April 2001 – Letter from America – News for Parrots

With the arrival of a new administration in Washington, there have been wholesale changes in the economists occupying key policy positions. In the first of this year’s Letters from America, Angus Deaton reports on these changes – and notes some surprises.

In the 1960s, one of the ‘satire’ groups ran a sketch which began ‘Here is the news for parrots. A jumbo jet today crashed on takeoff. No parrots were hurt.’ In the US, over the last four months, we have had an extraordinary Presidential election which, if it did not exactly crash the national polity, left many hurt. And if some distinguished economists lost their Washington positions as part of the larger convulsion, other economists continue to flourish there under the new administration. Even if the new team contains fewer academic stars than the old, there will be no return to the desert of the Reagan administration when the President’s chief economic advisor was Beryl Sprinkel. (You don’t remember Mr Sprinkel? Quite so.)

The most influential of the Bush economists is Larry Lindsey, a Harvard (Martin Feldstein) trained tax economist who is a committed tax-cutter, and who is the point-man for the Bush tax cut that will preoccupy the Congress for many months to come. Glenn Hubbard has been recently nominated as Chairman of the Council of Economic Advisors. Hubbard, from Columbia University, a fine economist by anyone’s standards, is also a believer in tax cuts, and was hailed by Dan Mitchell of the Heritage Foundation as a ‘very good economist, which by definition means he appreciates free-market policies.’ He was a fellow student of Feldstein’s at Harvard with Lindsey, and was previously a Deputy Assistant Secretary in the Treasury in the administration of Bush père. When that administration was grasping for good economic news to counteract the rampant Bill Clinton in 1992, Hubbard wrote a famous Treasury ‘rags to riches’ memo (ordered up by Representative Dick Armey, of whom more below) which found a huge amount of upward mobility in incomes in the 1980s, a good deal of which turned out to come from college students who’d grown up into real jobs, or had the good fortune to get married, turning their tax returns from one earner into two.

A notable feature of Hubbard’s nomination was that neither the Wall Street Journal nor the Washington Post regarded the announcement as worth reporting, marking an extraordinary decline in the rank of the Chairman of the Council. In part, this is the legacy of Larry Summers, the retiring Treasury Secretary (whose signature appears on the dollar) and whose dominance in the Washington economic hierarchy restricted the space for other economic advisers. (Summers’ appointment to be the next President of Harvard has just been announced.) In part too, the Clinton administration split economic responsibility between the Council of Economic Advisors and a then new National Economic Council. Lindsey is head of the NEC, and the power of his position, with its direct access to the President, has further marginalized the Chairman of the Council. Indeed, the newspapers have repeatedly reported that the administration has had difficulty filling the position and that it was turned down by, among others, John Taylor. Taylor is rumoured to be the lead candidate for nomination to the Treasury Undersecretary for International Affairs, a position that is the administration’s connection to the World Bank and the IMF (whose abolition Taylor has supported in the past), and which was the starting point for Summers’ ascent to Treasury Secretary. If appointed, Taylor would be the intellectual heavyweight among the Bush economists.

'Lower taxes’ is the central demand of the right and it is the immediate and overriding priority of the new administration, so that a commitment to that objective is the litmus test for economists in this administration. Lindsey has described the estate tax (referred to by Republicans as the ‘death’ tax) as ‘the biggest impediment to capital formation on the nation’s books.’ This view was immediately denounced by 120 billionaires (including George Soros, Bill Gates père, and Warren Buffett) in an advertisement in the New York Times, prompting Lindsey to muse publicly on the relationship between the billionaires and their children. If the ‘death’ tax is indeed abolished, together with capital gains taxes at death, as the administration intends, there will be a lucrative (if necessarily short-lived) money-laundering business for the elderly. The income tax will be readily avoidable by those rich enough to be able to convert income into capital gains, and lucky enough to find a willing collaborator on the brink of eternity. But the best rhetoric comes in defence of income tax reduction. Economists on the right, after years of arguing the contrary, have suddenly awakened to the benefits of using tax policy to fine tune the economy. And Dick Armey, himself once a professor of economics at North Texas State University, but now the House Majority Leader, slammed the Democrats for attempting to force the nation down a road that ‘will forever change the relationship between government and its citizens,’ and for ‘proposing a highly reckless and irresponsible course’ that will result in ‘the diminution of American liberty’ and have ‘a consequence utterly without precedent in American life.’

What is he talking about? The under-funding of defence? UnAmerican activities? Not at all. The democrats are merely proposing to pay down the national debt, long a rallying cry on the right! But paying down the debt would lead the Federal Government into owning some part of the economy (‘the diminution of American liberty’) and, more seriously, would interfere with the overarching priority of lowering taxes.

Lastly, news of a parrot of a different colour. A decade ago, Princeton hired an iconoclastic young political scientist, John DiIulio. The son of a cop from Philadelphia, he challenged both right and left with his research on criminal behaviour, most famously with his warnings about the ‘superpredators,’ the young criminals that were terrorizing American cities. In the last few years, after experiencing a religious epiphany, he has been an advocate of church-based community action as an effective tool for combating violence in inner cities. In the new administration, he has been vaulted to national prominence as Director of a new White House Office of Faith Based and Community Initiatives whose purpose is to bring churches into the government apparatus of community and welfare assistance. This initiative is intensely controversial, raising issues of separation of church and state, and of the Federal Government subsidizing religion, including fringe groups and cults. There is deep discomfort among many of the churches from both ends of the political spectrum. But perhaps most intriguing is how someone as unpredictable as DiIulio could have attained such prominence in an administration that so values loyalty to its aims. DiIulio has already been in difficulties for speaking out against abolition of the ‘death’ tax, citing its incentives to charitable giving, while hoping that he is not being the ‘skunk at the picnic.’ It seems unlikely that such heterodoxy will be common in the new administration.

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