THEY BROKE IT AND DON'T WANT US TO OWN IT:

Bush's Own Goal: The political imperative behind President Bush's "ownership society" is to provide pseudopopulist cover for his highly elitist policies. (PAUL KRUGMAN, 8/13/04, NY Times)

[T]here's a political imperative behind the "ownership society" theme: the need to provide pseudopopulist cover to policies that are, in reality, highly elitist.

The Bush tax cuts have, of course, heavily favored the very, very well off. But they have also, more specifically, favored unearned income over earned income - or, if you prefer, investment returns over wages. Last year Daniel Altman pointed out in The New York Times that Mr. Bush's proposals, if fully adopted, "could eliminate almost all taxes on investment income and wealth for almost all Americans." Mr. Bush hasn't yet gotten all he wants, but he has taken a large step toward a system in which only labor income is taxed.

The political problem with a policy favoring investment returns over wages is that a vast majority of Americans derive their income primarily from wages, and that the bulk of investment income goes to a small elite. How, then, can such a policy be sold? By promising that everyone can join the elite. [...]

If the "ownership society" means anything, it means spreading investment income more widely - a laudable goal, if achievable.

But does Mr. Bush have a way to get us there?

There's a section on his campaign blog about the ownership society, but it's short on specifics. Much of the space is devoted to new types of tax-sheltered savings accounts. People who have looked into plans for such accounts know, however, that they would provide more tax shelters for the wealthy, but would be irrelevant to most families, who already have access to 401(k)'s. Their ability to invest more is limited not by taxes but by the fact that they aren't earning enough to save more.

The one seemingly substantive proposal is a blast from the past: a renewed call for the partial privatization of Social Security, which would divert payroll taxes into personal accounts.

We should, of course, return to a system where only those who actually pay taxes and have vested property interests in the state are entitled to determine how their tax dollars are spent, but Mr. Krugman, as most of the President's critics, dramatically underestimates how radical a transformation he envisions. The ownership society would make it so that everyone falls under that rubric--this is its conservative genius. The classic conservative critique of democracy is that a system which allows the majority to vote itself the money of the minority will eventually see exactly that happen. But, by transitioning from income to consumption taxes you make sure that even the poorer among us feel the pinch of too high government spending and give them a reason to oppose it. By creating personal property for them to own--in the form of Health Savings Accounts; privatized Social Security Accounts; private instead of public housing; etc.--you give them a vested interest in the stability of the society and in the growth of the economy. The ambition may be sane, but it is too make every man an elite, an owner of a personal stake in the nation.

Additionally, and it's even more surprising that Mr. Krugman doesn't get this, the ownership society is a way of getting out hands of government, where it at best lies fallow, and into the hands of the productive economy. Here's how Daniel Altman explains their vision:

[They] 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.

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.

Sending a trillion dollars back to the wealthy in tax cuts is all well and good, but the big enchilada is obviously the enormous pool of Social Security money--real and imagined. Rather than having the government collect Social Security taxes and sit on them a prtivatized system would put tens of trillions of dollars into stocks and bonds. The increased return on those dollars is reason enough to make this change but the neoconomists believe that making all this additional money available to business will increase the rate at which the economy can grow.

That may be delusional, but if so Mr. Krugman, who folks swear was a respected economist just a few years ago, isn't offering any reasons why it is. Indeed, his argument seems to be based almost entirely on the Left's political desire to keep folks poor and atomized so that they will support redistribution of wealth. That's a sensible plan for the elites who want to run the redistribution and control lives, but it's bad for the country, including the poor.

MORE:
Vulgar Keynesians: A penny spent is not a penny earned? (Paul Krugman, 2/06/97, Slate)

Consider...the "paradox of thrift." Suppose that for some reason the savings rate--the fraction of income not spent--goes up. According to the early Keynesian models, this will actually lead to a decline in total savings and investment. Why? Because higher desired savings will lead to an economic slump, which will reduce income and also reduce investment demand; since in the end savings and investment are always equal, the total volume of savings must actually fall! [...]

