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Where Is Our Economic Policy?

Chief executives say the Bush Administration lacks a viable strategy for U.S. competitiveness.

For President George W. Bush, the night of January 20, 2005, was one to remember. Nine gala balls were held around Washington, D.C., amid blazing fireworks in celebration of his second inauguration. Of the lot, the snazziest shindig was the Black Tie and Boots Ball, put on at the Marriott Wardman Park Hotel by the Texas

Society. Featuring exotic animals from Bush’s home state, including an armadillo and an alligator, the event was a fast sellout. By some accounts, tickets sold online at prices of up to $4,000 were gone in 40 minutes.

Corporate leaders greatly preferred Bush to Democrat John Kerry, but since federal laws prevented their companies from donating directly to the Bush campaign, funding the inauguration was one way to show gratitude. Companies lined up to bankroll the events: ExxonMobil gave $250,000 plus another $50,000 just for the Black Tie and Boots Ball, and Altria Group and Time Warner each supplied another $250,000.

Six months later, however, a quiet but stunning realization has crept in: It seems corporate leaders have serious doubts about Bush and his economic team in their second term. Although few chief executives will speak about the issue publicly, they worry that Bush continues to ignore critical issues while he spends time and political capital on more ideologically driven matters such as Social Security reform and building democracies around the world.

Left to languish are issues of equal or greater economic importance, such as America’s eroding competitiveness, a decline in R&D and work force education, and a slowdown in high technology efforts aimed at promoting broadband and the Internet. Bush’s economic policy team has also failed to address, at least to the satisfaction of CEOs, other serious issues such as the ballooning federal budget deficit, health cost burdens on companies and soaring energy prices.

“Bush seems to have been re-elected on the basis of the fear of terrorism, Iraq and overall security,” says one reader, who requested anonymity, in Chief Executive’s most recent CEO Confidence Index poll. “But we have the most unbalanced budget, a tax policy that favors the wealthy, declining public schools, a health care system in worsening condition, a trade imbalance with just about every country, oil prices at all-time highs [and] no real alternative energy or conservation plan.”

Asked to grade Bush’s economic policy, 593 respondents gave the president a grade point average of a C. The highest grade he received was a B- for his tax policies, but on other issues, the President received only passing marks (see report card, left).

At the same time, the magazine’s overall CEO Confidence Index witnessed its largest drop ever. The index fell 16.8 points to the lowest level since November 2003. Attitudes toward employment also deteriorated, indicating that no significant increase in hiring is foreseeable (see charts, page 32). Contributing to the doubtful climate in the corner office has been a burst of statistics that show slowing economic growth, weakening capital-goods orders, stock market declines and chaotic energy prices. At the same time, the Federal Reserve seems determined to keep raising interest rates, raising fears of “stagflation,” or stagnant growth and high inflation.

It’s difficult for chief executives to publicly disparage Bush because many depend on solid relations with the government agencies. Criticizing a sitting president isn’t exactly good for business. Also, the majority of chief executives polled are Republicans who support Bush overall; one respondent said he was “100 percent” behind Bush, while another called himself a “devoted Republican.”

Yet on economic issues, there remains a notable lack of support. “Republicans have forgotten their economic policy foundations,” one respondent wrote. “The loss of manufacturing to subsidized imports will turn us all into hairdressers and used car salesmen making no products, with no research and development.”

Who’s in Charge?
The blame for the business community’s queasiness rests with Bush’s economic brain trust. While former President Bill Clinton received raves for economic policy stars such as Goldman Sachs’ Robert Rubin and bright academics like Lawrence Summers, Bush’s economic policy team garners little such praise.

The titular head of Bush’s team is John Snow, the former CEO of the CSX rail company, toting a Ph.D. in economics. Regarded as an affable team player, Snow came onboard in 2003 after Bush fired Paul O’Neill, the outspoken former CEO of Alcoa, who ran afoul of the President’s inner sanctum. Another key post, the director of the National Council on Economics, is held by a relative newcomer, Allan Hubbard, a businessman and Bush backer from Indiana with limited Washington or economic policy experience. Observers note that Snow and Hubbard hail from mainstream business backgrounds rather than from economic think tanks or financial agencies. “Clearly,” says Diane C. Swonk, chief economist at Mesirow Financial in Chicago, “economists do not have the same role as they did in the early 1990s when a lot of crises hit.”

