My column quoted Kudlow calling Santorum’s economic plan “terrible,” because it favors manufacturers by lowering their corporate income tax rate to 0 percent, while not doing the same for non-manufacturers. Kudlow says I accused him in the column of being anti-blue-collar. I certainly wrote that many Republicans are, but I don’t agree that my column leveled this accusation specifically at Kudlow.
He wrote:“The Keystone opposition coming out of the White House is completely alienating all these people, the folks who work with their hands. And it’s these workers who have been decimated in the recession far more than any other group in the economy.”
Kudlow and I have our disagreements about bailouts and taxes (and the meaning of my latest column), but on these points, we agree: 1) Santorum is wrong to pick winners and losers, and 2) many economy-distorting policies need to be fixed, but the policies that hurt blue-collar workers impose unique costs.
– Tim Carney is senior political columnist for the Washington Examiner.
A day after coming in third in the Iowa Republican presidential caucuses, Ron Paul set his sights on New Hampshire and took aim at Rick Santorum. He also declared he had no intention of leaving the Republican party.
Santorum is a typical “big-government Republican” who is not really conservative, Paul told me Wednesday night. He said that he’s the true fiscal conservative who believes in free-market economics, adding that both Santorum and Newt Gingrich don’t understand that concept.
“I think they think in terms of patching up things, and maintaining the status quo, and don’t rock the boat and you can’t cut anything,” Paul said. However, Paul noted that former Massachusetts governor Mitt Romney deserved a “little bit of credit” for working in the private sector.
Santorum, a former U.S. senator, finished just eight votes behind Romney in the Iowa caucuses. But Paul, who did well among independents and younger voters in Iowa, says he can bring those votes to the GOP. He also slammed those who tried to vilify his supporters throughout the campaign.
“I thought the party was a broad tent, a big tent, [that] brings people in . . . but aren’t young people pretty important?” he said. “I get real energized when I go to the campuses and talk about economic policy and talk about gold standards and things like this, but they don’t want to invite these people in.”
But while his libertarian views may have brought in independent voters, Paul dismissed the idea of running as an independent.
“Right now I’m doing so well, why would I think about it?” he said. “I was raised in a Republican family. I was elected twelve times to Congress as a Republican.”
“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.
When you think of Republican congressman Paul Ryan, terms like earnest, serious, and important come to mind. So does the term old-fashioned. Ryan comes from an old-fashioned place, the blue-collar town of Janesville, Wisconsin. He cherishes the old-fashioned values of a faithful family man. He even looks old-fashioned, with his white shirts and striped ties. And he uses old-fashioned argument skills, persuasively weaving big-picture themes with the numbers that back them up.
And Ryan has old-fashioned goals, too, like saving America from fiscal bankruptcy, economic stagnation, and a European-style entitlement state.
“Just look at what happened across the Atlantic,” Ryan told me in a year-end interview. “We have to avoid that. We must reclaim our founding principles of economic freedom and free markets. We must preserve the American Idea.”
With this vision, and with a pro-growth budget framework called “A Roadmap for America’s Future,” Ryan’s serious ideas have seriously gotten under President Obama’s skin.
Color me cranky about this week’s Republican presidential debate in Iowa. The headline stories were about whether Newt Gingrich actually lobbied for Freddie Mac, or why Mitt Romney changed his positions on gay rights, guns, and abortion. But a GOP growth message to defeat President Obama was completely missing in this debate. It was a supply-side whiff.
This election is principally about the economy and its poor performance. It’s about the slow rate of growth, the high rate of unemployment, and the tax, regulatory, spending, and monetary obstacles conjured up by Obama that are holding back the animal spirits which are so essential to job creation and prosperity.
Risk-taking is virtually absent today. Business profits are strong, but firms won’t make commitments in front of Obamacare, regulations, mandates, and tax threats. The president is on the campaign trail with a leftist, class-warfare message. He blames successful entrepreneurs for their wealth, and slurs high-powered businesses at every turn. His is a big-government planning vision, an FDR-like vision.
But where was the GOP response in Sioux City, Iowa?
The payroll-tax-cut debate is not really about the payroll tax, which is a very weak-kneed economic stimulant and a lackluster job creator because of its temporary nature. Without permanent incentives at lower tax rates, these rebates don’t do anything for growth and jobs.
