Biggest Job for New Advisers:
Win the Economic Recovery

President Bush's two new economic advisers face an awesome challenge, and how they handle it could determine the course of the American economy for the next century.

The big issue isn't the stimulus plan. As Paul O'Neill correctly put it, that's "show business." You take a couple of investor tax breaks from column A and a couple of middle-class tax breaks from column B, throw in some unemployment benefits, and you've got a deal that will pass Congress this spring ... just as a recovery is getting under way. It won't help much; but it won't hurt much, either.

Nor is the big issue the expected war against Iraq. Even if the president's slow-to-take-a-hint economic adviser, Lawrence Lindsey, was right to say it would cost as much as $200 billion in the worst-case scenario, that's still a one-time cost that mostly goes away once the fighting is over. With a weak economy, temporary war spending would be welcome. In fact, the dirty truth is that war, if it goes as planned, is a great stimulus package. It would pump needed money into the economy and remove the uncertainty that has been holding down business investment. If lower oil prices emerge at war's end, that'll be icing on the cake.

SNOW COMES TO WASHINGTON • Snow's Many Moves Between Washington, Business1   • Snow's Latest CSX Contract Covered Exit to D.C.2   • What Bush's New Team Means for Your Taxes3

No, the real challenge comes after war ends and recovery begins. That's when Messrs. John Snow and Stephen Friedman will have to take a closer look at the books and realize just how out of whack they've become.

The Congressional Budget Office provided a hint of the problem's magnitude last week when it prepared a run of deficit projections for Republican Sen. George Voinovich. In August, the CBO had projected a budget surplus of roughly $500 billion in the year 2012. But that rosy projection was based on a cathedral of unrealistic assumptions, including the notion that the 2001 tax cuts would expire and spending would be frozen. Make the tax cuts permanent, as Mr. Bush has requested, and assume spending continues to grow at the rate of the past two years, and that $500 billion surplus becomes a $500 billion deficit.

Then add two giant problems that the CBO and Mr. Voinovich don't mention. The first is the alternative minimum tax -- a growing menace in the tax code that over the next decade will deprive most people of the benefits of the Bush tax cut. The second is the new prescription-drug benefit that both parties have promised to deliver to the elderly. Repeal the minimum tax and pass a prescription-drug benefit, and the 2012 deficit grows to $750 billion, at least.

And after that comes the real shocker, as baby boomers start to retire and collect Social Security and Medicare. Unless changes are made in the two old-age entitlements, the deficit after 2012 will really explode.

Are any of these estimates reliable? Of course not. Like all long-term deficit projections, they are certain to be wrong. But the challenge facing Messrs. Snow and Friedman is making sure the error goes in the right direction, not the wrong one. That will require them to do two things:

1) Keep the economy growing in the long term at a rate faster than the 3% growth rate CBO now assumes. A more ambitious -- but not unrealistic -- 4% average rate, for instance, would eliminate two-thirds of the 2012 deficit.

2) Overhaul both Social Security and Medicare in order to reduce their long-term costs.

When it comes to boosting long-term growth, Messrs. Snow and Friedman will have to take sides in the economic debate that splits the Republican Party: They'll have to choose between the Steve Forbes supply-side view, which sees tax cuts as the surest way to promote economic growth, regardless of their short-term effect on the government's finances, and the Robert Rubin deficit-hawk view, which holds that a balanced budget promotes long-term growth by keeping government borrowing down, and leaving more capital for private investment. Messrs. Snow and Friedman are from the bond-market wing of the party. But they are inheriting a tax-cut agenda forged in the supply-side wing. It won't be easy to square the circle.

As for altering Social Security and Medicare, the two men will find their boss an enthusiastic advocate. But it isn't clear Mr. Bush is a wholly informed advocate. At some point, they'll have to show him that overhauling the two programs will mean reining in benefits, at least for future retirees. Private Social Security accounts may be a good idea, but as Federal Reserve Chairman Alan Greenspan has said, those accounts by themselves do little or nothing to fix the program's funding problems. And most proposals to rein in benefits -- slowly raising the retirement age, for instance -- could hurt the president in his 2004 re-election effort.

So congratulations, Messrs. Snow and Friedman. If you succeed, you'll set the nation on a solid economic course for the rest of the century. If you fail, we may be headed for a fiscal train wreck.

Write to Alan Murray at alan.murray@wsj.com⁴

Updated December 10, 2002 12:11 a.m. EST