Bush Is Backing Reform, Not Wall Street

If you want to know the difference between the Republican party of Texan George Bush, and that of the East Coast establishment that once dominated it, look no further than the difference between what is going on in Washington and what is happening on Wall Street. The president, looking to the future, followed his smashing triumph in the off-year congressional elections by declaring the White House a no-gloat zone. The Wall Street establishment looked at those results and declared the financial community a no-reform zone.

When the president told his troops not to gloat over their increased margin in the House of Representatives and their capture of the Senate, he was looking ahead. He aims to get the Democrats to cooperate with his legislative agenda, and to force his economic team to concentrate on developing policies that will put the economy on a path to solid growth, soon and for a good long while. He knows that by refusing to rub the Democrats’ noses in their defeat he increases his chances of persuading at least some of the members of the opposition to back him now that he has turned his attention from electioneering to legislating.

Buoyed by the increased likelihood of getting his legislation approved, Bush has his economists working all out to come up with changes in the tax regime that will stimulate the economy now, and in the longer run improve incentives to invest and save.

Start with the stimulus. The economy continues to grow, but not at a pace sufficient to mop up the excess capacity left over from the 1990s, or to create lots of new jobs in the near term. The Federal Reserve Board’s monetary policy committee has done its bit by lowering interest rates, and Bush wants to give the economy an added boost with a fiscal stimulus and an overhaul of the tax system.

Unfortunately, he is persuaded that the first step is to make permanent the tax cuts that are due to expire in 2010. His economists are telling the president that consumers, knowing the cuts will some day expire, are not adjusting their spending patterns to reflect the increase in their after-tax income.

Last week, under questioning from a congressional committee, Fed chairman Alan Greenspan all but killed the president’s chances of winning on this issue. Greenspan argued that since most consumers are already treating the tax cuts as if they are permanent, the legislation the president seeks will have no effect on spending patterns. He might have added that because no Congress can bind its successor, permanence is not in the gift of any president, no matter how popular.

More important, White House economists are exploring new ways to make sure that this Bush does not follow in the footsteps of his father, and become a one-term president because he is seen to ignore the economy and the welfare of Joe Six-pack, our version of the man on the Clapham omnibus. At this writing, they are poring over data relating to the immediate effect on consumption of the last cut in income taxes, which effect seems to have been less than some had hoped. My own reading of conversations now ongoing is that many administration economists would not be unhappy even if further tax cuts ended up in savings accounts and in debt paydowns, rather than in shop tills, since that rebalancing of consumer balance sheets to increase net worth would be a healthy development, in the long run.

But the Bush team, eager as it is to improve the long-term health of the economy, also wants to come up with plans that do affect the near term—plans that will have the economy moving ahead well in advance of the presidential elections, a mere two years away. New depreciation schedules that increase early write-offs for business investments made in 2003 are high on the list of the proposals likely to be put on the president’s desk. So is a suggestion that investors be allowed to deduct some $10,000 of net losses resulting from unfortunate investments in shares, a big jump from the current $3,000 limit, and that capital gains taxes be lowered or abolished. Finally, the president’s team will propose the elimination of what they consider to be the double taxation of dividends, perhaps coupling this with some tax relief for lower earners.

Whatever one might think of any of these proposals, the vigorous mulling, studying, and arguing now causing missed meals by White House staffers will soon result in a package that they believe meets the president’s goal of permitting the country to move forward with a more efficient tax system. This, Bush holds, is a far better use of his staff’s time than making speeches before partisan groups eager to hear a gloat or two.

Contrast this with the backward-looking Wall Streeters who think that the disarray at the Pittless SEC, and a few more business-friendly faces in Congress, provide an opportunity to gut some of the reforms designed to restore investor confidence in the integrity of markets. The accounting lobby is working hard to make sure that the new accounting review board, a headless body in a headless SEC after its chairman, Bill Webster, followed Harvey Pitt back into the private sector, does not adopt meaningful rules to regulate auditors. And the investment bankers have had the regulators to a private dinner at which they somehow persuaded the overseers that the banks themselves can successfully monitor the new bank-funded “independent” research firms that are to be established in the hope of giving investors an honest appraisal of the prospects of the companies that analysts allege they study.

Investors who saw the last set of Chinese Walls fall at the first blast of a fee-hungry investment banker’s trumpet can be forgiven for failing to be reassured by the new promises of the Wall Street establishment. Their prosperity is more likely to be assured by the forward-looking president than the backward-looking bankers.

This article appeared in London’s Sunday Times on November 17, 2002, and is reprinted with permission.