WAYNE O'LEARY

Economics for Dummies

The conservative stewards of the nation's economy are, it appears, running on empty. Alan Greenspan, the reigning guru of free-market economics, has ordered 13 consecutive interest-rate cuts in two and a half years to stimulate growth -- to no avail. The slump continues. George W. Bush, the executive branch's champion of laissez-faire, has rammed through three major tax cuts over the identical period. Same result. Meanwhile, the addicted corporate establishment keeps calling for its twin fixes: just one more lowering of the prime lending rate, just one more reduction in federal taxes on the upper classes, and all will be well with the US economy. It hasn't succeeded, but they keep on trying.

The question is why. Let's give Greenspan the benefit of the doubt. He undoubtedly believes in his perennial prescription; it seemed to work in the late 1990s, so it should work now. With borrowing rates at a 45-year low, he's probably as puzzled as everyone else. Furthermore, as Fed chairman, he has few other cards to play. Monetary policy (the juggling of interest rates and the money supply) is what the Federal Reserve Board does; it has no broader powers or mandate. The Fed was created, after all, not to run the economy, but to regulate the banking sector. Greenspan's tenure as banker-in-chief simply coincided with the boom of the '90s, and so his monetary machinations were given the credit for it, especially with the rest of the federal government taking a hands-off approach to economics in the era of deregulation.

The likely truth is that it was all just coincidental. For a variety of reasons -- population growth, generational change, technological innovation, pent-up demand, the end of the Cold War -- times were right for an economic expansion. Greenspan was invested with attributes of genius he never possessed, since there is an evident need to personalize public failure and success -- e.g., Herbert Hoover "caused" the Depression, and Ronald Reagan "won" the Cold War. Ipso facto, Alan Greenspan created the bull market of the 1990s and brought about the boom. Life is simpler viewed that way. Poor Alan probably shares the illusion himself.

So, the chairman is revisiting the scene of his earlier triumph, and who can blame him? He's an economic animal doing what conventional economic wisdom says worked before (notwithstanding the hurt it puts on interest-dependent seniors living on fixed incomes). Not so George W. Bush. His tax-cut medicine, while true to hoary Republican principle, is much more than economic policy; it's political strategy and social engineering. As a stimulative economic cure, its flaws are self-evident. The Bush cuts are not demand-side cuts; they're not putting money into the hands of the hard-pressed majority of Americans who need and might spend it. Instead, the cash is going to a minority who will mostly sock it away in long-term bonds and other conservative, non-entrepreneurial investments.

Even if the tax cuts were evenly distributed, which they're not, respected economic thinkers remain dubious about the very efficacy of reducing taxes as a means to spur growth through the supposed encouragement of investment, hard work and risk taking. Robert Heilbroner and Lester Thurow, best-selling authors of the excellent primer Economics Explained [Touchstone Books, 1994], acknowledge that marginal tax-rate cuts generate "some response," but nothing like the immense response their advocates expect and claim. The experience of the 1980s, they write, proved that the supply-side reductions of that era neither unleashed massive investment nor increased the GNP; most important, they did not produce sufficient expansion of the tax base to offset the government revenue losses created by the very cuts themselves.

Moreover, the latest round of slashing has reduced the sorts of taxes that by their very nature cannot, when cut, stimulate the level of consumption necessary to revive a sluggish economy. Eliminating estate taxes primarily benefited the richest 1 or 2 percent of Americans, who are subjected to inheritance levies by virtue of multi-million-dollar bequests. Reducing dividend taxes mostly benefited the top 8% in income (over $100,000 per annum) who collect nearly two-thirds of all dividends. And lowering capital-gains taxes mainly affected the wealthiest 1% of stockholders (fewer than one million investors), who claim approximately two-thirds of all capital gains. The latter group includes America's coddled corporate CEOs, holders of fully an eighth of all Wall Street securities. These people are not the much-celebrated mass of consumers who carried the US economy through its glory years.

Regardless, that's almost a secondary consideration to the Bush White House and its supporters. To them, tax cuts slanted toward high-end incomes have two other purposes: One is to deprive the federal treasury of billions in revenue and thereby undermine the purportedly wasteful public programs (Social Security and Medicare, in particular) they dislike -- or, as rightwing activist Grover Norquist pungently puts it, to shrink the hated government in Washington to the point where it can be "drowned in the bathtub"; the other purpose is to redistribute income upward to members of the so-called investor class, whom the Bushites view as the most valued and deserving of our citizens, the ones who will presumably use their added riches productively and who, in any case, have earned a just reward simply by virtue of social position. (For all you might conceivably do, this Bud's for you.) Viewed in that light, the tax cuts are less an economic measure than a weapon in the GOP's declared political war against the Democratic left and its undeclared class war against the working poor and middle-income Americans.

It is painfully obvious that the Greenspan-Bush road to economic recovery has led to a dead end. The Federal Reserve, for its part, is out of ammunition; interest rates are already so low they can't be cut any further. Similarly, the Bush administration, committed to making annual tax cuts a feature of the current Republican regime, can no longer peddle that fool's gold; there's no more surplus to give away. In the end, the sole accomplishment of recent conservative economic policy has been to create the conditions for a fiscal perfect storm, as record budget deficits meet the jobless recovery and the costs of policing the world vie with health-care and retirement needs for scarce federal dollars. Hang on tight.

Wayne O'Leary is a writer in Orono, Maine.


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