Thursday, December 29, 2011

Art for Newt


“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.

Tuesday, December 13, 2011

Market Better Off Now than a Week Ago: Bob Doll


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.”

Obama's Big Class-Warfare Theme


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.

Wednesday, December 07, 2011

One-on-One with Newt Gingrich



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.

KUDLOW: Well, you've done well. You've already said you've helped him.

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...

Mr. GINGRICH: Thank you.

Tuesday, December 06, 2011

One-on-One with Jon Huntsman

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.”

Slamming Economic Inequality -- Not a Slam Dunk

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.

Tuesday, November 22, 2011

The Dems and the Supercommittee Debate

Didn’t our Democratic friends always intend to derail the supercommittee over the top Bush tax rates? You remember that $800 billion revenue number always floating around from the Democratic leaks? Well, that’s the static-revenue estimate of repealing the 35 percent and 33 percent Bush rates. And sometimes that Democratic revenue number moved up to $1.2 trillion. Well, that would include the static-revenue estimate of the 5.6 percent millionaire surtax. Get it?

In an important sense, the whole supercommittee debate from the Democratic side was about taxing the rich. They never went quite as far as Obama’s populist class-warfare rant, at least not publically. But basically this logjam was about so-called tax fairness.

Ironically, when the automatic spending cuts trigger in, Speaker John Boehner will win out. His original vision -- going back to the debt-ceiling debate last summer -- was $1 in spending cuts for each $1 of debt increase. So the sequester will get $1.2 trillion in spending cuts on top of last summer’s $1 trillion.

No it’s not great. We should have done $4 trillion to $6 trillion by reforming entitlements and undergoing pro-growth tax reform for individuals and corporations. But at the end of the day, we dodged a super tax hike and got a couple trillion dollars of lower spending. Not the worst thing in the world.

Saturday, November 19, 2011

Junk the Trigger? It's an X-Rated Option


Instead of a super tax hike from the supercommittee, a much better option for the economy and budget-cutting credibility would be to implement plan B, which is the automatic spending-cut trigger known as sequestration.

The Wall Street Journal editorial on the sequester scenario shows a roughly $70 billion budget cut in 2013 and probably more in the future as the budget baseline is pulled down. A $70 billion cut would be one of the largest on record -- maybe the largest. It would show real budget discipline. And it is vastly superior to the economy-killing $500 billion to $800 billion tax hike supported by Democrats who oppose true tax reform that would lower marginal rates and broaden the base.

But both parties are quaking in their boots over the automatic budget-cutting trigger.

I interviewed senator and supercommittee-member Pat Toomey last night on CNBC. He has the best tax-reform plan, which would drop the top rate to 28 percent, bring other rates down, and limit upper-income deductions and exemptions. Unfortunately, Sen. Toomey’s plan does not at this point appear to have bipartisan support.

Nevertheless, Toomey told me that the automatic trigger has big problems. Specifically, he noted that half the trigger would be concentrated on defense. Then he said, “In the very unfortunate event that our committee were not to be successful, and I still hope we will, but if not, then I think we would have a very concerted effort to reconfigure the sequestration.”

Mr. Toomey’s Republican colleagues undoubtedly agree with this reconfiguration. But you can bet the Democrats on the committee will not. So the only way out would be the most irresponsible way out: junking the automatic spending-cut trigger altogether.

And that option would be a disaster for financial markets. Stocks would plunge. Think back to last July and August during the debt-ceiling debate. Junking the trigger would be a fiscal blight and would mean a sure credit downgrade.

For those who worry about the defense problem, leave it to a post-election Congress that could provide a supplemental to add back some defense spending if necessary. All the budget issues will be revisited post-election anyway.

But junking the trigger would be a fiscal calamity for the United States. It’s an X-rated option. Don’t even think about it.

Friday, November 18, 2011

The U.S. Is Stronger than Most Folks Think

You wouldn’t know it from yesterday’s down day in the stock market. But the daily numbers continue to show an economy that is stronger than most folks think.

Today, for example, initial jobless claims fell to 388,000 -- the lowest level in seven months. And the Philly Fed manufacturing index, which translates to 53 on an ISM basis, shows a very strong employment component.

Earlier in the week, the index of industrial production beat estimates with an especially strong reading on business equipment. That spells strong capital-goods investment, itself a job creator.

Retail sales in October also beat estimates, and are rising over 7 percent against year-ago. Both producer and consumer price inflation dropped slightly in October.

Smart economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP for Q4. Another luminary, Joe LaVorgna, thinks GDP could actually be 4 percent for the quarter ending in December.

