Alan Reynolds

Mort Zuckerman, editor of U.S. News & World Report, recently bemoaned "an opportunity lost" by the Democratic Party. "Who would have thought," he wrote, "that Kerry would fail to develop the obvious signature grand theme that might have been an election winner: the economic squeeze on the middle class?" But it's not as though Sens. Kerry and Edwards haven't tried. Perhaps it's not such a grand theme after all.

 For one thing, the Kerry team tends to count everyone among "The Middle Class." One Kerry ad says, "An estimated 1.6 million families will file for bankruptcy in 2004, 90 percent from the middle class. Health care costs will contribute to half of all of these bankruptcies."

 Two sources were cited, Consumers Union and a Bill Moyers TV show. But Consumers Union just said 90 percent of bankruptcies involved divorce, job loss and/or big medical bills. Rich people are not immune to such misfortune. The fact that health care costs are on this list is not something new in the Bush years -- the figures came from the 1998 bankruptcy commission. In fact, all costs "contribute to" every bankruptcy, with mortgage payments normally being the largest.
The Bill Moyers show was an interview with bankruptcy law professor Elizabeth Whalen about her book "The Two-Income Trap," which broadened the definition of middle class in amazing ways: "When membership in the middle class is defined by enduring criteria ... such as going to college, owning a home or having held a good job -- more than 90 percent of those in bankruptcy would qualify as middle class."

 By the same criteria, however, those with extremely high incomes and wealth would also qualify as middle class. Zuckerman and Teresa Kerry, for example, are on Forbes' list of the wealthiest 400 people in America. Yet even Zuckerman and the Kerrys would qualify as "middle class" under the Whalen-Kerry definition, as they own their own homes (the Kerrys have five). Besides, personal bankruptcies rose most sharply from 1994 to 1998, and actually fell last year, contrary to this Kerry ad. What "estimated" bankruptcies means is a mystery, but estimates aren't facts.

 Another new Kerry ad, "The Truth About Taxes," says, "The middle class is paying the bigger share of the America's tax burden, and the wealthiest are paying less." The source, the Congressional Budget Office, figures the average income tax among the middle fifth of taxpayers fell from 10.4 percent to 3.4 percent of income, or nearly a third. The average tax among the top 1 percent fell from 24.5 to 19.7 percent, less than a fifth. The share of income tax paid by the top 1 percent is now 32.3 percent, up slightly from 31.6 percent.
 How can an ad called "The Truth About Taxes" be so untrue? The answer is that any cut in income taxes must increase the relative importance of excise taxes and Social Security taxes because those taxes were not cut. Even if the rich drank only the best wine, smoked the best cigars and drove the fastest gas-guzzlers, the fact is that 1 percent is just too few people to pay a big share of the unchanged federal excises on liquor, tobacco and gasoline.

 It necessarily follows, by definition, that the top 1 percent must pay a smaller share of total taxes because that total includes excise taxes, which did not change. The same is true of Social Security taxes, which are limited because the benefits are limited. But to say the flat rate Social Security and excise taxes are now relatively more important is not the same as saying the middle class is paying higher tax rates on paychecks, gasoline or beer. They are not. On the contrary, lower BEG ITAL) income taxes have left the middle class with more after-tax income with which to buy gasoline and beer.

  The whole notion of a middle class squeeze began in April with the bizarre redefinition of the misery index to mean subtracting inflation twice -- first by claiming (incorrectly) that "real" incomes are falling and then by griping about particular living costs as if they had not already been counted as inflation and therefore subtracted from income.

 This should have been called the miserable index, and it should now be put out of its misery. In the vice presidential debate, Edwards offered a sample of his supposedly sunny side by saying "the bright light of America . . . is flickering today." Why? "Your incomes are going down, and the cost of everything -- college tuition, health care -- is going through the roof."

 Over the past four quarters, wages, salaries and benefits grew at a 5.2 percent annual rate, while prices for personal consumption were up only 2.1 percent. Incomes are not down, even after subtracting inflation.

 Investors did not fare so well. Interest and dividend income fell in 2002 and 2003, though it is up this year. Stock market losses were horrific from March 2000 through March 2003. Yet Kerry wants to raise the tax on dividends by 164 percent and raise the tax on capital gains by a third. Since most stockholders have incomes far below $200,000, Kerry has already promised to break his TV promise (to not raise taxes on incomes below $200,000).

 What, if anything, is left of the "grand theme"? It is true that some people are more affected than others by particular expenses, such as college tuition or prescription drugs. Yet that cannot be honestly described as a general issue that "squeezes" the entire "middle class."

 Increasing numbers of Americans are much too old to be affected by college costs, either as students or as parents. And many Americans are over- insured for routine medical bills, and therefore largely unaffected by them. Most people have drug insurance that charges a flat co-payment, such as $15, for branded drugs, so increases in drug prices seem virtually invisible to consumers. This drives up demand and price -- a problem the Kerry plan would aggravate with more tax-financed subsidies.

 The sticker price of college tuition appears to be up quite a lot, but so is financial aid. The actual net cost to parents or students depends on whether or not they qualify. I wrote the background study on this subject in The National Commission on the Cost of Higher Education's 1998 report, "Straight Talk About College Costs & Prices." Even upper-middle-income families almost always qualify for substantial financial aid, so the sticker price is meaningless.

  We would have all welcomed an honest debate on this "grand theme" that some unidentified Bush administration policies are somehow responsible for a mis-measured squeeze on an undefined middle class. Unfortunately, Kerry and his political handlers appear congenitally incapable of using statistics honestly. They view numbers as weapons of mass deception and could care less where the numbers come from or what they really mean.

 Each new Kerry-Edwards campaign ad proves once again that these candidates are habitually incompetent and/or dishonest in their use of economic facts. And this, too, is a matter of trust.

Alan Reynolds

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