Why The Dole Plan Will Work

I was surprised when I received a phone call in early May to attend a meeting in Washington with then-Senate Majority Leader Bob Dole of Kansas, other senators, and a few economists to discuss the formulation of an economic program for the Presidential campaign. I had been the consummate Washington outsider: I declined all invitations to testify before Congress and had never even set foot in the Capitol, the building where the meeting was to take place!

But I accepted this invitation because I believed that new economic initiatives were much needed to raise the growth rate of America. The meetings with Dole and his advisers gave me a priceless education on the mix of economic and other factors that determine an economic program.

It was early agreed that cuts in income and capital-gains taxes were to be the centerpiece of his program. I believed large cuts were essential; their precise form mattered much less. Dole chose a 15% across-the-board tax cut from several alternatives because families can easily understand how that would directly affect them. Moreover, this cut is a major step toward the reforms he promised for his first Presidential term: a simpler and flatter tax structure, a balanced-budget amendment to the Constitution, and the requirement of supermajorities in Congress to raise income-tax rates.

From the beginning, Dole wanted major education and training initiatives because he recognizes that investments in human capital are essential to robust long-term growth in modern economies that depend on knowledge, skills, and information. Better education and training will also help narrow the inequality in earnings that has grown over the past two decades.

VOUCHERS AND SAVINGS. His program advocates scholarships, or vouchers, for students from middle-class and poor families that could be spent at private schools, including parochial schools. Poorer students attend the worst public schools, since they cannot afford either private schools or good suburban schools. Vouchers, choice, and competition among schools sharply distinguish Dole's approach from President Clinton's, since he, along with the teachers' unions, has strongly opposed school vouchers and choice.

The Dole plan includes education savings accounts that allow families to contribute $500 per year to an "education individual retirement account" for each child, which can be spent eventually on college or other post-high-school education. It also gives tax incentives to companies to pay for training and retraining of employees--including those who lost their jobs, possibly because of downsizing.

The Dole program plans to first stop and then roll back the rapid growth in regulations under Presidents George Bush and Bill Clinton. The Clinton Administration itself estimates that the cost of complying with federal regulations in 1995 absorbed almost 10% of gross domestic product, and the cost is continuing to rise. Dole would require benefit-cost analysis to justify new regulations and would reevaluate all existing regulations.

FEEDBACK. I believe the full program can reach the target of 3.5% growth per year. The U.S. and many other countries have enormous reservoirs of skills that are throttled by high taxes, excessive regulations, and failures to properly educate and train much of the workforce. Any country will gain a large burst in economic vitality if it can improve opportunities for men and women to start businesses and encourage much greater investments in human and physical capital.

The tax cuts and other incentives in the Dole program would reduce federal revenues by about $550 billion over the six-year period to the year 2002. Faster economic growth and reallocation of assets toward more taxable forms induced by the whole program, not just the tax cuts, is assumed to recover during this six-year period about 27%, or $150 billion, of the revenue loss.

I consider this 27% feedback conservative. Martin S. Feldstein of Harvard University has estimated that the 1986 tax cuts yielded a 40% feedback. More than $200 billion, rather than the assumed $150 billion, will be recovered in six years if the Dole package raises growth by only 0.2 percentage points each year for six years: Instead of growing at 2.2% each year, the economy would grow at 2.4% in the first year, 2.6% in the second, and so on.

Some critics label the assumption of revenue recovery voodoo economics revisited, but to me it is a simple implication of elementary economics taught to freshmen: that powerful changes in incentives have powerful effects on behavior. Economists should go out of business if they deny that taxes, prices, and costs significantly alter behavior. This is the strength of Dole's economic plan.

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