Seeking freedom, at home and abroad

Jan 20th 2005
From The Economist Global Agenda

George Bush began his second term with a speech calling for freedom around the world. But for the conservative, radical president, “freedom” also means big changes to domestic programmes. Can Mr Bush realise his vision of an “ownership society”?

GEORGE BUSH’S favourite word is not hard to guess. “Free” or “freedom” appeared 34 times in his 15-minute second inaugural speech on Thursday January 20th. Most of the instances were devoted to Mr Bush's goal of expanding freedom around the world as a means of fighting the desperation that leads to terrorism. But the president also has a vision of completing “the unfinished work of American freedom”. For him, this means a society that gives every citizen “a stake in the promise and future of our country”. It sounds like anodyne stuff, but it has a very specific meaning. In his second term, the president will attempt a radical transformation of some of the mainstays of the American economy, in particular the tax code and the pension system.

American presidents’ second terms tend to end up tarred by scandal: think of Richard Nixon and Watergate, Ronald Reagan and Iran-Contra, Bill Clinton and Monica Lewinsky. It is not obvious which kind of scandal, if any, might befall George Bush in his second stint as leader of the free world. But nor does this mean it will be easy. Second-termers, despite nominally having four years to get the job done, actually have little time to push through their agenda—within a year, Congress is looking to its mid-term elections, knowing that presidential coat-tails can no longer carry them. This could make the legislature less pliable to Mr Bush’s will than it was in his first term, when he had little trouble passing his bills and saw fit to veto not a single one emanating from Capitol Hill. A new prescription-drug benefit for Medicare, the health-care plan for pensioners, was especially costly.

And that forbearance with the veto has given Mr Bush a second problem. His inability or unwillingness to scrap a spending programme here or there helped push the budget deficit to an estimated $422 billion in 2004, according to the Congressional Budget Office. The war in Iraq remains a big drain on the public coffers, and administration officials—including Condoleezza Rice, the incoming secretary of state, in her confirmation hearings this week—have steadfastly refused to offer any timetable for pulling out American forces. But September 11th and the war in Iraq do not give Mr Bush a blanket excuse for the red ink: discretionary spending on things other than defence grew faster in his first years as president than it had in Mr Clinton’s last years in office.

So the fiscal squeeze will make it hard for Mr Bush to achieve his two biggest goals: reforming the tax code and introducing private accounts into Social Security, the federal pensions programme. Overhauling Social Security will incur big transition costs, even if the move to private accounts is eventually successful. Reforming the tax system need not, in principle, make the deficit worse. But if Mr Bush simplifies the tax code (which is politically popular) he will also have to broaden the tax base (which is not).

The prospects for Social Security reform depend on who wins the communications war. The president and his allies have sought to portray the pensions scheme as being in crisis, running soon into pools of red ink that will force a rise in the retirement age or cuts in benefits. This has meant exaggerating the immediacy of the problem—the system’s inflows will not fall short of its payments until 2018. But Mr Bush is right to point out that the programme is on an unsustainable path. To balance the scary talk of a crisis, his team has come up with the sunny phrase “ownership society”. Giving Americans a personal account in which they can invest part of their own payroll taxes will give them a sense of control over their retirement.

The Democrats will have their own communications strategy. In particular, they will raise the spectre of cuts in guaranteed benefits: if the contributions of the young are siphoned off into private accounts, there is no way to promise current levels of benefits to the old without actually making the deficit worse. And the Democrats have experience in demagoguery on entitlement cuts. In the late 1990s, they successfully painted the Republican Congress’s plans to slow Medicare growth as throwing Granny out of her wheelchair. Now, the Democrats will say, the Republicans want to snatch the pension from her purse, too.

Despite the risks, Mr Bush will move early and forcefully on Social Security. Less clear are the prospects for reform of the tax code. Breathless conservatives around him want to increase America’s dismal savings rate by shifting the tax burden from investment income to consumption. But such a radical overhaul is unlikely, especially if Mr Bush has already expended a great deal of political capital on Social Security.

Instead, the president is likely to focus on making his first-term tax cuts permanent and introducing some other changes at the margin. One would be to eliminate the Alternative Minimum Tax (AMT), originally devised to keep the rich from finding too many loopholes, but now hitting many upper-middle income families. Killing the AMT will require finding money elsewhere. Mr Bush says he wants to cut other deductions and loopholes—such as the deduction of state income taxes from federally taxable income. But each loophole has a vocal constituency, both in Congress and among voters.

Mr Bush may feel a wind at his back thanks to his re-election. But he has set himself mammoth tasks. He begins his second term with the lowest approval rating of any re-elected president since Dwight Eisenhower in 1957. Blood is still being shed in Iraq, and America could find itself confronting serious new threats in Iran and elsewhere. To make a Reaganesque mark on domestic policy, Mr Bush will need more than political capital. He will need a great deal of luck.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.