George W. Bush's 'Risky Scheme'
Jude Wanniski
May 16, 2000


To: Karl Rove, Bush campaign manager
From: Jude Wanniski
Re: Privatizing Social Security

It may not be a fatal error, but I do think you have to be careful with the way Governor Bush uses his idea of privatizing Social Security in his campaign for the White House. I’m sure your boss thinks it will demonstrate his willingness to be bold, even courageous, in tackling issues that traditionally have undercut Republican attempts at higher office -- and Social Security “reform” has been one of those. It’s called the “third-rail of politics,” because Social Security -- and Medicare -- has been the most popular government social program of the last 60 years. The fact that it is running an actuarial deficit of several trillion dollars means it is one that has to be dealt with seriously by any candidate for the President or congressional seats. The notion that you can do so by diverting funds away from government bonds into private equity markets -- which is at the heart of the Bush proposal -- will do nothing, I’m afraid, to cut into the actuarial deficit. All it will do is give Vice President Gore the opportunity to cast it as “a risky scheme” that will put Social Security in jeopardy as it benefits the already well-to-do. I would not be that hyperbolic, Mr. Rove, but I do believe Gore will score with that argument and when he confronts Bush in the debates this autumn, he will have arguments that will be hard to counter.

In 1996, you may recall, Gore knocked Jack Kemp all over the ring in their one debate. If you take the trouble to watch the debate, you will find that Kemp had no good response to the punches Gore threw at him over the “risky scheme” to cut income-tax rates by 15%. In fact, the scheme was a terrible one that Jack and the supply-siders had opposed BEFORE Bob Dole invited Jack onto the ticket. Kemp actually had made critical remarks of the flaws in the plan that he was then asked to defend. Because the academic economists who constructed the plan made some errors regarding the alternative minimum tax (ATM), the plan actually raised tax liabilities for several million middle-class taxpayers. Those same economists are now part of the Bush team. They are all nice fellows, but they have been error prone when it comes to translating their academic experience into practical political programs. Indeed, they are the same fellows who advised President Bush, which led to the Clinton presidency. In 1996, when Kemp agreed to go on the ticket, I did what I could to try to persuade the Dole folks to amend the tax plan -- telling them it would drag down the ticket. They decided it would cause more confusion than it was worth to make any suggestions, and that was that. Unfortunately, Kemp and the supply-siders got blamed for the Dole defeat anyway.

Because I know you are on good terms with Jack, I suggest you invite him to Austin for a discussion on how you can address the likely criticisms that will come at Bush as the campaign unfolds. So far, Kemp has publicly played the good soldier for you guys, endorsing the SSI initiative and the Bush tax cuts, although they are far from what he would actually recommend in private, I believe. Unless you take care of this now, it will seem like panic time if you wait until October to make some necessary adjustments. The electorate knows the system has to be “fixed,” but it will not be persuaded by any plan that does not confront the actuarial deficit. Only economic growth can accomplish that, economic growth that adds dramatically to the capital base available to the work force. You cannot do that unless you lower the 20% capital gains tax, though, which your economic advisors do not want to do. The candidate himself will have to figure a way out of that corner. The good news for you is that Vice President Gore’s “solution” will not work either, as it merely closes the actuarial deficit with general revenues and no greater capital formation that the economy can produce under the current tax system. You can make the adjustments, I think, but not if you wait until the last minute. I append a column that appeared in by Llewellyn Rockwell, Jr., on May 4, which addresses this same issue in a different way.