Assessment of Bush's First Year and Future

Transcript

MR. MIKE ARMACOST: Welcome everyone to this National Issues Forum and to Brookings. I'm delighted to see such a full room.

It's been a year since George Bush was inaugurated. We all listened to his State of the Union message last night, therefore it seemed a useful moment to us to reflect on his performance over the past year and to consider the priorities and policy goals he's outlined for the period ahead.

One of the good features of an institution like Brookings is we have a very broad agenda and consequently have core competencies that cross the lines between economics and politics and foreign policy, so we've got a large number of scholars participating and I have no doubt you will hear a diversity of views.

Before introducing the panel and turning the mike over to Tom Mann let me offer a few personal comments.

That it has been an eventful year for George Bush goes without saying. He looked very confident and very resolute last evening, and he had good reason I think to look back over the past 12 months with considerable satisfaction.

A year ago many, particularly in the media, referred to him as an accidental president, described the results of the Florida election as tainted, chastised the court for resolving the election's outcome. Today his legitimacy is not challenged. His performance in office, particularly since September, has drawn wide praise, even from former critics. His support in public opinion polls by any measure is extraordinary. In the face of daunting challenges at home and abroad a substantial majority of Americans, judging from the recent polls, believe the country is on the right track.

During his campaign Mr. Bush declared his intent to appoint a Cabinet and White House staff of talent and experience. He did so, and beyond these qualities his principal appointees have I believe impressed many for the intellectual, ethnic and gender diversity they reflected as well. This is not a White House staff nor a Cabinet dominated by white males from the business world.

Last January many expressed skepticism about the prospects for his key legislative priorities, but today a major tax bill and significant education bill have already been enacted. Trade promotion authority was passed by the House and is awaiting Senate approval. These are significant accomplishments for a President dealing with a Congress so closely divided.

The federal budget picture has obviously deteriorated, and sharply, due principally to the slowing of the economy and the need to undertake major new spending efforts to ameliorate the effects of the downturn and respond to new defense requirements both at home and abroad. You'll hear, I'm sure, more about the long term budget picture from the panel. Certainly that outlook is not as bright as it was a year ago, nor is it clear as the Administration must hope whether the current recession will prove to be one of the shortest and shallowest on record.

Surely the President was fortunate to inherit a situation in which he had considerable flexibility to use both monetary and fiscal policy to counter the downturn, and he's done so quite aggressively as has, of course, the Fed.

As for foreign policy, a year ago many observers expected a hard-nosed approach from the President focused on a narrower conception of national interests and a diminished commitment to multilateralism. September 11th was a major turning point. In the face of renewed evidence of our vulnerability to terrorism the Administration has done, I believe, a quite remarkable job of mobilizing all the great powers, and many others to boot, in a grand counter-terrorist coalition. It devised an impressive military strategy for swiftly consigning the Taliban regime to the dust bin of history. It has begun to address the large gaps in U.S. preparedness for homeland defense.

It has earned praise from foreign as well as domestic critics for its conversion to multilateralism, even though in the words of a former Brookings colleague it has been multilateralism a la carte. Whatever one's views about missile defense, one must admire the skill with which the Administration has managed to increase its freedom of action in that sphere without impairing the development of a solid relationship with Moscow.

And on the trade front the Administration not only completed arrangements for China's accession to WTO but managed through energetic leadership and savvy negotiating tactics to produce an agreed framework for a new multilateral trade round, a result as surprising as it was welcome in the light of the debacle suffered on the last try in Seattle.

By any measure it seems to me this is a pretty impressive start. Not that there haven't been setbacks or missteps or disappointments.

And what of the future? I'll leave that essentially to the panel. Speaking for myself, I was impressed by the President's candor and honesty last night. He didn't minimize the dangers we face in the struggle against terrorism. If anything, he highlighted them by expanding the counterterrorist mission with his warning on Iraq, Iran and North Korea. He did not declare victory nor deny the need for sustained effort significant to sacrifice.

He signaled a readiness to provide those charged with implementing tough missions at home and abroad with the resources they need to do the job. And with his call for civic renewal he tapped into the evident desire of Americans all across the country to do their own part in protecting and perfecting in our community.

Honest and intelligent men and women, as always, will disagree over priorities and strategies. Indeed, in a nation as diverse as ours and with a staff as diverse as ours we can't expect a measure of the full consensus at least on goals even in a rare moment of national unity such as this.

The purpose of our discussion today is at least to explore the range of the differences on ends and means that will provide the focus of political discourse in the months ahead.

It's a great honor, as always, to call on Tom Mann. He's been a fixture and a star of Brookings for many years. He directed our Government Studies Program for a number of years. You know what a key player he's been on issues like campaign finance reform, congressional reform, and a host of other issues. He's a man of supreme intelligence and moderation, and it's a pleasure to turn the podium over to you, Tom.

MR. THOMAS E. MANN: Thank you very much, Mike, for getting us off to such a good and substantive start.

Our session is about assessing the Bush presidency—looking back and looking ahead. We had, of course, as Mike said the State of the Union speech last night. I think I've discovered a hidden theme in the speech that Mike really didn't discuss. I don't know how many of you picked this up, but it was really the President's call for physical fitness. (Laughter) I mean the aerobic content of that performance last night. Did you see how many times Members of Congress had to get up and give standing applauses? I was afraid Senator Kennedy wasn't going to make it, but it was striking. (Laughter)

As Mike has suggested, this has been a most extraordinary period in American history. We have perhaps the most controversial and disputed presidential election in history. We had a change of party control of the Senate in mid session. We had 9/11 and all that has meant to us in the world. We saw budget surpluses as far as the eye can see turn into deficits, and we had the largest and most breathtakingly abrupt corporate collapse, the Enron matter, as well. Five extraordinary developments or events, all of which make it very difficult to draw on historical analogies, to have any great confidence in forecasting how matters will play out in the months and years ahead.

We've already had several George W. Bush presidencies. At the least pre- and post-September 11. I would argue we had two before September 11th, before and after the control of the Senate shifted; and now with his State of the Union speech we enter I think a much more complicated, challenged, nuance period of time.

I think there's tremendous uncertainty about the lasting effects of 9/11 on our 50/50 politics, on our foreign and domestic policies, and on the way in which citizens connect to or remained distant from their government.

So what we've done is assembled a classy group of Brookings scholars to look back on 2001 and then ahead to 2002 and beyond. Given the number of people involved, our format will depart from our normal fare. We're not going to have set speeches or presentations from you. We're going to try to be conversational. We're going to bring you, the audience, in along the way and make it as lively and informative as it is within our power to accomplish.

We have three clusters of subject matter we'd like to discuss with you today. We'll begin with a focus on presidential organization, style and strategy and for that we're going to initially call on our colleagues Stephen Hess, Paul Light, and Bill Frenzel, all of the Governmental Studies Program. Paul is our Director. Then we're going to turn to foreign policy matters and we have Ivo Daalder and Jim Lindsay, both Senior Fellows in Foreign Policy Studies. Then we will turn to economic and social policy matters and for that we also have three Senior Fellows. In this case in both economic studies and governmental studies, Peter Orszag, Isabel Sawhill, and Tom Loveless.

I'll pose some initial questions to our colleagues, elicit brief responses, encourage the rest of you to take exception of what you've heard, invite the audience to mix it up with ourselves, and then move on to another topic. But I'm going to try to move sequentially so I would ask that you not raise a foreign policy substance question in our first session but hold it to the second. So let's begin.

I'd like to begin with Steve. What have we learned about how President Bush has chosen to organize his White House and what does that mean for his presidency?

MR. STEPHEN HESS: Looking at the first year of organizational charts and staff, going from Franklin Roosevelt to George W. Bush, I would say that Bush has produced the most functional White House since Dwight Eisenhower, and that surprised me and I suspect surprised an awful lot of other people, and you have to ask yourself why. The first reason you come up with is that George W. Bush is a skilled executive. That surprises journalists and scholars, who are the ones who tend to assess presidencies, because they not executives ourselves, may not know very much about executive skills, and often disdain executive qualities.

But if you were looking for a place— in a society that doesn't have a School for Presidents— to see someone who has some chance of taking over quickly, you would probably want to go to the governors of very large states. Probably I'd have to say the worst place to go would be to the governors of small southern one-party states who have to learn their lessons all over again.

