bush and kerry and the economy

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    What the election really means to you

    Voting your wallet in Nov.? Before you do, focus on the economy your candidate would deliver.
    September 29, 2004: 3:21 PM EDT
    By Michael Sivy, MONEY Magazine. Additional reporting by Carolyn Bigda, Tara Kalwarski and Stephanie D. Smith.

    NEW YORK (MONEY Magazine) - George Bush and John Kerry disagree about lots of things, but when it comes to economics, they have the same message: Vote for me, and you'll be better off.

    It's a simple, direct appeal to voters' self-interest, and each candidate has backed it with economic proposals that a cynic might regard as fairly naked attempts to buy support.

    But if you really want to protect your family's economic interests in this election, you need to look beyond such short-term calculations as whether, say, Bush's tax cuts or Kerry's health-care proposals will put more money in your pocket. Presidential candidates think in four-year chunks of history. You can't afford to.

    Ultimately, your interests are best served by an economy that will still be healthy when you retire and still competitive when your children and grandchildren join the work force. Whether you conclude that Sen. Kerry or President Bush is better able to produce that outcome is, of course, highly subjective.

    But that's not to say that there is no real difference between their economic visions. The two diverge sharply on crucial matters like taxes, the deficit and energy -- and they would each make different trade-offs.

    So don't kid yourself: On Nov. 2 you'll be making one of the biggest decisions about your money that you'll make all year, and you should understand what you're voting for.

    Taxes and the deficit

    The federal budget deficit this year is $455 billion, or 3.8 percent of GDP. It could remain above $400 billion a year through 2008 unless something is done.

    Running a deficit isn't necessarily a bad thing when the economy is ailing, as it was from 2000 to 2003. Continuing to build up federal debt in a recovery, however, is shortsighted and dangerous: As economist Milton Friedman points out, a tax cut that adds to the deficit today is just a tax hike on future taxpayers.

    One way to close the deficit would be to raise taxes modestly. But the boldest strokes of Bush's administration have been his two huge tax cuts -- and his chief concern in a second term would be to ensure that they are made permanent.

    Bush claims that he can cut the deficit in half within five years, largely by reducing spending. But he doesn't plan on cutting defense, and he can't cut entitlements or interest on the national debt.

    "Outside those areas, there's just not enough money to get you there," says David Kelly, economic adviser at Putnam Investments. The Republicans respond that growth will close the gap -- which is not an answer but an evasion.

    Kerry plans to roll back Bush's tax cuts for households earning more than $200,000 and to sharply reduce tax breaks for capital gains and dividends.

    That might raise anywhere from $650 billion to $900 billion over 10 years. But he has a host of spending plans that add as much as two or three times what his tax increases would bring in.

    In other words, Kerry's proposal is no different from Bush's. Pray for growth.

    Besides the deficit, Americans' low savings rate worries many economists. Because we save less than 1 percent of income, down from more than 7 percent in 1990, we have become dependent on borrowing from foreigners.

    That isn't a problem as long as foreign investors see lots of opportunity here. But if that inpouring of capital ever slackens, interest rates could soar, choking off growth.

    "We have to save more -- period," says Richard Berner, chief U.S. economist at Morgan Stanley.

    Kerry has no real plans for increasing the savings rate. Bush's ideas are still very vague. Among them: replacing part of the income tax with a consumption tax, and privatizing part of Social Security.

    Despite all the talk about reining in government spending, neither party is willing to take on entitlements like Social Security and Medicare.

    Both programs promise the elderly more than the country can afford, especially once the baby boomers retire. Partial privatization of Social Security is arguably desirable as a way of boosting the savings rate.

    But the Republicans' claim that it will solve the program's looming funding crisis is disingenuous. The Democrats' unwillingness to deal with the issue at all is simply political cowardice.

    Industrial policy

    It may be a cliché, but Republicans do tend to look at problems from the business executive's point of view. Removing impediments to growth is the top priority.

    "Our focus," says Bush's top economic adviser, Stephen Friedman, "is keeping America the most productive place in the world."

    Charting the challenge
    The occupant of the Oval Office on Jan. 20 will face a wall full of worrisome numbers. For a generation, the U.S. economy has been living off borrowed money and heedlessly consuming natural resources like oil. At the same time, the country has underinvested in basic scientific research, and young members of its work force lag those in much of the developed world in the extent of their technical training.

    Percentage of 24-year-olds with a science or engineering degree
    Finland 13.2%
    Taiwan 11.1%
    South Korea 10.9%
    United Kingdom 10.7%
    Japan 8.0%
    Germany 6.6%
    Switzerland 6.5%
    United States 5.7%

    By contrast, Democrats have a more bottom-up view that favors cushioning the sharp ups and downs of a free market. Neither candidate is ideologically consistent, however. Bush imposed protectionist steel tariffs for 2002 and 2003, while Kerry wants to cut corporate income taxes.

