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It is a singular advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end purposed -- that is, an extension of the revenue.
--Alexander Hamilton

The neoconomists have one goal: to increase the rate at which the economy grows by changing how the nation uses its resources. It is a worthy goal, too. Following such as path could lead to a period of untold prosperity, with living standards rising faster than ever before. Or it might not. But even if the plan works, it might just lead to the collapse of the capitalist system.
-The Neoconomists: The Bush administration's other revolutionaries. (Daniel Altman, May 10, 2004, Slate)

To the best of my knowledge, Daniel Altman coined the neologism that gives his book its title in a very fine piece for Slate, that identified an important but still overlooked unifying theme of the Bush Administration's economic policy, The Neoconomists: The Bush administration's other revolutionaries (Daniel Altman, May 10, 2004, Slate):
While neoconservatives in the Bush administration remake American foreign policy, another cadre of ideologues—call them the neoconomists—is busy attempting to transform American society.

The revolution in economic policy is not being televised. There was no big speech by President Bush to mark its birth, no "Axis of Evil" catchphrase designed to capture headlines. Yet it is every bit as dramatic and risky a change.

The neoconomists have one goal: to increase the rate at which the economy grows by changing how the nation uses its resources. It is a worthy goal, too. Following such as path could lead to a period of untold prosperity, with living standards rising faster than ever before. Or it might not. But even if the plan works, it might just lead to the collapse of the capitalist system.

The nation's current economic policy came to Washington in care of R. Glenn Hubbard and Lawrence B. Lindsey, who spent roughly the first two years of the Bush administration as the chairman of the Council of Economic Advisers and chairman of the National Economic Council, respectively.

For years, both men had been ardent supporters of the notion that income from savings and wealth was taxed too much. In 1990, Lindsey wrote that "with only a very modest loss of tax revenue, the tax system can be reformed to substantially encourage the savings we need to sustain our investment in a more productive economy." A decade later, Hubbard and a co-author wrote that savings and wealth had "long and widely been acknowledged as especially impaired by taxation."

Hubbard and Lindsey saw cutting taxes on savings and wealth as a recipe for faster growth. Their plans were consistent with supply-side economics, which had dominated Republican policy for decades, since they targeted the economy's long-run potential to grow rather than short-run fine-tuning of demand. But the focus on savings was a departure from earlier conservative doctrine.

During the Reagan administration, most talk about tax cuts centered on removing disincentives to work. In the years that followed, though, academic economists began to favor a new set of theoretical models where the savings rate took a more prominent role as a determinant of economic growth. In addition, the models suggested that the pace of technological change depended on changes in the size of the capital stock, which can only grow if investors save more. The neoconomists didn't invent these models—that was the job of theorists whose work sometimes looked more like physics than economics—but they quickly grasped the implications for policy. They used the models to postulate the following chain reaction:

1. Government cuts tax rates on savings and wealth.

2. Saving by households—bank accounts, stocks, bonds, etc.—increases.

3. More money becomes available to American businesses, since they're the ones offering the bank accounts, stocks, bonds, etc.

4. Businesses spend more on machinery, software, and other capital, as well as on research and development.

5. The nation's output of goods and services grows, and technological innovation accelerates.

6. Incomes and living standards rise more quickly for several years and perhaps forever.

With George W. Bush's cooperation, the first steps have already been taken. So far, the president has signed bills eliminating the estate tax, lowering the tax rates on dividends and capital gains, and helping companies to reduce the tax they pay on their profits. In addition, by cutting rates for "ordinary" income, the Bush administration has lowered taxes on interest payments, rental income and income from mutual funds, and pensions and retirement accounts. (Though slated to be temporary, the Bush administration is campaigning to make its tax breaks permanent.) All of these changes make it relatively more attractive to accumulate wealth than to spend money.

In addition, the White House is pushing for an initiative that would almost single-handedly accomplish Hubbard and Lindsey's goal: a huge expansion of tax-free savings accounts. And the growth of these tax-free savings accounts would dovetail well with the White House's plan for reforming Social Security, which calls for the creation of another type of tax-free investment account for every working American.
The tone of the piece grows a bit hysterical towards its end, but is generally a not unbalanced look at an obviously important aspect of this presidency.

When it came time for Mr. Altman to expand his essay into a full-fledged book one would have hoped to see him provide a wider perspective on how neoconomics fits with the rest of the Bush domestic agenda, but that's unfortunately lacking here. And we might have hoped to see meatier analysis of what increased savings rates and reduced consumption have done in other times or other economies, but there's not much of that here either. Instead the book seems to narrow the focus and dwell mostly on tax changes, which Mr. Altman uses as polemical whips. this is a book that would appear to owe as much to the popularity of the spate of deliriously anti-Bush tomes and films that came out before the election as to Mr. Altman's original economic insight. But in casting himself as a kind of economist version of Michael Moore, Mr. Altman squandered an opportunity to make his mark with what could have been a compelling first draft of history.

The bulk of the book then restates the ideas behind Neoconomics, but turns its attention almost exclusively to tax policy. There Mr. Altman draws up a scorecard of taxes that the neconomists wanted to abolish--the Estate Tax; Dividend Tax; Capital Gains Tax; Interest Tax; and Corporate Income Tax--of which he says only the last two remain. As he notes, that earns them a pretty high grade, though considering the President's talk of fundamental tax reform and his willingness to consider replacing the income tax with some kind of consumption tax, the big test likely lies ahead.

By discussing taxes in near isolation, and because the tax changes shift the burden away from savings and inestment, Mr. Altman is able portray all of this as a kind of reverse class warfare, by the few haves against the many have-nots. Towards the end of the book, as at the end of his essay, he's nearly forecasting a revolution because of the imagined wealth disparities and destitution that such tax policies will bring.

