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Economic Policy Priorities of Bush II

Author: Roger M. Kubarych
January 26, 2005
Market Eye on Nikkei Financial Daily

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President Bush is reelected. The Republican Party hold solid majorities in Congress. Supported by rising incomes and huge increases in home values, the US economy is moving ahead strongly. Economic growth of 3 to 4% is likely to persist in 2005, even though the Federal Reserve is bound to hike short-term interest rates by another 1 to 2%.

To White House strategists these are ideal conditions for pushing ahead with ambitious economic policy initiatives. All are controversial, even within the Republican majority. Here are the top three:

Priority 1: Social Security restructuring. At a minimum, this would include some form of partial privatization plus introduction of a method of financing the unavoidable transition costs of such a scheme. The problem with Social Security is not an immediate crisis. There is none. But over time, as in other industrialized countries, demographic trends will reduce the ratio of workers to retired people. So pay-as-you-go programs such as Social Security will either have to find new sources of revenue or cut benefits. Young Americans know this and take for granted that they won’t collect the same generous benefits their parents and grandparents will get. Privatization essentially means offering to everyone the opportunity to make some investments with tax advantages, now enjoyed by half the population through 401k accounts or other pension plans. Democrats resist for two reasons: they would prefer to fix the long-term problem by increasing taxes on wealthy individuals and they realize that investors tend to vote Republican. Many Republicans who accept the Bush argument fear that Democrats can exploit the issue successfully in next year’s mid-term Congressional elections. Prospects: good if the White House is willing to compromise; otherwise a radical proposal will languish.

Priority 2: Income tax reform. Supply-siders since the Reagan era have yearned for a flatter income tax rate structure as well as simplification of the messy US system. Something like this was accomplished in 1986, when both tax deductions and tax rates were cut. But Republicans found out to their dismay that it was easy for Democrats to restore higher marginal tax rates but impossible for them to restore terminated tax breaks. Plus business lobbyists prefer the current system, since they know how to use it to their advantage. Prospects: very unlikely. But just raising the issue will allow new ideas to infiltrate the debate. In particular, some members of Congress will support a national consumption tax to take some burden off the income tax. That is a debate that the US needs to have, since the US tax structure tilts against saving and in favor of spending. Eventually that must change.

Priority 3: Tort reform. The number one priority of the business community is to stop class action lawsuits and to roll back punitive damage awards that juries inflict on businesses unlucky enough to lose a product liability case, for example, asbestos and tobacco. Medical malpractice suits rouse the same passions among doctors. However, the number one source of financial support for Democrats are trial lawyers. Together, they have successfully blocked tort reform for years. Prospects: best in some time, given the Republican Congressional majorities. But a lot of Republicans come from states in which lawsuits against the rich and powerful have populist appeal. So any progress will come only after considerable wrangling.

Three other priorities, though lower down the list, bear watching. One is immigration reform. The Wall Street Journal editorial page, plus many US businesses, favor liberalization through a guest-worker program, which the Bush administration also favors. The issue used to split the Democrats, because labor unions normally opposed reform. But some union leaders are coming around to a more liberal position. Republicans are split on the issue, too, because grass-roots opposition to more immigrants is still formidable. Prospects: uncertain.

Two is energy policy. The Bush platform is to drill more and regulate less. Democrats prefer higher taxes or other forms of rationing, for instance tougher mileage standards for autos. Prospects: some useful compromises under the slogan of US energy independence.

Three is containing the trade deficit. Bush II does not think curbing the trade deficit deserves the highest priority. But the administration will favor some combination of a weaker dollar, removal of barriers to US exports, and urging other countries to stimulate faster economic growth. Democrats are more worried about the trade deficit but offer no real alternative. Prospects: The White House approach will be followed but won’t do much about the trade deficit.

Notice that there was no mention of lowering the Federal government budget deficit? That’s not an oversight. It’s simply not a Bush II priority!

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