Savings apocalypse?

In Taxes and Consequences: The Second Term Begins, amid the sensible questions Daniel Altman asks about Bush's economic plans, he puts in this one about the mooted privatization of Social Security:

President Bush said he wants to give workers an opportunity to divert part of their payroll taxes to individual investment accounts, in the hope that the financial markets would pay higher returns than the existing Social Security system....[W]ho would choose where workers could put their money? Would they have been able to invest in Enron?

There are many questions about Bush's economic policies in general and about Social Security privatization in particular, but even I understand that one could very easily design this kind of privatization to give people only a limited set of options, such as a few different kinds of mutual funds and a money market fund. If Altman refuses to even make such a proposal, I wonder how qualified he is to discuss the other policies. In fact, Altman is opposed to the entire idea of encouraging people to save by cutting taxes on investments.

The neoconomists didn't invent these models—that was the job of theorists whose work sometimes looked more like physics than economics—but they quickly grasped the implications for policy.

So he admits that academic theory is behind the proposal, but dismisses the theory as work that "sometimes looked more like physics than economics."

They used the models to 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.

...there is no assurance that the positive chain-reaction the neoconomists envision will actually occur. [R. Glenn Hubbard and Lawrence B. Lindsey]'s strategy has never been tried in a large, wealthy economy.

...even if the Bush administration succeeds, its policies could create two problems that could undo all their positive effects: rising inequality and a drastic change in incentives.

Wealthier people derive more of their income from returns on saving—both in dollar terms and as a proportion of income—than poor people do. When taxes on the return from savings suddenly disappear, the wealthy benefit the most. It may be that people who depend on their jobs for income will benefit, too, in the long run, thanks to an expanding economy and rising wages. But for several years, in all likelihood, the income gap will continue to widen.

That income gap poses some real dangers to the economy and even to the earnings of the wealthy. With rising inequality, it's harder for poor people to obtain economic opportunities, because chances to get education and training, or to bring ideas to market, depend on money as well as talent, and because the number of these opportunities is limited...

His conclusion is that if the rich get richer, the poor will inevitably get poorer, but he offers zero evidence for this. After all, the economy is not a zero-sum system.

Perhaps more important, abolishing taxes on saving would give people every incentive to receive all their income from financial assets rather than wages and salaries. For some, spending all day adjusting one's portfolio might make more sense than taking a job. Even people who work will seek ways to avoid taxes, for example by being paid solely in stock options or high-interest bonds.

Even though he is concerned that "there is no assurance that the positive chain-reaction the neoconomists envision will actually occur," he is confident to predict that those who can afford to invest will only be the wealthy, and that despite their investments, they are simply parasites. In fact, even today there are many people whose wealth mainly resides in stocks, who still take jobs anyway. I'm looking online for a rightist discussion or rebuttal of Altman, but mostly see only leftists cheering him on. That suggests to me that Bush will lose this battle. And besides, even someone like Tyler Cowen, "on the conservative side" is cited in the Wall Street Journal as opposing the plan:

I wish to privatize many things, but forced savings is not one of them. The so-called privatized accounts would be regulated rather than truly private in the libertarian sense. They will channel benefits to government-approved providers, thus leading to bureaucracy, regulation, and costly commissions. We could even imagine a government trying to direct those investment funds to particular sectors. And if anyone's account goes bust, a secondary safety net would likely bail them out. What if the whole market went bust for about 10 years' time, as it did in the 1970s? Imagine a replay of the S&L crisis but on a larger scale.

And that's not to mention how to pay off current recipients.