Such paradoxes are still fun to contemplate; they still appear in some freshman textbooks. Nonetheless, few economists take them seriously these days. There are a number of reasons, but the most important can be stated in two words: Alan Greenspan.

After all, the simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman's judgment--you may think that he should keep the economy on a looser rein--but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.

But putting Greenspan (or his successor) into the picture restores much of the classical vision of the macroeconomy. Instead of an invisible hand pushing the economy toward full employment in some unspecified long run, we have the visible hand of the Fed pushing us toward its estimate of the noninflationary unemployment rate over the course of two or three years. To accomplish this, the board must raise or lower interest rates to bring savings and investment at that target unemployment rate in line with each other. And so all the paradoxes of thrift, widow's cruses, and so on become irrelevant. In particular, an increase in the savings rate will translate into higher investment after all, because the Fed will make sure that it does.

To me, at least, the idea that changes in demand will normally be offset by Fed policy--so that they will, on average, have no effect on employment--seems both simple and entirely reasonable. Yet it is clear that very few people outside the world of academic economics think about things that way. For example, the debate over the North American Free Trade Agreement was conducted almost entirely in terms of supposed job creation or destruction. The obvious (to me) point that the average unemployment rate over the next 10 years will be what the Fed wants it to be, regardless of the U.S.-Mexico trade balance, never made it into the public consciousness. (In fact, when I made that argument at one panel discussion in 1993, a fellow panelist--a NAFTA advocate, as it happens--exploded in rage: "It's remarks like that that make people hate economists!")

What has made it into the public consciousness--including, alas, that of many policy intellectuals who imagine themselves well informed--is a sort of caricature Keynesianism, the hallmark of which is an uncritical acceptance of the idea that reduced consumer spending is always a bad thing. In the United States, where inflation and the budget deficit have receded for the time being, vulgar Keynesianism has recently staged an impressive comeback. The paradox of thrift and the widow's cruse are both major themes in William Greider's latest book, which I discussed last month. (Although it is doubtful whether Greider is aware of the source of his ideas--as Keynes wrote, "Practical men, who believe themselves quite exempt from any intellectual influence, are usually the slaves of some defunct economist.") It is perhaps not surprising that the same ideas are echoed by John B. Judis in the New Republic; but when you see the idea that higher savings will actually reduce growth treated seriously in Business Week ("Looking for Growth in All the Wrong Places," Feb. 3), you realize that there is a real cultural phenomenon developing.

To justify the claim that savings are actually bad for growth (as opposed to the quite different, more reasonable position that they are not as crucial as some would claim), you must convincingly argue that the Fed is impotent--that it cannot, by lowering interest rates, ensure that an increase in desired savings gets translated into higher investment.
It is not enough to argue that interest rates are only one of several influences on investment. That is like saying that my pressure on the gas pedal is only one of many influences on the speed of my car. So what? I am able to adjust that pressure, and so my car's speed is normally determined by how fast I think I can safely drive. Similarly, Greenspan is able to change interest rates freely (the Fed can double the money supply in a day, if it wants to), and so the level of employment is normally determined by how high he thinks it can safely go--end of story.

No, to make sense of the claim that savings are bad you must argue either that interest rates have no effect on spending (try telling that to the National Association of Homebuilders) or that potential savings are so high compared with investment opportunities that the Fed cannot bring the two in line even at a near-zero interest rate. The latter was a reasonable position during the 1930s, when the rate on Treasury bills was less than one-tenth of 1 percent; it is an arguable claim right now for Japan, where interest rates are about 1 percent. (Actually, I think that the Bank of Japan could still pull that economy out of its funk, and that its passivity is a case of gross malfeasance. That, however, is a subject for another column.) But the bank that holds a mortgage on my house sends me a little notice each month assuring me that the interest rate in America is still quite positive, thank you.

Posted by Orrin Judd at August 14, 2004 11:19 AM