Then you have to ask yourself a couple of other reasons why. One, Bush did an amazing thing in this transition. He turned it over to someone else. He turned it over to Dick Cheney, the Vice President-Elect, who also happened to have been the Chief of Staff for a previous President, and who knew the lay of the land.

Third, during the campaign he proposed as specific a programmatic approach, the five things that he wanted to do as President, as you've ever seen. Often Presidents come in and say okay, as did Robert Redford, in "The Candidate," what do we do now? Then they have to spend an awful lot of that first year arguing with each other about what exactly they have to do now. These people knew what they had to do now.

Next, he had the advantage of being a front runner for the nomination, which means he could choose early the cream of the crop in terms of staff and give them a year or more to work together. So then he could have moved them into the White House with him as a team.

Then, strangely, he seemed to go back to what we had learned under Louis Brownlow, who wrote the rules for presidential staff under Roosevelt, who said that the staff should have a "passion for anonymity." So with the exception of the three people who are supposed to be out front—the Press Secretary, the National Security Advisor and the Chief of Staff—these folks do not seem to be competing for air time on Sunday. One of the most powerful men is sitting in the back there right now, Josh Bolton, none of you recognize him. He's the Deputy Chief of Staff—Of course he's not sitting back there, but you wouldn't have recognized him anyway. (Laughter) That's sort of an array of "why."

VOICE: What a trick.

MR. HESS: Now things start to happen and we'll see what conceivably can happen to a staff as it meets its first scandal and so forth.

MR. MANN: Steve, let me just press one question. Clearly they thought through their priorities and the sequence of priorities well before the election, they were confident of winning. But then the election came, it took 30-some days to resolve. The President lost the popular vote; won because of—it ended with the Supreme Court decision. They decided then and there that that should have no bearing no the agenda or the strategy they proposed. Was that a reasonable way to approach this? And does that mean that the magnitude of victory, the extent to which one picks up or loses seats in Congress, the sort of nature of public opinion really has little bearing on the agenda of a President?

MR. HESS: We would disagree, but I would have to say not only was it the correct way, but it was the constitutional way. The President, whether he wins by one vote or not, on January 20th at noon when he raises his hand he gets 100 percent of the power that goes with the job and then has to do with it as he sees fit. So I don't think there's anything in our system that was designed for coalition government and he chose not to do it that way.

I should say also, a very strange thing, because I've always tended to give him so much credit for doing these things so fast, in half of the transition days, but as I start to think about it, in some ways that was actually an advantage. While we were all focused, the press and politicians, on Florida as opposed to cutting each other up on who's going to get the next appointment, quietly under Dick Cheney they were moving ahead with this, and I think that probably helped the fast start that they actually got.

MR. MANN: Paul, we learned something about a President's conception of the presidency and of the executive vis-a-vis the Congress in the way in which they occasionally pick fights with Congress or avoid them. Vice President Cheney is now involved in a colossal battle with the GAO over the release of information about his energy task force. What does this struggle and the additional struggle with Dan Burton and the House Government Reform Committee over release of other information, tell us about the President's conception of the Office of the Presidency and the executive prerogative.

MR. PAUL C. LIGHT: I'd say just by way of starting that September 11th brought out the best in the country, and it brought out the best in the White House. I don't think this was a well functioning White House before September 11th. On the same level, I think they were struggling. Dick Cheney was disappearing before September 11th and there were lots of squabbles underway. But I agree with Steve, that post-September 11th they've done a terrific job.

I am on the side of Congress on the GAO battle. Steve is not. We've talked about this. I think that Dick Cheney has gone out of his way to characterize this as an effort to open up secret and confidential conversations, but if you're going to have a conversation and put up a big neon sign that's blinking "task force, task force, task force", you kind of bring on people's interests in it. I think Cheney and the Bush Administration are going to have to eventually tell the American public who was on the task force. I just think they're going to be required to do so. Whether it goes to the court, whether it's settled beforehand, I think the General Accounting Office is asking for reasonable information and I think eventually they'll get it.

I would say that the Cheney/GAO controversy surrounds a general hostility in this Administration to public access to information, and that goes well back to the very beginning. This has been a very tightly controlled Administration. They've been very concerned about the release of information that goes down the line to the Cabinet officers. Secretary Tommy Thompson's recent decision to centralize all public affairs activities in the Department of Health and Human Services, I think you can find a number of examples in the Administration where the Administration's been extremely reluctant to share information, and I think the Cheney task force is a good example.

This was a non-story. Had they released it last spring, had they just said, when the counselor general said all right, I'll just take a list of names, give me the names of people who participated, this would have been a one-day story. We would have seen if there were a lot of Enron people and a lot of petroleum people and a lot of business people, and people would have said well that's pretty much what we expected. Now we're going to go all the way through the court system and eventually I think the administration will have to tell us something about it, but it will be reluctant to do something.

MR. MANN: It tells us something though about President Bush and Vice President Cheney's view of the executive. Dick Cheney for 30-plus years has had very strong years about the executive. He is a Hamiltonian. He served in Congress, but he really believes that the President has its particular powers and prerogatives and he believes that those have been weakened over a long period of time.

One of the most fascinating documents to read is the minority report of the Iran Contra Committee which Dick wrote, and in it you will see much of this sentiment. This is long held and heart felt. My sense is that the President instinctively relates to that. He's an executive CEO type. He believes in loyalty and discipline. Information is on a sort of need to know basis. The Administration has exhibited extraordinary discipline in starting and ending meetings on time, on staying on message more generally. The question is what that might mean over the longer haul in working out an effective relationship with the Congress.

Paul, is it your sense that the struggle with the Brooking committee in this regard is akin to the GAO dispute?

MR. LIGHT: I think this Administration has two great dislikes in Washington. They don't like the media very much and releasing information, and they don't like Congress very much. They particularly don't like the Senate very much. And they haven't liked Congress since the very beginning. I think that just reflects an executive Hamiltonian view of the world.

I would say that Dick Cheney was in the White House in 1974-'75 when the great statutes that are now coming home on information were enacted. The amendments to the Freedom of Information Act; the Government and the Sunshine Act; the Federal Advisory Committee Act. This was a period when Cheney was Chief of Staff and Deputy Chief of Staff to Rumsfeld where we enacted all these laws that require government to make information available, and it's disquieting and discomforting, but as I say about the energy task force, if they didn't want it revealed they should have kept it secret.

Once they said they were going to have a task force, once they advertised it as such, they were obligated to reveal who was on it. That just comes with the territory and Dick Cheney should know that as well as anybody.

MR. MANN: Your comments about Congress are a perfect segue to our colleague Bill Frenzel, a former Member of Congress.

Bill, last night the President pitched more tax cuts, making permanent those approved, moving them up, and adding additional ones in his stimulus bill, but also more spending. And then said the Congress has the responsibility for fiscal discipline.

Now what does this tell us about the President's conception of presidential congressional relations?

MR. BILL FRENZEL: It reinforces some of the points that Paul made that the President believes the Executive Branch should be a leader and he is trying to be one and to take it with him, although obviously any enlightened executive knows he's not going to have those folks on Capital Hill clapping their hands for him all the time.

But I must say his relationships with Congress have been extraordinary. When he took over of course he had tiny majorities in both houses. Those majorities were anxious to help him and to make their joint enterprise be successful. So when he started out he was working almost exclusively with Republicans and he passed his tax cut with Republicans.

Then when Jim Jeffords went over the side the game changed a little bit. But in fact to the President's credit he had already been doing a bipartisan gig on the education bill when that happened. This is the other side of the President, the cooperator, the person who can't say enough wonderful things about the senior Senator from Massachusetts.

However, you get through that work on the education bill and you come to September 11th, and here you have a little different relationship between the President and Congress. Here he's meeting with the joint leadership, that is the bipartisan leadership of both houses on, in the beginning, even more than weekly basis. The Congress is finding for the first time in perhaps at least a dozen years that it can talk to itself, or the members can talk to each other across party lines, they're enjoying doing the work, and so he continues a pretty good relationship with the Congress until the year runs out.

Now it runs out on a sour note because the Senate decides that fiscal stimulus, or at least the price it has to pay for the fiscal stimulus is not worth doing. But if you go back over the whole year for an Administration that clearly wanted to be a leader and was not in a hurry to pander to the Congress, received, at least according to Congressional Quarterly's rating, sort of a off-the-chart better than Lyndon Johnson record for the year.

