The Bush paradox: why do his fortunes lag as the economy improves?

THREE YEARS AGO, in the 2002 election cycle, the economy was sluggish, struggling to emerge from the recession and the dislocations of 9/11. According to most polls, President Bush received solid ratings on his handling of the economy. Today, GDP growth has firmed at 4 percent a year, and several million new jobs have been created since the economy bottomed in the first Bush term. The inflation rate remains low, as have long-term interest rates, including home mortgage rates. President Bush has unfavorable ratings on his handling of the economy, and the trend of recent polls has been down.

Whatever happened to the old rules? Has a strong and improving economy become a political negative for sitting presidents?

Part of the anomaly undoubtedly relates to the politics of wartime. The president was highly rated for his conduct of the war on terrorism in 2002, and some of that capital appeared to spill over onto his economic rating. By the same token, the spike in suicide bombings in Iraq in the last few months is no doubt casting a pall on voters' ratings of the president's performance on issues seemingly unrelated to the war. The lesson, if there is one: A wartime government is well advised either to conduct a visibly successful war effort, or at least to be holding its own in the political debate over why progress has slowed or gone into reverse.

The president's failure to reap political benefits from a strong economy may stem from aspects of the domestic debate as well. It seems implausible that voters, tens of millions of whom have refinanced their homes and improved their balance sheets, are utterly oblivious to recent economic gains. It is interesting that one of the recent national polls found voters' view of the strength of the economy going up even while the president's rating on economic issues has continued to slide.

In the president's first four years, it was often the Democrats who were baffled by this sort of conundrum. That is, George W. Bush seemed consistently to overperform politically. To Democrats, his political strength was greater than the facts of the issues--the war, the economy, domestic issues like health care, values issues like gay rights and stem-cell research--seemed to warrant. Today, particularly on the economy, he appears weaker than the objective facts would seem to warrant. What has changed?

Not the ups and downs of war. The failure to find weapons of mass destruction and the retreat from Falluja were, if anything, lower lows for Bush and his administration than the current wave of suicide bombings. There are Democratic strategists still in a state of shock that Bush was able to win the election in the face of such stinging setbacks in the war.

Not polarization. The hallmark of national politics since 2000 has been intense partisanship and ideological strife in a closely divided nation. So far in the second term, this shows no sign of changing.

In fact, to many Republicans the continuation of a high degree of polarization has come as something of a surprise. In the elections of 2002 and 2004, it was Bush and the Republicans who seemed adept at riding the wave of polarization. Both these elections were brutal, closely contested, and in doubt until the very end. Yet not only did Bush defeat John Kerry, but Republicans gained House and Senate seats in both 2002 and 2004.

Democratic attrition was particularly striking in the Senate. From an edge of 50-49-1 following the 2001 defection of James Jeffords, Democrats found themselves at 44-55-1 in 2005. Under Tom Daschle the Senate had become the focus of bitter-end obstruction of the Bush agenda, on issues ranging from judges to energy to the faith-based initiative. With the Democratic losses and Daschle's own defeat in South Dakota, many Republicans assumed that Senate Democrats would begin to scale back their confrontational stance toward Bush.

Instead, Democratic Senate leaders have widened their use of the filibuster from Bush judicial nominees to U.N. ambassador-designate John Bolton, and may even filibuster the president's first appointment to the Supreme Court. On a series of second-tier issues like bankruptcy reform and class-action lawsuits, increased Republican Senate strength has helped carry the day. But the significance of these Bush victories is small in comparison with the impact of Senate-centered polarization on Bush's high-profile second-term agenda on the economy and Social Security.

In the first term, Bush won his biggest domestic victories with the tax-cut bills of 2001 and 2003. Both of these bills cleared the Senate under budget rules that prohibit filibusters. The 2003 tax cut, which moved up the effective date of the 2001 tax cuts and achieved a bold, unexpectedly large reduction in the double taxation of dividends, cleared its major Senate hurdle on a tie vote.

The heart of Bush's second-term domestic agenda is three big items: making the first-term tax cuts permanent; reforming Social Security by scaling back its demographic deficit and carving personal retirement accounts from the payroll tax; followed by broad-based tax reform, to be shaped later this year by the report of a Bush-appointed study group.

These three proposals, the third of which is not yet defined, have one simple element in common: They cannot be passed with Republican votes alone. None of them fit into the simple-majority context of a budget resolution. This year's Republican-backed budget resolution, which stretches ahead five years, can extend some tax cuts scheduled to expire at the end of 2008 to the end of 2010, and almost certainly will do so. But to make the tax cuts permanent under Senate budget rules, a minimum of 60 senators would be needed to overcome a point of order. The same 60 votes would be needed to enact a broad reform of the tax code, or to make the huge changes in Social Security the president has asked for. Of their nature, the three big items of Bush's second-term agenda will have to be bipartisan, or they won't happen at all.

Six months ago, it appeared plausible that Bush could push one or more of these things toward enactment. In the first term, he effectively used the presidential bully pulpit to overcome resistance to his war strategy and his tax-cut-centered economic strategy. But there appears to be something about his second-term economic agenda that is not only resistant to the bully pulpit, but shows signs of denying Bush credit for the kind of strong economic growth that normally benefits an incumbent administration. As long as this is the political dynamic, Democrats have no incentive to reduce the level of confrontation--not when the very thing that often stung them in the first Bush term appears to be helping them now.

What explains this dynamic? One explanation may be that the three big-ticket items are not just bipartisan, they are interrelated. Momentum on one can improve the chances for momentum on one or more of the others. It can be argued, for instance, that the stock market has underperformed this year in relation to the robust growth of business profits and continued low long-term interest rates. One factor restraining stock prices has to be the growing likelihood that this Congress will not make the tax cuts permanent. In turn, the lack of a bull market this year undoubtedly makes the idea of personal accounts appear less attractive than otherwise would be the case.

For the dynamic of obstruction and polarization to change, and barring a road-to-Damascus turnaround by Senate Democrats, the politics of the economic debate must change in the president's favor. The likeliest way for this to happen is by a return to confrontational debate on the tax issue.

The Bush tax cuts have now been effective for about two years, and more and more conclusive data on their impact is becoming available. Recent numbers from the Congressional Budget Office show a surge in income tax revenue (around 15 percent higher than a year earlier) well beyond most predictions--and utterly contrary to Democratic lamentations about a hollowing out of the tax base due to Bush's "tax cuts for the rich." With little left to gain in this Congress by downplaying partisan disagreement on taxes, the administration should soon be taking credit for the success of the 2001-2003 tax cuts in stimulating strong growth, as well as producing unexpectedly strong revenues.

With uncertain present prospects of congressional movement on Social Security or making the tax cuts permanent, the report of Bush's tax reform group later this summer takes on great importance. In the present mood, little will be gained by trying to split the difference between the parties' approaches to tax reform, or by offering incremental change. As Bob Packwood figured out as Senate Finance Committee chairman in 1986, a sudden movement toward a very broad tax base and unexpectedly low rates is much more likely to get people's attention than tinkering on details. Ask Senate Democrats to explain why a simple, low-rate tax code should be still another occasion for obstruction. The minute they open their mouths, the political dynamics of the economic debate will again begin to favor the president.

Jeffrey Bell is a principal of Capital City Partners, a Washington consulting firm. Cesar Conda is a principal of Navigators, LLC, a Washington consulting firm, and served from 2001-2003 as economic adviser to Vice President Dick Cheney.

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