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Changing for the Better -- or Worse?

In Policy Proposals, Bush Offers Dueling Views on Economy

By Jonathan Weisman
Washington Post Staff Writer
Friday, December 17, 2004; Page A12

Throughout a two-day conference on the economy, President Bush and his allies extolled the virtues of his tax cuts and "pro-growth" policies, which they said have lifted the nation from recession and propelled it well above its international economic competitors. If Washington adheres to the path of fiscal restraint while following the president's tax prescriptions, it was suggested, policymakers could secure powerful economic growth far into the future.

Yet when the subject turned to the nation's legal or Social Security systems, the picture grew suddenly dark. Frivolous lawsuits have hobbled America's businesses and have put them at the mercy of their enlightened overseas competition, administration officials said. As for federal entitlements, a rising tide of retiring baby boomers will inevitably slow economic growth and bankrupt Social Security.

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Social Security

"The crisis is now," Bush warned in his closing speech.

Such contradictions emerged repeatedly, pointing up the delicate balancing act that Bush faces as he tries to sell his economic proposals. On tax changes, the president must convince constituents that four years of tax cutting has worked so well in promoting economic growth that his tax policies should be not just continued but enhanced. The cuts of his first term should be made permanent, the president says, while the broader tax code must be changed further to cut taxes on savings and investment.

But Bush must also convince lawmakers that no matter what they do to spur growth through tax changes, the future will remain dire for the U.S. legal and Social Security systems.

"I'm frankly somewhat skeptical of this vision that we all have" of an aging work force cutting economic growth, James Glassman, J.P. Morgan Chase's senior U.S. economist, told the president in one of the few discordant notes of the conference. "If you think about it, we've been growing 3.5 percent to 4 percent per year since the Civil War. If we can match that performance in the next 50 years -- and I don't see why that's so hard to do -- then I think the fiscal challenge that we see in our mind's eye will be a lot less daunting than is commonly understood."

By confining the economic discussions to discrete panels discussing specific subjects, conference organizers usually kept the contradictions from clashing head-on. But to an observer of the entire gathering, they were not hard to find.

"The economy is in good shape. Employment is rising. Inflation is low. Our growth rate is nearly 4 percent, twice the rates of Europe and Japan," Harvard University economist Martin Feldstein said to open the conference Wednesday.

"The cost of litigation in America makes it more difficult for us to compete with nations in Europe," Bush said four hours later.

"The president believes a changing world can be a time of great opportunity for all Americans to earn a better living, have a rewarding career and enjoy a fulfilling life," Treasury Secretary John W. Snow said Wednesday. "His goals are to make the [tax] code simpler and to increase long-run economic growth and job creation."

"Demography is destiny," Time Warner Inc. Chairman Richard D. Parsons said a day later, maintaining that an aging population will force Social Security changes, regardless of long-run economic growth.

Bush warned the conference yesterday that in 2018, the Social Security system will begin paying out more in benefits than it receives in Social Security taxes. By 2042, the system will be able to pay beneficiaries no more than 75 percent of their promised benefits.

"Once that line in the red has been crossed, the shortfalls will grow larger with each passing year," he continued.

But those projections are based on a dire view of the nation's economic future, one in which the growth in economic productivity crashes from the 3.4 percent rate of last year to 1.6 percent from 2012 on. Economic growth is anticipated to be cut nearly in half from historic trends, to 1.8 percent between 2015 and 2080.

But projections about the fate of Social Security have been sensitive to changes in actual economic performance. Higher-then-expected economic and productivity growth have pushed back Social Security's anticipated demise from 2029 -- as predicted in 1994 -- to the 2042 date forecast by Social Security's board of trustees.

"Under the trustees' projections, growth is going to slow to half the pace we've been growing for 150 years," Glassman said in an interview. "That might be, but I don't know why I should believe that."

"There still are problems," Glassman added, "but it's not the fiscal doomsday that people imagine."

Other economists believe an economic slowdown is inevitable, as the number of retirees begins to surpass the number of workers. But in that case, stock market gains may also slow considerably from the market's historical 7.8 percent annual rate of return. Also, any proposal to divert some Social Security taxes into private investment accounts would rely on stock market gains to make up for cuts in defined benefits.

The Center for Economic and Policy Research, which ardently opposes Bush's Social Security proposals, has concluded that stock gains under the trustees' economic projections would be 4.2 percent, a yield low enough to throw all of the White House's projected benefit gains into doubt.

Henry J. Aaron, an economist at the Brookings Institution, said the president has proven to be deft at changing the justifications for his policies, whether it was war with Iraq or tax cuts. He will have to be even more flexible in his second term, Aaron concluded.

"The administration is trying to put the best face it can on each of these policies," Aaron said. "The inconsistencies are unavoidable."

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