Bush's New Reality

From peace and prosperity to war and deficits, Bush has had a wrenching first year. Here's how his Presidency will change

If Bill Clinton was the ultimate political improviser, George W. Bush has been his polar opposite: a devotee of meticulous planning and a Presidential style that leaves little to chance. Beginning with an intensive series of 1999 policy tutorials in Austin, the then-Texas Governor crafted a platform that, to his mind, seemed perfectly attuned to the times. He backed an insular foreign policy aimed at disentangling the U.S. from messy nation-building missions. On the domestic front, he planned to tap billions in boom-time surpluses for sweeping tax cuts and a "compassionate conservative" agenda that offered generous new aid for the working poor.

So much for forward planning. Outside of the tax front, where the new President won a resounding victory with passage of a $1.35 trillion tax cut, little has gone according to script. The defection of a maverick Vermonter tilted the Senate to the Democrats, forcing Bush to make concessions to the opposition. Terrorist attacks on New York and the Pentagon ended the Administration's global detachment, replacing it with a high-tech war on terror, frantic coalition-building, peacekeeping missions in red-hot spots, and lots of foreign aid.

Meanwhile, the abrupt halt to the 10-year economic boom snuffed out the revenue gusher Bush had counted on to pay for compassionate social spending and conservative tax cuts. Deepened by the economy's post-September 11 swoon, the downturn burned a hole through the budget even as it became clear that national security outlays would have to rise for the foreseeable future.

On top of those blows to the economy and investing came the collapse of Enron Corp. Its saga--replete with tales of creative accounting, insider dealing, and a web of political influence that reached far into both Republican and Democratic circles--is compelling a deregulation-minded White House to rush out new controls on the financial sector.

The shift from peace and prosperity to open-ended war and deficits represents one of the most wrenching turnabouts for any recent President. While Bush's commitment to conservative principles remains unswerving, the Right's antennae are twitching. Says David A. Keene, chairman of the American Conservative Union: "Bush walks a fine line. He wants smaller, less intrusive government but is now presiding over a government that's big and growing."

True, but it's mainly growing in a relatively narrow sector: military spending and a new rapid-response system to deal with terrorist attacks. In the President's 2003 budget, scheduled to be released on Feb. 4, the Pentagon and new Office of Homeland Security will get $64 billion in new budget authority. But because Bush wants all appropriations to rise less than 5%, other programs will be squeezed hard, setting up battles with congressional Democrats and Republicans alike.

These altered priorities represent a big shift from Bush's original, bountiful "tax-cut and spend" vision, and they are a key reason the President needs to think about a new agenda. The other reason is his substantial record of first-year accomplishments. The leader whose legitimacy was once in doubt has done an immensely skillful job of getting his core policies in place. Taking office amid the fog of the disputed Florida vote, he managed wins on many of his "big reforms": a 10-year cut in marginal tax rates, a plan to boost school performance, and--because of the war--a big downpayment on military modernization. Only Social Security investment accounts and a "faith-based" antipoverty initiative, always the most problematic items on his A-list, eluded him.

A President's fruitful first year often marks the apogee of his power, though, and now Bush faces a stark new world. It is marked by the rising unemployment that's a hallmark of the New Economy bust, projections of future deficits, post-Enron pressure for re-regulation, angst over health-care costs, and alarming poverty statistics. But unlike Clinton, who riffed his way through office, moving fluidly from advocacy of a national health system to welfare reform, Bush is hemmed in by his desire for constancy. He thinks of himself as the anti-Clinton and meant to replace Bill's jam-session jazz with the predictable cadence of a country-and-western tune.

For Bush, the dizzying pace of change poses both a challenge and an opportunity. And it's the reason lights at the White House are burning into the night as aides labor over his Jan. 29 State of the Union speech. It must deftly touch on the Administration's sure-footed performance in the anti-terror war--which is behind Bush's 83% approval rating--while signaling a shift to domestic matters and the sickly economy.

While the lightning Afghan campaign was a tonic for Republicans, party officials know that battle ribbons won't be much help for GOP incumbents in November if the recovery is anemic. "This is becoming a Bush economy," says Thayer Capital Partners Chairman Frederic V. Malek, a longtime family friend. "I would like to see more of a push for stimulus from the [President's] economic team, because we need it."

Indeed, as the focus on the economy grows, Bush, now basking in a Churchillian glow, will face traditional hazards that bedevil leaders consumed by the demands of war. "Bush is entering a minefield period," says Fred I. Greenstein, a Princeton University Presidential scholar. The economy "is an area where there is a gap between his rhetoric and reality."

In his address, the President will attempt to link his stellar showing on the national-security front to another war that has to be won: vanquishing the recession and getting growth rates into the 3% range. To Bush's conservative economic advisers, that requires the removal of what one calls "roadblocks to growth"--government waste, regulatory barriers to small business and the Internet economy, high litigation costs, and a complex and inefficient tax code. It also means curbing the country's reliance on foreign oil.

