So John Snow of CSX and possibly Stephen Friedman, a former Goldman Sachs co-chairman, are going to lead the new economic team for the Bush White House. But there remains the question: what makes for a good performance by this team?
After all, during the past few days we have heard that the old team Paul O'Neill, the Treasury secretary, and Larry Lindsey, the White House chief economic adviser had 'failed'. Too often, supposedly neutral onlookers establish criteria that are snares in disguise: those who favour the Republicans, for example, rate Democrats against Republican goals and then gleefully mark them down as failures. Let us not be so disingenuous. We should measure Republicans by Republican standards. We will speak here of five goals appropriate to a growth-oriented Republican administration.
The first job for Mr Snow and perhaps Mr Friedman is to continue the tax-cutting started by their predecessors. It is important that the Bush administration use this last remaining non-election year to improve tax cuts already written into law by accelerating their implementation and making them permanent. Cutting taxes on dividends would help as well.
Mr Snow, especially, has good credentials for this work. Years ago, he served on Jack Kemp's Tax Commission, a supply-side group that elevated the tax issue for the Republican party in the Clinton years. What Mr Snow now has to do is convince people that these changes will fuel growth. Taken together, they can even increase revenues, since rate cuts give citizens an incentive to work and save; they get to keep more of their money. But they are possible only if attended by another change: the budget process must move to a system of 'dynamic analysis', forecasting that takes into account the positive growth consequences of rate cuts.
Overall, says David Malpass of Bear Stearns, 'the key to pushing through a tax reform will be a consistent message that reform helps the economy and so therefore, eventually, the fiscal stance of the US'. Even without overall reform, however, bringing forward tax cuts and making them permanent would demonstrate that this administration not only delivers but delivers a little extra. This would do something to restore trust that has been lost since President George W.Bush's father reversed his party's tax cuts in the face of the last Gulf war and the last budget crisis.
Shrinking the size of the federal government is also important. Tax cuts can stimulate growth but it is easier for them to do so when government is not growing, or is growing more slowly. One step in the right direction would be the creation of individual accounts for social security, since this public pension plan will be responsible for much of the future growth of government. Setting a new course for social security would be an indication of fiscal responsibility. What really matters is what government policy does for growth prospects. The size of the deficit is the wrong yardstick for measuring the success of fiscal reform.
Next come industrial policy and trade. To be true to its Reaganite ideals if not always Reaganite reality the new economic leadership ought to stop favouring one industry over the other. That means ignoring the argument that war requires bail-outs of airlines following September 11 2001, for example. It also means giving less consideration to the bleating of old industries, such as steel.
Advocacy of a strong and stable dollar should be central to the Bush agenda. Mr O'Neill's ambivalence about the dollar's volatility was clear from day one. Yet when the dollar is strong and stable, jobs in less productive areas fade away and jobs in more productive areas multiply.
The fifth goal is consistency on the role of international financial institutions such as the International Monetary Fund and World Bank. The Bush administration has been dismayingly inconsistent on the question of bail-outs for Latin America. Argentina heard Yes, then No, then Yes and then No. The story ended in financial implosion and a lurch leftward in the region. But it is not merely loan decisions that matter. Too often the US has backed plans that focus on fiscal austerity rather than relative competitiveness.
This week a thousand voices are arguing that aiming for such goals will mean fiscal suicide for the US. But it is important to remember that a good share of these voices belong to people who want nothing more than to see this administration stumble.
Disdain was heaped on the heads of Mr O'Neill and Mr Lindsey. But it is not clear the pair deserve this magnitude of disapproval. Mr O'Neill fought loyally, if not always effectively, for a classic Republican ideal tax reform. By advising Mr Bush so well as a presidential candidate and winning the White House, Mr Lindsey served his party. Once in office as the president's economic adviser, he pushed through America's first meaningful income-tax cut since the 1980s. Without the Republican loss of the Senate the altogether exogenous shock of September 11, these two men would have achieved more. In the context of the goals laid out for him in 2000, Mr Lindsey, especially, did not fail.
© Copyright 2002 Financial Times
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