January 24, 2005
by Irwin Stelzer
The music has stopped, the flower arrangements have wilted, and the 2,000 police who came from all over the country to aid the 4,000 Washington cops and the military to maintain security have gone home, as have the 12,000 Texans and Texan-wannabes who consumed 21,000 enchiladas at the "Black Tie and Boots Ball." Now all the president has to do is govern. Tony Blair once said that governing is a lot harder than campaigning, so now comes the hard part for Bush.
If the President were a Stephen Sondheim fan, he might have adopted the theme from Gypsy--"Some people sit on their butts; Got the dream, yeah, but not the guts; That's living for some people, for some hum-drum people…; But not" for George ("Rose", as in Gypsy Rose Lee, in the original).
No boring second-term presidency for George W. Bush; he intends to push a radical agenda, gambling that he has accumulated sufficient political capital to overwhelm reluctant members of his own party, and an already-virulent Democratic opposition.
After all, he has been re-elected after a first term in which he revolutionized the role of the federal government in education, pushed through tax cuts that avoided a major recession, went to war to secure the nation from terrorists, and introduced a massively expensive prescription drug program for the elderly that is the largest expansion in the welfare state since the days of Lyndon Johnson's Great Society. In the tradition of the oil wildcatters that dominate his hometown of Midland, Texas, Bush gambled all on his instincts, and won.
He now plans to repeat that performance. Iraq, of course, is the top of his worry list. But economic matters are not far down. The drooping dollar, the rising trade deficit, a seemingly intractable budget deficit, a social security (pension) system that the president says is in "crisis," a tax system he says is archaic, interest rates that are headed up, and oil prices that might well top $60 before the year is out -- all cry out for the attention of a president whose top priority must nevertheless be foreign affairs.
Bush has promised to halve the budget deficit, but faces tough opposition to his plan to freeze or reduce spending on agriculture, transport, scientific research, and anti-poverty programs. The president never has to face the voters again, but members of congress do.
Then there is the trade deficit, which continued to rise even as the dollar fell. Further growth in the deficit might trigger a run on the dollar, forcing the Fed to raise interest rates to recession-inducing levels.
Meanwhile, prospects for reform of the social security system are fading, as some Republicans abandon the president for fear that his proposed reduction in benefits will cost them so many seats they will lose control of congress, and others realize that creating private accounts will reduce the flow of money into the system without reducing outlays -- a combination that would balloon the deficit by $2-$5 trillion.
So why was the president smiling as he whirled his wife around the dance floors of a variety of inaugural balls? In part it is his well-founded confidence that those who "misunderestimated" him in the past are doing so again. In part it is because this conviction politician is comfortable when he is doing what he believes is right, no matter the reaction of others. And in part it is because the economy, all of its problems notwithstanding, is in rather good shape.
Last week's Federal Reserve Board survey of current business conditions reports "retail sales during the holidays were above year-ago levels [by a whopping 5.7% according to the National Retail Federation]…, manufacturing activity firmed…, businesses planned to increase capital spending…, real estate markets remained generally strong…, labor markets firmed… but wage pressure generally remained modest…, inflationary pressures remained largely in check…"
But some economists think reports of the recent past don't tell us much about the future. John Makin's latest newsletter challenges the 3.5% consensus growth forecast for 2005, arguing that the tax-cut stimulus and low interest rates succeeded in producing growth of only 3.3% since the end of 2001. And those stimuli are gone. Meanwhile, several key Federal Reserve policymakers are worrying aloud about the threat of renewed inflation, as productivity gains slow and the weak dollar drives up the prices of imports.
Morgan Stanley's Byron Wien agrees that inflation is a threat, a fear borne out by the fact that consumer prices rose last year by 3.3%, the fastest rate in four years. Add to factors that must be worrying the president's new economic team a prediction by the National Retail Federation that in 2005 sales will grow at only half the 6.7% chalked up last year.
But this gloomy outlook doesn't reckon with some underlying strengths. Economists at Goldman Sachs report that "US capital spending has been on a tear since the spring of 2003 … [and will] remain strong in 2005, rising an additional 8% or so." Orders for factory goods are rising rapidly, and the service sector is racking up impressive gains. The economy added 2.23 million jobs last year, the largest gain since 1999, contributing to a jump in consumer confidence. More houses were built in 2004 than in any year since 1978, and the momentum seems to be carrying into 2005. The falling dollar, despite its recent bounce-back, has begun to make itself felt: manufacturers report a sharp rise in exports. Foreign investments in U.S. assets are covering the trade deficit, and then some: in November inflows of $81 billion exceeded the deficit by over $20 billion. As for inflation, a continuation of the Fed's interest rate increases, combined with the absence of wage inflation, should continue to hold price increases, which have been nil in recent months, to tolerable levels.
Not a bad way to start a new presidential term.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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