Faith-Based Bubble of Bushonomics

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Wed, 15 Feb 2006 10:31:42 -0800 (PST)

Faith-Based Bubble of Bushonomics

 

 

 

 

http://www.comer.org/

 

Faith-Based Bubble of Bushonomics - M.Feldstein's Influence on

- G.W.B.'s Revolutionary Gamble with America's Future

 

The Faith-Based Bubble of Bushonomics

 

by Kieth Wilde

 

It is no longer news that income distribution in the United States

is more skewed in favor of the most wealthy families than it has been

for more than a hundred years. On October 5, 2005, the NYT editorial

board published a 13-page explanation under the heading

 

" Tilting the Tax System in Favor of the Rich. "

It recounts the successes of the wealthy (including directors

and managers of large corporations) at influencing legislators

to " rewrite the tax code, shifting more of the burden onto others "

by:

— Shrinking the estate tax, even to the point

of hoping to repeal it in this session of Congress;

— Rolling back taxes paid by investors and corporations

(especially on capital gains);

— Using payroll taxes (especially Social Security payments)

to mask the costs of tax cuts for the rich.

The consequence is that not only do the poor and working middle classes

pay a much higher rate of taxes on their incomes than do the wealthy,

but also that total tax revenues are vastly insufficient, far into the

future, to meet the usual government payment commitments for things

like Medicaid and Social Security and to administer the public domain

that has traditionally belonged to all citizens in common.

 

It is consistent with the deliberate and overt objective

of right wing strategists to shrink government

" down to a size where we can drown it in a bathtub. "

Although this campaign of the right is a perpetual one,

it really began to bite with the " Reagan Revolution " and became

a steamroller under Bush II. The tired rationale of " supply-side "

economics is that taking away taxes on capital gains

would increase investment in productivity-enhancing capital,

thereby generating increased growth for more jobs income

and replacement government revenue.

 

But as the editorial says, the tax cuts have never been proved

to even pay for themselves.

A recent book comments that never before has a wealthy nation

" attempted to lower its taxes on saving so dramatically and so

quickly. " In a disquieting footnote, the author adds that

" the country coming closest is probably Canada.

 

It is in the midst of a five-year tax-cutting plan, which, among other

things, lowers the tax rate on corporate profits by a quarter and

exempts a substantial share of capital gains from tax.

" The book, Neoconomy : George Bush's Revolutionary Gamble with

America's Future (New York: Public Affairs division of Perseus Books

Group, 2004), is an important reinforcement to the Times editorial

review because of the identity of the author and his links to

the doctrinal foundations of the taxation revolution:

 

Daniel Altman is a young journalist (The Economist,

later The New York Times) who took a Ph.D. in economics from

Harvard University. He assures us that the economic policy pursued

so relentlessly by the Bush Administration is no half-baked whim

of a business elite who simply promise trickle-down as a sop

while they grab more goodies for themselves.

 

It is rather the carefully considered strategy of an elite group

of academic economists who set their sights on

the one blunt instrument of tax cuts, and have pursued it

relentlessly, with the obvious cooperation of the President and an

obliging Congress.

 

Altman's focus is the influence of Martin Feldstein on economic

policies since the days of the Reagan revolution. Much of his

influence has been exerted directly on the G.W. Bush administration by

way of his best students, several of whom have held prominent

positions (e.g., R. Glenn Hubbard as Chairman of the Council of

Economic Advisors).

 

Two of them, in addition to Feldstein himself, were known to be among

the potential appointees to succeed Alan Greenspan. Feldstein is

further described by Altman as his much esteemed " long time adviser "

while a graduate student at Harvard – but with whom he has taken

pointed issue on the nature and probable impacts of the neoconomy.

 

Feldstein was frustrated in efforts to implement his ideas fully

under the Reagan and Bush I regimes. Altman tells us that when

G.W. Bush announced his intention to seek the Republican nomination

for President in 2000, Feldstein took the step of travelling to Texas

to propose the doctrine to him as a campaign theme and serious

legislative agenda.

 

The enthusiasm of Republican Party stalwarts and insiders

(Bush appointees) for Feldstein's approach is ascribed by Altman

to the psychology of rich CEOs who are typically optimistic

risk-takers whose plans almost never come in on budget or on time.

