If adopted, the GOP presidential front-runner's plan could swell the deficit, crowd out private investment, and potentially hurt growth in the long run.
AP Photo/Ron Edmonds
Newt Gingrich's economic plan is not Reaganesque. It is not, as so many of his Republican presidential rivals' claim their plans to be, inspired by Reaganomics. It is Reaganomics, cryogenically frozen in 1981, thawed 30 years later, and pumped full of Newt-style steroids in order to save the American people from slow growth. The plan features massive tax cuts (which would largely benefit businesses and the wealthy), less government spending (through the privatization of entitlement programs), interest-rate hikes, and rampant deregulation.
The foundation is classic supply-side, trickle-down, Laffer-curve economics, which Gingrich's economic advisers predict will unleash a boom that will eventually generate enough tax revenue to balance the federal budget. How big will that boom be, you ask? What do the campaign's projections show? "If you go back to the Reagan years, from 1983, that's our projection of what the boom would look like--exactly," says Peter Ferrara, a former Reagan aide who helped draft the Gingrich plan.
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Gingrich has shot to the top of the GOP field with relatively little examination of his economic agenda, compared to the scrutiny heaped on Mitt Romney and Rick Perry. Perhaps the best-known plank of the former speaker's jobs platform is looser labor laws to allow poor children to work as janitors in their own schools--an idea Gingrich loves to bat around, but which doesn't appear in his campaign's jobs literature.
What does appear is a package of tax cuts much deeper than Romney or Perry propose. Like Perry, Gingrich would let taxpayers choose between the current income-tax system or a flat rate. Perry's rate is 20 percent; Gingrich's is 15 percent. Romney would eliminate taxes on capital gains, dividends, and interest for taxpayers who earn less than $200,000 a year; Gingrich eliminates them entirely. Romney's plan cuts the corporate income-tax rate to 25 percent, while Perry's would be 20 percent. Gingrich would drop the corporate rate all the way to 12.5 percent--lower than even Ron Paul has proposed.
Gingrich, who blames excessive regulation for the 2008 financial crisis, also wants to advance Reaganomics by repealing the Dodd-Frank and Sarbanes-Oxley laws governing the financial sector and by replacing the Environmental Protection Agency and the National Labor Relations Board. He would reorient the Federal Reserve entirely toward taming inflation, axing the pursuit of full employment from its congressional mandate. He would cut spending by fundamentally restructuring safety-net programs, turning Medicaid into block grants to states and allowing Americans to opt into privatized accounts for Medicare and Social Security, eventually phasing out payroll taxes in the process.
"These are timeless economic principles," says Ferrara, a lawyer, author, and Gingrich economic adviser who directs entitlement and budget policy at the conservative Heartland Institute. The core of Reagan's 1980 platform, he points out, was an idea: "What we think is that it's not spending but production which is key to economic growth, and the key to production is production incentives."
During Reagan's final six years in office, gross domestic product increased by an average of 4.4 percent a year, well above the 3 percent average of the last 50 years. Since then, conservative economists have extolled the growth-spurring power of low taxes and light regulation. At a symposium at Stanford University's Hoover Institution this month, Edward Prescott, an economist at the Federal Reserve Bank of Minneapolis, argued that slashing marginal rates and reforming the tax code would unleash rapid economic expansion. Douglas Holtz-Eakin, a former Congressional Budget Office director who now runs the conservative American Action Forum think tank, says the Gingrich plan appears to be "a really efficient tax system" that would accelerate growth.
It's worth noting that Bill Clinton raised taxes as president, and in his last six years in office, the economy averaged 4 percent annual growth. It's also worth noting what's changed since the dawn of Reaganomics. Reagan took office amid sky-high inflation, especially compared with the 2 percent core rate today, and the top marginal income tax rate was 70 percent before he cut it. The nation wasn't recovering from a housing crash and a Wall Street meltdown. And it didn't face the mounting debt woes of America today; Reagan, after all, never balanced a federal budget.
Ferrara insists Gingrich's plan will achieve balance in a decade, thanks to increased growth and hemmed-in spending. But many economists say the plan, with its steeper tax cuts, could dig an even larger hole in the budget than Perry's, which the nonpartisan Tax Policy Center estimated would add a half-trillion dollars to the annual deficit in 2015. Gingrich's plan "is bound to lose quite a bit of revenue," says Rudolph Penner, a former CBO director who is now a fellow at the Urban Institute and is affiliated with the Tax Policy Center. It could swell the deficit, crowd out private investment, and potentially hurt growth in the long run.
"This is what George W. Bush did, but more extreme," says Austan Goolsbee, a former top economic adviser to President Obama who has published several academic papers challenging the Laffer-curve theory that says tax cuts can pay for themselves through increased growth. "And it didn't work! If massive tax cuts for corporations and the rich were a magic elixir for growth, then what happened? Because we did it in the 2000s--tax cuts in the trillions of dollars--and we barely grew."
Under Bush, the economy created less than 1 million jobs per year before the financial crisis and no net jobs when you count the recession. It has lost jobs in the recession and its aftermath under Obama. Reagan created about 2 million jobs per year--a blistering pace, but slower than the "jobs and prosperity" record Gingrich touts on his website. During his speakership, Gingrich brags, the economy created nearly 3 million jobs per year. He doesn't mention who was president.
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