Instead, the key to understanding the payroll-tax debate is to grasp Pres. Barack Obama’s leftist vision of taxing successful earners (the millionaire surtax) and his obsession with clean energy at the expense of fossil fuels. These are ideological positions. They support the Obama vision of class warfare and his attachment to radical environmentalism.
And the key to understanding this state of affairs is the disposition of the TransCanada Keystone XL pipeline, which Republicans cleverly threw into the payroll-tax debate as the only real job creator.
Senate Minority Leader Mitch McConnell says a Democratic plan to concede on a millionaire tax in order to get Republicans to pass an extension of the payroll tax likely won’t be enough to get an agreement.
“The tax they wanted to implement on business owners was something that couldn’t pass the House and couldn’t pass the Senate,” McConnell told me on Wednesday’s Kudlow Report. “So if they are giving up on that, they are giving up on something that couldn’t have cleared either body anyway, so I don’t know [how] far we’re down the path to an agreement.”
President Obama and fellow Democrats are now considering dropping the 1.9 percent surtax on income above $1 million a year that they wanted to pay for the payroll tax. But if Republicans are going to agree to extend the payroll tax cut — which expires on Dec. 31 and affects 160 million Americans — they want something in the bill that saves and creates jobs, McConnell said. The Keystone oil pipeline project between the U.S. and Canada will create jobs, he added, and therefore it “needs to be part of the package.”
The U.S. on Wednesday faced the prospect of an imminent government shutdown for the third time this year as a fight between lawmakers in Congress over taxes and spending turned nastier. Democrats, led by President Obama, are refusing to sign off on a bipartisan $1 trillion government-funding bill that would keep federal agencies operating beyond Friday until Republicans agree to a compromise deal on the payroll tax cut. On Tuesday, the House passed its version of the payroll tax bill, which Senate Majority Leader Harry Reid has vowed to kill.
However, McConnell has said he wants to turn first to the government-funding bill. McConnell told me that funding had been agreed upon in conference until Obama stepped in and played politics.
“Now they’ve got us two days away from a government shutdown, all instigated by the president himself,” he said. “When do you turn off the campaign? When do you take responsibility for governing?”
Bob Doll, chief equity strategist at BlackRock, told me on Monday’s Kudlow Report that while Europe still struggles with its debt crisis, things are moving in the right direction in the U.S. and China. And he thinks cyclical stocks will reap the benefits.
A few months ago, according to Doll, “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, Doll says the U.S. economy is showing a little growth and China is “a little less bad, maybe eventually good.”
“I think cyclicals will benefit,” he added.
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 eurozone 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 that 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. Said Doll, “This is a step in the right direction that should allow more reserve-requirement reductions.”
Following the GOP debate that nearly the whole world watched on Saturday night, the president on Sunday made it very clear that he will not back off his class-warfare vision in the coming year. Obama told Steve Kroft on 60 Minutes that middle-class inequality will be his big theme, and that somehow successful earners, investors, and small-business owners are to blame.
The president said that while fat-cat incomes went up 200 to 300 percent over the last few decades, middle-class incomes didn’t grow. This is not true, according to James Pethokoukis, whose blog posts citing various studies show that real median income rose at least 40 to 50 percent.
In any case, whatever the exact numbers, it’s still a mystery to me why successful people getting ahead cause anybody to fall behind. The Jack Kemp idea was always to foster a rising tide that would lift all boats. How can this happen if we penalize success and raise top tax rates on work and investment to 50 percent or more? That’s a mystery.
I should think, in a system of democratic capitalism, that more millionaires are a good thing. Show me a system of redistribution, and I’ll show you a system of economic stagnation.
Elsewhere in the interview the president said he did not overpromise on the results of his stimulus package. But actually, according to the original February 2009 stimulus documents, today’s unemployment rate should be close to 6 percent, not 8.6 percent. The president is now backing off by saying economic recovery is a long-term project that will take more than one term and more than one president.
By the way, Obama told the Today Show’s Matt Lauer in February 2009 that if he doesn’t “have this done in three years, then it’s going to be a one-term proposition.”
Which leads me to this thought regarding the GOP race: Since we basically know what Obama’s vision will be, which candidate will be better at besting Obama and his vision?
It’s going to be a battle between FDR’s 1930s and Ronald Reagan/Jack Kemp prosperity optimism.
