as a Wall Street guy?
Mr. GINGRICH: Sure.
KUDLOW: Is that a big issue for him?
Mr. GINGRICH: Sure. Can he win against Obama?
KUDLOW: Can he win against you in the Republican primaries?
Mr. GINGRICH: No. But that's--I hope not.
KUDLOW: Why...
Mr. GINGRICH: I can't--I can't sit here and offer advice on how he could beat me.
Mr. GINGRICH: Look, I think Mitt Romney's a very smart man. I think—I think that he--any Republican could be proud to have him as their nominee, and I think he'd be very formidable against Obama. I happen to think I would be a better candidate than Mitt, but that's, I mean, we are, after all, competing here. But I'm not going to say anything negative about him. I think he's a terrific person. And, candidly, we, all of us who believe in free enterprise, have to be committed to explaining to people that the process of improving the economy, the process of becoming more competitive, the process of being more effective in the world market is best done in the private sector by people who, literally, in the tradition of Adam Smith, while following their own interest, create a dramatically better general interest. And we can't allow socialist and left-wing radicals to browbeat us and seize the moral high ground. Because they represent the future of poverty and impoverishment, and destruction and food stamps, and that isn't a good enough future for any American.
KUDLOW: And economic freedom is a moral issue.
Mr. GINGRICH: It is a moral issue, and it's at the heart of freedom. If you don't--the Founding Fathers almost wrote in "the right to property" instead of "the pursuit of happiness."
KUDLOW: That's right. That's what it was. Thank you. Newt Gingrich...
Mr. GINGRICH: Good to be with you.
KUDLOW: ...former speaker of the House, Republican front-runner. We appreciate you're here...
GOP Presidential Candidate Jon Huntsman dismissed Donald Trump and the debate the real estate mogul and reality TV star will be moderating, and told Larry Kudlow he’s the only consistent conservative in the race.
The former Utah Governor and former ambassador to China likened the Newsmax-sponsored presidential debate to a reality show, and said he would not be participating.
“There’s some dignity associated with a run for the highest office in the land, and it shouldn’t be trivialized and it shouldn’t be dumbed down,” he said. “If Don Trump cares about our nation’s future, he should have been a candidate for president. He shouldn’t be manipulating the process from the sidelines.”
His statement was the latest in an ongoing war of words with Trump. Huntsman also denied Trump’s claim that he called several times to schedule a meeting in hopes of getting Trump’s endorsement.
“I called him once after he got out of the race, just like I called Tim Pawlenty, as a courtesy call,” Huntsman said. “Not looking for a meeting, not looking for support or anything else.”
One debate Huntsman said he will be doing is the “Lincoln-Douglas” debate Newt Gingrich in New Hampshire on December 12. He thinks it will provide an opportunity for an in-depth discussion of the issues.
“You can only get so much in 30 second sound bites,” he said. “People fall back on rehearsed lines and that doesn’t serve the purpose of educating the voting public about who you are and what it is you stand for.”
Huntsman also touted his conservative credentials, saying “You’re not going to find a more committed conservative in the race … I am a consistent conservative.”
He pointed to his pro-life, pro-second amendment stances. He also said as governor of Utah he delivered the largest tax cut in the history of the state and signed the second school choice voucher bill in the country.
Mitt Romney, on the other hand is a “flip-flopper conservative,” Huntsman said, adding that he thinks Newt Gingrich is “grandiose and a little bombastic.”
And while many may not know of his conservative views, Huntsman said he’s not going to pander for votes.
“I’m going to be who I am. I’m not going to contort myself into a pretzel,” he said. “I want a steady, substantive rise and that’s exactly what we’re getting in New Hampshire.”
By Ronald Schmidt and Janice Willett November 16, 2011
Ronald Schmidt is the Janice M. and Joseph T. Willett Professor of Business Administration, for Teaching and Service, at the University of Rochester’s William E. Simon Graduate School of Business Administration.
Janice Willett is a freelance editor and an alumna of the University of Rochester’s William E. Simon Graduate School of Business Administration.
Politicians and pundits, not to mention Occupy Wall Street participants and now Warren Buffett as well, voice concern that economic inequality is increasing and propose to reverse this trend by raising taxes on big earners. But whether or by how much inequality has actually changed is open to question, because the statistical analysis is often misleading.
The recent Congressional Budget Office report on income distribution is a case in point. It states that for the top 1 percent of households, “average real after-tax household income grew by 275 percent between 1979 and 2007,” compared with much smaller rates of increase for the other 99 percent. But a closer look shows that income inequality basically hasn’t changed since a quarter-century ago.