All these better readings continue to clash with market pessimism over Europe’s debt and banking problems. Today on CNBC, however, St. Louis Fed president Jim Bullard said the European problem will be contained, and that it won’t have much effect on the U.S. economy.

And eminent economist Art Laffer believes the new Italian government run by Mario Monti is putting together a pro-growth economic plan to extend the retirement age of public workers, knock out 300,000 government-sector jobs, overhaul the tax system, and privatize state-owned properties. Laffer believes Monti, the former European commissioner for taxes, favors pro-growth reform and simplification. Laffer also thinks Germany will knock its budget deficit under 3 percent, with spending cuts combined with a small tax cut.

In other words, the European story may not be quite as bad as the bond-market vigilantes believe.

There’s no question that the Eurozone is close to recession, and that many of its members still have massive work to do. They need to live within their means, thwart the social-welfare entitlement system, and curb government-union excess. Plus there’s the need for flatter-tax simplification to promote growth.

But I can’t help but think that whatever the state of decline in Europe may be, it is the U.S. that ultimately will benefit. Despite the class-warfare mistakes coming out of Washington and a weak-kneed supercommittee, political regime change is coming. Meanwhile, the U.S. economy is more resilient and perhaps even stronger than people think.

Thursday, November 17, 2011

Five Lessons for America from the European Fiscal Crisis

Here's a very timely video on Europe's fiscal crisis, narrated by an Italian student who was an intern at Cato Institute. The text is written by Dan Mitchell, a senior fellow at Cato and a top expert on tax reform and supply-side tax policy.



I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.

This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.

Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.

Wednesday, November 16, 2011

Super Committee Co-Chair: Tax Hikes Won't Happen



The 12 member congressional “super committee” is still working on a deficit deal, but Co-chairman Jeb Hensarling (R-TX) said on the Kudlow Report that "super" tax hikes will not be part of any compromise.

“We’re facing a jobs crisis and a debt crisis,” he said. “We’re certainly not going to exacerbate one by trying to address the other. Frankly, that’s one of the reasons we are stymied at the moment.”

Hensarling denied any knowledge of what the Wall Street Journal said was a plan for $300 billion in tax revenues up front and $500 billion in tax revenues later.
“As the co-chairman of the committee, I don’t know what agreement you are talking about," he said. "It certainly hasn’t been presented to me.”

The super committee has until November 23rd to agree on a plan to cut the federal deficit. The legislation that established the panel of six Democrats and six Republicans put in place an enforcement mechanism that will trigger automatic cuts if the committee fails to reach an agreement on $1.2 trillion in deficit cuts over 10years.

Hensarling told me that Republicans have gone as far as they feel they can go.
“We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates,” he said.

Hensarling believes they can bring down the top individual tax rate to between 28 and 30 percent and the corporate rate to 25 percent.

"On balance, we think that would be pro-growth," he added. "But, listen, any penny of increased static revenue is a step in the wrong direction. We can only balance that with pro-growth reforms. And, frankly, the Democrats have never agreed to that.”

Tuesday, November 15, 2011

U.S. Banks Benefiting from European Crisis



Fears over the European debt crisis sent the market lower Monday, with financial stocks leading the way, but Rochdale Securities' Dick Bove said that what’s happening in the euro zone is actually helping banks.

“The irony of what’s going on right now is that the banks are benefiting at the moment from what’s going on in Europe,” he said on The Kudlow Report. “The European banks are selling American assets to American banks at discounted prices which is creating a benefit for the American banks.”

The fact of the matter is banking companies are in pretty good shape, Bove noted.
U.S. banks, however, are flush with cash and therefore there should be no fears over funding issues, Bove said. In fact, he thinks they are overcapitalized.

“If you take all the numbers going back 75 years to when the FDIC was first created,” he said, “we’ve never had this high a level of capital plus reserves as a percentage of assets in the banking industry, ever.”

Plus, deposits are pouring in because when people are afraid of what’s happening in the market, they put their money in the bank.

“The banks have too much liquidity right now, too much capital right now,” he said. “There is no funding issue.”

What banks are Bove’s picks? He likes JP Morgan Chase, U.S. Bancorp, and Morgan Stanley.

Wednesday, November 09, 2011

One-on-One with Newt Gingrich

The idea of 99 percent of the population versus 1 percent of the rich, which Occupy Wall Street protestors have made their mantra, is just wrong, GOP presidential candidate Newt Gingrich said on “The Kudlow Report” last night.

“I am for 100 percent,” he said. “I think this idea of 99 percent and 1 percent is grotesque European socialist class warfare baloney.”

And President Obama is playing right along with that class warfare by expressing sympathy for the protesters, he added.

