January 2007

The 2007 State of the Union: Addressing Key Questions of Economic and Foreign Policy

All eyes remain on the president's Iraq policy, but other significant international challenges continue to grow. Iran's efforts to export terror and develop weapons of mass destruction present a potent threat to American interests. Efforts to engage North Korea with multilateral diplomacy have failed. Al Qaeda, though hobbled, seeks to stage attacks on the United States and its interests abroad. As Washington looks for new and creative ways to stymie enemies abroad, Vladimir Putin’s government in Russia increasingly uses its growing oil wealth to defend rogue allies the world over. China, too, seeks to reinvent itself as a global power and counterweight to American interests in the Pacific and further afield. Meanwhile, anti-dictators such as Venezuela's Hugo Chávez seek to create new alliances against the United States throughout Latin America and the Middle East. In his seventh State of the Union address, President George W. Bush had little good news to report to the American people. What agenda should the United States pursue with its former Cold War competitor? Can progress be made on stopping the proliferation of aggressive nuclear programs? How will the new Congressional balance of power affect foreign policy in the coming year?

Congressional Democrats have a large number of domestic policy measures on tap for the first part the year. They plan to enact budget reforms, raise the minimum wage, change the rules concerning the determination of Medicare's drug price, and repair the Alternative Minimum Tax (AMT). Budget reforms and fixes for the AMT have received broad bipartisan support in the past, but efforts to allow the government to negotiate drug prices and minimum-wage increases have been more contentious. Are the political forces aligned with the economic merits of these different policies? Should Congress consider other policies, such as President Bush’s call to reform entitlements?

AEI scholars assessed the State of the Union and previewed the president's speech at a panel discussion on January 23, 2007.

Michael Rubin
AEI

President Bush’s "axis of evil" speech five years ago was considered unhelpful in supporting a diplomatic approach to a nuclear Iran.  However, Bush’s statement was perhaps prescient in identifying the undeniable danger and instability which Iran continues to generate.

In assessing U.S. policy on Iran, it is necessary to consider how the commonalities and differences within factionalized groups assist or impede progress. The United States is not good at mediating between factions. Many consider the United States to be unpopular with respect to foreign-policy decision making, but there is nothing wrong with a policy that is guided by principle and honest debate.

Leon Aron
AEI

Since the last State of the Union address, the relational gap between the United States and Russia has widened. There is evidence of shrinking in our common arrangements and commitments, which include the global War on Terror, nuclear nonproliferation, Russia’s reliability as a global energy supplier, and the evolution toward the rule of law and a liberal market economy. Underlying this trend is the lack of an overarching goal for Russia. In the 1990s, Russia altered foreign and domestic behavior to enter the civilized world, but no such adjustments or goals are apparent in Russian politics today.

Moscow is making short-term, risky decisions guided solely by the perception of immediate gain in the perceived commercial profit and geopolitical preponderance in the post-Soviet sphere. Russia’s commercial relationship with Iran is the main issue over which the United States and Russia are at odds, as the Russian government continues to sell advanced military equipment to Iran.

If Russia chooses to play by a different set of rules, then the United States must respond in kind. The United States must act with just as much regard for Russia’s sensibilities as Russia does vis-a-vis the United States.

Gary J. Schmitt
AEI

The coming year is as critical to the Bush presidency as any other year since the September 11th attacks, but the State of the Union address will matter very little. The notion of the "rhetorical presidency" is based on the premise that the president acts as a leader in Congress and as a representative of the body public. In the end, words do not move institutions. The American public will pay attention, but only if words later translate into policy.

The events in Iraq over the next six to nine months will be far more important than the president’s speech. If the United States does not show progress in Iraq by the time the appropriations bills begin to come up in August, then the Democratic Congress will surely move to bring the war to a close.

Dan Blumenthal
AEI

The policies in Iraq have second and third order effects in the Asia-Pacific region. The president must take on his bureaucracy and commit to North Korean talks. Such talks with North Korea have been ineffective because China and South Korea have refused to commit to the process. The only way to change course is to let the Chinese know that the situation in North Korea is a litmus test of the U.S.-China relationship. Without an increased focus on North Korea, it will remain on an irreversible path to nuclear power.

Thomas Donnelly
AEI

President Bush’s State of the Union speech is important, but not as important as the speech that General David Petraeus will give on the strategy in Iraq this month. Petraeus embodies the changed strategy for the Bush administration. In his State of the Union, President Bush should support Petraeus and his remarks. While the surge in troops is likely to be successful in clear-and-hold operations in Baghdad and al Anbar, the United States needs to articulate a policy for the long haul.

The United States also needs to prepare for a presidential transition. This will involve not only communicating a plan for Iraq but also one for Afghanistan. A resurgence of al Qaeda and Taliban forces in both Afghanistan and Pakistan must not be ignored. The president needs to consider increasing the number of U.S. land forces there before his term’s end. Only by thinking beyond the end of this administration can effective foreign and defense policy decisions be made.

Panel II: Economic Policy 

Mark B. McClellan, M.D.
AEI

With the president’s proposal to make health-care costs tax deductible, health care has become a central issue this year. While the cap will increase costs for people with expensive employee health care, it will provide coverage for roughly 5 million uninsured people.

Many economists support the president’s model. Critics claim that the bill is not indexed to medical inflation and that it undermines employer coverage. The proposal is a constructive move since there are no other financially feasible plans that will cover so many people.

With rising health-care costs and millions of uninsured Americans, the Democrats and Republicans will have much to debate, including Medicare spending and health-care budget proposals. We can expect legislation on drug-safety regulation and coverage.

Alan D. Viard
AEI

The alternative minimum tax (AMT) has a lower tax schedule, yields higher taxable income, and has no exemptions. In 2006 there were 3.5 million people captured by the AMT. If current legislation remains, that number will increase to 26 million. If continued, the loss of extending the patch one year will be $40 billion.
 
A budget neutral approach that scraps the AMT, goes back to one system, and eliminates local deductions would be ideal. The president and Congress will most likely support a one-year extension, providing offsets to accommodate the "pay-go" approach to keep fiscal balance.

There are a few possible mechanisms to offset the $40 billion shortfall, including a tax increase on domestic oil production. Increasing taxes for American firms abroad is another solution, but this neither makes economic sense nor will it increase domestic investment or jobs. Another option is better diligence on tax compliance, but this is unlikely to yield large enough sums. We can resort to old revenue raisers. The question then shifts to 2008: is another round of offsets necessary to keep the AMT?

Lawrence B. Lindsey
AEI

There is speculation that there will be a 10 percent ethanol authorization for all gasoline by 2014--a $14 billion ethanol mandate. To do this, 5 billon bushels of corn are needed. This is unfeasible given the high prices of oil and corn. We need to look at the impact of taking away food exports from the rest of the world in order to reach the 5 billion bushel mark here in the United States. This could produce results that may not be in the nation’s best interest or that may be scientifically impossible.

AEI interns Jenna Lally and Gregory Trum Jr. prepared this summary.