The big parlor game in Washington these days is guessing who's going to get the big jobs in the Bush administration's second term. It's fun, it's gossipy, it's all about power. But I'd like to propose my own game: guessing what George W. Bush is really up to when he talks about "reforming" taxes and Social Security, and how he proposes to deal with the budget deficit. Since it's my game, I get to go first. Prediction one: Despite Bush's promises that tax reform will be "revenue-neutral," we'll get lots more cuts than increases. Eliminating taxes on income from investments is more fun than getting Congress to pass a big national sales tax. Second, I think Bush will push for personal Social Security accounts right away rather than chartering yet another bipartisan commission and waiting a year for its report. And, finally, Bush will try to use a nifty little math trick -- call it "accounting reform" -- to show personal accounts reducing the budget deficit even though the Treasury will have to borrow more money.
My predictions, based on four years of watching Bush, assume that we're not dealing with a typical pol tinkering with the system. He's Chainsaw George, an economic radical who wants to raze the conventional order and impose his own. Look at his first four years. When budget rules seemed to limit the size of his 2001 tax cuts, he adopted the fiction that the cuts would be allowed to expire. This let him cram 10 pounds of cuts into a seven-pound bag -- and he immediately started pushing to make the cuts permanent. Ditto for the 2003 cuts. There's never a reason not to cut taxes. The economy's good? Cut taxes, give people their money back. Economy's bad? Cut taxes to stimulate it. Fish gotta swim, birds gotta fly, W's gotta cut. Deficits, shmeficits. Who cares? Just borrow some more from China and Japan.
Now to Social Security. I think Bush is going to quickly push to let people invest some of their Social Security taxes in personal accounts in return for accepting a lower guaranteed benefit. That's the gist of the report from Bush's 2001 Social Security commission (Remember it? Few do.) that I think he'll use as a template -- an interesting document, which I recently reread. It recommends letting people invest either 2 percent of their Social Security taxes (Option 1) or up to $1,000 a year (Option 2) in personal accounts. These would drain money from the Treasury short-term. But combined with the benefit cuts, they'd reduce costs over the long term.
Under current budget rules, diverting $60 billion a year into private accounts would add $60 billion to the deficit because the money wouldn't be going to the Treasury anymore. This is the "transition cost" people are always talking about. But now watch, as I show you how I think Bush will deal with this problem by changing the accounting.
Buried on page 65 of the 2004 Social Security trustees' report is the rationale for such an accounting change. It's a table, first added last year, that shows the government's net obligation under Social Security's current (and unsustainable) benefit formula. With the combination of personal accounts and benefit cuts, this obligation would probably be shown to be shrinking every year. Thus, the combination of personal accounts and reductions in the guaranteed benefit would cut the budget deficit despite increasing the cash deficit. "This new calculation is meant to provide a more complete number that would capture the benefits of personal accounts" that don't show up in current budget math, says University of Illinois professor Jeffrey Brown, who worked for Bush's 2001 commission.
It's not clear if the Bushies can cram such a change through the budget accounting system -- but I bet they'll try. Whether that's good or bad accounting is a topic for another day.
Bottom line: If I'm right, Uncle Sam will need to borrow more than most people project, regardless of whatever happy numbers Bush brandishes. What I don't know -- no one does -- is if financial markets will make this money available without running up interest rates substantially. A rise in long-term rates, combined with the Federal Reserve's ongoing increases in short-term rates, could put a big hurt on the economy.
Maybe Bush will get the financial markets to fund his plan without running up rates. Or maybe he won't care much if rates rise. One thing I'm sure of, though, is that the markets have a lot better chance of reining Bush in than the Democrats have.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.