“I repudiate anybody who wants to divide Americans and I think that that there is a fundamental destructive quality to this 99 percent idea,” Gingrich said. “I think that it is shameful the president of the United States would engage in class warfare and pit Americans against each other in way which can only be destructive of the fabric of American society.”

The former Speaker of the House, who is set to join the other seven candidates in a CNBC debate Wednesday, has been rising in the polls recently. An NBC News/Wall Street Journal poll on Monday put him in third place. In another survey, he’s just six points behind President Obama in a hypothetical match up.

If elected president, Gingrich plans to jump start the economy and create jobs by taking a page from Ronald Reagan.

The plan, he said, is simple—“lower taxes, less regulation, more American energy and work with the people who create jobs and don’t engage in class warfare against them.”
Gingrich noted that while he was Speaker of the House, he worked with President Clinton on reforming welfare and cutting taxes. But Clinton was a centrist, he said, while Obama is a genuine “radical” who has difficulty negotiating.

The candidate also addressed the sexual harassment allegations plaguing his rival Herman Cain, telling Kudlow that Cain did the right thing by addressing the claims.
“He was clear, he was forceful and he certainly deserves people giving him the benefit of the doubt," he said.

But, he noted, we'll have to wait and see how it plays out. “It’s not over yet,” he added.


Tuesday, November 08, 2011

Stronger Than We Think?

Is the American economy stronger than we think?

Small-business jobs in the Labor Department household survey have increased by an average 335,000 in each of the last three months. Kelly Evans of the Wall Street Journal notes that the ADP survey is showing stronger small-business employment. Earlier reports on business-capital investment show considerable strength. Despite all the debt and banking-contagion worries over in Europe, the U.S. stock market continues to creep higher. Initial jobless claims have slipped under 400,000. Oil prices continue to rise, gaining almost $20 over the past few months. Bank loans to businesses are rising in double digits. So is the M2 money supply. And corporate profits have exceeded expectations once again.

No, Washington is not helping. Neither is Europe. China looks shakier and shakier. And we know that consumer real incomes and housing are still problematic.

But let me wonder out loud: Is the American economy stronger than we think?

Friday, November 04, 2011

Will Bernanke Soon Surprise the U.S.?

Will the Federal Reserve’s Ben Bernanke soon follow the European Central Bank’s Mario Draghi? In his first action as Jean-Claude Trichet’s replacement, Draghi cut the ECB target rate by a quarter percent to 1.25 percent from 1.5 percent. It was a surprise.

Given the hullabaloo over Greece’s bailout referendum (which is now dead in the water) and the likelihood of a new Greek government, Draghi’s liquidity addition is a modest but useful antidote to major financial stress and uncertainty in the Eurozone. He’s probably going to cut rates a lot more in view of Europe’s perilous financial and economic situation.

So that leads to this question: Will Bernanke soon surprise the U.S.?

At his news conference yesterday, the Fed head emphasized the ongoing weakness in housing as a key factor in the sluggish economy and high unemployment rate. He openly acknowledged that the door is wide open for a new Fed action to purchase mortgage-backed bonds in order to provide additional support for the weak housing market. This goes beyond Fed actions to reinvest MBS bonds as they mature. In other words, quantitative easing.

Wall Street may be impressed with recent economic data, like the ISMs and other stats that show the economy is not now flipping into recession. But Bernanke is less impressed. The Fed downgraded its 2012 forecast for real growth from 3.5 percent to 2.7 percent. And it raised its unemployment estimate for next year from 8 percent to 8.6 percent by year-end 2012. And despite continued inflation pressures, the central bank essentially kept its inflation target at a low 1.7 percent.

So it’s not unreasonable to suggest that Bernanke is setting the stage for a new round of QE. Growth at 2.7 percent is insufficient to significantly reduce unemployment. And housing remains a big problem. So while the U.S. doesn’t face the kind of financial stress that Europe does, Bernanke may follow Draghi with a U.S. easing move.

Thursday, November 03, 2011

One-on-One with Ron Paul

The Federal Reserve is still in quantitative easing mode despite the fact that it announced Wednesday it would hold off any new actions to aid the economy, Republican presidential candidate and Congressman Ron Paul said on the Kudlow Report last night. Take a listen:

Wednesday, November 02, 2011

One-on-One with Dick Bove

Investors dumping U.S. bank stocks are overreacting to all the European debt crisis speculation, Rochdale Securities’ Dick Bove said last night on the Kudlow Report.

“I think we’ve gone nuts,” he said. “I think these [U.S. bank] stocks are so cheap, that people should be buying them as aggressively as they could.”

The financials led the S&P lower Tuesday after investors fled the market on fears that the European debt deal could fall apart. After conflicting reports on whether Greece plans to hold a referendum on the debt agreement reached last week, the government jumped in to say the vote is on.