Bush’s current advisors draw fire for being more of a sales team than true long-term thinkers and policymakers. Policy is really formed, some say, by a trusted core of individuals, including Vice President Dick Cheney and advisor Karl Rove. In this view, the Treasury has been marginalized while Cheney and Rove keep Bush focused on issues such as Social Security. Says one survey respondent: “President Bush has been a major disappointment to the moderate conservatives who put him in office. He panders to the right wing of the party and calls it conservative policy. That is false.”

In an interview with Chief Executive, John Snow denied the Bush Administration was focusing too much on Social Security to the detriment of other issues. On energy, he says “we suffer from the fact that we haven’t had a real focus on energy policy for a long time.” But he asserts that Bush has sent serious proposals to Congress. Competitiveness and trade are top priorities, Snow argues, pointing to efforts to create a Central American Free Trade Agreement much like the current one with Mexico and Canada. The way to stay competitive, he says, is “using government powers to eliminate the impediments that get in the way of the good performance of the American economy.”

Social Security, Snow adds, is merely the first step in a long-range strategy to fix more nettlesome issues such as health care costs. “Social Security is the issue the President is taking to the American people this time because it’s much better understood,” he says. “It’s been studied every which way to Sunday. It’s all about demographics … all about the changing nature of the American work force, and it’s pretty straightforward.” Rising health care costs are “incredibly complex issues,” he adds. If the country can’t find the political will to deal with Social Security, “it’s going to be [nearly] impossible to find the political will with much more complicated issues [like] Medicare and Medicaid.”

Manufacturing At Risk
Part of the overarching problem, frustrated CEOs charge, is that the Bush team doesn’t seem to understand the broad economic challenges facing the U.S. His administration’s lockstep attachment to a simplistic version of free market principles has led to public statements some call gaffes. Asked about General Motor’s troubles in losing $1.1 billion in this year’s first quarter, Bush replied, “They’re going to have to learn to compete … with, say, the Japanese automobile manufacturers.” The statement stunned many U.S. automaker executives who are concerned that the industry’s very survival may be at stake and believe that some form of government action will be necessary.

Many manufacturers are, in fact, worried about their ability to survive in the face of competition from Japan and South Korea on the technology-intensive side and from China and India on the more labor-intensive side. After taking a beating from foreign competitors in the 1970s and 1980s, many manufacturers fought back. CEOs attacked bloated labor forces and antiquated ways of production, and new technologies enabled America to revitalize its automobile and electronics industries. The development of new services, particularly the Internet, turned global communications on its head, streamlined operations, provided better education for workers and made supply chains more efficient. As a result, prosperity was de rigueur for most of the 1990s, but today, particularly in the auto sector and related fields, the warm glow has long since faded as Toyota, Hyundai and others keep gaining on General Motors and Ford.

Responding to these competitive pressures has simply not been on Bush’s agenda, but business leaders do credit the President for introducing his 2003 tax cut program, which helped ease the recession of 2001. “I think the tax cuts were pretty beneficial to the economy,” says Dave Huether, chief economist at the National Association of Manufacturers in Washington. “We did a simulation of what would have happened without the cuts. The poor performance of 2001 would have continued into 2002 and you wouldn’t have seen a real recovery until 2003 or 2004.”

But Bush’s economic successes seem to begin and end with tax cuts. America’s global competitive position, meanwhile, seems to be eroding. China continues to gain enormous economic power as it exploits its cheap labor force and takes advantage of a fixed-rate currency exchange rate, although the Bush Administration’s mid-May decision to reimpose quotas on three textile categories imported from China is a hopeful sign that someone is paying attention. That said, the U.S. trade deficit with China grew last year to $162 billion, a 30.6 percent rise from 2003. Similarly, the U.S. trade deficit with Japan and Western Europe increased 14 percent. “I wish we had different people making economic policy,” says Peter Morici, an economist and professor of business at the University of Maryland.

