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David I. Levine and Brad DeLong
Former Senator Dole's choice of Jack Kemp as his running mate is bad news.
It tells us that the economic plan proposed on August 5 cannot be rejected as merely a campaign stunt--bearing as little relationship to the policies that would be followed by a Dole administration as George Bush's command to "read my lips: no new taxes" bore to the policies that his administration followed. By choosing Jack Kemp as his running mate, former Senator Dole has made it clear that a Dole administration will not, in Jack Kemp's words, "worship at the alter of a balanced budget." In a Dole administration tax cuts (weighted, as usual, to give the lion's share of reductions to those with high incomes) will have a higher priority than increases in public investment or in deficit reduction, let alone budget balance.
This is a striking change in position: for nearly a generation Senator Dole had resisted the short-run political gains of promising "pain-free" economic policies. One of the most appealing things about him had been his honesty that economic policy involved difficult choices: honesty that got him derided as one of those "root canal-loving Republicans" by Jack Kemp and Kemp's political allies. In return, Senator Dole had used his sardonic wit to poke fun at the unrealistic forecasts of the supply-siders.
However, now Senator Dole is gone. He has been replaced by Candidate Dole--or, perhaps, Santa Dole promising tax cuts for everything from children to capital gains to individual retirement accounts. But Christmas does not come in August. For the first week after the announced economic program we could hope that it did not foretell the economic policies of a Dole administration. With the selection of Jack Kemp that hope is gone: the clear reality is that a Dole administration would set off down a road that threatens to do to deficits in the nineties what the previous Republican administrations did to deficits in the eighties.
How are the tax cuts that Candidate Dole has promised to be financed? Dole has committed himself to leaving Social Security, Medicare, veterans' programs, defense spending, and other sacred cows untouched at their currently-projected spending levels. There is not much of the government left. There is handwaving about massive savings by ending administrative inefficiencies, but it is impossible to believe that a President Dole will magically unlock hundreds of billions of dollars worth of savings somehow missed by twelve years of Reagan-Bush austerity followed by four years of Clinton-Gore reinvention.
There is more handwaving about a "growth bonus". But the economic program proposes no policies that could possibly perform the miracle of nearly doubling the rate of productivity growth. Productivity growth requires high rates of investment in capital, in knowledge, and in people. But none of the tax cuts are incentives to boost investment in new plant and equipment or in research and development: the capital gains cut is backward-looking, providing much more of a windfall to those who invested long ago in the past than an incentive to boost investment in the future.
Moreover, the cuts in domestic spending implicit in the program will force large declines in federally-funded R&D at the National Science Foundation, the National Institute of Health, and elsewhere. There is nothing to improve education.
And there is the higher deficit generated by "no longer worshipping at the alter of a balanced budget," by cutting taxes without making any provision for budget balance. The rule of thumb is that running an extra deficit of $1,000 for one year robs business of sufficient capital to lower national product by $100. Maintain the extra deficits in the Dole plan for a decade, and find that you have appreciably slowed growth, not boosted it.
No serious economist claims today that the U.S. economy is stronger because of the economic policies of the 1980s than it would have been had the 1980s seen the country following the economic policies of, say, an Eisenhower.
But there is one piece of good news in all this. The good news is that Candidate Dole has finished the process of refocusing Republican political rhetoric. It used to be that Republican political rhetoric glorified trickle-down economics and personal wealth, and denied even the existence of the wage stagnation, widening income inequality, and slow productivity growth that plagued the 1970s and 1980s. But now Candidate Dole is focusing on the crucial economic issues of the last 20 years: slow growth in productivity and real incomes, and the fact that most of the gains of the slow growth are concentrated at the top of the income distribution. It is, at times, hard to tell the difference between Candidate Dole and Labor Secretary Reich.
But boosting productivity growth and restoring balance to the distribution of income will not be achieved by yet another package of deficit-boosting tax cuts tilted toward the well off. It might have been possible in 1980--before the experience of the Reagan budget deficits--to argue in good faith that faster economic growth required tilting the distribution of income in favor of the rich and making America a more unequal society; it is not possible to make such an argument in good faith today.
A true debate about how to boost economic growth would be a very good thing for America. Politicians would discuss carefully-planned shifts in the tax code to provide incentives to boost future investment in capital, in education, and in research and development. They would pledge to truly "reinvent" government, and to boost spending on that too-small subset of government policies that are truly cost-effective, like federally-funded research, prenatal care and in children's health, adult retraining and job search, and sensible environmental cleanup. They would pledge to eliminate the deficit, both to increase the pool of capital available for private enterprise and to start preparing the country for the major shifts in spending and taxation that will follow as night follows day from the aging of the large baby-boom generation.
But that is not the debate that we are going to have.
It was, perhaps, good news for the Republican Party when Senator Dole decided to resign from the Senate to devote full-time attention to the campaign. It would be bad news to elect a President Dole who has resigned from reality.
David I. Levine is a professor of economics at the Haas School of Business, and Brad DeLong is an associate professor of economics in the College of Letters and Science, University of California, Berkeley.
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