They are bold over-reachers who are prepared to take a big risk

in the hope of making a lasting legacy.

 

Altman is skeptical of the risk they are taking, and he knows

that the Feldsteinian economists are aware of it too,

but that they are sufficiently secure in their doctrine

that they are willing to follow through relentlessly.

(One factor in their confidence may be that the main neoconomists

are themselves millionaires. Social Security privatization would mean

no personal qualms, and it is a key element of their agenda

long championed by Feldstein.)

 

The doctrine, however, is based in untested, non-testable

economic theory. If the neoconomist professors are right,

 

Altman acknowledges that their path

could indeed lead to a period of untold prosperity.

But,

" It could also lead to nothing less than

— the collapse of the capitalist system

— a Real Revolution in which the nation's tax-paying Laborers

— Rise up against a class of Wealthy Free-Riders. "

 

The core of the neoconomists' idea is that aggregate savings

are typically insufficient to fund a major increase in technologically

advanced capital and the trained labor to use it productively.

The key to a quantum leap in such investment is to encourage it

from the people who are best able to do it – the already rich.

 

The working classes tend to not save much out of their incomes,

and are unlikely able or interested in making direct investments.

Ergo, massive reform of tax regulations to favor those

with the highest incomes, and especially incomes based on revenues

from property and other wealth. Other of their simplifying tax reforms

would reduce distortions in employer-employee structure and permit "

consumer sovereignty " to manifest more clearly. The whole is premised

on belief in the neo-classical economic fixation that the economy

is a natural system tending toward a general equilibrium.

 

Untested, Untestable Theory

 

The doctrine that Altman describes as untested, non-testable theory

is premised in assumptions rather than empiricism.

Faith in general equilibrium developed out of the marginalist

revolution of economics as " neoclassical economics, " partly as a

reaction against the short-term counter-cyclical emphasis of Keynesian

analysis.

 

Keynes analyzed an imperfect world; the neoclassicals prefer one

that is logically perfect. Their reaction began in the late fifties

and early sixties with the mathematization of their theory.

 

The new models were " sets of equations that purported

to describe how the economy behaved over time….

[T]hey linked together stocks and flows of labor and capital

with functions [borrowed from physics and engineering.]

 

Given a starting point, the models could predict how living standards

would change as the economy moved, inexorably, to a stable equilibrium.

When the economy reached that equilibrium, [despite some remaining

short-term fluctuations]…the average rate at which the economy grew,

over long periods of time, would stay the same.

 

The models showed how taxes, saving, depreciation and population

growth could determine that rate by changing the economy's supplies

of labor, capital and technology.

In academia, the focus shifted to the long run….

This philosophy became the basis of true supply-side economics " (pp.

23-4).

 

Altman emphasizes that the neoconomists have consciously avoided

important and time-tested ways of complementing their objective

of growth in total output and consumption with counter-cyclical fiscal

and tax policies. Such programs in the past included short-term

expansion in government spending on physical capital or targeted

reduction in taxes to stimulate particular sectors such as research,

education and training. These encourage innovation in capital

deepening and the training/education programs required to bring the

labor force up to the level where it can make most productive use of

the improved capital.

 

The neo-con-omist program is based in faith that the rich would

ultimately choose to invest where it would do the most good to grow

the economy and make everyone well off (via abundant jobs and high

wages for the working classes). It is most alarming, therefore, to

read this book in the context of mounting evidence that the wealthy do

not invest in growing the real economy – a subject which Altman does

not even touch.

 

Altman recounts the relentless and successful campaign, under Bush II,

to change tax rules, all in same direction, for same purpose.

The immediate consequences were not encouraging, as economic

problems grew worse from 2000 to 2004, by the conventional indicators.

The effects of spending cuts to unemployment insurance, medical care

and other direct benefits to poor people were masked

by greatly increased expenditures for warfare.

 

Other high-profile economists called the neoconomist scenario

wishful thinking on an unprecedented scale. To counter the implied

threat to their agenda, the neoconomists and legislative allies push

for very long-term changes to tax rules, to assure that they have time

to work.