Now there are a lot of things wrong with the rating, and so it's probably less magnificent than it sounds. Nevertheless it was a pretty darn good first year. Then you say where do we go next year? I think it gets tougher.

Truly, the President served up to the Congress something it couldn't quite do unless it had eight arms and four legs. It cannot do all those great programs and maintain fiscal discipline as well.

But if we look on last year as a model, the President is still going to achieve a number of the things that he sets out to achieve. And of course partly because of this surge of patriotism that he carries with him and which he, of course, injected very emotionally into the speech last night.

So things are going to get tougher. The trade promotion authority isn't very easy. Fiscal stimulus that he wants left over from last year is going to be very difficult for him to achieve. And even that at best, and other things are going to be difficult too. But based on the record of last year he is well launched.

MR. MANN: I think what some Democratic critics or perhaps Democrats frustrated by the President's success would say is that most of the bipartisanship saved the handful of issues that are inherently bipartisan like education. Most of the bipartisanship is personal and rhetorical and it really sort of covers what is underneath, as you suggested, the outset of pretty conventional partisan strategy which is to play from your base and try to pick up whatever additional support you can. And what struck me last night in the State of the Union on the second part where he was talking about economic security is the way to achieve jobs was, and then he laid out seven or eight things, and all of those were his old agenda items. Energy and tax cuts. This President has decided not to use the occasion to in any way transform his agenda or try to transform the broader political environment. I say that, I may think that's a wiser thing to do, but I'm just offering that as an observation.

Would you agree with that, that that is the sort of course of government that he's settled upon and believes will work?

MR. FRENZEL: I would agree with the Democrat criticism that he works his side of the aisle and then as little on their side as is humanly possible, and that is true. He worked the so-called centrist Democrats on his tax program and other things and didn't go to working the full caucus until the emergency. That's going to hurt him in the future. He is going to have trouble with what is the main body of Democrats in the Congress.

Nevertheless, one has to say that he has been extraordinarily successful so far, and maybe he'll find some more of those right-leaning Democrats as he goes forward into this year. And maybe the rest of his program is going to be hard for some of his Democrats to resist as they move forward through these various programs.

MR. MANN: One last question. I'd just like to get Paul and perhaps Ivo and Peter to comment on as well. Since September 11 a major focus of our government and our country has been homeland security. What's the assessment of how the effort is going to mobilize the resources of government to bring some coherence to an effort to enhance security here at home? Paul, Ivo, Peter.

MR. LIGHT: I think that we've come a long way since September 11th and that we've got an incredibly long way to go.

I think the agencies that are involved in the homeland security issue for the most part, although not exclusively. We've got exceptions like Federal Emergency Management Administration, FEMA, which is a well run, well functioning agency. I think there are a lot of damaged agencies that we're calling on here that need significant reconstructive work.

The work force involved in the homeland security effort, the federal employees, civil servants are battered. They are under-resourced, they are under-equipped, and there was nothing in the State of the Union address last night to talk about how we're going to rebuild the work force that is on the front lines.

Now we did hear that we need another pay increase for uniformed personnel, but I think federal employees, civil servants, were kind of hoping that there would be and, in the speech, we also need the same for federal civil servants. I think that work force needs help right now and the agencies in which that work force is performing are needing major reconstructive work.

MR. MANN: Ivo, do you want to say something about this?

MR. IVO H. DAALDER: I agree with Paul. I think much has been done in four and a half months, but much much more needs to be done.

I guess somewhat disappointing in the President's speech, which raised homeland security as one of the three pillars, was how little he in fact said about homeland security. He mentioned the fact, the importance, that he's going to double the spending on homeland security which itself was doubled within the year. We spent about $12 billion, or $11 billion at the outset of 2001. Now he wants to spend somewhere around $38 billion. I think most Americans would regard that kind of money well spent given the kinds of problems we have. But he didn't lay out a strategy, nor is there a strategy, in fact, on how you are going to spend this money. What are the programs? What are the particular things that we need to do on which this money is spent? He mentioned there's going to be some bioterrorism stuff, we're going to do some border and airport security stuff but it wasn't presented in a coherent whole, and one has the sense that there isn't in fact a coherent whole.

And finally, this major reorganization could be done within the federal government. For example, a proposal out of the White House to merge those agencies that are responsible for guarding the border. He didn't mention it. It's probably not going to be in his budget as far as we hear in the report, which means if you can't do it four months after September 11th, it's going to be really difficult to do it 12 months after September 11th. He missed a major opportunity to use the urgency of September 11th to start us in the right direction.

So he's gone some parts in the right direction but he's got a long way to go and it's going to be more and more difficult as time goes by.

MR. MANN: Peter or Bell, did you want to say something about this?

MS. ISABEL V. SAWHILL: I just want to add the footnote that I think we tend to forget about the important role that state governments play in this. That's where all the front line responders are. Those are the people who are under stress. And they're under enormous fiscal stress because of the recession. We've got something like $40 billion of deficits at the state level projected. They have to, most of them, balance their budgets constitutionally, so they're going to be cutting back.

I am surprised that a President who has also served as A Governor and has a Secretary of Health and Human Services who is the point person on all of this homeland security, who has also been a Governor hasn't responded in some more positive way in terms of this problem that states and localities face in the coming year or two.

MR. PETER R. ORSZAG: If I can just try to tie these two things together. One of the things we'll be waiting to see is the President's budget which comes out on February 4th which will provide much more detail about what specifically the spending will go towards.

One of the things that at least was alluded to in the speech is not only funding for training and assistance to first responders, it's unclear how much there will be there and how well the budget will put forward a strategy as a whole for why this type of thing or that type of thing makes sense.

VOICE: Can I just add, too?

MR. MANN: Yes.

MR. LIGHT: On the positive side I want to say that I think the Department of Transportation is making significant progress in building the Transportation Security Agency. I really like what's happening there. I think they are building a prototype of a federal agency from scratch. I mean we haven't done something like this since the Civil War, really. I really like what's happening there and that's a good story emerging in terms of outside the box thinking, aggressive.

The second thing is that we do see these agencies like Immigration and Naturalization Service where you would have thought that September 11th would have been enough to really shake them up and really get them moving, but I think they're struggling with basic work force quality issues, hiring problems. We don't have a public service infrastructure I think to allow them to respond quickly and we're seeing some 10, 15 years of neglect showing up here I think.

MR. MANN: I want to mention that this event is being WebCast on the Internet, live streaming audio and video. One can get it on the Brookings web site home page. We invite those who are watching to send questions by e-mail to Questions@Brookings.edu.

I'm going to move to foreign policy, but if someone has a question about this subject—Yes, sir. Please identify yourself.

Q: Richard Salmon with Kipplinger.

For Paul Light or Stephen Hess, regarding presidential prerogative. How does Bush's inclination to use them and to consolidate power in the White House compare with Clinton's use, with his father's use, and with Reagan's use? Because they all certainly seemed to be inclined to consolidate quickly their power versus Congress and elsewhere.

MR. HESS: I think the description of George W. Bush and his urge to bring the powers of the Article 2 back into what he believes they should be is appropriate. It's the usual struggle between Article 1 and Article 2.

I find it very funny. If you stay in this town long enough you tend to be an Article 1 or an Article 2 person. Paul's an Article 1 person, I'm an Article 2 person.

Let me get back to the question of executive privilege, because that sort of brings it to a head right at this moment.

These folks in the White House, at least politically, they're pretty smart. They know what are they doing, denying material about the Clinton Administration to Dan Burton, for heaven's sakes. That's not helping the Republicans very much. They know what the people on Main Street must be thinking about keeping back the information—"There's smoke, there might be fire there." While in fact it's pretty obvious where they're coming from and always has been. They stated their position about energy as clearly as you could right back in the campaign.

So where do I come down? I come down to the fact that they're doing something that's not politically very wise and they really are standing on principle. I don't think that's so unusual in Washington, but it does have to reiterated from time to time.

MR. MANN: Paul, do you want to say anything?

MR. LIGHT: There are laws on the statute books governing some of this activity. I think that makes me an Article 2 person. (Laughter) Or Article 1, actually.

