Political Hay

Newt’s New Contract

As previewed at the last debate, he's delivered a product "far bolder, far deeper, far more profound" than 1994's Contract, not to mention 1980's.

By 10.5.11

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Last week, Newt Gingrich released his 21st Century Contract with America, composed of 10 specific legislative proposals he would enact if elected President. In the 1994 Congressional campaigns, Republicans not only rode Newt's Contract with America proposals to Republican majorities in Congress. They maintained their House majority for 12 years, after Republicans had only held a House majority for 2 of the previous 74 years.

Newt's 21st century contract is similarly a document on which the entire Republican Party can campaign next year, and win a generation of governing majorities.

Booming Recovery, Long Overdue

Gingrich pledges in his new contract to "Return to robust job creation with a bold set of tax cuts and regulatory reforms that will free American entrepreneurs to invest and hire, as well as by reforming the Federal Reserve."

That includes a proposal for corporate tax reform, closing loopholes and reducing the federal rate from 35%, second highest in the developed world, all the way down to 12.5%. Ireland, long a poor, economically backward nation, adopted that rate in 1988 when it suffered the second lowest per capita income in the EU. The Irish rode the resulting boom over the next 20 years to the second highest per capita income in the EU. Jack Kemp used to advance this policy for America as well, noting that our own Treasury Department issued a study showing that Ireland raises more corporate tax revenues as a percent of GDP with this low rate than we do with our rate nearly 3 times as high.

Gingrich's economic recovery plan would also abolish the capital gains tax, because "At a zero percent rate, hundreds of billions of dollars in new investments would pour into the United States to create new firms and build new factories." By effectively double-taxing capital income, the capital gains levy discourages the venture capital that feeds start-ups and creates jobs. That is why 14 out of 30 OECD countries, plus China, Taiwan, Hong Kong, Singapore, and others, already enjoy zero capital gains taxes. Gingrich's Contract would further eliminate double taxation by abolishing the death tax and the Alternative Minimum Tax.

Gingrich's new contract also includes the proposal for an optional flat tax long advocated by Wall Street Journal senior economics writer Steve Moore. Gingrich explains:

All tax filers would be given the option to pay their income taxes subject to current income tax provisions or to pay under a lower single rate of taxation with limited deductions. A revenue neutral flat tax reform would save hundreds of billions of dollars in compliance costs each year and would eliminate the need for taxes on savings, dividends, and capital gains. A faster, flatter, fairer tax structure would be simple: tax returns could be done on a single page. Subtract from your income a standard deduction and deductions for charity and home ownership, multiply the result by a fixed single rate of taxation, and the process is over. 

This is a complete answer to President Obama and Warren Buffett arguing that corporate CEOs should pay the same tax rate as their secretaries. Under a flat tax, they would. In my recent book America's Ticking Bankruptcy Bomb, I explain that with the resulting economic boom from these policies, on a dynamic basis the revenue neutral flat tax rate could be as low as 15% for all.

Gingrich adds, "To further empower job creators, we must get rid of regulations that prevent them from growing and hiring. This means taking decision-making power from bureaucrats who don't know how job creation works." That would include repealing the Dodd-Frank regulatory tsunami threatening to swamp the nation's financial system, and replacing the Environmental Protection Agency with an Environmental Solutions Agency "that will operate on the premise that most environmental problems can and should be solved by states and local communities…and focus on incentives for new solutions, research and technologies." Gingrich would also replace the National Labor Relations Board with "a new common sense organization for labor-management relations," and reform the Food and Drug Administration to fast track wonder drug breakthroughs.

Gingrich provides for a complete Reagan style economic recovery plan by also proposing to fundamentally reform the Federal Reserve. Besides "a full-scale audit of Federal Reserve activities," Gingrich proposes that "The Fed's monetary policy discretion should be limited to following a price rule guiding the conduct of monetary policy. The Fed should monitor the signals provided by sensitive commodity prices with the goal of maintaining stable prices, thereby contributing to a stable dollar without inflation." Among those sensitive commodity prices would be gold, providing a formal, legislatively mandated link to gold in monetary policy for the first time in 40 years.

