A Bad Bet

Neoconomy: George Bush's Revolutionary Gamble with America's Future by Daniel Altman

George W. Bush may pride himself on his conservative credentials. But few presidents have ever surrounded themselves with so many would-be revolutionaries. In foreign policy, Paul Wolfowitz has pushed to remake the entire Middle East (if not the world). In national defense, instigators of the “revolution in military affairs” have aimed to reinvent the way Americans fight wars. And in domestic policy, a tight-knit group of supply-side economists has pushed the administration to restructure the entire U.S. tax system, with an eye toward fundamentally transforming the way the U.S. economy works.

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While the changes in foreign policy and military affairs have garnered the full attention of the press, the radical nature of the administration’s economic policy has stayed largely under the radar. This makes Daniel Altman’s incisive new book, Neoconomy, an especially welcome addition to the seemingly endless list of volumes on the Bush White House. Altman’s tone is measured, and he evaluates the ideas of what he calls the “neoconomists” seriously. As a result, his conclusion is all the more compelling: The administration is taking a far-too-risky gamble with America’s economic well-being, while simultaneously remaking the American social contract in a way few voters would have ever approved.

At first glance, the administration’s economic policy seems to boil down to one thing: tax cuts. A major tax cut was the first initiative President Bush pushed through Congress, and he went on to slash taxes twice more, even as the budget deficit soared and the country fought two wars. This may have seemed excessive and unjust -- especially since the principal beneficiaries of the tax cuts are those at the very top of the income scale -- but is it really radical?

The answer, Altman convincingly argues, is yes, because of the kinds of tax cuts that the administration pushed for, and the kinds of changes it was trying to bring about. It is also radical because of the risks it poses to America’s future as a middle-class society.

The neoconomists, like all good conservatives, want lower taxes across the board. But the most important thing, they believe, is making it as cheap as possible for people to save and to invest. To put it crudely, the Bush administration has wanted to tax savings and investments less; in practice, this has meant taxing wealth less and taxing work more.

It may be tempting to simply write off the neoconomists as the sinister minions of fat cats. But they have zeroed in on a real problem: Americans don’t save enough. The more we save, the more money is available for businesses to invest. In theory, the more they invest -- in new technologies, new plants, new products -- the more productive the economy becomes.

Doing away with a raft of estate, dividend, interest, and capital gains taxes would free up enormous amounts of capital; if the neoconomists are to be believed, this should, in turn, lead to a permanent across-the-board improvement in the health of the U.S. economy. Yes, the wealthy would get a whole lot wealthier. But (in theory at least) everyone up and down the income ladder could end up better off. As Altman puts it with dry wit, “So there Americans would be, merrily keeping more of their income, merrily saving more, and merrily watching the economy expand more quickly than ever.”

This certainly makes for a pleasant image. But there are also major problems with the neoconomists’ model. The first is that they would make -- and are making -- America a far more unequal place than it already is. It didn’t have to be this way: The administration could have retooled the tax system to discourage consumption -- thereby encouraging people to save instead -- while still distributing the tax burden fairly. Yet the Bush White House never contemplated such a fix, because fairness -- in the sense of having rich people pay a higher percentage of their income in taxes than the middle class or poor -- isn’t something it’s concerned with.

The truly alarming thing, in fact, is that if you cut taxes on the rich, and keep increasing government spending -- as the Bush administration has done, not just on security and defense, but on almost everything -- then the only way to make up the difference is to raise taxes on everyone else. That hasn’t happened just yet, because the Bush administration has chosen to borrow hundreds of billions of dollars instead. But the logic of the neoconomists’ proposals is implacable: lower taxes for a few, higher taxes for most.

As Altman writes, it’s unlikely that most Americans would ever have signed on to that program. But when the nation fell into recession right after Bush took office, the administration sold its tax cuts to the public as a way to get the economy growing again. This was deliberately misleading; the neoconomists were never concerned about how the economy was doing in the present. The tax cuts, as massive as they’ve been, did very little to kick-start the economy -- because they weren’t designed to. If you want to use tax policy to try to jolt an economy out of recession, you’re best off with short-term tax cuts that people will spend. But as Altman writes, “Rather than pushing to enact short-term measures to deal with short-term problems, they set out a tax-cutting agenda that would last for a decade, and, oh yes, also have some positive side effects for the current malaise.” With its eye on the future, the Bush administration essentially left the millions of workers trying to find a job -- and the tens of millions of others who have watched their incomes stagnate -- to fend for themselves.

Even with all these flaws, if these tax cuts really were going to take us to the promised land of the neoconomy -- with more jobs, higher wages, and faster growth -- they might have been worth it: short-term pain, long-term gain. Right? But the problem, as Altman quite deftly shows, is that we’re unlikely to ever catch a glimpse of that promised land. The supply-side assumptions that underlie the theory are, in the first place, still mostly conjectures. More important, the neoconomists’ theory is now a poor fit with American political and economic realities, or what you might call the facts on the ground.

The Bush administration’s new spending has brought the return of massive budget deficits, which in 2000 Americans thought they’d seen the last of. Any reasonable estimate now shows red ink spilling into the future as far as we can see. If the goal of the neoconomists was to increase savings, the Bush administration’s borrowing spree seems to have defeated the purpose.

Meanwhile, just over the horizon, are the massive obligations the government owes to aging baby boomers who will soon start collecting Social Security and Medicare. And here, Altman shows, is where the deepest problem with the Bush tax cuts arises. Cutting taxes in the present, after all, doesn’t eliminate the government’s obligations. It just shifts the onus of paying for them.

Indeed, it seems the whole point of the Bush tax cuts has been to transfer tomorrow’s tax burden from investors to workers, from the affluent to the middle class. And since that tax burden will be exceptionally heavy in the future, the Bush “tax cuts” will, most likely, amount to a massive tax increase on most working Americans. It’s possible, though increasingly doubtful, that neoconomics could lead to an explosion in innovation and productivity that would benefit all Americans. But it seems far more likely it will lead instead to an explosion of middle-class anger and resentment. Although the future of the neoconomy remains uncertain, it doesn’t look especially merry.

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