U.S. and global prosperity cannot be separated. As the world’s largest economy, the U.S. must maintain stability and growth. The large twin deficits that now exist reflect a bloated government and a dearth of private savings. Real nondefense discretionary spending grew at a record rate during the past four years. Can the second Bush administration muster the political will to cut the growth of that spending?
Likewise, the huge unfunded liabilities in Social Security and Medicare, which dwarf the federal debt, must be addressed if government growth is to be limited. Will the president and Congress have the foresight and courage to take steps to move toward a fully funded system of pensions, so that younger workers will have ownership rights in their retirement accounts? Will Health Savings Accounts become the norm? Or will third‐party payment continue to drive up healthcare costs?
Without fundamental institutional reform of Social Security and Medicare, payroll taxes will have to be increased dramatically from the current 15.3 percent over the next two decades. Continuing the current paygo nature of those two programs will reduce savings and investment, slow growth, and, most important, erode liberty and responsibility by restricting ownership rights.
The complex nature of the U.S. tax code, the double taxation of saving, the high marginal tax rates under the current progressive federal income tax, and the waste of resources caused by distortions in the market pricing system all point to the need for serious tax reform.
Finally, the large U.S. current account deficit eventually will have to be corrected through a gradual fall in the foreign exchange value of the dollar and an increase in the savings rate. The best way to increase savings is to reduce marginal tax rates and allow workers the right to take part of their payroll taxes and place them in personal accounts, in which real assets can accumulate. The economic growth generated would be good for the U.S. and good for the global economy.
Bringing the current account into balance also requires that the U.S. and its trading partners adhere to free‐trade practices. As Federal Reserve Chairman Alan Greenspan has noted, “The costs of any new … protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy. Consequently, it is imperative that creeping protectionism be thwarted and reversed.”
President Bush has used free‐trade rhetoric, but his actions have not always followed his principles. During his second term, it is imperative that he embrace market liberalism and not cave in to protectionism. That includes letting China determine the timing of any currency revaluation, without the threat of U.S. sanctions.
The U.S. may have some leverage over the pace of China’s transformation, given the WTO protocol. But it would be dangerous to invoke unilateral actions against China for failing to float the RMB, as some in Congress have recommended.
Moving toward an ownership society, in which taxpayers retain a greater portion of their income and have a stronger incentive to save and invest, will benefit America and the world. In his acceptance speech, President Bush pledged to “continue our economic progress,” “reform our outdated tax code,” and “strengthen Social Security for the next generation.” He also promised to “help the emerging democracies of Iraq and Afghanistan” and “fight this war on terror with every resource of our national power so our children can live in freedom and in peace.” Those are noble goals.
The problem is that in pursuing all those good things, priorities must be set and tradeoffs made. During wartime, resources must be spent first and foremost on national defense, but that requires cutting other spending to restrain the growth of government. President Bush and Congress failed to do this during the last four years; they now have the chance to start anew.
Delaying real reform will only increase long‐run costs. If the U.S. is to remain the world’s largest and freest nation it cannot afford to squander the opportunity to create an ownership society and limit the role of government to what our Founders intended — the protection of life, liberty, and property.
President Bush’s challenge is to win the war on terrorism while defending freedom at home. So far the record is mixed.