New President, New Economic Priorities

George W. Bush will be hit with a frostbitten economy when he’s inaugurated in January.

Business activity, already wavering, will be slowing to a crawl. Companies, instead of expanding, will be cutting costs, possibly laying off employees. The Federal Reserve will be thinking about lowering interest rates.

And the new Bush administration will come into office pushing for tax cuts to revive the economy. Bush said Friday that he believes strongly in “the need to reduce marginal rates” of taxes.

How he goes about such tax reduction will signal clearly the new administration’s approach to the economy for the next four years.

Initial victories will come easily. Bush will have little difficulty reducing the so-called marriage penalty, under which many working couples pay more income tax than they would as two single individuals. Bush also will reduce the inheritance tax, probably by raising the level of estates to be taxed above today’s $650,000 minimum. Congress passed legislation reducing the marriage penalty and estate tax in its last session, but President Clinton vetoed the measures.

More significant will be the Bush effort to lower tax brackets. Under proposals envisioned by the Bush economic team, the lowest tax bracket would fall to 10% from 15%, cutting taxes by one-third for couples with less than $30,000 in taxable income. Top rates would be lowered to 33% from 39.5% at present.

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To be sure, the rich would benefit greatly from such tax cuts. Bush’s chief economic advisor, Lawrence Lindsey, has noted that the top 1% of income earners now pay 33% of all income taxes, so any cut obviously would benefit them.

But the working poor pay higher marginal rates simply because the tax bite comes out of a smaller income. Accordingly, Lindsey believes, tax cuts would give the working poor a needed lift, a hand up toward middle-class living standards.

The philosophy behind Lindsey’s thinking, and that of Bush, is called compassionate conservatism. Bush used the phrase emphatically in his speech last week, saying, “Compassionate conservatism will be the foundation of my administration.”

Bush didn’t invent the concept. It’s a belief that has spread in Republican circles in recent years and was the subject of a 1996 book, “The Compassionate Conservative,” by Pasadena businessman Joseph Jacobs, a son of Lebanese immigrants, who founded Jacobs Engineering Co.

As described by Jacobs and by 1996 vice-presidential candidate Jack Kemp, compassionate conservatism departs from a simple trust in markets to sort out the common good. If markets don’t work, they should be given a kick to make them work for the most people.

For example, Lindsey, 46, who served as a Federal Reserve governor, strongly favors the Community Reinvestment Act, which requires banks to make loans in poor neighborhoods. Markets aren’t working for those neighborhoods, Lindsey figures, so government should give an assist.

The philosophy will be adapted in many ways in the Bush administration. In education, grants will be available to students from low-income homes to take math and science courses and prepare for college. Tax-deferred education savings accounts will be expanded. More controversially, the Bush administration will propose financial help for poor parents to enroll their children in private schools.

Compassionate conservatism doesn’t restrict its concerns to poor people. It also takes exception to environmental regulations, especially when they hold up energy production.

Bush’s policies will have particular effect in energy, with a focus on electricity. Bush recognizes that electricity is in crisis today in California and the Western states and soon to be in crisis everywhere because of restrictions on building power plants and on use of fuels such as coal.

Bush’s energy policy will call for stepped-up research on removing pollutants from coal to make it more usable as fuel for electricity generation. And it will emphasize development of natural gas.

Coal is a national as opposed to a West Coast problem. Coal-fired generating plants produce 57% of all U.S. electricity. But many such plants could not operate legally today if they had not received exemptions years ago from environmental regulations.

Yet the plants cannot be shut down. Their output is critical to an economy more dependent than ever on electricity. As Bush said in his campaign, “Due to growth of the ‘new economy,’ electricity has risen to almost 37% of U.S. energy demand, from 25% in 1975.”

Directly affected by a Bush coal program would be such companies as Consol Energy, of Wilmington, Del., and St. Louis-based Arch Coal and Peabody Coal, which is owned by Lehman Bros. investors.

Bush also will push for maximum development of natural gas and oil in Alaska and elsewhere.

In defense policy, the Bush administration will give priority to increased pay for armed forces personnel--aiming to assure an all-volunteer military a middle-class standard of living.

The new administration also will launch a broad review of U.S. security strategy. The review will start from the perspective that in a changing world, the U.S. military should emphasize fewer foreign bases and more U.S.-based mobile forces capable of striking quickly in distant trouble spots.

If that perspective becomes policy, it would influence weapons procurement, calling for more U.S.-based bomber aircraft, more transport and airborne tanker planes and fast naval ships as opposed to aircraft carriers and fighter planes stationed around the world.

Defense advisors to the incoming Bush administration already counsel a reduction in U.S. funds for peacekeeping in Bosnia and the former Yugoslavia and an increase in European expenditures for that purpose.

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Compassionate conservatism also has a stance on Social Security, one that favors individuals using some of the money they now pay in Social Security taxes to invest for their retirement. The Bush administration would offer such a change to young workers, while leaving current policies in place for workers nearer retirement.

Some analysts doubt that Bush will introduce controversial Social Security changes in his first year in office, as he confronts a divided Congress and a wobbly economy.

But longtime Washington operatives advise differently, saying that a new administration must try to get all it can in its first year, because after that congressional fractiousness and looming elections would stall prospects for visionary programs.

To a great extent, how he copes with the economy in his first year will determine Bush’s chances for success in the rest of his term.

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James Flanigan can be reached at jim.flanigan@latimes.com.