Say what you will about former Speaker Newt Gingrich. His philosophy, his policy proposals, his track record, his campaign, and all the rest. But the one thing you have to acknowledge about Gingrich is that he’s a sizzler. He has a way with words. And he’s as good a communicator as anyone in modern politics.
In my CNBC interview with Gingrich this week, he slammed President Obama’s tax-the-rich, class-warfare attack on bank’s and businesspeople. He hammered Obama, calling him a hard-left radical who is opposed to free enterprise, capitalism, and “virtually everything which made America great.”
It was a brutal, frontal, hard-hitting attack on the president. He called Obama “the candidate of food stamps, the finest food-stamp president in American history.” He said, “I want to get equality by bringing people up. [Obama] wants to get equality by bringing people down.” He said, “I want to be the guy who says, ‘I want to help every American have a better future.’ [Obama] wants to make sure that he levels Americans down so we all have an equally mediocre future.”
Here’s the video and transcript of my interview with Newt Gingrich on Tuesday night’s Kudlow Report:
KUDLOW: 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 polls shows former House Speaker Newt Gingrich soaring to a 15 point lead over Mitt Romney, 37 to 22. Ron Paul and Rick Perry trailing in single digits.
All right. Joining me now for a first-on-CNBC interview is the aforementioned GOP frontrunner, Newt Gingrich.
Mr. Speaker, welcome. We appreciate it very much.
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?
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?
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.
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 under-taxed; 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.
KUDLOW: We never believed in temporary one-year-long tax cuts.
KUDLOW: Whatever. They’re just rebates. We believed in lower marginal tax rates which would improve after-tax incentive to work and invest.
#more#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?
GINGRICH: Look, I don’t think …
KUDLOW: Why aren’t you out there asking for pro-growth tax reform …
GINGRICH: I do.
KUDLOW: … across the board?
GINGRICH: If you go to newt.org and you look at the things I recommend …
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.
GINGRICH: I’m for abolishing the death tax. I’m for 100 percent expensing for all new equipment. I’m for a 12.5 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 …
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.
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.
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 a 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 versus the 99 percent?
KUDLOW: And what’s your response? How will you rebut that?
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 Saul 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.
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.
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?
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-an-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.
KUDLOW: I mean, it’s a different era than TR.
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.”
GINGRICH: I am a Ronald Reagan conservative.
KUDLOW: Or, “I’m a Jack Kemp conservative.”
GINGRICH: Look, I’m …
KUDLOW: I don’t want to get stuck up on TR, but I just …
GINGRICH: Wait a second. Wait a sec — wait a second.
KUDLOW: I just want …
GINGRICH: Wait a second. I …
KUDLOW: You’re a historian, and you’re an intellectual historian. You know this stuff.
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.
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. Okay? 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.
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 ten 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 ten years. That’s a swing of $5 trillion.
KUDLOW: I think it’s all …
GINGRICH: Okay. So my point …
KUDLOW: I think it’s all great, and I think it’s all factual.
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 …
GINGRICH: Well, I …
KUDLOW: … working for the drug entitlement, which so many …
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?
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. Okay? 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.
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?
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 ten 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 …
GINGRICH: … which really began to allow Medicare to reach in …
KUDLOW: The best part of the bill. The single best part of the bill.
GINGRICH: Well, and, we also created health savings accounts.
KUDLOW: Yes. Yes.
GINGRICH: Okay. 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.
KUDLOW: But I am impelled, I have to ask you, regarding Nancy Pelosi, her latest charge …
KUDLOW: … that she has new information on your ethics investigation years ago. What’s your response to that?
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?
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.
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?
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?
GINGRICH: You are the worst possible questioner.
KUDLOW: The worst.
GINGRICH: You and I worked together with …
KUDLOW: I …
GINGRICH: … with Richard Rahn, Jude Wanniski …
KUDLOW: I understand. But I’m doing my job.
GINGRICH: … Art Laffer. I’m just saying.
KUDLOW: I’m doing my job.
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?
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 …
GINGRICH: That’s right.
KUDLOW: … helped make him rich from Bain Capital.
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.
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.
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?
KUDLOW: Is that a big issue for him?
GINGRICH: Sure. Can he win against Obama?
KUDLOW: Can he win against you in the Republican primaries?
GINGRICH: No. But that’s — I hope not.