Not that Steve is advocating abrogation of the laws or a lack of rule of law. That's not what he's saying. (Laughter)

MR. HESS: That would be wrong.

MR. LIGHT: Actually I prefer the language of the first branch of government and the second branch, and I have to say on this particular point, the strength comes from the interaction between the institutions and the testing of it, and sort of my own sense is the Administration has found some bad cases to test and to set some precedents that will assist the Executive Branch.

One of the risks of waging the wrong fight on principle is that you weaken your case for yourself and your successors. My reading of the laws involved here suggests that in the end the GAO and the Congress will win and in some ways I think that's unfortunate because I also happen to believe that Congress is only effective when the Executive is effective and stands up for its rights. But when they stand up for supposed rights that conflict with law then they run the risk of doing damage.

Last word from Steve.

MR. HESS: A very important word because I do agree in one area with Paul Light, and since he's my boss I want that on the record, and that is the question of secrecy and keeping information too close to the vest. This can work while they're on top, everything is going well. The minute things start turning around as in fact they may with the wedge of Enron, you will see how quickly the press can take advantage of the opportunity they've given them in that regard. So I don't like secrecy period, but I think in political terms it's a very bad strategy as well.

MR. MANN: Jim Lindsay. Last night, the President seemed to heighten expectations that we will wage war on Iraq in the not too distant future. That apparently is the reading of a number of our European allies and those in other places around the world. Do you believe that's what the President was trying to signal? Does it tell us something about the strategy that he has settled on a post-Afghan strategy? And more generally, how would you evaluate his role as Commander in Chief?

MR. JAMES M. LINDSAY: I think the way to the answer the question is to sort of unpack it a little bit. I don't think it signals strategy. In fact if you listen to the speech or you read it very carefully it says very little about what it is the President intends to do, but it is very clear that the President put down last night a very tough marker on the table. What do you think his rhetoric was? It depends on your perspective. It seems to me that he clearly expanded the so-called Bush Doctrine in dealing with terrorism. You go back to September 20th, the President addressed Congress, he talked about going after terrorism with global reach and there was a great deal of confusion afterwards and what exactly did global reach mean. Some people suggest it was an artful way of sounding like we were going to do a lot, we were just going to focus on al Qaeda. Others have suggested it was broadly conceived, we could do lots of things. I think that question was answered definitively last night when the President spoke not only about al Qaeda but going after Hammas, Hezbollah, and several other groups. So clearly in terms of terrorists we're not guarding this very narrowly.

We clearly have a very full plate just dealing with that. Obviously Hammas and Hezbollah have been a problem for Israel for quite some time, so the Administration clearly has its work cut out for it.

What was very significant last night was the President stopped there, expanded the Bush Doctrine thinking even further to put that marker down in which he not only talked about sort of the usual, talking about rogue states or outlaw regimes, but he named names. He said Iraq, he said North Korea, he said Iran. I think he made it very clear that he intends to do something about it.

Now what were his motivations, to what extent was he sincere, to what extent was he strategic? I don't know. Obviously one possibility is sending a very stiff message to our European allies, to the Russians and others, that you had better do something about it, this problem, or we will.

The real tough nut here is in some sense, the President's words were quite remarkable. He talked about time is not on our side. These states pose a grave and growing danger. So clearly the speech is going to be read by many people the way you suggested. I think it's clear by the reaction in Europe and I think in East Asia that the President had something more than delivering a very tough note from the State Department. We're not going to—I think talking about engaging with Iran is really out the window right now.

The problem as you look at these issues, they're very very difficult ones to deal with. I think actually Iraq is the easiest one. North Korea you look at, I would imagine the people of Seoul today, a city of several million which is in range of North Korean artillery fire, probably weren't very comfortable with the saber rattling and I think that could cause some problems. The President has put himself in a box because by talking so tough he's created the expectation he's going to do something, and if he doesn't do something, then you run the risk of being criticized for threatening and not being able to follow through. But then again when you have not just al Qaeda, not just Hezbollah, not just Hammas, but North Korea, Iran, Iraq, that's a very full plate. I'm not sure how that's going to work going forward. My suspicion is they have mixed feelings.

MR. MANN: You've been looking ahead. Look back over the last four and a half months of how the U.S. response was planned and implemented and how it's likely to be completed. And if it's likely to be completed in Afghanistan.

MR. LINDSAY: I would actually borrow the President's line from his speech last night. I think he's got it exactly right. He said "The war is well begun, but it is only just begun." I think that captures it exactly. The war has gone quite well in phase one. I think that's the reason why the President's 90 percent in the public opinion polls. The Taliban is on the ash heap, al Qaeda is on the run. There's been actually fairly dramatic changes with U.S. alliances. That's a change in our relation with Russia. Six months ago people were predicting Pakistan was a failed state. That seems to have really turned around. We have new relations in Central Asia. I think that's going very well.

I think the President in saying we have a tough road ahead is quite right. I think if you actually look at Afghanistan, the tendency is to talk about it as a marathon, and I think actually what we're engaged in is like a triathalon, multiple triathalons. The first part in Afghanistan, that was fairly easy, which was destroying the Taliban. Now we actually have to put Afghanistan back together in the near term to make it function over the long term. It doesn't serve our interests if Afghanistan five, ten, fifteen years from now reverts to where it was prior to September 11th. A very, very tough road to go, and because this is an Administration that's always been very skeptical about state building, we don't do that. But clearly in Afghanistan we'll have to do it. And looking beyond Afghanistan you have the clear problem that not all these problems can be solved with bombs. Indeed many of the hijack on September 11th weren't in Kandahar, they were in Hamburg or Miami, so it's a much harder task to accomplish.

MR. MANN: Ivo, let's take a somewhat broader perspective. Has 9/11 changed American foreign policy?

MR. DAALDER: Well it's changed in one important respect. On foreign policy about the war on terrorism, we are slowly expanding, as Jim said, what that means but it is still a very focused, very purposeful, very driven foreign policy in a way that prior to September 11th it wasn't. But in other ways perhaps it has changed a lot less.

My sense is that President Bush and the Vice President and the Secretary of State, Secretary of Defense—maybe not the Secretary of State—look at September 11th as a confirmation of their view of the world which is that it is an extraordinarily dangerous world out there full of bad characters and evil people, axis of evil as they are now called by the President. And what September 11th drove home is how bad that can be and how dangerous it can be. They had run the campaign and they had run the first nine months of the presidency warning about the bad people and the bad things that are out there, the dangers whether it be missiles or weapons of mass destruction or indeed terrorism, and then on September 11th we saw it on CNN if not in our own personal lives in a way that could not more dramatically confirm that view than was the case before.

And in that sense their response to September 11th was rather similar to their response and foreign policy inclinations beforehand, which was to get as much support for their particular course of action, to be the hub in the wheel and get the allies and others to be the spokes, to form the kind of coalitions that Mike Armacost and Jim Lindsay talked about, but to be driven and very clearly motivated in a particular direction. Not to submit yourself to institutions or multilateral constraints on your behavior because the interests were clear and the need was evident.

I'd add though that I think one of the more interesting parts about yesterday's speech was the last fifth of the speech which was about foreign policy in general and really talked about a foreign policy that was very different than we had heard from this President before. It was a foreign policy that talked about American values and the need to promote those values, to secure them in other places, to respect women, the rule of law, religious tolerance, etc. Making part one of the means to that end the new notion of a Freedom Corps where you have volunteers in the United States becoming part of spreading the message, educating other people. That's a very different kind of foreign policy, more Powellesque in fact, and maybe that's the explanation. Powell lost the first part of the speech but got the second part of the foreign policy speech.

MR. MANN: That was a bureaucratic tack. (Laughter)

MR. DAALDER: Everybody knows how the State of the Union get together. That's usually how it happens.

It was a different part of the speech. And I think if you can start and he starts combining these two aspects in the future, the hard-nosed realist view with regard to dealing with those who would do us harm, while at the same time the more liberal, value-based notion in order to try to minimize the possibility of terrorists and others to sprout around the world, I think we've got a really strong and very good and sensible road ahead.

MR. MANN: Are there reasons to believe that the second, the end part of that speech mark a real departure? That it was not rhetorical flourish but reflected a real genuine shift?

