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.
Hubbard and Lindsey's agenda is long-term, but it has already incurred some substantial costs. In the short term, their focus on savings has offered relatively little stimulus to the economy. Had the White House directed more incentives toward spending, the lag between recession and recovery might have been shorter.
In the long term, the cost of the Bush administration's policy has been forgone opportunities. The combination of the weak economy and the White House's decadelong schedule of tax cuts has left future administrations with little room to maneuver. Forecasts for budget balances from 2002 to 2011 have dropped from $5.6 trillion in surpluses to $2.9 trillion in deficits in the past three years. In the coming years, the federal government will have little money to invest in economic growth directly, by spending money on education, worker training, or basic research, which generate reliably high returns to society in the long run.
This latter cost is particularly germane, since there is no assurance that the positive chain-reaction the neoconomists envision will actually occur. Hubbard and Lindsey's strategy has never been tried in a large, wealthy economy. One flaw in the theory is that American savings do not always stay in America for use by American companies. In the past two decades, the share of savings sent abroad appears to have risen from about 10 percent to at least 40 percent. And when the Treasury borrows to make up for large deficits, more American savings will end up in the hands of government and less in investments by businesses.
The speedy growth of the economy in the last three quarters—averaging more than 5 percent at an annual rate—could signal impressive things to come. And the experience of the Clinton administration proved that even the biggest deficits can disappear given a broad enough expansion in the economy. But even if the Bush administration succeeds, its policies could create two problems that could undo all their positive effects: rising inequality and a drastic change in incentives.
Wealthier people derive more of their income from returns on saving—both in dollar terms and as a proportion of income—than poor people do. When taxes on the return from savings suddenly disappear, the wealthy benefit the most. It may be that people who depend on their jobs for income will benefit, too, in the long run, thanks to an expanding economy and rising wages. But for several years, in all likelihood, the income gap will continue to widen.
That income gap poses some real dangers to the economy and even to the earnings of the wealthy. With rising inequality, it's harder for poor people to obtain economic opportunities, because chances to get education and training, or to bring ideas to market, depend on money as well as talent, and because the number of these opportunities is limited.