26 October 2004


I recently read Daniel Altman’s new book Neoconomy (2004). Altman provides an excellent analysis of the Bush administration’s economic policy. The book chiefly deals with the Bush taxcuts and their lasting significance for the U.S. economic outlook as well as their constraining influence on future decision-making.

Bush taxcuts were aimed at priming the stagnant economy. The American people were told that these mammoth cuts would lead to a significant increase in spending, which would help to jumpstart the economy. But an exhaustive study by Karen Dynan (Federal Reserve), Jonathan Skinner (Dartmouth) and S. Zeldes (Columbia) has clearly shown that spending by the wealthy tends to increase very slowly with increased income, with the implication that the federal government would have been much better off providing tax cuts for the poor—especially the working poor. This great handout to the wealthy—which will costs Americans a decade worth of surpluses—also seems to have done little to spur investment. Wealthy Americans, receiving this bonus during a stagnant period, often invested this money in overseas operations, earning them income that will probably go untaxed.

In the book, Altman laments the opportunity costs of the Bush taxcuts, pointing out that the same surplus could have been used to increase the number of teachers by 50% or to make the first year of college free. There are some great gems in Altman’s book, such as the following remark about the unfairness of the cuts:

“A person making $500,000 got a tax cut that was 59 times the size of the one for the person making $20,000 . . . Does the person who earns $500,000 a year need to pay 59 times the rent in order to live in a place that makes her just as happy? Or eat food that costs 59 times as much?” (Neoconomy)

Altman goes on to predict dire consequences of the cuts in the future, suggesting that these taxcuts, in addition to being intrinsically unfair, lead to economic inefficiency:

“. . . access to opportunities may differ. That can be a problem. In a world driven solely by economic efficiency, the young people with the highest aptitudes for leading productive lives would receive the most education and training, so that society might best exploit their talents. In America, it doesn’t always work that way. Children who grow up in poor areas typically have access to fewer resources . . . than their wealthier counterparts . . . As long as money mediates access to opportunities, inequality will continue to create economic inefficiencies.” (Neoconomy, pp. 238, 239)

* Incidently, Neoconomy is the first book I've run across that actually uses a blog as a source. We bloggers are coming up in the world, eh?

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