The war for your wallet
Bush and Kerry get ready to rumble over the health of the economy
Though foreign policy has dominated the debates so far, this week's face-off in Tempe, Ariz., may reveal the sharpest contrast yet between John Kerry and George W. Bush as it deals with the issue they differ most on, the economy.
Bush will seek to convince Americans that the massive tax cuts he muscled through Congress brought the country back from a recession he claims to have inherited from Bill Clinton. Warm and fuzzy memories of the '90s boom times coupled with recent polls that show much unease about the current state of things make Bush's job difficult. For his part, Kerry will harp on the loss of 821,000 jobs during Bush II's term.
The challenger might be bolstered by last week's employment report, which showed only 96,000 new jobs were created in September--far fewer than expected and not enough to keep up with population growth.
Like his father, George W. Bush was unlucky enough to be in office when the business cycle turned down, and his first year as president saw both an eight-month recession and the second year of a nasty bear market for stocks. Determined to make good on campaign promises to return government surpluses to taxpayers, in 2001 Bush pushed through a 10-year, $1.35 trillion tax cut that included lower marginal rates and an expansion of the child tax credit. Seeing lower taxes as an elixir for nearly every economic problem, Bush engineered three more cuts over three years, worth an additional half-trillion dollars. And the president wants even more if voters renew his contract.
Easy money. Many economists credit the 83 million rebate checks triggered by the 2001 tax relief bill, plus other tax cuts, with boosting the post-recession economy. But many also note that more targeted, short-term tax cuts could have done it more efficiently without creating huge long-run budget deficits. And certainly the Federal Reserve's accommodative approach to interest rates had as much or more effect, as consumers spent willy-nilly on new homes and cars. The stock market posted a 26 percent return in 2003, before falling into its recent sideways shuffle.
Bush's problem is that while the economy has done well by the numbers--strong gross domestic product and corporate profit growth plus cheap credit--in the past few years, these have translated into only very modest job gains, while wages have remained flat. To add insult to injury, the stock market, which served as the economic indicator of the second Clinton term, is still below its level when Bush took office. Throw in the insecurity about jobs going overseas and a budget surplus that has become a gaping deficit, and it's easy to fathom the economic angst.
"People are looking for economic answers," says Jeff Mayers, who as editor of WisPolitics.com watches politics in the swing state of Wisconsin very closely. "Wisconsinites need reassurance that they're going to get help making the economic transition to the future."
Voters in every state care most about jobs and income, pollsters say, and Bush is the first president since Herbert Hoover to preside over a net job loss. Per capita disposable personal income, a good measure of how well off people feel, is up just 6 percent over the Bush years; it rose 21 percent during Clinton's terms.
And then there's oil. Last week, the price of crude topped $53 a barrel, owing to increased global demand plus worries about Iraq and other geopolitical hot spots. The 56 percent price increase since the start of the year cuts against Bush, "not because voters follow it in the news but because it hits them in the face every time they go to the pump," says Carroll Doherty, editor at the Pew Research Center.
With Bush's approval rating on the economy hovering around 43 percent for months, Kerry is trying to capitalize on these negative perceptions. He blames the incumbent's policies for jobs moving offshore, though it's been going on for decades and is a byproduct of the free trade that both candidates espouse. Kerry has been a staunch supporter of free trade during his two decades in the Senate. Yet he now calls for environmental and labor standards in trade pacts, language that Gary Hufbauer, senior fellow at the Institute for International Economics, calls "the pleasant face of protectionism."
The kindest cut? It's on taxes where the divide between the two is widest. Under Bush's tax cuts, the top 20 percent of income earners received 73 percent of the cuts. Kerry argues that a tax cut plan targeting middle-class Americans would have yielded more economic gain. But doling out dough is not free of cost. The Congressional Budget Office projects a budget deficit equal to 3.6 percent of GDP this year, compared with a 2.4 percent surplus in 2000. Such a swing of 6 percentage points is not only remarkable, says Richard Kogan of the Center on Budget and Policy Priorities, "it is unprecedented in the postwar period."
With the baby boom generation set to start retiring in 2008, the deficit problem will be greatly magnified by major Social Security and Medicare shortfalls. "We do think chronic deficits have consequences leading to less investment, less capital deepening, and slower productivity growth over time," says Goldman Sachs chief economist Bill Dudley.
Neither candidate has articulated a plan for trimming the deficit that wins plaudits from economists. "On the deficit issue I give them both a grade in the D range," says Robert Bixby, executive director at the Concord Coalition, which advocates a fiscally responsible federal government, "perhaps a gentleman's C minus."
This story appears in the October 18, 2004 print edition of U.S. News & World Report.