MR. DAALDER: I think we'll know on February 4th. February 4th we'll get the budget. If the budget shows, which it will, a big increase on defense and a big increase for bombs, a big increase for homeland defense, a big increase for barriers, and no increase for foreign aid or other expenditures towards that to support diplomacy, we know we have a foreign policy of rhetoric, a slogan, and not necessarily of reality.

But if we see a big increase on the money necessary to make that other part of the foreign policy work then in fact you have the resources and the commitment in the budget as well as in the policy to start making this real.

MR. MANN: Don't we know from budget leaks that the Administration has parted company with Tony Blair on a major financial investment?

MR. LINDSAY: Ivo's always an optimist.

MR. DAALDER: There is between now and February 4th, I can't count the number of days, what is it, six days or five days, and there's always change possible.

MR. MANN: I would invite questions from the audience on foreign policy.

While you're thinking, Jim, do you attach the same significance as Ivo does to the second half of the foreign policy speech?

MR. LINDSAY: I always agree with Ivo. That's the rule. (Laughter)

I think the reality is it is very easy to get up and say all the good things, but at the end of the day what are you actually going to do to bring them about? I think if there's one criticism I would have of Bush foreign policy, it has been very insistent in describing threats that exist out there. It hasn't been quite as good at talking about the opportunities that exist beyond America's border to build a better wall. And I would hope that not just the President but also the Secretary of State could bring more attention to that issue. But I think that if American foreign policy simply is about bombs and barriers, that we are going to be fighting this war against terrorism for an exceedingly long time.

MR. MANN: In his remarks Mike suggested that the charge of unilateralism was really a bit of a caricature. That wasn't your word but I think a sentiment in that since 9/11 we've seen the extent to which it didn't reflect the basic orientation and instincts of the Administration. I think it's probably also fair to say that if we visited European capitals now they'd be sensing, not just because of the speech last night, but the Administration's position on the Geneva Convention and Guantanamo, that in fact the basic orientation that we do what we have to do and if you're sensible you'll come along has been there and is likely to persist. Would you agree or disagree?

MR. DAALDER: I'd agree. I guess the way I would characterize it, for most of the rest of the world multilateralism a la carte is unilateralism by another name. That is from their perspective what they're looking for is an American commitment to be constrained, to be part of an international, set of international norms, rules, treaties, institutions that on the one hand spread the burden but on the other hand also involve a sense of reciprocity, a sense of being constrained in one's behavior. There are certain things you may want to do but don't because of the consequences of doing so, as we are learning right now with respect to the Geneva Convention. Why is it, not surprisingly, that it is the Joint Chiefs of Staff and the Secretary of State who say wait a minute. Our guys can be in fact taken prisoner and we want them to have the same kind of rights that we have signed up on. That's the kind of reciprocity that Europeans would tend to stress more than Americans. But so far in large measure what you see is a foreign policy of a clear vision and the choice is up to others. Are you with us or are you against us? You can choose, but we're not going to change our behavior.

MR. LINDSAY: A point here that gets back actually to the question you asked Ivo in terms of the continuity of the Administration. I think this Administration sees the events of the past year, not just events after September 11th but before that, a confirmation as to world view, particularly dealing with our allies. I think there's a very strong sense among many members of the Administration that if we lead others will follow, and a tendency not to get anguished over the fact that our allies are complaining. Indeed, almost defensive regarding Europeans, much in the same way that parents regard children who complain about being told to get in the car to go to the store. You simply say end of discussion, get in the car.

I think what they would argue is that throughout the past year that wisdom's been proven.

Let's go back a year ago. The notion was this Administration can do a number of things that would just [up] the apple cart that would be unacceptable. And the Administration went out and actually touched those third rails, whether it was Kyoto or the Biological Weapons Protocol or the agreement on small arms, the ABM Treaty most significantly. The Administration was willing to pay that price and it said yes, they're going to complain but when we need them they'll be there. This is just all atmospherics, don't worry about it. Indeed, September 11th demonstrated that. If they were willing to be tough, set the pace, others will come rally around.

The real question is, and I think this is one the Europeans are getting right now is, what are the long term costs of that policy of sort of pushing people where they don't want to go? Because there is a very real danger that the perception of American arrogance actually has a corrosive effect not in the short term, but in the long term. In lots of other issues that you don't normally think about you can have spill-over effects whether it's trade or other things. A very interesting dynamic to watch, not in the months to come but in the years to come.

MR. MANN: Thank you. I am going to shift us to economic and social policy immediately, unless have a pressing foreign policy question.

Q: John Fortier, AEI.

I was wondering if Jim or Ivo could talk a little bit about why Iran was included in the axis of evil. Why it was identified so publicly? Not that it doesn't necessarily deserve the title, but that there have been some hopeful signs, Powell has been working with Iran. Has there been a real change of thinking about Iran? Is there a reason for identifying them so publicly?

MR. DAALDER: The President actually had chastised Iran I guess ten days ago or two weeks ago already. I think, clearly after September 11th there was the attempt to push the opening with Iran. There were a number of very positive movements. The Iranians continue to cooperate on rescuing pilots that might need rescue on their territory; they sounded the right tunes with regard to the war on terrorism in general; they were extremely cooperative as far as negotiations of the new government, but then a number of things happened. Most importantly is they started to become a problem in Western Afghanistan again. They started to play a different kind of game.

I hasten to add that I think every warlord in Afghanistan is playing a different game and that's part of our problem in Afghanistan.

Secondly, and most importantly, I think, was the shipment of arms to the Palestinian Authority which was both damaging in our relationship with Arafat but also with regard to Tehran.

Nevertheless, to be frank, I think it was a colossal mistake to put both Iran and more importantly even North Korea on that list of states which has basically boxed this Administration into a highly confrontational policy with regard to those two countries. Not allowing the possibility of a more diplomatic, a more engaging way of dealing with the threat that weapons of mass destruction pose.

In regard to the North Koreans, the President is going to Seoul in three weeks and he's just pulled the rug under Kim Dae-jung's feet for the second time. He did the same thing when Kim Dae-jung came here in March and denounced the North Koreans as Kim Dae-jung was really looking for us to engage with and reengage in the North, and now he's done it again hours after the South Koreans changed their cabinet in order to enable a reengagement with the North. It's a very interesting way of treating one's old ally.

MR. LINDSAY: A quick addendum to that. I think if you look at the three countries that are part of this axis of evil the President spoke about last night, personally I think Iran is the most dangerous. I also think it's the most difficult to deal with, which is why I think it is odd that it was singled out because the question is okay, and what do we do next? I haven't really heard any serious discussion particularly in this town about what it is you do with Iran beyond the policy that you already have.

Iran is, if you look at it in terms of politics, has a much more robust and institutionalized government than the one you have next door in Iraq. I think it's probably likely to prove to be fairly brittle. It's also a much larger country, has much larger military capability. It has also a lot more friends. So I'm perplexed as to okay, now we've put a marker down. What does that mean in terms of practical policy stuff? I think Ivo's quite right that engaging right now would seem to be off the table, but I don't know what the plan B is.

MR. MANN: George Bush campaigned for the presidency as a compassionate conservative. What has that meant in his first year in office and what should we anticipate under that rubric during 2002?

MS. SAWHILL: I think there were three things that happened in the first year that are relevant to that. The first and most important was he did very successfully promote his education agenda, and I'm sure Tom will have a lot more to say about that. That is the epitome of leaving no child behind, if we can successfully educate people and have a more accountable system with standards.

The second thing was the faith-based initiative which was to some extent the embodiment of compassionate conservatism and meant to be the most concrete manifestation of the government's commitment.

That has been sidetracked. It was very strongly criticized from both the right and the left for somewhat different reasons. There is a stripped down version of a bill in the Senate now that Rick Santorum and Joe Lieberman are trying to work on, but that whole discussion about faith-based initiatives was only lightly touched on in the State of the Union and I thought it was interesting that we sort of secularized that whole discussion now in talking about the new culture of responsibility. What are we talking about? We're not talking just about the faith-based any more, we're talking about Americorps and the Peace Corps and the new USA Freedom Corps or whatever it's called and that's a much more governmental, traditional way of dealing with volunteerism that goes way beyond the faith-based. The details remain to be seen on all of that, what kind of resources will be behind it, but I thought it was one of the most interesting and in fact rhetorically at least uplifting part of the speech.