Gingrich displays an understanding of the libertarian, Hayek-Von Mises, Austrian school of economics in writing in regard to monetary policy:

Artificial interest rates distort investment decisions all across the economy, resulting in a misallocation of productive resources that cannot be sustained over the long term. Eventually, artificially low interest rates lead to an economic bust and widespread job losses. Only when interest rates are no longer manipulated can businesses and entrepreneurs determine the right investments that can in turn lead to sustainable job creation throughout the economy.

Art Laffer, a central architect of Reaganomics, says regarding Gingrich's economic recovery plan, "The combination of pro-growth tax reform, spending restraint, and sound money will restore robust economic growth with low unemployment and low inflation," and praises "the powerful effect it will have on the future growth path of the United States economy." Indeed, Gingrich has the formula for another generation long economic boom achieved by freeing a dynamic economy that is straining to break out of the bonds of Obamanomics.

Repeal and Replace Obamacare

Gingrich features first in his Contract the priority to "Repeal Obamacare and pass a replacement that saves lives and money by empowering patients and doctors, not bureaucrats and politicians." Gingrich explains, "The Obamacare law is unconstitutional, unaffordable, unworkable, and stunningly unfair. It's so-called 'individual mandate' is blatantly unconstitutional and an unprecedented expansion of federal power."

Gingrich displays profound insight into why the individual and employer mandates are so unworkable, writing in the Contract:

Their intractable problem is this: once you have a mandate, the government has to specify exactly what coverage must be included in insurance for it to qualify. This introduces political considerations into determining these minimum standards, guaranteeing that nothing desired by the special interests will be left out. And once the government mandates such expensive insurance, the government becomes responsible for its costs. It has to adopt expensive subsidies to help people pay for the expensive plans that it is requiring. The resulting cost to the taxpayer and strain on the budget leads the government to try and control healthcare costs by limiting healthcare services. The inevitable result is rationing by a nameless, faceless, unaccountable board of government bureaucrats. 

These intractable problems arise whether the mandates are imposed by the federal government or a state government. In fact, exactly these disastrous results are playing out under Romneycare in Massachusetts.

Repeal of Obamacare cuts future spending and taxes by trillions. It also would result in further dramatic reductions in regulatory burdens and costs. As Gingrich's Contract notes, "The Obamacare law also creates one thousand, nine hundred and sixty eight separate grants of power to bureaucrats, most of them to the Secretary of Health and Human Services and her bureaucracy. It creates 159 new boards, agencies and other government entities to administer health decisions that should be up to the individual in consultation with their doctor."

Gingrich also displays original insight into the policies that should replace Obamacare:

I will advocate for specific replacement health policies that will create a free market framework for health care, provide affordable, portable, and reliable healthcare coverage, and establish a health care safety net focused on those in need. This system will assure health care for all with no individual mandate or employer mandate of any kind. This alternative to Obamacare begins with patient power and localism and the many common sense ideas developed over the past eight years at the Center for Health Transformation.

These policies adopt the Patient Power framework advocated by conservative health policy guru John Goodman at NCPA in Dallas. That is why Gingrich's reforms include extending

Health Savings Accounts throughout the entire health care system. Everyone on Medicare should be free to choose an HSA as part of their coverage if they want it. Everyone on Medicaid should be free to choose an HSA for part of his or her coverage. All workers should be free to use their health insurance tax credit or deduction to choose an HSA in place of their employer-provided health insurance if they desire.

The very first paper on Health Savings Accounts, in fact, was co-authored by John Goodman and myself in 1981. Gingrich was a leader in Congress providing for the initial adoption of HSAs in federal law.

The Contract and Cutting Edge Entitlement Reform

Gingrich's Contract calls for fundamental sweeping entitlement reform, reflecting my recent book America's Ticking Bankruptcy Bomb. That book explains in full, copious detail why Gingrich is so right to say in the Contract: 

I reject the idea that we can solve our budget and debt crisis by some combination of cutting benefits and raising taxes within the current framework of these two programs [Social Security and Medicare]. Instead, we need to think outside the box with fundamental, structural reforms that would transform and modernize these two programs, changing how they work to achieve their goals. Any American who wants to enter or remain in the existing Medicare and Social Security programs will be able to do so, but we will introduce optional alternatives that give Americans more control over their health and retirement…. Instead of tax and spend redistribution, I propose that new legislation reform our entitlement programs so that they can benefit from modern capital, labor, and insurance markets to achieve their goals, with positive, pro-growth incentives to reinforce and further economic growth, rather than counterproductively subtract from it. If we do this right we can achieve the goal of ensuring a secure and healthy retirement for all, far better and far more effectively, at just a fraction of the cost of the current, outdated, counterproductive entitlement programs.