    Nevertheless, Bush's ideas for improving the business climate have the merit of simplicity: cut taxes, loosen regulation and offer targeted reforms. The President wants to make health benefits more affordable for small businesses by allowing them to band together and buy group coverage. He favors massive reform of laws on corporate liability and class-action suits, as well as looser environmental and commercial regulation.

    Kerry, by contrast, offers a mix of old-time pro-labor goodies and wonkish industrial policy. He favors raising the minimum wage to $7 an hour by 2007, extending unemployment benefits, strengthening the right to unionize and requiring equal pay for women doing the same work as men. However fair-minded these initiatives may be, they'll raise companies' costs and certainly won't promote economic growth.

    Kerry's best idea when it comes to spurring economic growth is to ramp up spending on basic scientific research.

    "The thing to do is increase the budget of the National Science Foundation," says Yale economics professor Robert Shiller, referring to the government's primary supporter of nonmedical, nonmilitary research. Kerry also wants to actively promote broadband Internet access.

    Bush has little in the way of science policy. Spending on nonmedical research has declined as a percentage of gross domestic product during the past 30 years, and Bush has cut the National Science Foundation's fiscal 2005 budget.

    Energy independence

    Economists distinguish between normal market forces and external events known as exogenous shocks. Such shocks are unpredictable, but some still need to be anticipated by government policy.

    One obvious shock would be a disruption of the oil supply. In September, oil reached record highs of as much as $50 a barrel. In part, this reflects fears that terrorists might target global production.

    But the real energy problem is that demand is growing too fast. Asia accounts for most of that growth, but U.S. oil consumption jumped a hefty 3.2 percent in the second quarter.

    Bush's energy policy includes improvements in efficiency and electricity generation, but mostly it relies on stepped-up domestic oil production. At the rate U.S. demand is growing, that's an inadequate solution.

    Kerry wants to invest in alternative fuels and create incentives for auto companies to make more efficient cars. Problem is, such proposals can be expensive and ineffective. The only alternative technologies that succeed are those that arise out of market demand, such as the new hybrid gas/electric cars.

    There is a better solution, however: Slap a stiff tax on oil or gasoline, as virtually every other oil-import-dependent country has done. Neither party has the nerve for that, of course.

    Human capital

    Let's start by dispelling one myth: Free trade and outsourcing are not destroying high-wage jobs. On the whole, well-paying jobs are growing more than twice as fast as low-paying ones.

    The real problems are that high-paying blue-collar jobs are disappearing, those workers are not being retrained and U.S. schools are not turning out enough highly skilled graduates to keep the U.S. work force competitive.

    Both candidates agree on the importance of offering new training to workers whose jobs move overseas. Bush, in his guise as the Education President, has a wide array of programs to promote elementary and secondary education, along with mandated standards.

    Kerry has similar plans and says he'll spend a bit more. His freedom is constrained by the need to please the teachers unions -- always strongly Democrat -- but some of his proposals appear to be beneficial nonetheless.

    Choosing between them

    In one sense, the choice is pretty clear. A Bush administration would rely on standard free-market principles: Cut taxes and regulation, open the world to trade and let it rip. Most economists would say that this is the course most likely to produce high growth.

    The benefits of this growth, however, would go mainly to the providers of capital and the most highly skilled workers, while the costs would be largely borne by the employees left behind.

    A Kerry administration would try to moderate the vicissitudes of this process. Sometimes such intervention has the desired effect; other times it unintentionally makes things worse. Either way, it will almost certainly produce slower growth.

    There's one other factor. Pressure is going to mount to reduce the deficit. And neither candidate can fulfill all, or even most, of his campaign promises and simultaneously bring the deficit down. So what's likely to give way when the choices get really hard?

    Bush won't want to reverse course and raise taxes -- his tax cuts are the hallmark of his first term. He won't want to stint on defense, education or health-care initiatives like the prescription-drug benefit.

    That means most other social spending is going to be under continuous and relentless pressure. If you don't like the way government has off-loaded more and more financial risk onto your shoulders in recent years, you really won't like a second Bush administration.

    Kerry can't be seen to do any less social spending than Bush. He may trim a little from defense. But when the time comes to stanch the red ink, Kerry will have to raise taxes -- and not only on those earning $200,000 or more. Taxes may be the price we pay for a civilized society.

    On Nov. 2, you get to vote on just how much civilization you want to pay for.

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