BUSINESSWEEK ONLINE : AUGUST 14, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY

Bushonomics: Voodoo in the Numbers?
With his coronation over, Bush will face scrutiny over his tax cut plan

As George W. Bush prepared to claim his party's nomination to thunderous cheers, Republicans braced for the campaign against Democrat Al Gore, more united than they have been in decades. If the July 31-Aug. 4 Philadelphia parley was marked by anything, it was the absence of snarly conservatism and the dominance of Bush's big-tent rhetoric. Inside the First Union Center, banners proclaimed ''togetherness,'' and the GOP faithful tried hard to get with the mellow new message.

Capped by an acceptance speech that the Texan billed as ''a talk from the heart,'' Bush outlined an ambitious agenda for renewal. The key themes: slashing tax rates to their lowest level in more than a decade, creating private investment accounts for Social Security, revitalizing America's defenses, and swelling the ranks of the middle class with education initiatives that stress choice and competition. The school proposals would ''leave no child behind,'' Bush was expected to tell the convention. With delegates stomping in synch during Bush's four-day love-in, the result was just the kind of harmonious tableau he and the party were seeking.

Thanks to the new resolve of conservatives to go along with Bush's ''compassionate'' formula to end eight years of White House exile, the convention has given Bush momentum for the campaign's final push. And the corporate reps who lit up the night with glittering fundraising soirees are upbeat. ''The Bush people have done almost everything right so far,'' says Craig L. Fuller, president of the National Association of Chain Drug Stores and a former Reagan White House aide. ''Gore, meantime, is still getting no traction from the great economy.''

THE COUNTERATTACK. Even so, Bush's high command knows the glow of the footlights will fade. Gore will counter with his own Hollywood pageantry at the Democrats' Aug. 14-17 conclave in Los Angeles. That's when Gore will attempt the most critical strategic moves of the campaign: first, to shift the spotlight from Bill Clinton to himself, and second, to counter Bush's gauzy appeals with a tougher look at the Texan's record and stands on the issues.

Among the key questions Bush will face from Gore: With the economy growing at a sizzling 5.2%, why promise an ''insurance policy'' in the form of a potentially inflationary tax cut? And what benefit does the nation get from a tax reduction, a partly privatized Social Security system, and a defense buildup that could turn a newfound surplus back into red ink?

Bush and Lawrence B. Lindsey, the Texan's chief economic adviser, claim the money is there, especially to pay for a tax cut, which could cost anywhere from $1.3 trillion to $1.7 trillion over 10 years. ''There is more than ample tax revenue to cover this tax cut,'' Lindsey insists. He points to a July Congressional Budget Office forecast that projects a $2.2 trillion non-Social Security surplus over 10 years.

Other economists aren't quite so sanguine, partly because Bush may be underestimating the cost of his initiatives and partly because budget-surplus forecasts are so unreliable. To see the problem, one need only examine the numbers for 2010. By then, even a two-term President Bush would be long gone. But the full impact on revenues of his tax plan would just be taking hold. In that year, the CBO estimates the surplus will be $377 billion. Bush's tax cut would drain about $250 billion. Add to that a Medicare prescription drug benefit Bush favors. A House GOP version is projected to cost $30 billion. Suddenly the surplus is down to $97 billion.

Meanwhile, CBO assumes non-Social Security spending will grow at the rate of inflation. Trouble is, the GOP Congress has been spending faster than that. This year, spending is likely to rise by at least 10%. The Center on Budget & Policy Priorities, a liberal think-tank, calculates that increasing spending to account for inflation plus the expected rise in population would shrink the surplus by $74 billion more. That leaves a ''mere'' $23 billion. Bush insists he can compensate by making government more efficient, but savings from trimming waste and abuse have always proven elusive.

Finally, Bush still needs to deal with Social Security. The Texan would redirect 16% of taxpayer contributions into private investment accounts. To fund the transition, he may have to use general revenues. As a result, the once-flush federal balance sheet could tip into deficit.

But while many of the economic effects of the Bush plan would be not be felt for several years, one concern seems much more immediate: Is the package inflationary? Economists worry that if the tax cuts hype consumption in an already overheated economy, the Federal Reserve would be forced to raise interest rates. Says Harvard University economist Benjamin Friedman: ''The Fed wouldn't let the economic stimulus associated with these tax cuts push the economy into even faster growth.''

GOOD, BAD, UGLY. Goldman, Sachs & Co. researchers have simulated the impact of the Bush tax cuts on the economy. The findings: Annual growth would increase 0.25% to 0.5% for the first couple of years. The unemployment rate would dip by an average half-point over the life of the 10-year tax plan, and inflation would increase by 0.75%. ''To forestall that [kind of inflationary growth], the Fed would almost surely have to tighten'' by more than a half-point, says Goldman Sachs economist Edward McKelvey. ''Bush's plan poses a threat to the expansion.'' No doubt Team Gore--buttressed by heavyweights such as ex-Treasury Secretary Robert E. Rubin--will pound away at that notion.

Lindsey recognizes the overheating potential of cutting taxes too fast, but claims that Fed Chairman Alan Greenspan can abide the Bush plan despite his oft-stated preference for debt reduction. ''We would structure a program that would not disrupt the Fed's anti-inflationary efforts,'' says Lindsey. But he adds: ''The rate of implementation is something to think about.''

POLICY PUNCHING. While Democrats seek to undermine the credibility of the Bush tax proposals, they'll also focus on the other pillar of the domestic plan outlined in Philly: education. Bush wants to boost teacher accountability and give states more freedom to experiment with alternative schooling. Plus, he backs a plan to provide voucher-like tax credits to parents who send their kids to private schools. Gore intends to assail the voucher scheme as a Trojan Horse bid that would undermine public education. Bush also claims his proposals can be accomplished without boosting federal spending. The Vice-President will say that without billions in additional dollars for new classrooms and teachers, the Texan's pledge to stamp out illiteracy is no more than political graffiti.

Bush also devoted an entire night at the convention to driving home his contention that under Democrats, America's defenses have been allowed to wither. Under Bush-style realpolitik, he will hike military R&D while deploying a costly new anti-ballistic missile shield. Gore doesn't want to appear anti-defense, but will blast his rival for making budget-busting promises. The Republican's beloved Star Wars system, which has trouble hitting its targets in testing, becomes a metaphor for a Bush fiscal strategy that dissipates the surplus on blue-sky projects.

What's ironic about this line of attack is that the Bush-Gore defense differences are modest. Both men, in fact, want to hike the military budget from the current $300 billion a year. ''Defense outlays are going up,'' says former Representative Vin Weber (R-Minn.). ''It's a question of how much.''

To win on Nov. 7, Bush needs to deflect pointed questions about the risks inherent in his tax-centric economic strategy. To do that, he must continue to blur the distinctions between New Democratic policies and compassionate conservatism. If it works, Bush-besotted voters won't care about the economic fine print. The big imponderable: If the Texan wins, will it be because of Bushonomics--or in spite of it?

By Howard Gleckman and Lee Walczak, with Paula Dywer and Amy Borrus in Philadelphia, and Rich Miller in Washington

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