Why the discrepancy? For starters, the CBO report covers the period 1979 to 2007. According to the authors, 1979 was the earliest year for which certain Census Bureau data are available. Fair enough. The report also chose 1979 and 2007 as its beginning and end dates because “both were economic peak years just prior to a recession.” But the peaks were by no means equally intense—and the economic downturn of 2008 and 2009 can hardly be characterized as just “a recession.” It started from a much higher level of economic activity, occurred much more rapidly, and involved a much bigger increase in unemployment than did the recession following 1979.
So does the choice of 2007 as an end date affect the CBO results? The report itself says in passing (and perhaps disingenuously) that “the turmoil in financial markets in 2008 probably reversed some of that growth [in real after-tax income for the top 1 percent of households] but it is not clear by how much or for how long.” And yet the report was released late in 2011—surely the CBO has access to data that would have allowed a more definitive analysis.
According to IRS data, which extend through 2009, the average nominal Adjusted Gross Income (AGI) for filers with AGI of at least $500,000 declined by 17.8 percent from 2007 to 2009, and their average after-tax income declined by 19.9 percent. For those with AGI of less than $500,000, AGI declined by only 2.6 percent, and after-tax income declined by only 1.5 percent. These numbers certainly do not indicate an increase in income inequality.
In fact, there has been a marked decline in income inequality over the last decade. From 2000 to 2009, average AGI declined by 15.0 percent and average after-tax income declined by 11.0 percent for returns with AGI of at least $500,000. (Filers with an AGI of at least $500,000 represent 0.5 percent of all returns in both years, so this comparison is similar in spirit to the CBO report, which looks at the top 1 percent of households.) For all other returns, there were increases of 14.6 percent for average AGI and 17.3 percent for average after-tax income.
The CBO report also examines inequality trends on the basis of a Gini index for “market” income (which includes capital gains but not transfers such as welfare payments) and after-tax income. The Gini index can range from 0 to 1, with higher values signaling a more unequal income distribution. The CBO report shows the index increasing from 1979 to 2007—although almost all of the increase occurs over two periods, 1979 to 1986 and 2002 to 2007. And there’s still the question of what happened in 2008 and 2009.
As it turns out, a Gini index calculated on the basis of IRS data alone closely tracks the CBO Gini index for market income from 2000 to 2007 (the average difference is only .0023)—and its level in 2009 was essentially the same as in 2002. In short, most of the increase in the index from 2002 to 2007 was wiped out by the Great Recession—which means that most of the increase over the full 1979 to 2009 period covered in the CBO report had already occurred by 1986. Basically, the income distribution is the same as it was 25 years ago.
What about the common view that the top 1 percent are always the same people? The Occupiers, with their signs pitting the 99 percent against the 1 percent, have clearly fallen prey to this fallacy. But IRS data reveal that the business cycle creates and destroys high earners, as evidenced by swings in the number of ultra-high-income returns—those with AGI of at least $10 million, for which data were first published in 2000. From 11,215 in 2000, the number of these filers fell by more than half to 5,309 in 2002 before tripling to 18,394 in 2007 and then falling again by more than half to 8,274 in 2009. This does not square with the rich consistently getting richer—or even staying richer.
What could give rise to income inequality in the first place? Consider three males who graduated from high school in 1980 and worked full-time for the next three decades. (We use males and full-time workers only to abstract from variables such as changes in the gender composition of the labor force that could twist historical comparisons of earnings.) For one of them, education ends with high school, while the second gets a college degree and the third earns a graduate degree. In 1987, when these three were between the ages of 25 and 34, the average high school graduate earned $22,595, while a college graduate earned $31,631 and a holder of a graduate degree earned $36,667. But 20 years later, in 2007, the corresponding averages for male full-time workers ages 45 to 54 were $46,667, $88,242, and $120,391.
Unequal? Yes. But the increase in inequality arose because these individuals made different decisions about their education, not because tax policy favors the rich. In essence, economic inequality is another term for incentives that encourage investment in education—or, for that matter, starting a new business. Of course, most new start-ups fail, so there’s a lot of risk involved. But taxing the successful ones will not make failures less likely—and it will discourage the risky investments that are the engine of economic growth. Just ask your local lottery retailer if more tickets are sold when the prizes are large or when they are small.
In short, there has been no significant deterioration in economic equality that could serve as a pretext for raising tax rates. And as has been pointed out elsewhere, there simply aren’t enough rich people—nor do they earn enough money—to close the budget deficit. If we want to solve our budget problems, we need to cut spending. And if the Occupiers really want to help, they might consider that instead of heckling bankers and spending cold nights in a public park, they could study for the LSAT, MCAT, or GMAT and become high-tax-paying citizens.