Bush's political advisers, led by White House counselor Karl Rove, have more immediate concerns. To limit a backlash over the economic slump, the Administration will bundle leftover stimulus ideas into a rechristened "economic security program." In West Virginia on Jan. 22, Bush set the tone, urging Congress to "keep in mind one word--jobs."

The key elements of "economic security" are accelerated tax cuts, extended unemployment benefits, tax breaks for purchasing health insurance, and a dollop of more money for working moms and inner-city youths. Political pros view this kind of repackaging amid budgetary stringency as "virtual compassion." Says University of Texas political scientist Bruce Buchanan: "This is a rhetorical rather than substantive exercise. There's no way Bush can get to the left of Democrats [on aiding recession victims]. But as was the case on prescription drugs, he'll just throw a plan out there."

Although the aid is far less than Democrats desire, the White House hopes its economic security blanket signals that compassionate policies will continue. "Bush may not read the polls, but his advisers sure do," says the ACU's Keene. "At a time of anxiety over jobs and personal safety, it's smart to use a powerful term like `security.' But from a conservative's standpoint, it's also a bit dangerous. You're speaking the language of the opposition."

Actually, Bush's biggest problem isn't resistance from conservatives who fear that individual freedoms will be sacrificed for the sake of fighting terrorism and recession. More worrisome are mainstream voters who might not discern much of a safety net behind the President's economic pep talks. "Republicans need a lunch box economic theory that goes beyond tax cuts," says Bruce Reed, president of the Democratic Leadership Council. "It's an interesting challenge to show you care when you don't want to lift a finger."

Bush, of course, plans to do quite a bit more than that, but he's burdened by a lack of resources and the impression that he accepts new social spending only as a bargaining chip for his all-powerful tax cuts. Beyond that, most political experts think that, stylistically at least, the President who prefers to extol personal responsibility has little choice but to tell Americans that government will fight the downturn. It's a lesson seared into his consciousness by Bush Sr.'s fall from grace after the glory of the Persian Gulf War. "The public has to see concrete evidence of concern," says a GOP consultant. "If you have to say, `Message: I care,' they know you don't."

Despite Bush's aggressive effort to inoculate himself from the Enron scandal, Democrats hope to make the midterm elections a referendum on budget deficits and Bush's blindness to corporate abuses. But political experts doubt that an attack based on bemoaning budgetary red ink will move many voters. And Democrats' links to Enron's political piggybank undermine charges of a GOP scandal.

"Bush has faced cataclysmic changes," says Brown University political scientist Darrell West, "but there's an upside." For instance, the President can now "blame his budget and economic woes on Osama bin Laden." Adds Mark McKinnon, Bush's campaign media adviser: "The war and recession--and clearly, it is not a `Bush recession'--mean that dollars are now very limited. If not a lot gets done this year, the war becomes a filter for everything."

That's not to say the Administration won't try to move the ball on Capitol Hill with a program of carryover items, such as a patients' rights bill, and a few new overtures. Says one business lobbyist: "Karl Rove's plan is to keep the pipeline full so the President can dominate the agenda. A lot of these secondary items, like patients' rights, don't cost very much. So we're back to the old Clinton idea: `I share your pain."'

While the White House has not finalized ideas for Bush's Jan. 29 speech, here's a glimpse of the evolving agenda:

HELP FOR WORKERS: Bush plans to put just under $100 billion in the budget for stimulus, but aides fear that Senate Majority Leader Tom Daschle's latest offer of a slimmed-down package is a ploy. In that case, Bush will try for piecemeal passage of key items, such as extended unemployment benefits and money to help buy health insurance.

Prospects: Chances for a modest economic security package look good.

FAST TRACK: Building on last year's House passage of legislation restoring the President's ability to speed trade pacts through Congress, the White House will push to get enough moderate Senate Democrats on board to break the deadlock. Compromise language that pays more heed to labor and environmental protections is pivotal.

Prospects: Decent. U.S. Trade Representative Robert B. Zoellick is in dealing mode, and House GOP hardliners may go along.

ENERGY: On the energy front, Bush and Vice-President Dick Cheney are trying to dislodge a comprehensive bill from the Senate and are using the argument that it's really a jobs program. Under the leadership of Energy Committee Chairman Jeff Bingaman (D-N.M.), Democrats have already added conservation incentives to the pro-production Cheney plan. The hangup is drilling in the Arctic National Wildlife Refuge. Moderate Republicans warn that the fight isn't worth it, but Bush thinks he has enough labor support to prevail.

Prospects: Compromise legislation should pass this year.

HEALTH CARE: Administration officials desperately want an accord with the Democrats on a patients' bill of rights now that lawmakers have bowed to White House demands that make it harder to win big judgments against insurance companies. With both parties concerned about angry consumers hit by rising co-payments and deductibles, interest in patient protection is running high. The big sticking point on the health front is a promised Medicare prescription-drug benefit for seniors. Bush campaigned on a $150 billion plan that many experts say understates the cost of the new entitlement. Later this year, Iowa Senator Charles E. Grassley, top Republican on the Senate Finance Committee, will introduce something a little more realistic. The price tag: $300 billion. There's just one problem, says Grassley: "I don't see where we get the $300 billion."