But what's happening in Europe should not affect U.S. banks, Bove said, because most have virtually no exposure to the EU. Plus, most banks beat their earnings estimates for the third quarter.

As for the “five big American banks” that do have exposure to Europe, their risk is “not very great at all.”

That’s because Bove believes the EU will not let its banks fail.

“The ECB will do, if you want, a QE2,” he said. “It’s going to save all of the major European banks. It’s already shown its will to do so.”

Tuesday, November 01, 2011

No Reason for More Fed QE


The Fed is meeting Tuesday-Wednesday on monetary policy. The FOMC statement will be released at 12:30 p.m. on Wednesday, and then Ben Bernanke will have a news conference at 2:15 p.m.

With both real GDP and inflation at 2.5 percent, there doesn’t seem to be much of a case for new Fed quantitative easing. While unemployment is high, that’s a function of regulatory and tax obstacles -- certainly not tight money. Both QE1 and QE2 have failed to bring down unemployment. There’s a lesson there.

The real side of the economy is governed more by tax and regulatory policies that either create new incentives for growth or take those incentives away. And massive spending stimulus threatens higher future tax rates -- a disincentive for growth and job creation.

The monetary-policy lever affects the level of prices and the inflation rate, along with the dollar’s value. But money has no permanent impact on jobs and growth.

Now here are some interesting statistics. Believe it or not, business loans are picking up. According to the Fed, commercial and industrial loans by banks to business have increased 16 percent annually over the last 13 weeks and 11.9 percent annually over the last 26 weeks. So some expansion is going on out there. And that’s what the strong business capital-goods-investment numbers showed in Q3 GDP.

Here’s a second stat. Over the past year, the M2 money supply has grown at 10.2 percent while C&I loans have increased 9.2 percent. So as credit is expanded to business, the deposit base of the banking system is also expanding. And as those $1.6 trillion in excess bank reserves on deposit at the Fed are put to work, credit expansion is going to be that much stronger.

Monday, October 31, 2011

Cain Charges Are Clearly Vague


We all know that Herman Cain is strongly denying the sexual harassment charges written up in the Politico story. And he has said that he was falsely accused while at the National Restaurant Association.

But there’s a sentence in the Politico story that I wanted to point out to everyone. It makes no sense at all: “There were also descriptions of physical gestures that were not overtly sexual but that made women who experienced or witnessed them uncomfortable and that they regarded as improper in a professional relationship.”

What does this mean?

The gestures weren’t overtly sexual, but the women were uncomfortable and believed the gestures were improper in a professional relationship. These are all second-hand testimonies from “close associates” of the women accusers, but I don’t know what standards are being talked about.

I mean, based on this sort of thing, anybody could think anything about almost anything. I’m not blasting the Politico people per se. I just don’t understand the meaning of what they’re reporting.

Basically, if Herman Cain faces new and additional charges, I guess he’s gonna have a big problem. But right now this is just too vague for me. It may well be that it was cheaper to send the women packing with a settlement than go through a long hearing with huge legal fees. I just don’t know.

But with so many of Cain’s fellow board members and co-workers praising him, as Politico reported, I just don’t think there’s much behind this.

Friday, October 28, 2011

One-on-One with Charles Dallara

Fresh back from Brussels, former assistant US Treasury Secretary Charles Dallara. He is the managing director for the Institute of International Finance. He was the lead negotiator for the banks and the private creditors regarding the Greek debt.

Wednesday, October 26, 2011

Rick Perry: Flat Tax is 'Tax Cut for Everyone'

GOP presidential candidate Rick Perry, who unveiled his 20 percent flat tax Tuesday, said his economic plan will “lower taxes across the board” and pull back every regulation that has been implemented since the 2008 financial crisis. He also dismissed criticism that it would raise taxes on the middle class.

“This is a tax cut for everyone in this country. Those who want to pick this apart, those that want to play class warfare, that’s their business,” Perry said. “Let’s not get down in the weeds here from the standpoint of going and saying this person over here is going to get a little bit different tax.”

The Texas governor is hoping his “Cut, Balance and Grow” plan will help jump-start his fading presidential campaign. He’s now trailing four other contenders for the 2012 Republican nomination in a new CBS/New York Times poll. He stands at 6 percent, Herman Cain is leading the pack with 25 percent and Mitt Romney is in second place with 21 percent.

His plan calls for a 20 percent flat rate on individual and corporate income and has a $12,500 exemption per person. It will keep deductions for mortgage interest, charitable deductions and local taxes.

“We need to get America working,” Perry said. “We need a president who understands that the way to get this country back on track is by lowering the tax burden and particularly the regulatory climate and that’s what this plan does.”

