State of the Union: Some Thoughts Jude Wanniski February 4, 2005

In his extended press conference the other day and in his State of the Union Address Wednesday evening, President Bush was never better, more confident of his presentation, his material, his views and his objectives than I’ve ever seen him. There have been a number of times in recent years when I reached for the remote when I saw him about to make a statement on one thing or another, so painful was it to watch. Not any more. He’s clearly out of his freshman and sophomore terms and an upperclassman, as Presidents go. And whatever missteps he has made while climbing the learning curve so far they are not worrying him as he sketches out an awesome set of fundamental reforms at home and abroad. My sense is that he has read the election results more carefully than as first reported, when he seemed to be claiming a mandate for perpetual war against the world’s bad guys and that he feels comfortable with separating idealistic goals with practicalities.

I’ve actually told those Bush people who are still willing to communicate with me after I told them I would vote for Senator Kerry, solely to protest the Iraq war, that I thought if he made an adjustment in his approach to global problems in his second term, away from force in favor of diplomacy, he could have an enormously successful legacy. He’s made a step in that direction in the nomination of Bob Zoellick as Deputy Secretary of State and the removal of Douglas Feith as the No.#3 man at the Pentagon. We’ll have to see how his policy toward Iran ripens before we can be sure he’ll stay on the diplomatic path. 

The most chilling lines in his Address were these: “Today, Iran remains the world’s primary sponsor of terror, pursuing nuclear weapons while depriving its people of the freedom they seek and deserve. We are working with European allies to make clear to the Iranian regime that it must give up its uranium enrichment program and any plutonium reprocessing, and end its support for terrorism. And to the Iranian people, I say tonight: As you stand for your own liberty, America stands with you.” We can be sure the President’s national audience did not understand that he is demanding that Iran – alone among the 160 or so signatories of the Non-Proliferation Treaty -- voluntarily give up its right to enrich uranium to a small degree in order to provide its own fuel for nuclear power plants, not nuclear weapons. It is, in other words, an offer the Iranians almost certainly would never accept. 

The chill deepened Thursday when Secretary of State Condoleezza Rice, in London in her first diplomatic mission, dumped all over the Europeans by saying the U.S. would not join their efforts in offering Iran incentives to drop what is only suspected of being a nuclear arms program. Suspected by whom? Only politicians. The International Atomic Energy Agency (IAEA) has repeatedly reported that it has no evidence of any Iranian nuclear weapons program and that Iran has permitted inspections of any site suspected by Iranian exiles of harboring such programs. In addition, Condi told the London press that Iran had a human-rights record “to be loathed,” apparently unaware that there is complete religious freedom in Iran, with a sizeable Jewish population of 25,000. By morning today, Dr. Rice backtracked a bit, at least advising her hosts in London that as of now there are no U.S. plans to attack Iran. We must wonder how long she will last in the administration’s most important Cabinet post.

The President did much better in the presentation of his domestic agenda, with a serious commitment to Social Security reform and “a tax code that is pro-growth, easy to understand and fair to all.” There were hoots and catcalls from some Democrats when he said action had to be taken now or the system would be bankrupt come 2042. But the President has the winning argument there; the Democrats are unable to satisfactorily answer his point that as the baby boom retires in a few years we will have only two workers to finance one retiree instead of the three now doing that job. So far, the only Democratic plans involve payroll tax increases and assumptions that technological innovations will increase worker productivity over the next several decades. 

The Democrats do have some good arguments on why the President’s plan to privatize a third of the current system will not solve the two-worker-for-one retiree problem. It won’t and should have very little positive effect on equity values – which is why Chairman Bill Thomas of Ways & Means wants to merge the SSI and tax reforms. There is, though, a partisan reason Democrats sat on their hands and Republicans cheered while the President outlined his privatization plan. Once younger workers get an ownership stake in the equity market it probably is true they will object to public policies offered by the Democratic Party that drag on Wall Street. In that sense, privatization in and of itself might improve equity returns as well as general tax revenues that can help finance the future deficits in both SSI and Medicare.  

On Thursday night I spent an hour on a Wisconsin PBS radio talk show discussing Social Security, in general support of the privatization plan. But I also pointed out that if all the supply-side macro-economic reforms on the table were enacted – plus a monetary reform that fixed the dollar to gold – the current system could be preserved without privatization. Indeed, the economy could generate so much wealth that the much greater indeterminate Medicare liabilities could be easily handled. There would have to be one small change in SSI, indexing benefits to prices instead of wages. Even that change could incorporate a progression, with the lowest-income workers remaining indexed to wages, which tend to rise faster than prices. 

It was a good night’s work for the President, I thought, especially the emphasis he put on resolving the Israeli/Palestinian conflict. That could, in itself, resolve so many of the other problems confronting the government, Iran and Iraq included. I’ve always agreed with the heads of the other Islamic states that Al Qaeda and Islamic terrorism would wither on the vine if Ariel Sharon and Abu Mazen could come to terms. (Can we dream of closing down the Department of Homeland Security and cutting back airport security?!!!) We’ll be back to reality next week, though, with the President presenting his budget to a chorus of screams on programs being cut and further reports from Baghdad that the elections last Sunday were not all that meaningful. Still, February opened on a high note.