KUDLOW: Why …
GINGRICH: I can’t — I can’t sit here and offer advice on how he could beat me.
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.
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 …
GINGRICH: Good to be with you.
KUDLOW: … former speaker of the House, Republican frontrunner. We appreciate you’re here …
GOP presidential candidate Jon Huntsman dismissed Donald Trump and the debate he’ll be moderating, telling me last night that he’s the only consistent conservative in the race.
The former Utah Governor and former ambassador to China likened the <I>Newsmax</I>-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.”
Huntsman did say that he will be doing a Lincoln-Douglas-style debate with Newt Gingrich in New Hampshire on December 12. He thinks the event 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 and pro-second-amendment stances. He also noted that 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.”
It’s often said that help comes to those who help themselves. But Europe can’t seem to help itself. So on Wednesday, the U.S. Fed came to the rescue. And that rescue triggered a global stock market rally, including a near 500-point gain in the United States.
Basically, the Fed is making it cheaper for Europe to borrow dollars. And this dollar backstop symbolically shows that the Fed, the European Central Bank, and other big central banks are not going to permit a 2008-type credit freeze and financial meltdown.
But in terms of Europe’s overall problems, with governments unable to live within their means, and with investors on strike against government bonds and a very shaky banking system, the Fed action is really like taking a Tylenol gel cap. Might help the headache in the short run. But the fundamental illness is unaffected.
With a great feeling of loss and sadness, I want to join with so many others to mourn the passing of Ted Forstmann, the brilliant financier, entrepreneur, and free-market capitalist.
A Wall Street Journal editorial from Paul Gigot and a column by Charlie Gasparino in the New York Post chronicle Ted’s great achievements. It was Ted who invented the leveraged buyout, and it was Ted who walked away from the bubble of overleveraged junk bonds. Ted was a major philanthropist, and an education reformer, too.
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.
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.
You wouldn’t know it from today’s stock market, which as of this writing is off nearly 200 points. 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.
It would be a great tragedy if a super tax hike came out of a supercommittee compromise deal. It would do great harm to the economy — just as much harm as President Obama’s various tax-hike threats. And on the Republican side, a super tax hike would irreparably split the GOP.
Okay. Here’s the good news. In a CNBC interview this week, I asked supercommittee co-chair Jeb Hensarling about an idea of the Democrats to raise taxes by $600 billion to $800 billion. About $300 billion of that might be up-front, with $500 billion later from some tax-reform overhaul. This would be an unmitigated economic disaster.
But Hensarling was blunt: “Not going to happen, Larry.” He said no such deal has been presented to him. And if it were, he and other Republicans on the supercommittee would not support it.
The 12 member congressional supercommittee is still working on a deficit deal, but co-chairman Jeb Hensarling (R., Tex.) told me 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 Tuesday night. “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 supercommittee has until November 23 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 ten years.
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.”
Fears over the European debt crisis sent the market lower Monday, with financial stocks leading the way. But Rochdale Securities’ Dick Bove says what’s happening in Europe is actually helping U.S. 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,” Bove told me on last night’s 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 is that banking companies are in pretty good shape, Bove noted, adding that there should be no worries about funding issues since U.S. banks are flush with cash. In fact, he thinks U.S. banks 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, Bove said deposits are pouring in as people fearing what’s happening in the market put money in banks. “The banks have too much liquidity right now; too much capital right now,” he said. “There is no funding issue.”
Which banks are Bove’s picks? He likes JPMorgan Chase, U.S. Bancorp, and Morgan Stanley.
There were three winners in the CNBC debate: Herman Cain, Mitt Romney, and Newt Gingrich. Gov. Rick Perry was the obvious loser because of his memory lapse.
The guy with the toughest job on Wednesday night was Herman Cain, who has been hammered by sexual-harassment charges. He needed a strong performance to put him back on message with his 9-9-9 tax plan and pro-business, free-enterprise views. I give him first prize, simply because he performed so well. He had the most to gain and the most to lose. He gained.
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 said.
“I repudiate anybody who wants to divide Americans, and I think 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[s] which can only be destructive of the fabric of American society.”
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, 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 me 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,” Gingrich said. But he noted that we’ll have to wait and see how it plays out. “It’s not over yet,” he said.
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?