India, likewise, is gathering strength as a major service center. Its software writers and call centers are gaining thousands of jobs at the expense of those in the U.S., with its level of service growing ever more sophisticated as Bangalore call centers move up from handling telephone directories to interpreting X-rays of American patients sent halfway around the world via the Internet.

Broadband Lagging
T hat’s why it’s not just manufacturers who are concerned about the Bush economic policy mix€¦quot;high technology leaders also are worried that the U.S. has lost the lead in Internet technology and broadband communications. Thomas Bleha, a former U.S. diplomat in Japan and author of a critical article about Bush’s telecommunications policies in Foreign Affairs magazine, says the initial success of the Internet was based on close collaboration between U.S. government and business.

The Pentagon’s Defense Advanced Research Projects Agency (DARPA) played a key role in developing the Internet during the late 1960s on through the 1970s, and in the 1980s, the National Science Foundation partially underwrote college networks. President Clinton further fueled the Internet boom with a series of laws, including the 1996 Telecommunications Act, and other e-commerce initiatives. Business did the rest.

Yet, access to and adoption of broadband technology have stalled under Bush. “President Bush showed no interest in broadband until right up to the election,” Bleha says. “He said he wanted broadband access for all Americans by 2007 and would offer tax incentives to [encourage] it, but since the election there hasn’t been a murmur about it.” Treasury Secretary Snow says the administration’s strategy to influence Internet and broadband is based on deregulating the telecommunications industry.

Other governments, by contrast, are bootstrapping broadband and leaving the U.S. in a cloud of dial-up dust. Japan and South Korea, Bleha notes, slowly created their respective Internet programs back in 1999 through government-inspired programs, and by mid-2003, more Japanese homes were equipped with broadband connectivity than in the U.S. What’s more, both Japan and Korea now boast broadband speeds as high as 40 megabits per second, compared to the meager 1.5 Mbps rate that’s typical for many U.S. broadband or digital subscriber lines.

Clearly, the potential consequences for the U.S. are serious. As Japan and South Korea move forward, they are certain to draw attention from China and India, which will likely adopt similar technologies and draw ever more outsourcing work from the U.S. India has already embraced high-speed broadband, and China is making plans in its large coastal cities and in the industrial Harbin area.

Other new technologies may also go wanting as Bush and Congress continue to cut programs. For example, the National Science Foundation’s budget has lost $100 million for 2005, and the Pentagon’s budget for basic science may be cut by 20 percent. In so doing, Bush has not heeded the findings of the bipartisan National Innovation Initiative committee, which is part of the Council on Competitiveness. The committee published a report in December 2004 arguing that the U.S. leadership position in innovation was seriously challenged. The innovation committee, which is chaired by IBM CEO Sam Palmisano and Georgia Institute of Technology President G. Wayne Clough, advocated more R&D spending, more manufacturing, improvements to the patent process, the creation of a better infrastructure, improved education and resolution of the Social Security and health care crises.

Weakening R&D has some CEOs worried. “I truly believe that if the U.S. is going to be a player in the world economy, R&D has to be a priority,” says Kellie Johnson, president and CEO of Ace Clearwater Enterprise, a Torrance, Calif.-based firm that makes metal parts for the aerospace and defense industries, including the Army’s Apache attack helicopter. Johnson says there must be more collaboration with government labs and that a tax credit for R&D due to expire at the end of this year needs to be made permanent. Instead, what she sees is a crescendo of research cuts.