Many people have said 9/11 was a wakeup call for Americans thinking more about what they can do for their country instead of the other way around, and they wanted their leaders to ask for sacrifice. Now we're being told we should devote 4,000 hours or two years of our time to some kind of community service.

Now personally I would have liked it if in addition to being asked to donate some time we had been asked to donate some money. Imagine if we had each been asked to contribute one percent of our total income to this effort to combat terrorism, that would produce roughly $80 billion a year which would be enough to, as it happens, offset all of the fiscal 2003 budget deficit. Obviously that's a little gimmicky, but the point is we gave away so much money as part of last year's tax bill that we're now being asked to give in time and not being asked to give in money and I'm not sure we can do it all through volunteer efforts. We need professional efforts to solve a lot of the problems that are out there and I'm not sure that as much as citizens might want to volunteer their time, we can't solve all of our domestic problems with that just voluntary effort.

MR. MANN: Belle, just looking ahead for a moment to 2002, do you expect the reauthorization of the Welfare Reform Bill, the [TANF], to be a major focus of the President's attention this year? And will his approach to that fit within the rubric of compassionate conservatism?

MS. SAWHILL: I'm sure it will be an issue this year and I'm sure the White House will give some attention to it. I'm not sure how much. Welfare was reformed in 1996 and it has to be revised or reauthorized this year. The good news here is that welfare reform has been much more successful than most people thought it would be. Caseloads are down, poverty rates are down, most mothers leaving welfare are working with the help of various kinds of support like the earned income tax credit, food stamps and other things. They're even moving out of poverty in unprecedented numbers.

Now the numbers we have on all of that are only through 2000. If you look at 2001, caseloads are beginning to rise again. The unemployment rate of women maintaining families, many of whom are these welfare leavers, has gone from five percent to eight percent. So what worked in an economy in which the unemployment rate for this group was five percent may not work as well in an economy where the unemployment rate for this group is eight percent and heading higher. But yes, it will be an issue this year.

There's a bill that's already been introduced by the Democrats in the House that will make poverty reduction a goal rather than just reducing caseloads and reducing dependency which is what the President talked about in his speech last night.

It will restore some benefits to immigrants which the White House is also talking about, interestingly enough. It proposes to spend a lot more money on child care. I think child care may be a sleeper issue here. In his laundry list of domestic programs last night it was one area that the President didn't talk about, and there is a middle class constituency, not just a low income issue with respect to child care.

MR. MANN: Tom, Belle mentioned the education bill. Certainly the President considers the passage of that legislation as a signal accomplishment of his presidency. Is it? And what difference do we expect it to make in educational performance?

MR. TOM LOVELESS: Well it's a great political victory. There's no way around that. There's no question about that. Will it make a big difference? In 20 years will we look back and say boy, that was the legislation that really turned the tide? No. We won't.

This country still is a country in which state and local governments rule the roost when it comes to education and just to give you an idea, the budget of the Department of Education over the last five years has doubled, and that's really extraordinary, especially this President's party, as you know, a mainstay of its policy was to abolish that department and yet we're now pouring a lot of money into schools from the federal level. But even with that it's barely moving the needle on the percentage of total funding that comes from federal revenue. The percentage was about 6.6 percent five years ago, and now it's up in the mid eight's, it's like 8.5 percent.

So state and local governments are still where the action is. If state and local governments respond favorably to this legislation then I think we can see some continued progress, but otherwise we won't.

The other aspect of this bill, and this also is often true of federal policy in education. The federal government is very much like the guy who comes to the New Year's party at about 3:00 a.m. and opens up the door and yells Happy New Year. The main accountability measures in the law the states have already been doing since the 1980s. In the 1980s and 1990s most of the states in the country have already been doing the two main things. For instance, this law mandates testing. Forty-nine states have testing. Now true, they don't have testing in grades three through eight, some of them will have to be adding testing at certain grade levels, but they have testing in some grade levels.

This law mandates school report cards where schools report how they're doing in various subject matters with kids and how much kids are learning. Forty-five states have school report cards.

The accountability measures in the legislation allow the states control over defining what adequate progress is and also in terms of enforcing the provisions of the Act. The Act says that if a school fails states will be setting these standards on what is determined to be success in terms of progress, and if a school fails to meet that standard in two consecutive years children in that school are allowed to transfer out of public schools. Quite a few states already allow that, but this will be new in some areas. After three years the parents are given some funds to hire tutors. After five years the school can be reconstituted. So after five straight years of failure the schools can be reconstituted which may mean move out the staff and the principal and bring in new people. And again, a lot of states have done this too, with mixed success.

So in a substantive sense, no. This bill is not going to revolutionize American education. But in a political sense it's really a tremendous victory for the President.

MR. MANN: Are there actually any disincentives in the bill? Did it pass the standard "first do no harm"? Are there any sort of perverse incentives that could lead some schools to low ball, states to low ball standards?

MR. LOVELESS: No, and again that would not be because of this bill. I think it does pass the standard of doing no harm. If anything, this legislation will help, it will provide perhaps some political cover in some local districts where school boards are under fire because they have tough standards and they start failing kids.

By the way, this doesn't happen very often. There's an awful lot of talk about rigorous standards. The standards have a way of being watered down once the rubber meets the road. This bill might provide a little political cover in the sense that Governors and state legislatures and local school boards can say well the federal government's making us do this. But that's doubtful.

MR. MANN: What about the provision of targeting of more of the federal resources for poor schools and districts? Is that a consequential shift in the allocation of resources? And is it likely to make any difference?

MR. LOVELESS: That actually has been the mainstay of federal policy since 1965. The Elementary, Secondary Education Act of 1965 have major programs in that as Title I which already tries to direct funds to disadvantaged children, to poor children. Now they fiddle with the formula and exactly how that money gets channeled, and there might be a marginal change in the percentage that actually goes to schools with predominantly poor populations, but overall it's what the federal government's been trying to do since 1965. There's no monumental shift there.

MR. MANN: Peter, I remember Lyndon Johnson in the era of the Great Society and the Vietnam War said we can have guns and butter. Last night I heard our President say we can have guns and tax cuts.

The question to you is, did the President's tax cut last spring help or hurt the economy or didn't it really make any difference? And secondly, is the return to budget deficits likely to prove temporary as he suggested last night, or permanent?

MR. ORSZAG: Let me answer the second question first. He actually was very careful. He said that deficits will be temporary as long as Congress restrains spending. The question is what the likelihood is of those restraints, and the assumed restraints.

If you look at the CBO projections the answer to your question on how long the deficit will last depends on how you define a deficit. If you define a deficit as the entire budget being a deficit, the answer is that it looks like perhaps they will only last a couple of years and we will return to surpluses in the budget as a whole thereafter.

But if you define a deficit as being a deficit outside of Social Security, carving out the Social Security surplus, the answer there is we're looking again at deficits as far as the eye can see. Even under the official CBO projections those deficits last until 2010 and add up to about $750 billion. Those official projections are unduly optimistic because they assume no farm bill, they assume that the tax cut actually funds us in 2010, they assume that we don't extend the tax extenders that normally are extended each year. They assume no increase in defense and homeland security, etc., etc., etc.

So you're looking at very large deficits outside of Social Security that will last for an extended period of time. Some possibility that the budget as a whole will move back into surplus in a few years, although even that is uncertain.

The answer to your first question, I think you were asking what the impact of the tax cuts were on the economy today.

MR. MANN: I'm asking both on the economy now and if we have any sense of its longer term impact.

MR. ORSZAG: Let me answer the short run effects first. There are both positive and negative effects. The positive effect is that the tax cuts that are already in place have put cash in consumers' hands and that's a good thing especially given the economic downturn. Unfortunately the evidence suggests that that positive effect has been relatively small.

For example, the rebates that went out last fall, it looks like much less of them were spent rather than saved, even relative to the rebates that went out in 1975. So there might be a small positive effect from that but it unfortunately looks like it was quite modest.

On the negative side the tax cut has diminished the amount of debt that we'll be able to pay down and that raises long term interest rates. In fact the major macroeconomic models suggest that the tax cut as a whole may be keeping interest rates between a half a percentage point and a full percentage point higher than it would otherwise be and that's a negative for the economy today. When you weigh the two together it's a pretty close call. My opinion is if anything it might be a little bit negative but it's not a big deal one way or the other.

