Does America still have what it takes to achieve a high-growth economy? Does Congress? Economic growth, in the current recovery, is half that of past recessions since World War II. Moreover, average wages have been stagnant for seven years and there is a greater disparity between the very wealthy, a struggling middle class, and an emerging underclass that seems to be outside the economic and social mainstream in good times as well as bad. Technology, globalization, family breakdown, and a sub-par educational system have combined to deprive many working or lower-class citizens of solid, meaningful work and the ability to support their families and maintain their self-respect.
There are also government failures that compound the problem including an internationally uncompetitive corporate tax code, a perversely complicated income tax, and the unending accretion of inefficient and overdone regulation.
Last week, at the Heritage Foundation in Washington, CNBC Commentator and economist Larry Kudlow hosted a very lively, even provocative, blue-ribbon panel discussion (view it here) on the theme, “And Now for a Congressional Growth Agenda.” Besides the supply-side guru, Arthur Laffer, discussants included the impressive Carly Fiorina, former CEO of Hewlett-Packard, unsuccessful California Senate candidate and possible presidential candidate; the astute economic commentator, James (“Jimmy”) Pethokoukis of the American Enterprise Institute; and Stephen Moore, Heritage’s own Chief Economist and former Wall Street Journal editorial board member.
Fiorina, who started out as a secretary on her way to become a CEO, argued that we need to focus on our most important and only “limitless resource,” human potential, which, historically, was always given free rein in America but is now hobbled. She noted that one in six Americans are in poverty. Most ominously, we are, for the first time in our history, “destroying more business than we are creating.” Even worse, these are small businesses, where we always saw the most innovation and the greatest amount of job creation. The big corporations may be thriving and the stock market booming, but small business is being stifled. She noted that inequality is the highest in California, the state with the purest form of economic liberalism in the nation.
Seventy percent of small business owners believe the federal government is “hostile” to them, and Fiorina attributes this to government “crushing the life out of the economy.” As you might assume, she also puts a premium on job training and educational reform as key to optimizing human potential. This latter point is key since, as Byron York of the Washington Examiner has noted, Republicans tend to obsess over entrepreneurs to the exclusion of Americans who cannot or do not want to run their own business, which is the vast majority of voters.
Jimmy Pethokoukis, who actually agrees with York, seconded Carly Fiorina’s emphasis on new start-ups and small business because, let’s face it, America is also a welfare state and, in many ways, very much following the path of Europe and Scandinavia. “Our one big advantage, our only edge among social welfare states, is business start-ups.” But the data are disturbing. Despite the high visibility of Facebook, Twitter and other meteoric start-ups, these new ventures have seen “a steady erosion over 30 years,” claims Pethokoukis. Things look good, “until you look at the data,” even in the high-tech sector. Start-ups provide, not just jobs, but “competitive intensity” with big companies.
Kudlow introduced Arthur Laffer as “the father of supply-side economics” and “one of the most important economic voices in the world.” Pethokoukis seconded the motion and described him as “a world historical figure” for being the driving force behind the Reagan tax cuts and resulting boom, which the late Robert Bartley termed “The Seven Fat Years.”
Laffer did not disappoint. He offered his high-octane, Simon-pure prescription of low personal tax rates; elimination of special interest loopholes, thereby broadening the tax base; spending restraint; sound money; free trade; and regulatory reform. He backed this up with a wealth of data from the Reagan years and comparisons between states that tax income too highly versus those that tax consumption. He praised Jerry Brown’s 12.8 percent flat tax proposal, which he claimed was very popular in his primary campaign against Bill Clinton for president. He, naturally, praised Ronald Reagan, but also Bill Clinton while dismissing Presidents Johnson, Nixon, Ford, and Carter as the “four stooges,” as bipartisan a put-down as you will ever hear.
If we had had a 4 percent growth rate over the last six years, the historic rate, rather than the pathetic 2 percent we have had, the nation would have had an additional $2 trillion in GDP, asserted Laffer.
He reminded the audience that the Reagan tax cut passed the U.S. Senate 97-3 and then extrapolates this to the current political climate. His basic view is “Just don’t stand there, undo something.” After all, Jimmy Carter made Ronald Reagan.
“You cannot imagine the great President to replace President Obama,” claimed Laffer.
With Larry Kudlow’s prompting, Jimmy Pethokoukis demurred on Art Laffer’s hard- charging approach in the present economic and political environment, reflecting a divergence of conservative opinion about which I have previously written on this site. The difference has to do with means more than ends, but is not trivial.
The issue of income inequality, and what to do about it, is a primary concern of the electorate. There are, of course, two kinds of inequality, said Pethokoukis, one good, one bad. If someone creates a new product or service, say Facebook, and makes a ton of money, that is socially beneficial. However, if someone benefits from cronyism and rent-seeking through special legislative or regulatory favors, or is mired in a lousy educational system, a jobs-free economy, or social pathologies of varying kinds, this is bad.
