- The Washington Times - Saturday, November 6, 2004

NEOCONOMY: GEORGE BUSH’S REVOLUTIONARY GAMBLE WITH AMERICA’S FUTURE

By Daniel Altman

Public Affairs, $29.95, 304 pages

REVIEWED BY PHILIP GOLD

Economics has long been known as the dismal science. But for nearly a century, in America at least, it has also been the chirpy science. Ever since FDR, generations of economists — Keynesians, Neo-Keynesians, monetarists, supply-siders, and the rest — have chirped merrily and with confidence about the wonderful things that would happen, were the government to adopt their policies. From time to time, their policies have been tried. From time to time, good things have come to pass, though never in the quantity or quality predicted.

Today, however, an effort is underway that makes previous experiments seem timid at best. The “neoconomists” want to restructure America’s economy. Permanently. Their goal is long-term prosperity and robust growth, achieved by eliminating taxation on investment income. So far, according to Daniel Altman, results have been modest. The neoconomists may well succeed. But even if they do, their victory could have disastrous political and cultural consequences.

Mr. Altman, a Harvard-trained “recovering economist,” is a former reporter for The Economist and the New York Times. “Neoconomy” is his first book, alternately a bit hyperbolic and a bit vague. Still, it’s accessible and engaging. And if what he writes is true — I’m from Seattle; we make stuff, not policy — then “Neoconomy” could be one of the most important books of this election year. It certainly deserves to be read.

The story of the neoconomists, whom he identifies (he’s a bit short on names) mostly as academic spawn of Martin S. Feldstein and a cabal of Bush administration advisers and sub-cabinet types, begins a decade or so ago. Economists got to wondering about the growth spurt of the ‘90s. Many credited the Reagan tax cuts. Others noted that a couple decades worth of prior investment in new technologies, especially computers, were suddenly paying off. The neoconomists concluded that the best way to guarantee economic health and competitiveness might be to encourage R&D; and capital investment over the long haul. Forget tax cuts as a means of stimulating demand; forego improving the quality of the work force. Concentrate on technological advance and application.

The way to do this: free up untold billions of dollars for research and investment by eliminating taxes on investment income: dividends, interest, capital gains, inheritance. Shift the burden of taxation to earned income and consumption. Yes, this would obviously benefit the wealthy. But the wealthy were the folks with the money to save. Much as pre-Industrial Revolution economic theory held that there had to be a wealthy class given to extravagant consumption in order to provide work for the masses, the neoconomists argued that putting more money into the hands of the wealthy would also ensure economic salvation.

Two problems arose. First, this required a commitment to long-term planning, a quality rarely found among elected politicians. Second, although President Bush inherited a few trillions worth of projected budget surpluses, within a year these had turned to real deficits. Recession, the stock market collapse, the dot.com bust, high-viz corporate scandals such as Enron, September 11 and Iraq made this an inopportune time to undertake such risky experimentation.

The neoconomist response: Just Do It.

And they did, at least in part. The Bush administration got its tax cuts, spaced over ten years but packaged for public consumption as short-term stimulus. Additional successes came in scaling down estate and dividend taxes. Then, as momentum slowed in 2003, the neoconomists hit on a new ploy: expansion of tax-free individual savings accounts for various purposes (medical, education, retirement). The concept, which has now entered the realm of the politically attractive, was also packaged as a means to let average Americans keep more of their income. In truth, it created new kinds of shelters for those affluent enough to afford them. And if the neoconomists had their way, Social Security would be privatized, at least in part, and turned into an enormous pool of private capital.

Mr. Altman correctly points out that this restructuring of the federal tax system may well create a long-term economic boom, somewhat along predicted lines. It will certainly widen the gap between rich and poor and, to the extent that it succeeds, will shift the burden of taxation to those least able to afford it. Such a situation would be both politically volatile and utterly unjust.

But of more immediate concern is a question this whole approach raises. To what extent is this president, who styles himself a hard-headed businessman, the captive of his ideologues in both national security and economic policy? That’s a question only one man can answer, and that man ain’t me (or Bob Woodward). But a pattern seems clear. This administration is rife with officials and courtiers in love with their theories, and Mr. Bush seems noticeably reluctant to contradict or remove them when reality fails to conform.

Ideas, it seems, do have consequences, after all.

Philip Gold is author of “Take Back the Right” (Avalon/Carroll & Graf, Sept. 2004)

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