What I would say, however, is the tax cuts that haven't yet taken effect, those that occur in 2004, 2006, thereafter, those are having a negative effect on the economy today. The reason is that they do raise long term interest rates, that harms the economy today. But there's no offsetting positive effect from putting more cash in people's hands today.

Evidence suggests that people do not spend tax cuts prospectively. To get people to spend you can't just show them the money, you actually have to give it to them. So there's no positive offset, there's just a somewhat negative effect from that.

Turning to the long term which is in my opinion a much more important factor, all of this short run stuff is pretty modest. The real cost of the tax cut is the fiscal deterioration that it embodies. Over the ten year period as a whole, looking at the budget surpluses over the next ten years, the tax cut is the single largest factor explaining the deterioration that we've witnessed over the past year. So it's important to distinguish between the causes of the deterioration in the budget for 2002 and 2003 versus the longer term deterioration that we've also seen. For that longer term the tax cut accounts for 41 percent of the reduction of $4 trillion in the budget surpluses that are projected. That's the real cost. That reduction means that we're not, that national saving is not as high as it would be and that means that workers in the future will not have as much equipment and productive capital to work with. That's the real longer term cost.

The Congressional Budget Office has tried to evaluate the impact of the tax cut on the economy in the long term and decided that it couldn't even decide whether it was positive or negative because on the one hand you have reduced marginal tax rates and that may get people to work harder. On the other hand you have reduced national savings and that hurts the economy. The net effect looks like it's pretty small.

A final point, regardless of what the effects are in the economy in the short run or the long run, it does put a lot of pressure on the budget. One way of trying to encapsulate that is that the cost of the tax cut, assuming all the fund cites are removed and this is a debatable point, but assuming all the fund cites are removed, amounts to well more than the projected deficit in Social Security which is often perceived as being quite large. The tax cuts as a whole amount to about 1.5 percent of GDP over the next 75 years; the Social Security deficit is about half of that over the next 75 years. That may be one way of grasping the magnitudes involved.

MR. MANN: Let me pick up on that. The President in his campaign also identified the modernization of Medicare and Social Security, putting it on a stable basis and providing some form of partial privatization as high priority. Has the deterioration of the overall budget situation basically moved one or both of those completely off the agenda?

MR. ORSZAG: I'll put it like this and defer to Bill on this because he served on the Social Security Commission, but in my opinion it has. I think that the tax cut has impeded the ability to get individual accounts through the Congress or popularly acceptable. The three plans that the Commission came out with all would involve some form of general revenue, or revenue outside of Social Security. I think that kind of approach which may be viable politically is more viable if there is, if we're not running deficits outside of Social Security. If there's a surplus. It's much less viable if there are deficits outside of Social Security as we're now suggesting.

MR. MANN: Bill, would you pick up on that?

MR. FRENZEL: I have no complaint with that analysis. Obviously any change in Social Security is going to require funds outside of the system, at least for the transition. Obviously if there are more there it's going to be easier to do. It's pretty simple.

MR. MANN: What about Medicare? Here we face the prospect of actually increasing payments to providers as recommended by the Commission. We have a withdrawal of HMOs from the Medicare system suggesting those payments are going to have to go up, and we have really substantial demands for and political consensus built around adding a prescription drug benefit to say nothing of other forms of modernization.

What amount of money do we expect to be available in the President's budget? And is it enough to make any progress toward those goals?

MR. LOVELESS: Well, the President has indicated that, or the Administration has indicated his budget will include a prescription drug benefit with about $190 billion allocated for that purpose over the next ten years. Most—

VOICE: (inaudible)

MR. LOVELESS: Primarily for low income beneficiaries. Most analysts believe that is much too little money to provide the type of drug benefit that people expect. And even apart from that you have to remember that Medicare faces much more severe problems than Social Security in terms of the increase in spending that's projected because it's not only an aging population as under Social Security, but also the fact that health care costs tend to rise faster than general prices in the economy.

So we've got this short run debate over prescription drugs which as you noted would actually make the situation worse unless we somehow paid for it outside of the Medicare system, but over the longer term we have a very severe challenge facing us, in some sense more severe than Social Security, at least in terms of the increase in Medicare payments as a percentage of GDP that are projected.

MR. MANN: I'm going to turn to the audience in a minute. I'd like to pose questions that come from our Web audience.

How has the Administration's approach to trade policy changed in the period following the September 11 attacks? Ivo, Jim, Bill?

MR. LINDSAY: I don't think it's changed at all. I think if anything what clearly Bob Zoellick attempted to do was to tie the debate over so-called trade promotion authority which is the procedural device which limits Congress' ability to change trade deals once the President strikes them, has argued that's part of the war against terrorism, that we had to do it, and that he raised in the effort to persuade the House. But ultimately they managed to get the House to approve a trade promotion authority bill largely with a lot of broad-knuckled politics and arm twisting to get the necessary number of votes. There was one vote to spare. And did it largely by really putting some political pressure on people, representatives, Republican representatives from South Carolina and North Carolina, big textile places there. There was a fear they would be hurt under any new trade bill.

MR. MANN: Bill, do you want to add to that?

MR. FRENZEL: When the United States is leading the world and its citizens believe in that leadership, there is always an inclination in Congress to give the President a little more rope in whatever he is doing offshore. 1994 when, sorry, in '93 when Bill Clinton got the NAFTA agreement ratified by the Congress—

MR. MANN: With your help?

MR. FRENZEL: —in the House of Representatives where the battle was the most difficult, there were not as many as half a dozen but more than three Republican votes that said we do not want our President to go to Seattle tomorrow to the APEC meeting and look like he's been repudiated. We like him to look strong in that international forum. There may have been some of that at work in the TPA vote in the House this year. I know Congressmen think about that.

MR. MANN: Let me just ask you to look ahead a couple of weeks or months on this. The Senate will approve a TPA but I gather it could well approve a different TPA requiring a conference and then a return for another House vote. Since there was one absent Democratic member out at Walter Reed Hospital who would have voted no, the Republicans will have to come up with another vote and the pressure on those that felt squeezed will no doubt intensify.

Do we assume though that having achieved that initial victory in the House that one way or another it will be done?

MR. LINDSAY: I certainly think it's the White House's intent to make sure it's done. I think the question is going to probably be how high a price are they going to have to pay. But they do have a problem in that some people they were able to persuade with heavy moral [persuasion] and other things to vote with them, went back to their districts and got an earful from their constituents. And as Bill well knows, this is an election year and it's one thing that Representatives do in election years in particular is listening to what it is that their very interested constituents have to say. And I imagine you will probably see some defectors, and my guess is the White House is now trying to figure out if you get some defectors who are going to be people that you're going to get to switched sides to compensate?

MR. FRENZEL: It's a very difficult problem. Daschle has insisted that the bill go forward from the Senate with a fairly heavy larding of TAA in it, which is okay because some Democrat members of the House would think that's better. They won't think it's better enough for them to vote for it. Some Republican members of the House will think it's much over done.

It's going to be an enormously difficult thing to pass but I'm in agreement with my colleagues. Sometimes these things just have to pass and the votes are found somewhere.

MR. MANN: The context in environment more broadly is difficult, but would you say that Bob Zoellick is—however messy it's looked along the way both in getting agreement on the next round as well as moving TPA through the House, that basically it's one of the areas of achievement in the Bush Administration.

MR. FRENZEL: That's my conclusion. He's been extraordinary, I believe.

MR. LINDSAY: The jury's still out. It's going to be a very tough row for him to hoe. Even once they get the authority, then you have to go out and actually negotiate with other countries. This game has many many many more iterations to play. But certainly they're still playing which is from their point of view a good thing.

MR. MANN: But of course that's a generalization that can apply to the whole topic of our discussions today. A somewhat artificial taking a reading at one year or after the first full State of the Union speech, ultimately the campaign against terror, the broader foreign policy initiatives, issues regarding the economy in the short term and the budget in the long term will be resolved many months if not years from now. This is just a status report.

But on that matter I would be happy to invite questions. Yes, sir. Right here.

Q: My name is Robert Nichols from the ABMA.

Apart from political or philosophical considerations are there any economic advantages to a tax cut aimed towards the wealthiest Americans versus a tax cut aimed more towards the middle class?

