As it stands today, Bush's economic legacy is still
uncertain. Is Paulson more than a Hail Mary?

    As he nears the half-way mark of his second term, President George W. Bush is undoubtedly thinking about his legacy. With a new Treasury Secretary in place, coupled with the Federal Reserve's nearing completion of its tightening cycle, will the issues upon which Bush focused his domestic agenda-cutting taxes, decreasing federal spending and reforming Social Security and Medicare-resurface as major initiatives or be left to the next president, Democrat or Republican?
    The president has succeeded in cutting taxes, but so far has failed in his stated goals of fixing the finances of Social Security and Medicare. Because of the cost of funding Social Security, Medicare and Medicaid, leading long-term budget projections have calculated that federal spending will increase from the current 20% of gross domestic product (GDP) to a peacetime high of nearly 33% of GDP by 2050. The problems lack easy solutions.
What are the chances that Treasury Secretary Henry M. Paulson Jr., a seemingly reluctant warrior who took office July 10, can help fix the huge imbalances in the federal and trade deficits? Indeed, at this stage is there anyone who could step in and turn things around? Is the president himself prepared to spend what little political capital he has left on finding even partial solutions?
    Because the economy is bouncing along, and interest rates and inflation remain low by historical standards, politicians and much of the populace seemingly remain oblivious to the fact that the government has made promises to pay health and retirement benefits that it cannot keep with today's tax rates. Unless something is done, according to experts, Social Security, Medicare and other entitlement spending will grow over the next 40 years to roughly the size of the current U.S. federal budget. Spending on these, and on discretionary programs such as defense and education, are on pace to swamp the budget and have caused the federal government to run a budget deficit of slightly under $300 billion.
    Bush credits his tax cuts with spurring economic growth. They have produced a surge in tax revenues, which he says will enable the government to cut the federal deficit in half by 2008, one year ahead of schedule. Paulson, for his part, echoed his boss' comments in a recent speech at Columbia University.
    In the remaining 27 months of the administration, Paulson will confront tough spending questions on programs like Social Security and Medicare. As the former chief executive of Goldman Sachs Group, he has the stature to resume the debate on Social Security, Medicare, Medicaid and other entitlement programs, says Quincy Krosby, chief investment strategist for The Hartford Financial Services Group. "Obviously, for Republicans this is a crucial issue," says Krosby. "In a political year, not to mention we'll be gearing up for 2008, these are politically charged issues for both Republicans and Democrats."
    The main issue, Krosby says, is the federal deficit and the potential for underfunded entitlement programs. "For the Republicans, this has turned out to be an embarrassment and a dilemma. If Secretary Paulson can at least raise the issues again with the goal of actually outlining viable solutions, his appointment will be judged a major success by Wall Street and fiscal conservatives of both parties," she says. "Aside from the emotional aspects these issues represent, when we look at it from an economic perspective, we understand the inflationary aspect of not resolving the deficit, and certainly the Federal Reserve understands the inflationary impact of budget deficits."
    According to economist John Rutledge, who has advised the Bush administration on tax policy and Iraq and was one of the principal architects of the Reagan economic policy, seniors aren't ready yet to take their medicine. "The program that Bush announced right after his election was a ten right over the plate-low tax rates, reduced entitlement spending on Social Security and Medicare, and reduced regulations on business," says Rutledge. "They got part of what they wanted on taxes; they caved on spending. The drug prescriptions for seniors was a political gift to AARP. It's almost as if the economists made up the tax policies and the Karl Roves and political advisors were in charge of spending. It quickly became clear that the American people are not ready to face the music on Social Security and health care, and these issues are both dead in the water for his presidency.
"There's not going to be money in the kitty when the baby boomers decide to retire. That's coming up very soon. So there will be a sharp cut in benefits, but that will happen with a different president down the road."
    Thomas Rhoads, associate professor of economics at Towson University, says entitlement programs like Social Security and Medicare have become so ingrained that there is little incentive for many individuals to save during their earning years in preparation for retirement. "I would much rather see the U.S. rely on a savings tool to finance retirement instead of a government transfer program," says Rhoads, noting that this was the direction the Bush administration was headed in its Social Security reform program. "In the end, the incentives just line up better to create productivity gains and provide for a stronger U.S. economy."
    If you listen to Harvard University economist Richard N. Cooper, Bush got things backward. "I think Bush shot his wad on Social Security. I actually think Bush mistakenly tried to scare the American public into thinking Social Security was in deep trouble," says Cooper, who has served in six different administrations in various capacities starting with the Eisenhower administration. "The real problem is not Social Security but Medicare, where there's no end to the potential cost, and Bush actually worsened the fiscal situation instead of improving it by extending Medicare to cover drugs."
    Like Rutledge, Cooper thinks that the problems in Medicare are not likely to be addressed in the next two years. As for taxes, he says Bush's proposal to make permanent the temporary tax cuts of 2001 and 2003 "will blow a huge hole in the federal fiscal situation, which is otherwise manageable." Paulson's job, he says, "is to remind everybody, including both AARP and (Secretary of Defense Donald) Rumsfeld, that whenever a proposal is put forward for big new expenditures, it should be linked to a proposal on how to pay for them."
    Rhoads agrees with Rutledge and Cooper. "So far Bush hasn't done anything with his term in office. His legacy is one that should not leave fiscal conservatives satisfied," he says.
    Wasn't it Ronald Reagan who asked whether we were better off now than we were four years ago? "Given what Bush has done," says Rhoads, "we have to ask whether his polices will make us better off four years or more from now. That will help determine Bush's legacy."

Bruce W. Fraser, a freelance financial writer in New York, is a commissioning editor on the soon-to-be published Sixty Things To Do When You Turn Sixty. He may be reached at [email protected]. Visit him at