FT gloomy about Bush II economic policies

Executive Summary: expect a radical agenda which helps the GOP politically but may be disastrous for the dollar and deficits.

The economics of a second term
Financial Times, Tuesday, November 9, 2004, By Adam Posen

Ideological and partisan politicians know that elections are not about mandates or checking the people's will. They are about taking the reins of power and using them to realign the balance of interests in society in their favour - either by strengthening supporters' dependence on their programmes or by weakening the programmes of the opposition. The Bush administration understands this, and its radical economic agenda will move forward aggressively as a result. The "Bush II" agenda will not be constrained by bipartisanship, fiscal discipline or even economic reality, because the ultimate motivation is not economic but ideological - to shrink government and weaken Democratic opposition. The three big economic initiatives promised by Mr Bush should therefore be seen for the political thrusts they are.

First and most importantly will be the push for partial Social Security privatisation. This policy is at least as much to win over Wall Street - the one big business sector besides Hollywood that has continued contributing to Democrats as much as Republicans - by offering the fees that go with managing hundreds of billions of dollars in private accounts. For the Bush team, the political advantages of boosting asset markets temporarily and again giving those who manage money a direct stake in Republican programmes will outweigh any long-term fiscal costs (which limit government spending anyway).

On non-partisan Congressional Budget Office estimates, the transition costs of such a programme will present a budget shortfall of 1.5-2 per cent of gross domestic product a year for 10 years. Some will claim this just moves to the balance sheet an off-balance sheet liability that would be reneged on in future. Try telling that to bond markets, which will be asked to absorb another $200bn (£108bn) a year in government paper on top of today's deficits. Of course, as financial companies make money from trading volatility and sales fees and are not themselves the ultimate holders of the accumulating US government debt, the Bush strategy hopes they will be pleased at that end of the transaction too. Turning US debt into a new class of emerging market bonds may erode America's future, and its ability to fight terror, but it also offers profit opportunities to one-time political fence-sitters.

Second, the tax cuts of the Bush first term, set to be phased out in various years, will be made permanent. This result is already on course, given the Republican majorities in Congress and the Bush team's ability to claim there would be no impact on the current budget deficits. These "permanent" tax cuts will provide no short-term stimulus but will convince high-income voters that any shift away from Republican majorities will come at their expense. The cuts are also part of the multi-pronged "starve the beast" strategy to limit any future non-defence government programmes that might aid the Democrats or their voters.

The third initiative is the pursuit of tort reform that will limit medical malpractice claims, class-action suits, asbestos litigation and so on. Of all items on the Bush economic agenda, this has the most potential for some general benefit to economic efficiency and investment. Its political motivation, however, is the crassest: trial lawyers and their lobbies are the second largest contributors to the Democratic party after organised labour. Cut jury awards, and you cut funding for Democrats.

We should not, like Claude Rains' character in Casablanca, be "shocked" that politics is going on here. If Mr Bush's planned economic initiatives also promoted the general welfare, their dual use of locking in supporters would be welcome. However, the Bush administration is putting its political staying power ahead of economic responsibility - indeed it is weakening the independence of those very institutions on which Americans rely to check economic radicalism. For example, the current Republican congressional leadership is trying to override the constitutional design whereby the Senate acts as a brake on the executive branch and on the self-interest of "majority faction". Bill Frist, senate majority leader and George Allen, the Republican senate campaign committee chair, said their unprecedented direct campaign against Tom Daschle, the defeated Senate minority leader, should warn moderate Republican and Democratic senators not to be "obstructionist", even though that is precisely what the Founding Fathers intended the Senate to do.

The coming leadership change at the Federal Reserve is also being exploited to limit the Fed's room to criticise the inflationary implications of fiscal irresponsibility. The candidates to succeed Alan Greenspan as Fed chair are limited to those (Martin Feldstein and Glenn Hubbard, for example) who not only have ample qualifications, but also have explicitly supported the Bush team's Social Security and tax agenda. Even when central bankers don the Fed chairman's mantle of impartiality, these prior public statements will give the Bush team some protection from future Fed complaints.

Markets tend to assume that the US political system will prevent lasting extremist policies so, even now, observers discount the likelihood of the Bush administration fully pursuing - let alone passing - this economic agenda. If the thin blue line of Democrats and the responsible Republican moderates in the Senate bravely fulfil their constitutional role, perhaps the damage will be limited. If not, we can foresee the US economy following the path to extended decline of the British economy in the 1960s and 1970s and of Japan in the 1990s.

But, as Japan and the UK showed, once the political-economy dynamic is in motion, it takes years for the opposition to reverse it, even as its failures become obvious. That long-term preclusion of alternative policies is ultimately the goal of the Bush economic agenda.