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The Credibility Deficit

Is President Bush's new economic team up to handling a falling dollar, rising interest rates, and the oil problem?

11:00 PM, Dec 13, 2004 • By IRWIN M. STELZER
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PRESIDENT BUSH'S CHANCES of keeping world financial markets calm while pushing through Social Security and tax reform took a dive last week. Remember: If the president is to succeed in privatizing a portion of the Social Security system, he will have to persuade financial markets that it is safe to run even larger budget deficits, at least for awhile, as between $2 trillion and $5 trillion are diverted from the government pot into private accounts over the next decade. And if he is to reform the tax system by closing loopholes so that overall rates can be reduced, he will have to persuade Congress to take the political risk of creating the inevitable losers.

That means the president needs an economic team every bit as powerful and weighty as his foreign policy team. It is not to be. Bush has chosen to reappoint John Snow to the Treasury. Snow has been a loyal foot soldier, willing to travel the world to repeat that America favors both a strong dollar and one set by market forces. Since market forces, such as they are in currency markets, are progressively weakening the dollar, it is unlikely that the secretary fails to see the contradiction in his statement. Such loyal parroting of the White House line has its obvious rewards, but it does not make for credibility of the sort that the administration will need in the coming months.

A credibility deficit is not the only problem. Ideas matter in crafting economic policy, and since the departure of Larry Lindsey, few seem to have come to Bush's attention from his economic team. Stephen Friedman, departing from his job as head of the National Economic Council, has been all but invisible. If he has left any major policy ideas behind, word of them has not leaked out.

Gregory Mankiw, chairman of the president's Council of Economic Advisers, has been in exile since he offered the quite sensible opinion that outsourcing is a good thing, since it improves the competitiveness of American firms. This displeased Karl Rove, who was more concerned about carrying job-short Ohio than having the president's economist teach a course in the virtues of free trade. Mankiw, it will be recalled, has not only said that pension benefits must be cut if the books are to be balanced, but is the author of a leading textbook that teaches, "The most basic lesson about a budget deficit [is]: . . . When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls." Not the sort of stuff a criticism-averse White House wants to hear as it fights to have its tax cuts made permanent, and revenues siphoned from the Treasury into private retirement accounts. Mankiw will be relieved to return to Harvard, where criticism of the president is not only tolerated, but required for academic advancement.

Friedman and Mankiw's departure will be followed shortly by the retirement of Alan Greenspan when his term as chairman of the Federal Reserve Board expires in just 13 months. That is both bad and good news, bad because it removes a seasoned hand from the monetary policy controls, good because Greenspan might feel free to abandon studied obscurity in favor of clarity of expression on economic policy matters.

THE DEPARTURE of all of these economists, save Snow, presents the president with an opportunity to staff up with people with real ideas--a conservative free-marketeer who would argue against further expansion of the government might even be found. But a search for ideas does not seem to be the administration's top priority. The president's decision to exclude from tomorrow's White House conclave on economic policy anyone who might raise a dissenting voice, suggests that the meeting is intended more to provide Bush with photo ops than with new ideas on how to cope with the trade and budget deficits, the consequences of the falling dollar and rising interest rates, or continued dangerous reliance on imported oil.

Unfortunately, the administration appears to think that Karl Rove, the political genius whose knowledge of every district in Ohio contributed mightily to the president's reelection, can also craft a sensible economic program. The decision to run economic policy "out of Karl Rove's hip pocket," says the Wall Street Journal, "sufficed in the first term when tax cutting was the main policy focus, but it isn't likely to work for another four years . . . . Mr. Rove knows a lot, but we doubt he knows how to work out the next Long Term Capital Management failure, much less handle a dollar crisis."

But look on the bright side. Bush enters his second term with an economy that is growing at an annual rate of around 4 percent. Inflation is tame, and the dollar's downward movement has so far been more of a drift than a plunge. If past experience is any guide, a cheaper dollar might, just might, bring the trade deficit down to manageable levels.