(The Times editorial tells us that " Congress came back from its

summer recess this year planning...permanent repeal of the estate tax. " )

 

Might a Popular Revolt Blow Away Bush's Neoliberal Paradise?

 

Although the neocons may think their reforms are secure, Altman

suggests that the potentially explosive circumstances they have

created may blow away the familiar US political processes in a

populist revolt.

This prospect is magnified many-fold when one turns from

the faith-based model of the neoconomists to the empiricism

of a specialist in financial history.

 

Michael Hudson1 has shown that most of the savings are feeding

a financial bubble rather than being invested in actual physically

productive capital and the means to use it more effectively. Instead

of investing in real output, the savings of the wealthy go into

boosting the prices of financial assets and the owners take their

benefits in the form of non-taxed capital gains rather than on

earnings from profitable industry.

 

In the absence of real returns, the cost of servicing the new loans

that are made out of the savings of the rich, to purchase new

financial assets, must be paid out of real incomes that may in fact be

declining.

As house prices inflate, for example, the burden of mortgage interest

cuts into household income, making it impossible for consumers

to maintain customary levels of spending. Consumer spending

is universally acknowledged to be the primary driver (two-thirds)

of economic activity.

 

The net impact of this growing debt service is therefore deflationary.

A succinct and systematic presentation 2 of Hudson's argument

describes the FIRE sector (Finance, Insurance and Real Estate)

as separate from, and a parasite on, the real economy.

As a specialist in international financial relations and the history

of financial institutions, Hudson's research includes pre-history

in collaboration with archaeologists of the ancient near-east.

Their work shows the origins of money and finance in credit-based

relations between oriental monarchs and farmers in the emergence

of the agricultural revolution. Among their principal findings

is that when debt-service becomes too big a burden to be born,

the debts collapse and a new start is made.

 

Meltdown.

This pattern has been repeated throughout history.

The financialization threat to the neoconomist agenda

(cf. August ER review of Democratic Capitalism and

" The Good Capitalism and the Bad " September ER) is further reinforced

in Unseen Power: How Mutual Funds Threaten the Political

and Economic Wealth of Nations (Toronto: Stoddart Publishing Co., 2001).

 

This book, the fruit of PhD research by Adam Harmes (York U.)

" Shows how the explosion in mass investment through mutual funds and

pension funds represents...a sea change in the power of the financial

markets...explaining how fund managers and not CEOs have come to wield

the greatest clout in the global economy. It has led to a massive

shift in the balance of power between Wall Street and Main Street

– in favor of the former. (The phenomenon is not new; it was one of

the main themes developed by Thorstein Veblen.)

 

The threat of debt deflation has very recently become topical in

connection with the bubble in house prices, consumer debt and the

sudden upsurge in petroleum-based fuel prices. Articles in newspapers

on both sides of the border have detailed the reductions in consumer

spending that households are imposing on themselves in order to

maintain mortgage payments and buy gasoline. Many people took out

larger mortgages in order to pay off credit card debt under the

influence of low mortgage rates and inflating house prices. Some now

spend 50 to 75 percent of their monthly salaries on home payments.

 

" Americans have put themselves in a precarious spot. They have

overspent and taken out adjustable-rate and interest-only mortgages,

gambling that housing values will rise while interest rates

and the job market hold steady. Homeownership is sinking the family. "

 

The imminent repeal of bankruptcy laws in the US promises even more

deflationary pressure. And the latest news about government response

to Hurricane Katrina is that it is being used to extend the

neoconomist agenda as described by Altman. That is, to shrink

government assistance, repeal minimum wage rules, make the poor

responsible for their misery and transfer capital rebuilding contracts

to friends of the Administration

in Washington (NYT, October 11, 2005).

 

Economists who have worried that high energy bills alone might cause

a crisis of " consumer confidence " that could push the economy

into a full-blown recession haven't been seeing the half of it, therefore.

 

--

1. Distinguished Research Professor of Economics,

University of Missouri at Kansas City.

2. " Saving, Asset-Price Inflation, and Debt-Induced Deflation " to be

published in early 2006 in a volume edited by Prof. L. Randall Wray

of UMKC, Edward Elgar publishers.

End