The specific Contract proposals implementing this vision include "a voluntary option for younger Americans to put a portion of their Social Security contribution into personal Social Security savings accounts. Other countries, such as Chile, have found that this model creates vast savings while giving beneficiaries more control over when and how they plan to retire." In fact, Rep. Thaddeus McCotter last month introduced a new bill providing for a personal account option for Social Security. The Chief Actuary of Social Security scored that bill as eliminating all future Social Security deficits without cutting benefits or raising taxes, but just through the effect of the personal accounts in taking over so much of the financial burden of paying future promised benefits. In fact, because standard, long-term market investment returns are so much higher than what Social Security, relying on redistribution rather than investment, can even promise, future seniors with personal accounts would enjoy higher rather than lower overall benefits.

Similarly, for Medicare, Gingrich's Contract notes:

My proposed legislation will offer seniors new choices in Medicare, as well. It will give them the option to choose, on a voluntary basis, either to remain in the existing program, or to transition to a more personalized system in the private sector with greater options for better care. If they select the personalized system, beneficiaries would receive support to cover their private sector premiums. Giving all seniors the option to choose their insurance provider will improve price competition and help lower costs for the program.

That result has been proven with the Medicare Part D program, which helps seniors pay for competing private drug insurance plans. Because of market price competition, the costs of that program have been far below original projections.

Gingrich expands on those entitlement reforms by proposing to build upon the sweeping success of the 1996 reforms of the old Aid to Families with Dependent Children (AFDC) entitlement program, which Congress adopted under his leadership. Gingrich writes in the Contract: 

For example, during my Speakership, we passed the first major overhaul of an entitlement program in American history, with welfare reform in 1996. Under the old system, the federal government gave states a blank check, and often incentivized welfare recipients not to enter the work force. Naturally, spending growth was out of control, and the program did little to alleviate poverty. Our reform changed this: States now only get a fixed amount -- a "block grant" -- every year, and can design their welfare system however they want as long as they require recipients to eventually enter work.

Gingrich proposes:

There are 184 other means-tested entitlement programs that can be block granted in a similar manner to our reform in 1996. One program alone -- Medicaid -- could save the federal government over $700 billion in the next decade, according to Congressman Paul Ryan's 2012 Republican Budget. Not only would these programs be more responsive and dynamic on a state level, but Americans would save hundreds of billions of federal tax dollars every year. 

Full detail on such reform is also provided in my book America's Ticking Bankruptcy Bomb.

These reforms lead Gingrich to propose as well in the Contract to "Balance the federal budget by freeing job creators to grow the economy, reforming entitlements, and implementing productivity improvement systems such as Lean Six Sigma, to eliminate waste and fraud. Pass a balanced budget amendment to keep it balanced." Gingrich rightly recognizes, "The biggest key to reducing the deficit is robust economic growth…By creating more wealth and more taxpayers, and by developing billions of dollars worth of new American energy sources, we will dramatically increase federal, state and local revenues and decrease budget deficits….We can have higher revenues without having higher taxes."

Achieving that balanced budget would be further aided by using the private sector management and waste and fraud cutting techniques of a program known as Lean Six Sigma, promoted by an organization named Strong America Now. This is an updated and advanced version of Reagan's Grace Commission cost cutting recommendations.

Gingrich's Contract advances other path-breaking ideas, such as using Congress's powers to reorganize the federal judiciary and regulate the jurisdiction of the federal courts, including the Supreme Court, to rein in judicial activism, enforcing the Tenth Amendment, and unleashing the private sector to produce the maximum in American energy. Most exciting, Newt's Contract launches all of these ideas into the mainstream of the Republican Party.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.