American Account: Irwin Stelzer: Buoyant Bush plans a radical second term

THE MUSIC has stopped, the flower arrangements have wilted, and the 2,000 police who came from all over the country to aid the 4,000 Washington cops and the military to maintain security have gone home, as have the 12,000 Texans and Texan wannabes who consumed 21,000 enchiladas at the Black Tie and Boots Ball. Now all the president has to do is govern. Tony Blair once said that governing is a lot harder than campaigning, so now comes the hard part for George Bush. If the president were a Stephen Sondheim fan, he might have adopted the theme from Gypsy — “Some people sit on their butts; Got the dream, yeah, but not the guts; That’s living for some people, for some hum-drum people.” But not for Bush.

He has no intention of having a boring second-term presidency. He intends to push a radical agenda, gambling that he has accumulated sufficient political capital to overwhelm reluctant members of his own party, and an already virulent Democratic opposition.

After all, he has been re-elected after a first term in which he revolutionised the role of the federal government in education, pushed through tax cuts that avoided a major recession, went to war to secure the nation against terrorists, and introduced a prescription-drug programme for the elderly that is the largest expansion in the welfare state since the days of Lyndon Johnson’s Great Society. In the tradition of the oil wildcatters that dominate his hometown of Midland, Texas, Bush gambled all on his instincts, and won.

He now plans to repeat that performance. Iraq, of course, is the top of his worry list. But economic matters are not far down. The drooping dollar, the rising trade deficit, a seemingly intractable budget deficit, a social-security (pension) system that the president says is in “crisis”, a tax system he says is archaic, interest rates that are headed up, and oil prices that could top $60 before the year ends — these all cry out for the attention of a president whose top priority must nevertheless be foreign affairs.

Bush has promised to halve the budget deficit, but faces tough opposition to his plan to freeze or reduce spending on agriculture, transport, scientific research and anti-poverty programmes. The president never has to face the voters again, but members of Congress do.

Then there is the trade deficit, which continued to rise even as the dollar fell. Further growth in the deficit might trigger a run on the dollar, forcing the Fed to raise interest rates to recession-inducing levels.

Meanwhile, prospects for reform of the social-security system are fading, as some Republicans abandon the president for fear that his proposed reduction in benefits will cost them so many seats that they will lose control of Congress, and others realise that creating private accounts will reduce the flow of money into the system without reducing outlays — a combination that would balloon the deficit by between $2,000 billion and $5,000 billion.

So why was the president smiling as he whirled his wife around the dance floors at a variety of inaugural balls? In part it is his well-founded confidence that those who “misunderestimated” him in the past are doing so again. In part it is because this conviction politician is comfortable when he is doing what he believes is right, no matter the reaction of others. And in part it is because the economy, all of its problems notwithstanding, is in rather good shape.

Last week’s Federal Reserve Board survey of current business conditions reported “retail sales during the holidays were above year-ago levels (by a whopping 5.7%, according to the National Retail Federation), manufacturing activity firmed, businesses planned to increase capital spending, real-estate markets remained generally strong, labour markets firmed, but wage pressure generally remained modest, inflationary pressures remained largely in check”.

But some economists think that reports of the recent past don’t tell us much about the future. John Makin’s latest newsletter challenges the 3.5% consensus growth forecast for 2005, arguing that the tax-cut stimulus and low interest rates succeeded in producing growth of only 3.3% since the end of 2001. And those stimuli are gone. Meanwhile, several key Federal Reserve policymakers are worrying aloud about the threat of renewed inflation, as productivity gains slow and the weak dollar drives up the prices of imports.

Morgan Stanley’s Byron Wien agrees that inflation is a threat, a fear borne out by the fact that consumer prices rose last year by 3.3%, the fastest rate in four years. Another factor that will worry the president’s new economics team is a prediction by the National Retail Federation that in 2005 sales will grow at only half the 6.7% chalked up last year.

But this gloomy outlook doesn’t reckon with some underlying strengths. Economists at Goldman Sachs report that “US capital spending has been on a tear since the spring of 2003 ... (and will) remain strong in 2005, rising an additional 8% or so”. Orders for factory goods are rising rapidly, and the service sector is racking up impressive gains. The economy added 2.23m jobs last year, the largest gain since 1999, contributing to a jump in consumer confidence. More houses were built in 2004 than in any year since 1978, and the momentum seems to be carrying into 2005.

The falling dollar, despite its recent bounce-back, has begun to make itself felt: manufacturers report a sharp rise in exports. Foreign investments in American assets are covering the trade deficit, and then some: in November inflows of $81 billion exceeded the deficit by more than $20 billion. As for inflation, a continuation of the Fed’s interest-rate increases, combined with the absence of wage inflation, should continue to hold price increases to tolerable levels.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

"Meanwhile, prospects for reform of the social-security system are fading, as some Republicans abandon the president for fear that his proposed reduction in benefits will cost them so many seats that they will lose control of Congress, and others realise that creating private accounts will reduce the flow of money into the system without reducing outlays — a combination that would balloon the deficit by between $2,000 billion and $5,000 billion.

There is a story going around the net and it sounds feasible.
It goes like this, allow an individual to take ex-amount of money each year and invest it in a private account tax free (IRA's?) than when they apply for SS the amount accumalated would be deducted off their benefits. It wouldn't cost the government as much to implement.

"“crisis”, a tax system he says is archaic,

I was really looking forward to a TOTAL tax overhaul and reform!! Besides the tax cuts, a total overhaul is so needed and ASAP!

Would there be an additional benefit for that? People may well not wish to do that if any profit is deducted from SS payments without an incentive.

W might as well chalk off the SS overhaul project now. If the people in his own party won't back him, he's got a zero chance to get a bill through...

People may well not wish to do that if any profit is deducted from SS payments without an incentive.

There are certainly incentives: (1) the amount saved by younger workers is likely to exceed any Social Security they could reasonably hope to receive, and (2) the account passes to your heirs after your death.

-ccm

Buoyant Bush plans a radical second term

I wish that were the case. Alas, it is not. Frist's weak-kneed response to the Condi.gonzalex delays, and Specter's hiring of the NAACP hag as chief counsel, show that Bush's judicial revolution is stalled before it even reaches the starting gate.

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