Now What?

So it's to be four more years of George W. Bush, to the consternation of most of Europe's politicians and Britain's chattering classes, but to the apparent glee of investors and traders. If Bush and his fans needed any frosting on the cake it came with soaring share prices during the week, and Friday's report that the economy had added 337,000 jobs in October.

These endorsements by the voters and the markets will take on added significance when it becomes clear that America's voters may have reinstalled a social conservative in the White House, but they have also reelected a man with the most radical economic agenda of any president since Franklin D. Roosevelt created America's welfare-regulatory state.

On the broadest level, Bush plans to tip policy away from government programs and towards greater reliance on the individual. Not that he will try to dismantle the welfare state: neoconservatives long ago made their peace with social security, Medicaid and Medicare. Rather, Bush has acknowledged that government has reached the limits of its ability to fund these increasingly costly programs without raising taxes. And that he is not prepared to do.

So he will press for the partial privatization of social security, with individuals allowed to divert some of the funds that have been headed to the Treasury into higher-earning private investment accounts. And instead of expanding government spending on and control of health care, he will urge congress to allow individuals to create tax-advantaged health savings accounts to be used to cover medical costs. Individual control, rather than expanded government, is what this radical president has in mind for America.

The next radical move will be a major revision of the international economic institutions. Bush knows that the existing institutions, such as the Eurocentric and corrupt UN, were created over half a century ago when the world was a very different place. He knows, too, that the U.S. trade deficit, now running at 5.4% of GDP, cannot be sustained, and that the protectionist nostrums that John Kerry and John Edwards flirted with during the campaign are not the answer.

The solution requires a radical reorienting -- no pun intended -- of international economic policy. The first step on the road to reform passed almost unnoticed during the clamorous campaign: China was invited to the wining-and dining that surrounded the October meeting of the finance ministers of the leading industrial nations in Washington. The end-game is to expand the G-8 to reduce the importance of the moribund economies of Europe by including the burgeoning economies of China, India and Brazil at the top table of decision-makers.

The price China will be asked to pay for further integration into the global economy will be an agreement to allow its currency to appreciate against the dollar. Bush's team knows that in order to make imports more expensive and exports more competitive an orderly devaluation of the dollar is needed. Economists Maurice Obstfeld and Kenneth Rogoff estimate that if China persists in pegging its renminbi to the dollar, a 30% decline against other currencies would shrink America's current-account deficit by 1.4 percentage points of GDP, leaving it still at a non-trivial 4% of GDP.

Only if China allows the renminbi to appreciate against the dollar will the effect of such a major devaluation -- on the order of the decline when Ronald Reagan was in the White House -- cut the trade deficit to a sustainable level. Besides, if China's policy remains unchanged in the face of a dollar that has already fallen to an all-time low against the euro, euroland will bear the brunt of the dollar's revaluation. That will be a blow to the export industries of euroland and the UK, and increase the competitiveness of Chinese goods in those countries.

Bush's radicalism will not stop there. A major overhaul of its tax system is in America's future. It has long been a goal of neoconservatives to shift the tax burden from income and investment to consumption. Although a national VAT-style sales tax is not in the cards, the president should be able to persuade the Republican congress to renew and extend his low, 15% tax rate on dividends, and his cuts in the capital gains tax rate.

Which will leave open the question of just how Bush plans to keep his campaign promise to cut the federal deficit in half during his second term. Economic growth will do part of the job by generating more tax revenues, but only part. Watch this space for further news about this and such unanswered questions as to just how the president plans to use his new political muscle to curb Americans' appetite for imported oil, unless he suddenly accepts the need to tax gasoline and other oil products.

Finally, Bush will have to decide how to staff his new administration. Early on, he replaced the radical economic team that crafted his recession-averting tax plan with a more staid, less imaginative crowd that first included the egregious Paul O'Neill and then the pedestrian John Snow at the Treasury. He now needs folks with a bit more imagination. Most important will be his selection of a successor to Alan Greenspan as chairman of the Federal Reserve Board. Leading candidates include R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers, Harvard's Martin Feldstein, and John Taylor, the Stanford economist now on secondment to the Treasury.

Feldstein is widely regarded as the best of that trio, but there is some talk that the president is considering turning the Fed over to Larry Lindsey, a former Fed, governor and the Bush economic adviser widely credited with predicting the slow-down that Bush faced early in his administration -- and the one who formulated the plan to fight it.

A version of this article appeared in the Sunday Times (London) on November 7, 2004.