Pethokoukis observed that the top tax rate is still low, 40 percent, on people who are doing very well. And 45 percent of Americans, in the lower percentiles, pay no taxes at all. Moreover, the middle class is losing ground in terms of income. Politically, proposing a big tax cut on the wealthy, no matter how economically efficacious it might be, would be a disaster politically (I am paraphrasing). He does not oppose flattening the tax rate, but not now.
“I would address the middle class [first],” said Pethokoukis. The “Romney problem” — the perceived lack of empathy for the middle class — was toxic in the last presidential election. He supports increasing the child tax credit for parents and addressing corporate tax reform first given that it is (a) a mess, and (b) extremely anti-competitive for American businesses in the global economy. Larry Kudlow concurred in this latter recommendation, framing corporate tax reform as “an income booster for the middle class.” He also believes that the earned income tax credit is helpful to lower income taxpayers.
Pethokoukis was tempering Laffer’s economic truths with the political realities of the Age of Elizabeth Warren, whom Kudlow tagged as being a part of “the Sandinista wing of the Democratic Party.” Thus, any tax or economic reform proposal, require “a certain level of [political] plausibility” in an era very different from the 1980s.
Nevertheless, Laffer maintained that we have not had a pro-growth policy since Clinton. (I would observe that George W. Bush did a nice job with early tax cuts, but overwhelmed them with more entitlement spending — prescription drug benefits — and two wars that blew the budget through the roof. And, unfortunately, the Great Recession certainly left a bad taste in the mouths of the voters heading into the election in which Obama defeated, soundly, John McCain.)
Laffer notes that more revenue is generated by reducing marginal tax rates on high-income people because folks like Warren Buffett and Bill Gates can defeat higher tax rates by holding onto their unrealized capital gains, putting money into trusts, and deploying a myriad of tax-planning techniques (e.g., gifting the vacation home to your kids while retaining a life estate).
Lowering the marginal tax rate on wealthy people will cause them to put their money into more productive uses which will, in turn, generate more tax revenues. Low rates, higher revenues.
You should certainly be willing to compromise and negotiate, but you should not “negotiate against yourself,” at least at the front end of the process. In other words, said Laffer, stick with the strong, supply-side tax reform proposal and hold out for the best deal possible in the course of the political process.
Steve Moore, with Carly Fiorina’s concurrence, pointed to polling data showing Americans view “fairness” as a key value relative to taxation. As Fiorina claims, “if it is too complicated, it’s unfair.” She also thinks that simplification of the tax code is as important to voters as is the rate itself. The rate is certainly important, economically, but should be discussed separately from the simplification.
To his credit, Larry Kudlow did broach the subject of marriage and family breakdown, as well as the creation of a “permanent underclass in the latter quintile,” citing the breakthrough work of Prof. Brad Wilcox, director of the National Marriage Project at the University of Virginia, on the social and economic consequences of family breakdown. Married people “make a whole lot more income,” and marriage is “the key to poverty, inequality [and the] closed door.”
The data, argues Carly Fiorina, is “unmistakable.” “Marriage matters,” as does getting a high school education. Today, 45 percent of children are in single-parent households, most of which are under economic stress. Thus, education, jobs, and a stable family are paramount. We also need to reform welfare policies that deprive people of needed benefits if they do get married.
Stephen Moore recognizes that “country club Republicans” do not like to talk about social issues, but “Social issues are economic issues.” Kudlow added that “Political people need to talk about the culture.”
This recognition of the social issues as an economic issue, as well as a moral one, by serious economic conservatives, makes this Heritage event a major happening in terms of reconciling two of the important wings of the Reagan coalition. This is very good news. That said, Jimmy Pethokoukis’s admonition that “You can’t talk about social issues without an economic message for the low and middle class” must be taken to heart.
I should say a word about Carly Fiorina. I do not know if she has a shot at becoming president, but I hope the GOP gives her a serious look as vice president or at least a future cabinet post. She is smart, articulate and thoughtful. It wouldn’t hurt to have a woman with her talent front and center in the next election cycle. I was impressed how she handled the abortion issue, not only defending the right to life but also going on the offense against liberal Democratic orthodoxy as truly extreme.
Fiorina noted that African-Americans understand the devastation abortion has had on their community. She related how, whenever anyone asks her how she can support the GOP platform on abortion, she asks them how they can support the Democratic platform which countenances abortion for any reason, anytime, for all nine months of pregnancy. She argues that that plank is both “inhumane and bad economics.” If only her male Republicans colleagues could find their voices on this subject.
True to character, Larry Kudlow closed the discussion on an upbeat note. There is “too much pessimism in this country,” he observed. “If you believe in God, you have to be an optimist.” That’s true, but He leaves it to us to exercise our intellect and will to do what needs to be done. Yet, it is hard to argue with Kudlow’s closing remark that “We need a positive agenda.”
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