The Administration will insist that with new Medicare cost controls, the government might be able to afford prescription drug subsidies. But Dems are set to go on the attack, charging that the elusive benefit is another example of Bush's tax cut crowding out social spending. "They'll demagogue us on the issue and insist it's another case of our policies being tilted to the rich," says GOP demographer John Morgan.

Prospects: Good for patients' rights, bleak for a drug benefit--though both parties will go through the motions.

BUSINESS TAX BREAKS: Corporate America's plan to use the stimulus package as a vehicle for tax breaks such as accelerated depreciation and relief from the alternative minimum tax fizzled with the demise of the House GOP bill. "Frankly," says one lobbyist, "the corporate guys overreached with AMT and managed to look like hogs at the trough." Now, business reps talk glumly of just extending the life of the research-and-development tax credit and other expiring business incentives.

Prospects: A few small breaks pass this year, but when it comes to generous corporate tax relief, the train has left the station--and nobody was aboard.

TAX SIMPLIFICATION: Although corporations may be left empty-handed, that doesn't mean Bush is through tinkering with the tax code. The Treasury Dept. has given the White House options for what could turn into a major study of tax simplification. By 2004, the project could form the basis of a reelection issue--an overhaul to make taxes "fairer and flatter." That would be music to conservatives' ears since they want Bush to commit to still-lower rates and a whack at the capital-gains tax. Says Treasury Secretary Paul H. O'Neill: "We [first] need to work on simplification [ideas] that are within our control while we're thinking about something bigger."

Prospects: Republicans don't tend to run for office without brandishing a tax cut, so Bush may rev up the tax-reform issue at reelection time.

MORE SCHOOL REFORM: The Administration is planning a vigorous follow-on effort to this year's education-reform bill. The President plans to put an additional $2 billion in the budget for inner-city school districts and special-ed programs. Aides say he will keep barnstorming the country, talking up the need for more improvements.

Prospects: Very Clintonesque. Bush will back targeted education aid each year to spotlight his commitment to a national literacy program.

SOCIAL SECURITY: The recession and the return of deficits have doomed Bush's call for private investment accounts. Nervous GOP incumbents have told the White House to clam up on the subject until after the midterm elections. To complicate matters, gross domestic product would have to bounce back to boom levels before the idea could be viable again since Bush blew the estimated $1 trillion transition cost of a semi-private retirement system on his tax cut.

Prospects: The President will revisit the idea of modest investment accounts in 2003. Sooner or later--make that much later--the idea will probably become a reality.

REGULATORY REFORM: The Enron debacle has put the kibosh on plans for large-scale legislative deregulation of business. The Bushies will try to do what they can via administrative action, using the Office of Management & Budget as a hit squad for costly regs. Similarly, dreams of a major overhaul of the tort law system are giving way to a less ambitious agenda. "We will try to go issue by issue," says one corporate rep, "trying for limits on the tort bar on selected pieces of legislation rather than going the big-reform route."

The Administration will soon propose some new controls over business as part of the Enron fallout. Bush is being urged to tighten corporate governance, provide investors with a more transparent flow of financial data, and limit single-stock holdings in employee 401(k) plans. "You cannot on the one hand extol the rise of the investor class and leave the impression that the game is rigged against the little guy," says one lobbyist who advises the White House. "New controls are needed to flush out the system."

Prospects: Bush may announce new investor and retiree protections as soon as the State of the Union. New curbs "are coming" from Congress, shrugs one adviser. "We might as well get ahead of the curve."

Judging by the number of items on the President's to-do list, Bush seems intent on projecting a picture of Teddy Roosevelt-like vigor, even in the face of vanishing surpluses and rising security obligations. "The country has always liked activists in the White House," says GOP pollster Robert Teeter. "George W. is always moving, always looking for big things to do. And when something unexpected like Enron comes along, he says `let's find a Republican fix' for the problem."

Of course, it is far from clear yet that Bush has "fixed" the damage from Enron, which continues to widen as a case study in financial collapse. And an economy staggering under massive overcapacity and consumer debt may not be prone to repair with just a little splash of economic-security assistance.

Ultimately, the President who now inhabits the political stratosphere will be judged by his economic stewardship and ability to tackle problems that Americans care about most: jobs, affordable health care, decent schools, and, yes, protection from terrorist bombers. Now that the New Economy boom has given way to the sobering morning after, it's clear that the President--still drawn to sweeping ideas--has more will than wallet to pursue his vision.

That could present the ultimate irony for Bush, the studied anti-Clinton. Unless growth returns to boom-time levels, he could increasingly be forced to adopt some of his reviled predecessor's favored tactics: big talk but micro-programs, horse-trading that results in the gradual disappointment of his ideological base, and some smooth political palaver to cover it all in a cloud of empathy.

By Lee Walczak

With Richard S. Dunham and Rich Miller in Washington and bureau reports

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