Despite some modest improvements in the jobs picture with the release of today’s Labor Department report, I would guard against any irrational overexuberance that problems with employment or the economy are being solved.
A smaller-than-expected 80,000 gain in nonfarm payrolls was bolstered by upward revisions in the prior two months, amounting to 102,000 additional jobs. So over the past three months the establishment survey has averaged 114,000. It’s really nothing to write home about.
A 2 percent economy is simply way too slow to generate the kind of 300,000 per month job gains the country needs. Economic growth at 5 percent would be more like it.
And this should be a warning to members of Congress who are flirting with higher tax rates as part of the supercommittee deficit deliberations. There’s loose talk about raising the top Bush tax rates and adding to that a surcharge on millionaire tax rates. That would be a big negative for future growth. Moving the top rate for investors, small-business owners, and other successful earners from 35 percent to 50 percent in the name of deficit reduction would be a devastating blow to growth. By the way, it would not even remotely solve our deficit problems, which are the result of overspending across the board.
Turning back to the employment report, one of the biggest problems is the lack of income and earnings power. Average hourly earnings are only 1.2 percent annually over the past three months, compared to a consumer price increase of 4.8 percent. So after-tax post-inflation income is still falling.
Meanwhile, aggregate hours worked rose by only one-tenth of a percent in October and only 1.7 percent over the past three months at an annual rate. So even when you combine hours worked with hourly earnings, there’s still a shortfall in real income.
The best part of the jobs report is the recent surge in the household survey, which picked up 277,000 in October and has averaged 335,000 over the past three months. This is a good sign for small business, and it’s responsible for the small drop in unemployment to 9 percent from 9.1 percent.
But it seems as though the difference between nonfarm payrolls and the household survey is starting to narrow. Over the past year, for example, corporate payrolls have increased 125,000 per month while households have increased 102,000. This is a normal pattern over time.
Again, while there’s progress on the jobs front and the economy is moving away from recession, the numbers are relatively small. That’s why Washington must be mindful of the tax and regulatory barriers which continue to impede economic growth. Republicans in particular should not be lulled into a bad deficit package that could inhibit growth.
Tax incentives matter enormously, and we’re still in a very slow-based economy.
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.
The Federal Reserve is still in quantitative-easing mode, according to congressman and Republican presidential candidate and Ron Paul, despite the fact that it announced Wednesday it would hold off any new actions to aid the economy.
“In a way I think they’re still in QE, because [Ben Bernanke] guaranteed interest rates were going to stay about 0 percent for the next couple years,” Paul told me last night on The Kudlow Report.
And if tax rates don’t go down and spending isn’t cut, he added, all the quantitative easings in the world won’t solve our problems and “will eventually destroy our currency.”
The Fed on Wednesday left interest rates unchanged, cut its growth forecasts, and said it expects the unemployment rate to remain largely the same. It also left the door open to taking further actions to aid the economy in the future.
But according to Paul, Bernanke is doing exactly the opposite of what he should be doing.
“For him to do what I want him to do, he would have to admit his whole career was misdirected,” Paul said. Bernanke would have to acknowledge that his theories were wrong, according to Paul, who added that “all this QE stuff doesn’t work.”
The congressman from Texas is a long-time critic of the Federal Reserve and Bernanke, and his view didn’t change after watching the chairman’s latestpost-Fed-meeting news conference.
In that press conference, Bernanke defended the central bank’s record on keeping inflation low and said the Fed may look to reinvest in mortgage-backed securities to provide additional support for the weak housing market. But Paul believes buying more bonds just exacerbates the problem.
“I see no benefit from this whatsoever,” he said. “I think we don’t get the correction that we need. We need some of that debt liquidated. We need some of that mal-investment taken care of. We need prices to go down.”
And Bernanke is wrong about inflation not being a problem, he said. It’s here and it started with the increase of the money supply.
“There’s a lot of factors that go into pushing prices up,” he said. “We know that the stimulus has been put out there, and all we need to do is have a multiplier effect and this thing could get way out of control. And eventually I think that’s what’s going to happen.”
Paul said his ultimate goal is to diminish the power of the Fed to monetize debt. His pick for chairman if he’s elected president? Economist Jim Grant.
“I think he’s capable because he is a free-market person,” said Paul. “He understands sound money, and I think if he had to work within the system, he would be able to restrain the Fed money machine as much as anybody else could.”
