Undeterred by the prospect of war in the Middle East, President Bush last week pushed ahead with bold plans to overhaul the Medicare system, eliminate federal taxes on investment income, and increase federal spending on defense, foreign aid and homeland security.
The president seemed prepared to move ahead with his economic agenda without the backing of many political allies on Capitol Hill or even clear consensus within his administration.
Two new members of the economic team -- John W. Snow, confirmed last week as Treasury secretary, and Stephen Friedman, director of the National Economic Council -- as well as N. Gregory Mankiw, the Harvard professor expected to be tapped as the next chairman of the Council of Economic Advisers, have taken strong exception to the supply-side faith that large and endemic federal budget deficits don't matter. Nor are voters likely to be comfortable with the latest projections from the Congressional Budget Office that the 2004 deficit will be a record $200 billion, without even considering the costs of war and additional tax cuts. The budget office doesn't expect deficits to disappear until 2007.
Key Republicans on Capitol Hill, meanwhile, indicated their own discomfort with the president's proposal to offer a new prescription drug benefit to Medicare recipients who agree to give up the current fee-for-service arrangement and join a managed-care plan that can negotiate lower prices and eliminate unnecessary care. Another proposal -- this one allowing trade associations to offer unregulated group health insurance to member businesses across the country -- drew howls of protest from consumer groups, some insurers and state regulators.
As if that weren't already a full political plate, the president is also proposing to let Americans set up big new investment accounts that, for most people, will end their federal tax on interest, dividends and capital gains income. This is a somewhat upside-down version of the "consumption tax" long sought by tax reformers. The wrinkle here is that money will be taxed before it is put into the savings accounts -- not when it is taken out to be "consumed," as reformers have always advocated. Doing it the Bush way has the politically salutary effect of pushing almost the entire cost of the tax breaks decades into the future. Liberals denounced the idea, while surprised Republicans, already wary of a previous proposal to end taxation of dividends, awaited more details.
Bush, however, may be encouraged in his boldness by the fact that the economy appears to have stalled. The government reported last week that the economy grew at an anemic annual rate of 0.7 percent in the final quarter of 2002. And with business investment flat, consumers pulling back, stock prices stuck and payroll employment still declining, most forecasts now push off any significant rebound until the second half of the year.