An economic columnist rather than a political, Mr. Altman may be excused for having a somewhat limited understanding of the latter, but you'd think it obvious that President Bush and Karl Rove, who've made no bones about their intentions of moving the country permanently to the Right and making the GOP the majority party again, would not aim for plicies that will provoke the hatred of the masses and destroy the country. Indeed, the epigraph to Mr. Altman's chapter on the coming revolution need only be reversed in order for us to see what he's left out of the book:
In the nature of things, those who have not property, and see their neighbors possess much more than they think them to need, cannot be favorable to laws made for the protection of property. When this class becomes numerous, it grows clamorous. It looks on property as its prey and plunder, and is naturally ready, at all times, for violence and revolution.
-Daniel Webster
Clever conservatives then would seek to make the property owning class more numerous, so that the number of those favorable to laws for protecting property will swell. Mr. Bush can hardly take all the credit for it but home ownership rate was a record 69 percent in 2004, over 50% of Americans own stocks, and the nation has a staggering household net worth of over $47 Trillion. One thing that's particularly strange about all of this is that Mr. Altman apparently completely missed the enactment of a key component of the Neoconomic/Ownership Society agenda, the universal Health Savings Accounts in the Medicare reform bill that the President signed in December 2003, saying:
With this law, we are creating Health Savings Accounts -- (applause) -- we do so, so that all Americans can put money away for their health care tax-free.
Here's how the Sun-Times's financial columnist characterized such accounts, Health Savings Accounts great plan for health care (Terry Savage, January 22, 2004, Chicago Sun-Times)
The Health Savings Account was hidden away in the prescription drug bill passed by Congress last December. But unlike the seriously flawed drug plan, the Health Savings Account is an exciting concept that could make health insurance available -- affordable -- for millions of Americans who aren't covered by an employer plan.

It's a concept so new that the insurance industry is just gearing up to make it available. Health Savings Accounts combine inexpensive, high-deductible health insurance plans with a tax-advantaged savings account. "Tax-advantaged" is a new phrase, appropriate because this new account has so many different tax benefits.

Aside from making health insurance more affordable, there's a great social benefit to HSAs since they encourage everyone to be more watchful about unnecessary medical tests and expenses. If you don't spend the money in your HSA account, you keep it!
And if we extend our perspective out just a little further from where Mr. Altman's remains fixated, we can easily discover that the President has also made vouchers for the poor key components of his Education and Housing policies: Hope on Housing Policy: President Bush’s new housing voucher plan aims to move families up and out of assisted housing. (Howard Husock, 11 February 2004, City Journal); Yes, the Education President (Sol Stern, Summer 2004, City Journal); Bush Hails DC Vouchers at Catholic School (Kelly Amis Stewart, April 1, 2004, School Reform News); etc.. Tie all this together with programs that advocate marriage, boost home ownership, provide federal money to the faith-based institutions that do the best job serving the needy, etc., etc. and what emerges is not class warfare but an entire interlocking system designed to empower the poor and give them an ownership stake in America's future and their own.

Mind you, this is not to say that the President's agenda doesn't deserve scrutiny, especially scrutiny from economists. Pushing savings as relentlessly as these reforms would could certainly be risky, as witness Japan where the savings glut has fed deflation and recession for years now. But, even there an impartial observer would note both the absence of the kind of investments that the neoconomists are talking about -- here we will have mutual funds instead of passbook savings accounts and home ownership at levels the Japanese can not achieve simply because of geographic limitations -- and the obvious cultural and demographic differences, between an intellectually moribund, precipitously aging and childless Japan and a vibrant and rapidly expanding America. Revolutions never go as planned, but we seem rather well equipped for an experiment in investment. At thew very least, we caqn say that Mr. Altman has not done much to show that we aren't, nor that the Neoconomists aren't acting with the best intents. In the calmer light of the Bush re-election there's likely a better book to be written on the topic that Mr. Altman helpfully pioneered before losing his way.


Grade: (B-)


Daniel Altman Links:

    -ESSAY: U.S. debt: Watch out for the domino effect (Daniel Altman, February 12, 2005, International Herald Tribune)
    -ESSAY: A New Productivity Paradox: The government's data says Americans are working fewer hours. But you're still staying at the office every night. What gives? (Daniel Altman, October 2004,
    -REVIEW: of Neoconomy(Tom Gallagher, Washington Post)

Book-related and General Links:

    -BOOK SITE: Neoconomy
    -BOOK SITE: Neoconomy (Public Affairs Books)
    -ESSAY: THE RISK SOCIETY (James Surowiecki, 2004-11-08, The New Yorker)
    -ESSAY: TAX CODE: Tax cuts were just the beginning: the President is signalling a far more radical agenda. (JOHN CASSIDY, 2004-08-30, The New Yorker)
    -ESSAY: The Disunited States Of America (James Cusick, 11/07/04, Sunday Herald)
    -ARCHIVES: "neoconomy" (Find Articles)
    -REVIEW: of NEOCONOMY: George Bush's Revolutionary Gamble with America's Future By Daniel Altman (Tom Gallagher, Washington Post)
    -REVIEW: of Neoconomy: George Bush's Revolutionary Gamble with America's Future By Daniel Altman (James Surowiecki, Mother Jones)
    -REVIEW: of Neoconomy: George Bush's Revolutionary Gamble with America's Future By Daniel Altman (Dan Rosenheck, New Statesman)
    -ESSAY: The Free-Lunch Bunch: The Bush team's secret plan to "reform" Social Security. (Ron Suskind, Feb. 27, 2004, Slate)