Investors dumping U.S. bank stocks are overreacting to all the European debt-crisis speculation, Rochdale Securities’ Dick Bove told me last night on The Kudlow Report.
“I think we’ve gone nuts,” he said. “I think [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 reports conflicted 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 European Union. 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,” he said. 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.”
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.
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.
Last night on The Kudlow Report I interviewed Charles Dallara, former assistant secretary to the U.S. Treasury and the current managing director for the Institute of International Finance. Fresh back from Brussels, Dallara was the lead negotiator for the banks and the private creditors regarding the Greek debt.
Here are the video and transcript:
LARRY KUDLOW: A dramatic late night meeting that was somehow last night, although it probably seems much longer than last night for you. Let me ask you, in that meeting, can you tell us what actually happened? You’ve got Merkel, you got Sarkozy, you got LeGrange, rather. Did Sarkozy, for example, actually threaten you with 100 percent haircut on the Greek bonds for your banks? Did he actually come in threatening, two guns out? What was the story there?
CHARLES DALLARA: No, Larry, he was not threatening. We had a good, good discussion about the remaining issues that needed to be resolved in order to put this issue behind us there. We had spent the prior two and a half weeks negotiating and it came down to this final meeting between me, one of my colleagues)…and Chancellor Merkel and President Sarkozy. It was not a threatening meeting, it was a professional meeting where we exchanged views on the differences. And where it was very important for us to secure an increase in the amount of collateral that Europe would fund in order to underpin these new claims on Greek debt.
KUDLOW: Is that the 30 billion euros that’s being talked about that Greece has to borrow in order–this is important, you have to explain this to us. Greece borrows that money, that money goes into these new bond instruments, and that is what’s being traded out, that’s the actual transaction?
DALLARA: Well, that’s a core part of it. Of course, the key of all this is reducing Greece’s debt. You know, we agreed an historically significant reduction, 50 percent in the nominal value of Greece’s debt held by all private investors. It’s a remarkable agreement, Larry. But key to this forus was to insure that the new claims on Greece, the new paper, would not be full Greek exposure. And that’s where the 30 billion euro became pivotal. They had not been willing to commit that amount until that final meeting which we had with the chancellor and the president in order to secure for us what was a balanced deal.
KUDLOW: And regarding the 30 billion euros, what percentage of the total deal, what’s the net present value of this deal as you would estimate it, because after all, Greece is going to get this money but doesn’t Greece still stand behind most of these bonds in this transaction?
#more#DALLARA: Well, Greece will stand behind the remaining bonds, but for every 100 billion euro bonds that’s outstanding today, when the transaction is done, there should be roughly only 50 billion outstanding at that time. The new bonds will be Greek debt but the collateral will underpin the value of the principal on this so that the investors which we represent, Larry, will be exposed to Greek risk for the interest risk and will be collateralized for the principal risk. That’s the key to this, and it was the 30 billion that made it possible for us to agree to such a large, up-front haircut.
KUDLOW: Well just…
DALLARA: The net present value is something that we have to work out in the next round of more mechanical negotiations, but it’ll be somewhere probably just north of 50 percent.
KUDLOW: And you’re saying in published reports before you got on the plane, this is a voluntary decision on the part of the creditors that you represent. Is that still true now in the–after your long plane trip, and does that mean that the credit default swaps will not be triggered in?
DALLARA: Well, Larry, on the first question, it is absolutely a voluntary deal. I was in constant communication with my chairman, Joe Ackerman, will all of my board members, and with all of the major investors who were not represented on our board, to insure that they were willing, in this final hour, to go along with this transaction. We are confident that it will be very, very highly subscribed when the deal is done. And so I’m very confident that this is voluntary and it will lead to a very successful debt exchange when the details are ironed out and when the deal is implemented.
As far as the credit default swap is concerned, we’re not the judges of what activates a credit default swap. That’s up to those who are responsible for the standard setting in that–in that important element of the industry. It is my understanding, however, based on conversations that my staff have had with them, that it is unlikely that this would trigger the credit default—a credit default event, since it is a truly voluntary deal.
KUDLOW: Can you help us understand, a lot of people are asking this question.Two hundred and ten billion euros worth of private credits in this Greek deal but there’s still 350 billion bonds outstanding. In other words, the private creditors are only 60 percent of the total. People want to know, A, what is the participation rate going to be among private creditors, and B, what about the outstanding balance that is with the IMF and governments and elsewhere? How does that get handled in this transaction?