A major reason for the cuts is the record budget deficit of $412 billion last year, which could rise to $450 billion this year as a result of lost revenue from tax cuts and spending for the wars in Afghanistan and Iraq. CEOs in the Confidence Index survey repeatedly noted concern about the budget deficits and the overall U.S. debt, which is nearly $7.8 trillion and growing. “Fiscal policy is hurt by the lack of fiscal restraint,” said one CEO survey respondent. Another wrote: “Bush’s huge federal deficits, unjustified tax cuts, unfunded education programs, wrong approach to Social Security €˜reform’ and other fiscal actions have created a mess that will haunt the country for a long time.”

Energy Vacuum
Another drag on the economy, which showed its slowest rate of GDP growth in two years during this year’s first quarter, is energy prices. So far, Bush’s proposals to ease high prices have been to build new refineries on abandoned military bases and to build more nuclear plants in general. But cars don’t run on nuclear fuel, and while Bush has called for tax credits for buyers of high-mileage, gas-hybrid cars, there have been no inducements for car manufacturers to move toward more fuel-efficient models, thereby maintaining€¦quot;rather than reducing€¦quot;U.S. dependence on foreign oil.

Critics say Bush’s proposals are basically concessions to the oil industry, which makes huge profits off high oil prices. ExxonMobil racked up a 44 percent increase in earnings for this year’s first quarter, with net income surging to $7.86 billion. High among unresolved issues is the escalating price for natural gas, which is critical for manufacturers and has risen to nearly three times its historical price, according to the American Chemistry Council.

So when W. Fletcher Steele, CEO of Pine Hall Brick Co. in Winston-Salem, N.C., says natural gas prices are killing his business, it’s not hard to believe him. His firm, which supplies brick products throughout the eastern third of the U.S., depends on eight company-owned kilns that use great quantities of natural gas. “In a three-year period,” he says, “prices have more than doubled.” Steele says he realizes gas prices are market-driven, but improving the overall domestic energy picture would help. “What can be done is that electric power plants, be they coal or nuclear, should be made much easier to build,” he argues.

The big question for Bush is whether he’ll shift gears after reassessing the lack of traction he’s gained so far on marquee issues such as Social Security. April 28 marked the President’s first press conference in more than a year and he dedicated it to selling Social Security reform, so the signals are that a switch is unlikely.

Pressure, however, is growing on many economic fronts, particularly trade issues, as China-bashing is becoming more popular. Democratic Senator from New York Charles Schumer wants to impose a 27.5 percent tariff on all Chinese goods unless China adjusts its currency exchange rate system. Other protectionist schemes on Capitol Hill would set up duties that would cover what the Chinese government pays in subsidies to its exporters. Snow says the Bush Administration believes it is time for the Chinese “to move to a more flexible system and we are urging them to do so.” He says Bush has been instrumental in convincing the Chinese to start regulating their banks, allow domestic firms to keep more foreign capital they earn and permit foreign firms to participate in their financial system.

Yet CEOs seem to believe that Washington has very little clout with Beijing. “Our trade deficit is unbalanced and our budget is way out of balance,” wrote one survey respondent. “Foreigners, especially China, are accumulating too many U.S. dollars, and we are living high on borrowed money because of these imbalances. We’re really just laying the seeds for the collapse of our economy.”

Tepid support among CEOs for Bush’s economic policies flies in the face of popular press assertions that “big business” is an unquestioning ally of the Bush Administration. True, the administration has helped push through new laws limiting class action lawsuits and curbing the use of bankruptcy to avoid paying personal debts, which have been business priorities for years. But those measures do little to address the competitive challenge CEOs worry about.

It’s increasingly clear there is a major gap in perceptions between the White House and business leaders with regard to those issues. But it will be difficult to bridge that gap because many CEOs have long advocated government that “stays out of our business.” The Bush Administration also eschews what it regards as the practice of “picking winners and losers,” or favoring one industry over another.

In that climate, for CEOs to seek any form of regulatory or legislative relief from the government could raise the accusation that they are merely seeking bailouts. Yet CEOs say an improved mix of economic policies is critical to the health of many companies, from old-line manufacturers to cutting-edge technology firms. Whether they can communicate that view to the Bush policy team quickly and clearly enough€¦quot;and whether the President acts on it€¦quot;is likely to shape up as the most important test of Bush’s second term in office. Whether he passes or fails that test could affect the U.S. position in the global economy for decades to come.







































































































































































Snow Defends U.S. Economic Policy

The former CSX CEO says market-oriented strategies are working.

