BUSINESSWEEK ONLINE : DECEMBER 25, 2000 ISSUE
GOVERNMENT

'Sand in the Gears of Government'
Bush will be hard-pressed to meet more than modest goals

After two years of campaigning, a heart-stopping election night photo finish, and a 5-week legal and public-relations battle, George W. Bush is indeed going to be the next President of the U.S. Now all he has to do is try to govern.

With rancorous disputes over Florida votes still echoing, Bush will have to work with a bare five-vote majority in the House and a Senate deadlocked at 50-50. Lawmakers already have their eyes on the 2002 election, and voters are deeply divided over what they really want from the Capitol. ''It is going to be exactly what the public wants,'' says Steven E. Schier, a political scientist at Carleton College in Northfield, Minn: ''More sand in the gears of government, grinding at a very meager pace.''

So what can Bush do in such an environment? To start, he'll have to scale back an already modest agenda. He'll get a tax cut, but not the massive cuts that he proposed during the campaign. He'll have to ditch broad-based reform of Medicare but may be able to persuade Congress to agree to a new drug benefit for seniors. And Social Security reform? Don't expect it any time soon.

Bush will want some quick victories to establish credibility in Washington. But much of what he can accomplish in his first six months will be driven by the economy--and by the people he listens to as he starts to make policy decisions. Some Bush aides, including Lawrence Lindsey--expected to be the top White House economic adviser--are extremely bearish, even hinting at the possibility of a full-blown recession. Privately, other Bush advisers are less worried. They see growth slowing, but don't see it turning negative.

With the Federal Reserve unlikely to let that happen, Bush may have some help. In the face of a sagging economy, Fed chief Alan Greenspan has signaled he's ready to cut rates starting early next year. The central bank wants the overheated economy to slow, but if growth looks like it's settling below 3.5% or so, the Fed will jump in. ''The Fed will lower rates in the first quarter of next year,'' predicts Bear Stearns & Co. chief economist Wayne D. Angell.

''BIG, BIG FIGHT.'' Unlike in past slowdowns, this time the Fed has plenty of room to run. The national debt should continue to fall from its current level of $3 trillion. True, federal spending will rise, especially for health care and defense. And a modest tax cut will slow the recent big increases in federal revenues. But even after a $750 billion tax reduction, revenues could still be $500 billion higher in 2010 than they are this year. As long as the economy grows at 3% or more for the next decade, the non-Social Security surplus over the period should still approach $2 trillion, after tax cuts and new spending.

Publicly at least, Bush will continue to push for his tax cut. Indeed, Vice-President-elect Richard B. Cheney calls it a vital step toward warding off a possible recession.

And with his father's capitulation on his read-my-lips pledge still echoing in the ears of conservatives, Bush will probably have to send Congress a proposal for the whole cut. But there's no chance he'll get anything that big. He'll eventually have to abandon the centerpiece of his plan--a huge rate cut--especially for high-income taxpayers. ''There is going to be a big, big fight on rate cuts,'' says Stephen Moore, director of fiscal policy at the Cato Institute, a libertarian think tank in Washington. ''It will be the hardest part of the tax package to pass.''

Still, Bush can probably get a tax cut of $500 billion to $750 billion, including relief from the estate tax and marriage penalty. Congress will probably add a measure to expand individual retirement accounts and 401(k)s that was nearly adopted this year. And lawmakers may try to provide some relief from the alternative minimum tax, which is hitting more middle-class taxpayers. ''We'll do some very limited and narrowly targeted tax cuts,'' predicts Representative Jim Kolbe (R-Ariz.), a key GOP moderate.

Limited and narrow success may be a lot better than Bush will achieve with another central theme of his campaign agenda--Social Security reform. The Texan will, as promised, create a new bipartisan commission to develop a reform plan that would allow workers to invest in limited private accounts.

DRUG RELIEF. But Bush has never said how he would pay for such a scheme--which could cost as much as $2 trillion over the next decade. He has only two choices: Take the money out of the federal surplus or reduce future Social Security benefits. Many moderate Democrats back private accounts, but the idea will generate a firestorm of opposition from labor and party liberals. One line of attack: This year's sagging stock market exemplifies the risks of private accounts. With Congress so badly divided, it's hard to see how Bush will sell fundamental Social Security reform. ''When the details come out, it's going to be very controversial,'' says former Congressional Budget Office Director Robert D. Reischauer.

Bush may have better luck with health-care initiatives, although--as with taxes--he'll have to be satisfied with part of a loaf. In the campaign, he proposed gradually turning Medicare over to private insurers, with premiums subsidized by Washington. That has broad bipartisan support in Washington. But as long as the public remains so hostile to HMOs, it's hard to see either Bush or a divided Congress taking on the issue.

Instead, look for Bush to try to build a quick consensus on two more modest but popular health-care initiatives--a patients' bill of rights and a Medicare drug benefit. ''I expect something will be done on prescription drugs,'' says Peter B. Teeley, a lobbyist for biotech giant Amgen Inc. The patients' bill of rights would likely give HMO participants the limited right to sue their insurers. It could cost both insurers and employers some money. But because suits will probably only be allowed after a convoluted appeals process, and because judgments will be curbed, there will less to this than meets the eye.

The debate over a new Medicare drug benefit would leave pharmaceutical companies in a quandary. On one hand, such a benefit could lead to narrowing margins as insurers negotiate lower prices. On the other, it could dramatically increase demand for drugs. Teeley, for one, likes the trade-off. ''I think it's good for the industry,'' he says. If Bush and Congress seem to be making progress on health care, watch for a sleeper issue: expanded health coverage for the uninsured, which has the backing of business, labor, and the insurance industry. Such a costly measure could prove a windfall for embattled health insurers.

What other corporate goodies might be in the works? Bush will also push hard for big increases in defense spending, and Congress is likely to give him more money for Pentagon procurement. But the item at the top of his military wish list--the Star Wars anti-missile system--will get a much more skeptical hearing on Capitol Hill. Bush has never said how much he would spend on the project. Moreover, Democrats and even many Republicans are leery of a new Pentagon boondoggle.

Unlike most new Presidents, Bush cannot expect much of a honeymoon. He will have to struggle to win legitimacy for his razor-close election victory. Congress will struggle to get its legislation passed in an atmosphere that could be even more partisan and hard-fought than in recent years. And both political parties will struggle to position themselves for the 2002 elections. In such an uncertain atmosphere, Bush will be lucky to scrape together a few narrow victories. But as he has just discovered, winning ugly is still better than not winning at all.

By Howard Gleckman, with John Carey and Catherine Yang, in Washington

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