In fact, he plans on “pulling back every regulation that’s gone into effect since 2008.” He would repeal Dodd Frank, section 404 of the Sarbanes-Oxley Act—which requires companies to provide an auditor's report on the adequacy of their internal controls—and “Obamacare.”

“Let me tell you, if you do just those things, put this flat tax in place and the stock market would go through the roof,” he said. “But more importantly, there are going to be a lot of people who don’t have a job today that will have one.”

Perry also vowed that his economic plan, which cuts government spending and overhauls the Social Security program, will balance the budget by 2020.

And if you don’t like the flat tax, you can stay in the old system, he said.

As for his rivals, Perry dismissed Herman Cain’s 9-9-9 plan, saying the new sales tax “will not happen.” He said Mitt Romney’s economic plan "nibbles around the edges.”

“We need to clearly put in a tax structure that’s flat, that’s simple, that’s fair,” he said.

Tuesday, October 18, 2011

What Needs to Happen in Europe

The fear level in the market is so high right now that there has to be some solution to the greater problems before we can start to look at bank stocks on a fundamental basis, Rochdale Securities’ Dick Bove said in an interview on The Kudlow Report.

Stocks suffered their worst loss in two weeks on Monday after comments from Germany's finance minister caused investors to fear Europe's solution to its debt crisis may not come fast enough.

The solution, Bove said, starts with the recapitalization of European banks.

“The problem is you cannot resolve the Greek problem without debt forgiveness and you can’t give Greece debt forgiveness unless you allow the banks to writedown the Greek debt,” he said. “And you can’t allow the writedown of the Greek debt until you get equity capitalization of those banks.”

And that equity recapitalization has to come from the private sector, he added.

“I’m taking about the private sector putting the money into those banks to rebuild the capital similar to what happened in the United States in the last crisis here in 2008 and similar to happened in the United States in the late 1980s, early 1990s,” Bove said.

Once that debt forgiveness happens, he said, the Europeans can start to rebuild their economies.

Friday, October 14, 2011

One-on-One with Governor Rick Perry

I had the pleasure of interviewing Gov. Rick Perry last night on The Kudlow Report. The GOP presidential hopeful said he wants to dramatically increase oil and gas exploration and in the process create more than a million jobs.

Wednesday, October 12, 2011

Dexia and the European Wake-up


Yesterday’s massive 330-point stock market rally was generally linked to an expected Merkel-Sarkozy summit in a couple of weeks to nail down a new European rescue plan for bad government debt and troubled banks. But I think the more immediate cause of yesterday’s rally was the news that European leaders are rescuing the underwater bank Dexia. This bank-rescue mission looks to me like a new model to save all the European banks from the risk of catastrophic meltdown and contagion.

There are some key principles in the rescue -- nationalization, good-bank/bad-bank breakup, asset sales, and long-term guarantees of bank deposits and liabilities -- that could make Dexia a seminal event if it is saved. And it appears as though the authorities are road-testing the rescue as a model for bigger banks that may be in deeper trouble.

I am especially interested in the deposit and liability guarantees. I think these will be part of a big Euro-TARP capital-injection program based on the EFSF rescue fund of the ECB and IMF. In other words, like the FDIC, Treasury, and Fed guarantees of all bank and money-market funds in late 2008, the Europeans may do likewise as Greece defaults. The rescue funds will then support the banks, probably inject some debt capital or preferred shares, and then with those guarantees have the banks raise private-equity capital in the marketplace as soon as possible.

Dexia looks to me like the first example of the European wake-up. As such, it triggered a big bank-stock rally which led to the overall market rise.

One thing I don’t favor is a bailout of the sovereign countries. Greece should default, at least in a structured way, with large bond haircuts. Portugal, Italy -- they should not be bailed out. But the banks will have to be bailed out, as distasteful as that may be, in order to avoid a global catastrophe.

This is where the troika support is necessary, and the principle of guaranteeing all deposits and liabilities will be very helpful.

A final thought: I am persuaded that the ECB should cut rates and move to quantitative easing as part of the solution to the deep financial stresses that are pulling down the European economy. And I have a sneaking suspicion that Ben Bernanke will move to QE if the ECB does, even though it hasn’t worked up to now. Maybe this talk of pouring in money to raise nominal GDP will be the Fed’s new raison d’ĂȘtre.

But if the ECB runs a big QE to pump in liquidity (following the Bank of England), then the dollar is going to keep shooting up, imparting deflationary pressures on the U.S. economy that we cannot afford.

Whether Bernanke thinks in these terms remains to be seen.