MR. ORSZAG: You didn't ask about the disadvantages so I'll just give the advantages. (Laughter) I think the advantage is that there is some evidence suggesting that the highest income tax payers are the more responsive to marginal tax rates, so that if you are trying to get the biggest gain in terms of in the long run additional work effort, concentrating on reducing marginal tax rates for the highest income workers could have some justification for it.

How high those responsiveness or elasticities are is the subject of much debate and I actually, my reading of the literature suggests that they're not so high. So that while there may be some benefit there there are other costs that are outweighed.

Q: Can you also comment on disadvantages?

VOICE: Sure. (Laughter)

MR. MANN: I'm glad you asked me that question.

MR. ORSZAG: I'm glad you asked me that question. There are several disadvantages. First, you have to remember that we've experienced a very dramatic increase in income inequality in the United States over the past several decades. The tax code is one form of pushing against that expansion inequality, and by cutting tax rates substantially at the top end of the income distribution you are exacerbating those income inequality trends.

In addition, you're talking about a lot of money. There's an overall budget effect.

Finally, a lot of the highest marginal tax rates, as the President himself has emphasized, apply to lower income taxpayers who face the phase-out of foodstamps and other benefits, who also face the phase-out of the earned income tax credit. So if you're really interested in addressing marginal tax rates you wouldn't look just at the very high end.

Finally I would note, again, we face a long term budget challenge. When you look out there the next decade or so, we're looking at very significant fiscal gaps. The argument that we should reduce taxes even if you get some additional work effort now in exchange for raising taxes in the future in order to address those fiscal gaps, is problematic even from an economic theoretical perspective. It's not clear we should be cutting rates now and then having to raise rates even more in the future.

MS. SAWHILL: Can I add to this?

MR. MANN: Sure.

MS. SAWHILL: I think there's a political dimension to this and I've been looking at some of the polling data on how people feel when asked the question what do you think about this increasing income inequality. And two-thirds of the American public now say they would like to do something about it. And when asked to self-identify as a have or a have not, one-third of the American public now considers themselves in the have not category, and that's double what it was 12 years ago.

So there's something going on here and I mention it in the context of the Enron debacle because I think the possible political implications of Enron are an increased sense on the part of the public that a free market form of capitalism, the kind embraced particularly by the current Administration, may be harmful to the little guy. The big guys make out all right and the little guys don't. I just wonder how all of this begins to come together. The Enron thing, the distribution of the tax cut, and the way the polls are going.

MR. MANN: It will be interesting to see if it has any effect. I'd say the evidence heretofore is that Americans in general prefer to deal with income inequality by moving people up from the bottom and middle rather than moving people on the top down. In fact most Americans like to think of themselves via the lottery or their entrepreneurial skills as moving up and they like the possibility of it. They're used to seeing it. That's why you get oftentimes broad support or eliminating the estate tax, even when it applies to a fraction of one percent of households. By God next year my ship's coming in.

So I do think that is part of the culture that works against this, but you're right, Belle, it would be interesting to see if in the fall-off from Enron, and we haven't talked about that, there are public policy dimensions to Enron that we might want to chat about. There are going to be some serious discussions and Paul, you might think about whether you want to say something about the SEC and the regulatory agencies and whether in fact in this era of deregulation we might be moving to re-regulate some aspects of our financial markets and the like. Bill?

MR. FRENZEL: I wanted to get back to the tax cuts and the income inequality. One of the wonderful things about income inequality in the United States is that they're different people and the universe is always mixed. So it isn't just that there's the same group sitting at the top of the heap. Look around a couple of years later and it's a different group.

With respect to tax cuts. I think it's fair to describe that the American people are not unhappy with tax cuts and that it is a fairly powerful political instinct, and that there are a lot of economists that see more advantages than Peter sees in the tax cuts.

As for myself, I got my 600 bucks. I looked at it, a little embarrassed that it was all the government could afford. (Laughter)

MR. MANN: I suspect we could have a lively debate here about public opinion and tax cuts and impacts. I'm tempted to dive in, but I know Paul wants to address the question I left him with.

MR. LIGHT: I don't know what's going to happen with the Enron scandal. To me right now it's a tropical depression kind of brewing out there and there's not quite enough there yet to drive it into a really damaging political scandal for this Administration.

There are two or three things that could take it that direction. One is if we found out that the Administration knew about the collapse so much earlier than the rest of the country and that it might have warned, it might have done something either through the SEC or through the pension guarantee or that it just had knowledge so early that it acted irresponsibly in not warning everybody else including the President's mother-in-law. I didn't take the fact that his mother-in-law lost money as a sign of anything except that it was his mother-in-law. Now if his mother lost money— (Laughter) Then I'm thinking—

At any rate, enough of that joke.

The second thing is if somebody actually did do something. I mean we know that Dick Cheney did, and the Administration did, try to promote this project in India. The argument has been back well all administrations promote industries.

I was reminded during the playoffs of the Dan Merino commercial a few years ago for Isotoner gloves where he said, "I take care of the hands that take care of me." And I think that would be the slogan here for how Administrations behave. They took care of Enron because Enron took care of them and administrations choose industries to favor because of political connections. Just as the Clinton administration worked so hard to protect Hollywood from piracy and china of tapes and so forth. So if we find out that somebody did actually pick up the phone and actually did try to intervene that is one tremendous accelerator of this issue.

I guess the third issue would be — depending on sort of the intricacies and the webs of campaign finance, and you are the real expert there. The fact that our Attorney General recused himself. There's a wonderful column in the Post today about reporters who were involved with Enron. It's really a nasty business when you see how deeply this money penetrated our political system. And perhaps there is something there. This is still a story out there. I think if I were becoming a CPA, I'd be getting a little bit of coaching on sort of political management, wouldn't you? I mean maybe we should start offering courses for certified public accountants— (Laughter)

VOICE: Get a law degree first.

MR. LIGHT: Yeah. You've got to feel badly for all the accountants in the United States who now know that they could be coming before Congress sooner or later.

MR. MANN: This gentleman right here. We are nearing the end of our session. Please identify yourself.

Q: I'm John Workman, with COSA.

There was some discussion in the first session about staffing of the Bush White House. Political jargon has it that Andy Card and Nick Calio might want to leave the White House soon. Obviously these are two very key people. What would that do to the President's White House?

MR. HESS: If that question is for me I refuse to answer on the grounds that I don't know anything about it. I don't know. Why would I speculate on which one would leave or another who would replace them. I would say that Card has been quite a remarkable Chief of Staff. The history of Chiefs of Staff is a very spotted one, as you know, and they tend to often get in a lot of trouble, be very counterproductive and so forth.

This is a man who seems to have just the right touch, and I would assume that his loss would be felt. Yet on the other hand someone may come up and take his place and understand as well as he what the appropriate role should be.

The question of the congressional aide is not of the same importance. This is a city full of people who move back and forth between the Executive and the Congress, who are very skilled, and those who have great contacts, and the Administration's congressional person has generally done a good job. It's quite remarkable that when there were five major pieces of legislation that the President proposed in his campaign, and two of them have been passed in the first year, particularly the question of a tax bill, that usually has the gestation period of an elephant, and yet in three months it was passed.

On the other hand, one would have to question his responsibility or his office's responsibility in not understanding the feelings of Jim Jeffords. If they knew, why didn't they do something about it? And in some ways that changed the whole legislative situation for the President in a very dramatic and negative way. I would say they should take some of the blame involved in that.

So in one case I would worry more than in another case. But again, I don't know if that rumor is true or who would actually come up and take their place.

MR. MANN: Would any of my colleagues like to offer any final observations? Or have you already told us more than you know? (Laughter)

Bill, did you—

MR. FRENZEL: I was going to comment on that question. It is that the Chief of Staff of the White House is, to my way of thinking, the critical operator. And to me the hallmark of a Chief of Staff is one who gets out of the way, who doesn't get his name in the paper, and simply allows some kind of reasonable access to the chief executive. I think Mr. Card has done, by all reports that I see, an awfully good job. And if he should move on, no matter how well he is replaced there's a break-in period and there's going to be a little dip in White House efficiency. I think it would not be a great thing for the way the White House operates if he were to move on.

I agree with Steve, there are a lot of capable people out there who can fill in, but it takes awhile to get up to speed. It also takes a certain kind of personality. In some ways a self-effacing personality to be a good Chief of Staff in the White House. They're not easy to find.