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Economics for Dummies

Economics may be fancy science, but economic policy is plain old grubby politics. Back in January of this year, 110 economists, including three Nobel Prize winners, signed a letter urging Congress to support the main points of President George W. Bush’s $647 billion tax-cut plan, and to make his 2001 tax cut permanent. Such a policy would spur the sluggish economy, they said. On the other hand, the following month more than 400 prominent economists, including 10 Nobel Prize winners, signed a petition opposing the Bush tax cuts. What separate these two brainy groups isn’t their science, but their political views.

Both the 110 supporting Bush’s tax plan and the 400 opposing it agree that the economy is sputtering and needs to be boosted by government action. Both agree that a good way to stimulate the economy would be to spread some money around. If people had more money to spend, they’d buy more things and that, in turn, would cause manufacturers to hire more workers so as to make more things for people to buy. Or—in another scenario—if people had more money they’d invest in factories, and the factories, with all that money, would buy new machines and hire more workers to make more things.

Now, President Bush has always believed that the best way to get money into the hands of people and stimulate the economy is—surprise!—to cut taxes. Folks will take the money that would have gone to taxes and they’ll demand more things to buy; they’ll invest in business, so business will hire new workers to make more things. Another way to get money into the hands of people—needy people who would certainly spend whatever they receive—would be to extend unemployment benefits.

The president remained silent during congressional debate on extending benefits, and got on board only when it was a done deal. Giving money to the needy goes against Bush’s views about the nature of the unemployed. The “compassionate conservative” believes that “when government attempts to help the poor by simply redistributing income, it often undermines incentives to work harder and earn more.” The poor are not like the rich. Rich CEOs, whose salaries have soared over the past several years, work harder the more you pay them. The poor just collapse into a sybaritic lifestyle.

But let President Bush speak for himself about his tax philosophy. These are his words as they appear on the White House Web page: “These are the basic ideas that guide my tax policy: lower income taxes for all, with the greatest help for those most in need. Everyone who pays income taxes benefits—while the highest percentage tax cuts go to the lowest income Americans. I believe this is a formula for continuing the prosperity we’ve enjoyed, but also expanding it in ways we have yet to discover. It is an economics of inclusion. It is the agenda of a government that knows its limits and shows its heart.”

I don’t know why George W. Bush wants to sound so much like Bill Clinton or Al Gore, but let me guess: I guess it’s because most of us do believe that “the highest percentage tax cuts should go to the lowest income Americans,” and most of us do want an “economics of inclusion.” Unfortunately, what the president says and what he does are two very different things. His 2001 tax cut, which was also supposed to give purchasing power to folks like you and me, actually gave 40 percent of its benefits to the richest 1 percent of families. It barely moved the economy at all. In fact, the country lost 1.7 million jobs after that tax cut. As for the current tax bill that has just emerged from the House, by one estimate 27 percent of the tax cut would go to the bottom 90 percent of families, and another 27 percent would go to the richest .13 percent. So much for the “economics of inclusion.”

President Bush’s global economic policy is doing no better than his domestic finances. The United States is a debtor nation. As it has for so many years, the United States continues to buy more abroad than it sells, and—what’s more alarming—the president has managed to turn the surplus he inherited from Bill Clinton into a staggering deficit. This is a weird and dangerous position for a global empire to get into.

Here’s what one analyst has said about the current situation: “The United States is more dependent on foreign capital than at any time in the past 50 years. . . . The biggest risk to the U.S. economy is if the rest of the world were to change the terms and conditions on which is supplies America with capital. . . . What America is asking the rest of the world to fund has changed dramatically. Three years ago, capital rushed to fund a private-sector tech-inspired productivity miracle. Now America needs to entice twice as much capital to fund a large and rising public-sector deficit. . . . It is one thing to attract capital for a private-sector boom; it is quite another thing to finance Bush’s tax cuts and Bush’s war.”

The author of that quote isn’t an academic economist or a celebrated political partisan. He’s David Bowers, a global-investment strategist for Merrill Lynch. President Bush and his confederates, though in love with unilateral action, are dependent on multilateral funding. America’s military might is paid for by capital flowing in from abroad—and especially from Asian central banks. Now there’s some real shock and awe.

—Gene Mirabelli

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