What should the U.S be doing to maintain its competitiveness?
The key there is maintaining the basic free-market orientation of the American economy€¦quot;maintaining our innovativeness, our entrepreneurship, our spirit of enterprise. So maximizing the role of free market forces is the priority and using governmental powers to eliminate the impediments that get in the way of the good performance of the economy. [This involves] things like reducing the cost of litigation in the U.S., frivolous lawsuits, which we’re trying to do, and things like maintaining open trade€¦quot;the Central American Free Trade Agreement is very important to America. Putting in place an energy policy is awfully important.

So maintaining the fundamental structure of an open, resilient, innovative, enterprise-driven, market-based economy lies at the heart of our success. And, of course, you can’t be successful unless you have a good education system, involving things like the No Child Left Behind policy from the President. A good immigration policy is so important, [as is] keeping our great academic centers strong and well-funded.

What can be done to get energy prices, including natural gas, in line?
We suffer from the fact that we haven’t had a real focus on energy policy for a long time. And the neglect of energy policy€¦quot;the fact that we haven’t had one€¦quot;has put us in a difficult position today. The best thing we can do, it seems to me, is adopt the sort of proposals that the President sent to Congress, such as modernizing our infrastructure, creating more incentives, developing our own resources and moving into the oil alternatives and making greater use of nuclear. The administration has sent all of those ideas to Congress, but I think we have to recognize that we are paying the price for a long period of time when the country didn’t take the steps that should have been taken.

Critics say the U.S. has lost the competitive edge it once held in the Internet and broadband and that the Bush Administration is mostly ignoring this issue. What is your view?
The President has called for broad access to broadband, to deregulation of our telecommunications markets and the policies that would provide for innovation in the telecommunications space. It is one of the most important sources of innovation in the American economy. We need to get serious about moving towards a market-based telecommunications system because a market-based system is the only way to assure us that we are adapting in response to the best innovative technologies that are available.

In our survey, respondents said President Bush appears to be spending too much time on Social Security and not enough time on other issues, including health care costs, budget deficits and trade issues, as well as our deficit with China. Are we putting our focus on the right things?
Oh, absolutely. There’s no doubt about that. Social Security is the issue the President is taking to the American people at this time because it’s much better understood. It’s been studied every which way to Sunday. It’s all about demographics, about the changing nature of the American work force and it’s pretty straightforward.

Medicare and Medicaid are more complicated. They reflect incredibly complex issues, such as rising health care costs and the forces behind that, deep-seated political, moral, ethical and philosophical questions about the health care system. I suggest to your readers, if we can’t solve Social Security, which is much more straightforward, if we can’t find the political will to deal with that one, it’s going to be nigh on impossible to find the political will to deal with the much more complicated issues of Medicare and Medicaid. So, we see Medicare and Medicaid as critically important issues [and] we see success on Social Security leading to success on those fronts.

But in the interim we’re not neglecting Medicare and Medicaid, or rising health care costs. The administration has a number of initiatives under way to slow the rise in health care costs. Your readers, I am sure, are aware of a number of them, things like malpractice reform, and are probably pretty supportive of the administration on this. I hope they get behind it and work those issues because rising health care costs are directly related to abusive lawsuits that affect the way health care is delivered.

The administration is also pushing hard on things like getting consumers more involved in health care through health savings accounts. One of the problems we have in the health care arena, of course, is that consumers of health care are often spending other people’s money other than their own. When people spend others’ money rather than their own, they don’t make as good choices. The President’s proposals for health savings accounts are a real breakthrough on this score.

Health savings accounts will allow people to accumulate sizeable sums in a tax-advantaged way that they can use for health care purposes, but they can roll over as well. So what’s not spent in a given year can accumulate and continue to grow in a tax-advantaged way. There are a lot of thin

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