Realistic or reckless? President George W. Bush is throwing the dice in a flurry of audacious economic plans that promise to greatly stimulate American growth--or bust the budget and the economy with it. Even as he readies for war with Iraq, the President wants to create new tax-exempt savings accounts, expand retirement accounts, cut taxes on stock dividends, move up income tax cuts, end all inheritance taxes, offer a big Medicare drug benefit, and boost defense spending sharply. He is betting big that promoting capital formation will send the stock market higher and generate faster economic growth to pay for skyrocketing budget deficits. Yet his proposals will drain away potential tax revenues that may be needed in a future sure to see millions of baby boomers retire, Medicare and Social Security pressed for money, and expensive defense against terrorists. And while we admire the President's chutzpah, it will no doubt be hard to manage so many economic initiatives at a time when America will be fighting a war, possibly occupying Iraq, and defending the homeland.
Bush, in effect, is proposing nothing less than a radical reshaping of the tax system. Combine his proposal to end taxes on stock dividends with his idea of creating three new, tax-free savings and retirement plans that allow families to sock away substantial income annually and you get a huge tax incentive for Americans to save and invest more--and consume less. It is a bold experiment. If it works, it would invigorate the economy. But people may simply shift their existing savings from taxable to nontaxable accounts. Fewer employers may offer retirement plans. And the public may view it as a sop to the rich.
Managing all these initiatives, moreover, is problematic. Even as he tries to change savings and retirement, Bush is planning to shift more responsibility for Medicaid to the states, push vouchers for education, and nudge domestic and worldwide opinion toward the need for a radically new post-September 11 U.S. foreign policy of preemption to replace the old Cold War policy of containment. Iraq is the just the first instance of this. North Korea may be the second. But Bush has stumbled in making his case, and the cost has been significant. Anti-Americanism is rife around the world. So, too, has the Administration fumbled the ball on selling the dividend tax cut to the public.
But Bush's greatest risk is the skyrocketing federal budget deficit. He's betting that higher growth will pay down the growing debt and keep interest rates low. It's a real gamble. By their own numbers, the initiatives the President is proposing will produce $1 trillion in combined deficits through 2008. The budget doesn't include Iraqi war costs or the price of the occupation, which could total hundreds of billions of dollars.
If Bush's savings and tax initiatives invigorate investment, if productivity growth stays in the 2% to 2 1/2% range, if the war goes well, if there is no terrorism at home, if the economy grows at 3% to 3 1/2% per year for the whole decade--if all that happens, Bush could win his growth bet. But that's a lot of "ifs." We certainly favor policies that stimulate saving, investment, and growth. But the magnitude of the President's bet is so large in so many ways that it may drain away revenues needed just when the boomers retire and security costs are soaring. The danger is that the risks outweigh the benefits. What is needed is a smaller, more focused package.