The Economist on George Bush's Second Term

Economist.com George Bush's second term:

"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?"

"...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."

"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 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."

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