White House Economists Signal Market Bias

By: Peronet Despeignes

During a meeting with reporters earlier this month, Robert Glenn Hubbard, the slim, soft-spoken chairman of the White House Council of Economic Advisers, remarked that since arriving in Washington, he had slacked off on exercise and put on a few extra pounds.

"I don't notice it when I'm walking on a flat surface but I do when I walk upstairs. The 1990's are like that - a period of very rapid growth when we picked up excess baggage."

This short story, told by one of its top economists, says much about the Bush administration's plans for the U.S. economy. Where others see a decade, now past, of unprecedented prosperity and unrivalled economic success, this administration sees an age of complacency and missed opportunities.

Where many Americans focus on the boom, the White House appears preoccupied with what it calls bloat and waste.

Where others see a productivity miracle, Bush economists see room for improvement and insurance.

It is an impression reinforced by their first annual Economic Report of the President, released earlier this month. Economic reports, like the White House economists who write them, come and go, but the 2002 report merits special attention from anyone who wants a better understanding of the economic philosophy guiding much of this administration - the most market-oriented since the Reagan years.

The report is a free-market manifesto based on the view that economic resources are best allocated by the private sector; that incentives to work, save, invest, innovate and compete are the "core" of economic growth; that America's productivity miracle mainly reflects two decades of policy changes - not good fortune - that intensified competition by extending the scope of consumer choice and private markets; that the U.S. economy remains saddled with significant economic disincentives and that removing them - particularly to competition in healthcare and education - will reduce costs, improve quality, yield faster economic growth and ease the government's future financial burdens.

"The war against terrorism has increased the demands on our economy, and we must do everything in our power to build our economic strength to meet these demands", it begins.

The report makes, either implicitly or explicitly, at least 17 market-oriented proposals along these lines involving tax policy, trade, education, healthcare, retirement planning, local public services, immigration, environmental and competition policy.

For instance, it warns that excessive growth in government spending will siphon "billions of dollars away from private sector innovation, taxes will rise and growth will suffer".

It advocates more free trade as a competition and productivity boosting measure.

The partial conversion of Social Security into a system of personal accounts is sold as a means of reducing disincentives to work, bolstering national saving and investment.

The report recommends that parents in poorly performing public school systems be given more choice in where to send their children - through vouchers and tax credits - and advocates more choice and better information for patients on the cost and effectiveness of different public and private healthcare plans.

The latter two ideas are sold as a means by which competition will raise quality and reduce costs in public education and healthcare.

The economic merits of many of these proposals remain hotly debated, and the likelihood of their execution is highly uncertain - in many cases, unlikely. In the wake of the Enron disgrace, the public mood toward deregulation and partial privatisation of Social Security has soured.

The strongest school choice provisions were stripped out of the recently passed education reform bill, and the local school-choice/voucher movement is on the defensive.

Convincing western Europe that U.S. competition policy is "best practice" is already problematic at best. The report admits the difficulty of proving whether "temporary monopolies" (such as, it believes, Microsoft) are beset by "dynamic competition", are actually "temporary" and supply greater benefits than costs to consumers.

For all its advocacy of a partial transition to Social Security investment accounts, the administration fails to provide for this expensive idea in its recently proposed budget.

It recently proposed a big increase in military spending, and on some weapons programmes criticised as wasteful, and appears unlikely to get the restraint in non-military spending it has called for. Its tax cut plan - including cuts scheduled to be erratically phased in and phased out - has arguably exacerbated the complexity of the tax code.

The administration's free trade mantra is belied by its support of steel import restrictions and expanded farm subsidies.

One of its own economists, Mark McClellan, who sits on the advisory council, recently co-authored a study which identified hazards with making consumers better informed healthcare buyers.

In it, he concludes the use of "report cards" for cardiac surgery wards in New York and Pennsylvania led "doctors and hospitals to decline to treat more difficult, severely ill patients", exacerbated selection behaviour among patients and "led to higher [costs] and worse healthcare outcomes".

The 2002 Economic Report marks an important chapter in what could become a contentious debate over how to sustain America's growth if security measures weigh on the economy's efficiency, the protracted slump in business investment persists and the productivity miracle evaporates.

At stake is everything from stock market valuations to the stability of the dollar and how well the government will meet the financial challenges of the anti-terrorism campaign and the retirement of the baby-boom generation in the years to come.