Energized by his election as if it were a landslide, President George W. Bush proposes to spend his “political capital” on an ambitious economic agenda headed by reform of Social Security and the U.S. Tax Code.  The President’s candor in acknowledging that the deficits and tax cuts of his first term—the “Wall Street Relief and Bush Reelection Acts”—will make it harder to achieve his new agenda raises questions about the qualifications Team Bush brings to the task of cutting through these two Gordian knots.  President Bush did not secure a mandate for these goals from the electorate; opinion polls show that the public prefers a reduction of deficits over a reform of Social Security and taxation.

The reduction of the federal budget deficit should be the first priority of the economic agenda.  Bush has proposed to halve the federal deficit by pushing social-welfare spending off onto the already beleaguered budgets of the states and delaying the modernization of defense rather than rescinding any of his tax cuts or addressing the generous agricultural and corporate-welfare payoffs and other political pork that rewarded donors of his first-term victory.  Déjà vu of another Texan, Lyndon Johnson, he is still vacillating between “guns and butter” by opting for both.

The Bush plan for Social Security would offer younger workers the option of establishing “privatized” individual accounts funded from employee Social Security contributions.  This proposal has the commendable effect of beginning the conversion to a real retirement and disability savings scheme, directly addressing the chronic U.S. savings deficit and reducing the unfunded $3.7 billion actuarial liability that characterizes Social Security as a New Deal “Ponzi scheme” that gratuitously redistributes income from current workers to current retirees.  Bush has limited the scope of reform, however, by insisting that there will be no reductions in benefits nor increases in payroll taxes.  By comparison, Plan Two of the President’s Commission to Strengthen Social Security included cost-of-living adjustment of benefits rather than the current wage indexing, which, along with partial privatization, would resolve the pending crisis.

The tax-reform goals Bush has outlined include deferring taxes on all saving for investment until consumed and fundamentally simplifying the tax code—possibly by means of a consumption-based tax—while making permanent his first-term tax cuts.  The “complications” to which he has referred arise from the fact that both Social Security reform and fundamental tax reform will cause transitional losses in tax revenues that have already been spent on the tax cuts he proposes to make permanent.  Also, his tax cuts for dividends and capital gains were steps toward the flat income tax, not a consumption tax; only a consumption tax—such as a National Sales Tax or a Business Transaction (value-added) Tax—would provide the urgently needed border-adjusted taxation that could rescue the drowning manufacturing sector by leveling the playing field with other industrialized countries that impose value-added taxation.  The Commission on Tax Reform that the President intends to appoint must be allowed to address the border-adjusted taxation issue honestly.  The Commerce Department’s “Manufacturing in America” game plan declined to recognize the problem, much less to address it.

Unaddressed in the President’s plans for economic reform are runaway Medicare and Medicaid entitlements, which similarly redistribute income from current workers to current retirees’ and indigents’ healthcare and have an unfunded liability several times that of the Social Security obligations.  Bush proposes curbs on class-action and malpractice suits, as well as his tax-exempt healthcare savings accounts, to help rein in healthcare inflation.  These structural improvements, however, will be at the very least offset by his addition of prescription benefits to runaway “first dollar” to “the-sky-is-the-limit” Medicare entitlements.

Also conspicuously missing from the Bush agenda is anything that could arrest the decline of the devalued dollar, much less strengthen it.  (See “Diagnosing the Diminishing Dollar,” p. 42.)  The excess of cheap money being supplied by the Federal Reserve, acting as the lackey of Wall Street, undermines saving for investment, funds excessive borrowing for consumption, and invites speculation that threatens an eventual collapse of market values.  The closing of the saving deficit, the federal deficit, and the trade deficit all require financial discipline, not the quick fix of easy money, which will only exacerbate economic problems in the future.

An appropriate economic agenda for the next four years must take into account the reality that the United States has been on a consumption binge increasingly funded by foreign savings, an imbalance that threatens not only the United States but the entire world economy.  Solutions such as Social Security privatization and consumption-based taxation can contribute to increased saving and to restoring sound U.S. economic growth.  However, border-adjusted taxation is probably the most important reform needed to balance the unsustainable trade deficit in goods that transfers ownership and mortgages of U.S. productive assets to foreign investors to fund the excesses of U.S. consumers.  A respected currency is a far greater force for U.S. influence than spending on unwarranted military adventures—which, when added to bloated domestic spending, demands excessive federal revenues.

The President should be supported by his Republican Congress in legislating his priorities for economic reform, provided such legislation is accompanied by the curtailing of federal spending and the levying of the taxation required to close the federal deficit.  Republicans can expect bitter Democratic opposition to Social Security privatization but could get cooperation on border-adjusted tax reform.  The President can best serve his agenda by encouraging his Republican Congress to provide the legislation they are better staffed to create and by using his “bully pulpit” to sell these reforms to the electorate, while exercising critical and frugal oversight of which bills to sign and which to veto.