Friday, October 07, 2011

One-on-One with Jack Welch

Yesterday I spoke to the legendary Jack Welch, former Chairman and CEO of GE. In addition to his comments on a variety of issues, I began asking Mr. Welch about the very sad passing of Steve Jobs. Take a listen:



Thursday, October 06, 2011

One-on-One with Bank of America's Brian Moynihan

I had the chance to sit down with Bank of America CEO Brian Moynihan yesterday at the Washington Ideas Forum. We cover a lot of ground. Take a listen:

Wednesday, October 05, 2011

Chris Christie's Decision


So, Gov. Chris Christie gracefully, elegantly, and forcefully decided to stay out of the race.

Fortunately, the logic was consistent with past statements these many months that he has a job to do in New Jersey, he can’t leave that job unfinished, and he’s not going to walk away from the people who elected him. He has a loyalty to the state of New Jersey.

In the end, he said, “Now is not my time.”

No one will know that for sure, but if that’s what the governor believes, then he is right. I think he showed a lot of character in his news conference. And Chris Christie is full of good character.

Also, he continues to criticize President Obama. Christie said he has failed the leadership test. On the attack, Christie said, “Make sure President Obama is a one-termer.”

So you can bet Governor Christie will be on the campaign trail fighting to make Obama a one-termer. He’s not going to endorse in the GOP primary yet. But he’ll be on the hustings. I go back to what I think was the key point in Christie’s Reagan Library speech: Obama’s class-warfare, soak-the-rich policies are dividing the country, demonizing success, and sending a demoralizing message.

I hope Christie keeps the drumbeat going.

Tuesday, October 04, 2011

Still Front End of Recession


The stronger-than-expected ISM manufacturing-index reading for September might normally suggest that the economy, at least for now, has dodged a recession bullet. After zero jobs and zero real consumer spending in August, which put the stalled economy on the front end of recession, the ISM number is the first major September reading.

But economist Michael Darda says hold the applause: Inside the ISM, new orders and order backlogs either flat-lined or declined and remain below 50 -- the DMZ recession marker on the index.

Darda believes weak data in the U.S., plus the ongoing European crisis, plus the China slowdown, plus widened corporate credit spreads and stressful financial conditions, all point to a declining economy and additional stock market drops.

Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) is also on the bear side. He has a falling weekly leading index that signals recession is inevitable. “It’s either just begun, or it’s right in front of us,” he told CNN Money.

Tough stuff.

But another deepening economic problem is a lack of confidence. Scott Rasmussen, one of the nation’s best political pollsters, also publishes important and accurate consumer-confidence indexes. On a monthly basis, he is showing a huge confidence drop of 26 percent, from 88.3 last January to 65.6 through August. His reasons? There are several.

First, the majority of Americans believe we are still in recession and that the recession is dragging on. Second, the housing market is a killer (for the economy, as well as consumer sentiment). According to Rasmussen, fewer than half believe their homes are worth more than their mortgages. Only 23 percent expect their home values to go up this year. And with the market still at fall 2008 levels, people are obviously much less well off than they used to be.

And there’s more. Today, only 29 percent rate their finances as good or excellent. The night before Lehman collapsed, 43 percent rated their finances as good or excellent.

And on the political front, while people are rejecting Obama, they are also rejecting both political parties and the entire political process. According to Rasmussen, 73 percent don’t expect any deficit reduction before the 2012 election. Folks want any deal to include mostly spending cuts, but expect it will include mostly tax hikes. And if tax hikes are agreed to, 62 percent say the money will be spent on new programs rather than deficit reduction.

On top of all that, economist Alan Reynolds reminds us that the president’s so-called jobs plan proposes large and permanent increases in the highest income-tax rates in order to “pay for” a small and temporary cut in payroll taxes. Reynolds goes on to say that permanently higher tax rates on income to pay for temporarily lower tax rates on payrolls is not stimulus by anybody’s definition.

And of course, taxing millionaires and billionaires -- especially the Warren Buffet plan to raise the minimum tax rate on capital gains -- demonizes success and makes war on capital formation. Gov. Chris Christie calls this a demoralizing message.

So for now, I’ll stay with my take: We’re still on the front end of a recession.

Thursday, September 29, 2011

Obama as Demoralizer-in-Chief

So just when everyone had concluded the Chris Christie matter — saying “Great speech at the Reagan Library, but he’s not gonna run for president” — the New York Post comes along with a story that says the New Jersey governor is seriously considering a 2012 run. Apparently the Reagan Library experience had a big impact on Christie, and others. He’s now being urged to go for it by Nancy Reagan, Henry Kissinger, former president George W. Bush, and former first lady Barbara Bush.

According to the Post story, even Christie’s wife Mary Pat is warming to the idea.

