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.