DALLARA: Well, that’s a very good question, Larry. It was very important for us to hear that both European governments and the IMF are going to sustain and augment their commitment to Greece because they don’t pursue the debt reduction route. They’re actually extending more debt, more loans to Greece. But I would say that it is extremely low interest rates on concessional terms and it is also an important part of helping funding the Greek economy in the next years. But one of the reasons why we resisted going any higher than the 50 percent was because there’s only so much you can squeeze out of the private sector turnip here. We only hold, as you said, 60 percent. And a substantial portion of that, Larry, substantial portion of that is held in Greece by Greek banks, Greek citizens, Greek pensioners, Greek insurance firms. So we still have to work out some important arrangements to protect the Greek economy from this decision that has been made.
KUDLOW: Could these arrangements be possible deal-breakers, Charles?
DALLARA: No, I don’t see any. I mean, I feel comfortable after the extensive discussions we’ve had, and they were not only with leading European officials but with Greek government officials as well, that there are no deal-breakers lying ahead of us. So, of course, one can never say never, and we do have a lot of technical issues to be worked out, but I’m quite confident these are not issues, based on my experience, that should pose insurmountable hurdles, Larry.
KUDLOW: Charles, you’ve been around this block many times. You’ve been involved in a lot of important international negotiations down through the years when you were in the Treasury Department, now as a private citizen. Let me just ask you, at the end of the day, when people look at this deal, is it really backed up ultimately by the ESFS, and I want to ask you if this emergency fund is going to be levered up four to five times to at least a trillion euros or more? There’s confusion about this, there’s no specific statements. Part of the original money from the EFS–EFSF has been sequestered, apparently, to–for emergencies for Italy and Spain and Portugal and perhaps other countries. Will there be enough money in this emergency fund or in whatever special investment vehicles it may also hold, to cover, to ring-fence to backstop your deal and the banking system in Europe?
DALLARA: Yes, Larry, this is very complex, you’re right. The 30 billion euro that’s been committed to us will come through the ESFS structures. In addition, they have developed two different arrangements, which are quite, I think, workable and complementary. One will be an insurance fund and one will be a special purpose vehicle lending facility which will enable the ESFS to leverage its capital fire power and support countries such as Spain and Italy, if necessary. I actually think that even though once again, all the technical arrangements have not been worked out, that Europe is on the verge of breaking the back of this sovereign debt problem. A lot of work additionally needs to be done. Countries, especially such as Italy, will need to really earn their credibility in the markets, Larry. But I think these firewall arrangements, alongside the Greek debt deal, now provide the best opportunity that we’ve had, really, since the sovereign debt crisis erupted, for Europe to move past this crisis.
KUDLOW: And do you feel longer term–this is my last question, Charles, and again, drawing from your extensive experience in these matters–do you feel that the conditionality from the emergency rescue fund, from the IMF, from whomever else, whether the ECBS is participating, the individual governments, the so-called troika and so forth, will this force these countries to live within their means, to downsize their governments, to downsize their entitlements? And is there any hope of an economic growth plan as well? Do you see what I’m saying? Is this just a short-term fix we’re going through with euphoria in the markets or is there a long-term solution that you, yourself, foresee?
DALLARA: Well, Larry, I think you’re going to the heart of the matter there now. A lot of the adjustment plans that are being developed now for Greece, for Spain, for Portugal, Ireland and Italy, have a focus on budget discipline. There are, however, crucial elements of structural reform, liberalizing labor markets, bringing pension benefits back into reasonable proportions, reducing a wide range of structural rigidities in their economies, which inhibit efficient allocation of resources and inhibit growth. Those areas will really prove to be the ultimate test of whether Europe can move through this and establish sustainable growth again. If you look at the measures announced by Italy last night as part of this package, for example, increasing the retirement age from 65 to 67, removing restrictions on various industries in terms of how a person can be employed and how a person can be released, these are crucial to the future of Europe, Larry. And I believe they are just getting their shoulder to the wheel on these areas.
KUDLOW: Hm. All right, Charles Dallara, we thank you ever so much for your time. Please go and get a great night’s sleep. Congratulations on the deal you worked out. It’s a great pleasure for me to interview.