I don’t have anything to add to this in the way of a forecast. But it does give me a hook to weigh in on Christie’s speech. It was uplifting and inspiring. As many have commented, it was a Reagan leadership speech on exceptionalism, or “earned American exceptionalism,” as the Wall Street Journal editors put it. I agree.

There are a couple a points that I want to emphasize, though.

First, Christie gets the linkage between domestic economic growth, national security, and foreign-policy influence. This was an absolute key Reagan principle.

Reagan’s firing of the PATCO workers was heard around the world by the old Soviet Union. But it was Reagan’s tax cuts, limited government, deregulation, disinflation (with Paul Volcker), and free-trade policies that grew the economy by nearly 5 percent annually during the recovery period of the 1980s, with nearly 20 million new jobs added. That ultimately knocked out the Soviet Union. (Throw in deregulated oil prices, too. They decimated Soviet coffers.)

Second, at the Reagan Library, Christie talked about the New Jersey model, where in a tough war against government unions and teachers, divided government worked to reform the state’s pension and health benefits, cap property taxes, and hold down arbitration awards for union salaries. (Christie didn’t mention this, but he also stopped the millionaire’s tax in New Jersey.)

And while the governor said there was compromise on a bipartisan basis, and while he emphasized leadership in compromise several times in his speech, he noted that he balanced two budgets with over $13 billion in deficits without raising taxes.

So there’s compromise, and there’s compromise.

In New Jersey, Christie has set an example for the U.S. Congress. What he seems to be saying is that compromises should occur in the spending areas, with particular emphasis on entitlements and a general curbing of the public sector. That’s a strong, positive message.

Third, Christie is a growth guy. He gets that. Numerous times in the speech the governor spoke about pro-growth tax reform along with entitlement reform and free trade. He came down on the side of the entrepreneur, not the government planner. And he said he’d opt for free-market reform in education. These are important policy markers if he decides to run.

Additionally, in what may have been the speech’s toughest passage, Christie blasted President Obama for dividing the nation along class-warfare lines: “Telling those who are scared and struggling that the only way their lives can get better is to diminish the success of others . . . trying to cynically convince those who are suffering that the American economic pie is no longer a growing one . . . insisting that we must tax and take and demonize those who have already achieved the American dream . . . is a demoralizing message for America.” (Italics mine.)

That helped make the Christie speech truly superb.

American economic psychology today is depressed and dispirited. It is, in fact, demoralized. And President Obama’s contribution as a divider is a key part of this demoralization. Not the only part. There are other culprits. But a key part.

In effect, Christie has labeled Obama the demoralizer-in-chief. He is the first to do so. It was an exceptional addition to an exceptional speech.

I am not choosing sides here in the GOP primary. I am not endorsing. I am merely trying to report what I think is a very important political statement, one that should be incorporated into the various GOP campaigns and the national debate.

Governor Christie is holding President Obama responsible. No excuses. And that, by itself, is a big contribution.

Thursday, September 22, 2011

A Twisted Outlook

Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its “Operation Twist.” The market correctly perceives that the central bank’s plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn’t QE3, that’s for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed’s sterilized asset swap actually tightened financial markets.

The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference.

But the real issue is the new FOMC forecast: “There are significant downside risks to the economic outlook, including strains in global financial markets.” That was the killer statement.

So let me repeat: We are on the front end of a recession. The profits picture is very much in doubt. More Obamanomics tax hikes are in the air. Europe is unsolved. U.S. finances are a mess. All this is being discounted by slumping stocks.

Corporate credit risk spreads have been widening, which is a negative for the profits picture, as economist Michael Darda has pointed out. Profits are the mother’s milk of stocks. And the European funding markets have tightened substantially, as their much-wider financial-stress spreads all indicate.

Indeed, the European banking and sovereign-debt crisis is still a shoe waiting to fall. Greece may get bailed out again in a couple of weeks. But so far, the European Union’s authorities have not agreed on a bailout or bankruptcy plan to backstop debt-restructurings, or to recapitalize banks in the wake of those default restructurings.

Meanwhile, September purchasing managers’ indexes for European manufacturing and services teeter on the brink of recession. In Asia, Hong Kong shipping volumes are way down, and China’s PMI came in weak. The global transportation-delivery powerhouse FedEx just lowered its worldwide earnings and sales outlook.

And coming back home, the Obama $1.5 trillion tax-hike plan, and his veto threat for any deficit package that doesn’t include big tax hikes on successful earners, investors, and businesses, is another sword of Damocles hanging over the economy and the stock market.

Is the U.S. stock market now predicting recession? Well, the cyclical economic sectors are in bear-market mode, with roughly 25 percent declines since late April for energy, industrials, and materials. Banks, which are being hurt by credit downgrades and yield-curve flattening, are off over 30 percent.

How bad might the recession be? Well, it’s hard to say. But in all likelihood the answer is not so bad. The yield curve has narrowed from 10s to 2s, from nearly 300 basis points in March to about 150 basis points currently. But the curve is not inverted, and that’s important as a recession signal. And over the past ten years or so, the average spread has been about 160 basis points, not far from today’s reading.

Also, the U.S. banking system is flush with cash, as is corporate America. And for better or worse, interest rates in the Treasury market are negative (easy money). Business profits will slow significantly, but are still likely to rise a bit. And with oil dropping to about $80, a price shock that was a key slowdown factor is going away.

Housing is still in the tank, and consumer spending looks very iffy. And we had zero jobs and zero retail sales in August — two very bad signs. On the other hand, exports and business investment are still rising.

So it’s not 2008. Not by a long shot. But it’s not a pretty picture either.

Tuesday, September 20, 2011

Obama’s Bizarre Tax Attack

It could almost make your head spin. With an economy on the front end of another recession, President Obama’s tax attack on the folks who are most likely to succeed, invest, start new businesses, and create jobs is nothing short of staggering. Only liberal-left class-warfare ideology can explain this.

In his speech on Monday, Obama laid out $1.5 trillion in tax hikes over ten years, aimed almost entirely at America’s well-to-do. This includes $800 billion from rolling back the top rates in the Bush tax-cut plan, $470 some-odd billion to reduce itemized deductions for upper-bracket payers, and — oh yes — a millionaire’s tax called the “Buffett Rule.”

Pause a moment on the Buffett Rule. Almost all of Warren Buffett’s income comes from capital gains taxed at 15 percent. He only pays himself $100,000 a year, which would be taxed at the top rate. Most of his wealth is untaxed as unrealized capital gains. So his effective income-tax rate is lower than his secretary’s.

So what?

The vast majority of millionaires pay a 35 percent current tax rate on personal income from salaries, bonuses, and small-business income. Their effective tax rate is around 30 percent, much higher than the roughly 20 percent effective rate for the so-called middle class (depending, of course, on how you define the middle class).

Remember that the top 1 percent of income-tax payers shoulders 40 percent of all income taxes. They are paying their fair share. Then remember that 50 percent of income-tax filers don’t pay any income tax at all.

Obama refuses to tell us what the new millionaire tax rate would be, or what the formula might be in relation to middle-class taxpayers. But one thing’s for sure: This new Buffet tax is a penalty on investment, risk-taking, and job-creation.

No one even knows what the targeted group is going to be. A New York Times story suggests that the Buffet tax will hit three-tenths of 1 percent of taxpayers, which could be 450,000 people out of 144 million tax returns.

A Wall Street Journal story suggests the Buffet tax would have hit just 22,000 people in 2009, those households making more than $1 million annually and paying less than 15 percent of income in federal income taxes. According to the Tax Policy Center, doubling the tax burden of those 22,000 would raise just $19 billion a year. How silly is this?

And let’s also not forget that over the past four decades the evidence is absolutely clear that a lower capital-gains tax produces huge gains in revenues. Raising the cap-gains tax lowers revenues. It’s a pure Laffer-curve effect.

Clearly, the logic here is political, not economic. And it’s equally clear that Mr. Obama is now catering to his liberal-left base. I guess his logic is that even though so many people don’t have jobs, they’ll feel much better knowing that 22,000 rich people will have a higher tax rate.

Make sense?

Adding to this bizarre scenario, Obama knows full well that the debt-ceiling deal now moving to the phase-two super committee rules out tax increases. He also knows full well that none of these tax hikes will ever get through the GOP House. Perhaps, as Congressman Paul Ryan notes, class warfare makes for good politics. Perhaps.

But Ronald Reagan was branded a class warrior for the Kemp-Roth tax cuts, and he was overwhelmingly reelected. Why? Because low tax rates reignited economic growth and job-creation. Today, the president’s militant tax-hike threats, along with Obamacare and unmanageable regulatory costs, are holding back job-creators.

And Paul Ryan makes another key point: Tax investment more, and you’ll get less of it. If these kinds of tax hikes are ever passed, the economy will be doomed to stagnation over the long-run. Penalizing incentives will do that. And lower growth means higher deficits.

Why in the world doesn’t President Obama follow the overwhelming consensus for fundamental tax reform to lower marginal rates and broaden the income base? Economists of all stripes agree on this.

At the end of the day, it sure looks like our president wants to raise taxes on wealthy Americans and large corporations in order to spend more and enlarge the size and scope of government. From the standpoint of jobs, growth, and prosperity, it just won’t work.