Economic Showdown: Kerry Versus Bush

This month the Council of Economic Advisers released the 2004 Economic Report to the President. In addition to providing an assessment of America’s economy, the report also examines a number of important topics in order to determine how economic policies can affect national output. Everything from business cycles, to taxes, to regulation and legal reform are reviewed in this year’s report. The informative analysis is a welcome relief from the political coverage of the presidential campaign. More importantly, the report offers more valuable insights into issues that matter to voters than does the media’s fixation on military service records. While not as scintillating as headlines from the campaign trail, an informed discussion of economic policy is ultimately more useful to voters who, in poll after poll, demonstrate their concerns about domestic economic policy.

First, the good news. As the report notes, the economy is in “full-fledged recovery.” Third quarter growth in 2003 over 8 percent, and data suggests that the fourth quarter will show continued growth in national output. The recovery was evident in the stock market, where total value increased by $3 trillion in 2003. Moreover, toward the end of 2003, employment also began to show signs of expansion. In short, the economy has been rebounding and new jobs are being created. The more troubling news is that job growth has been lagging and has not kept pace with the increase in output, especially in the manufacturing sector. Much of the lag can be explained by important productivity gains, but this suggests that even more rapid economic growth is required to create new jobs.

With this in mind, President Bush has announced an economic growth plan that builds on the strengths of the private sector, while most of his opponents have focused on building the economy through bigger government, starting with a repeal of the Bush tax cuts. For Bush, the key to growth is providing the private sector with greater incentives to work, save, and invest. He has outlined a six-point economic plan to accomplish this.

Perhaps most importantly, the president has called on Congress to make the tax cuts permanent. Just next year, taxpayers are on the verge of losing the child tax credit, the marriage penalty reduction, and the expanded 10 percent tax bracket. Small businesses’ ability to expense investments is reduced dramatically in 2006, and in 2009 the top tax rates on dividends and capital gains increase significantly. Finally, in 2011 , the death tax and any remaining tax relief are phased out, meaning that taxpayers face a higher tax burden. Moving now to make these tax cuts permanent would provide continued savings for taxpayers while strengthening the incentives for economic growth by removing the uncertainties surrounding the durability of the current tax rates.

Moving beyond tax policy, the president’s plan calls for removing unnecessary government burdens on the private sector while providing businesses the flexibility to expand economic output. These include reforms to the costly health care system, streamlining the costly regulatory burden on American industries, ending the lawsuit abuse that costs Americans $180 billion annually, developing a more sensible energy policy that provides Americans access to affordable and dependable energy, and expanding opportunities for U.S. businesses in the global marketplace. Clearly, for President Bush, the key to economic growth is a vibrant private sector. Policies that increase incentives to work, save, and invest increase economic activity while generating new jobs. These policies address the need to expand output to bolster employment throughout the economy.

The president’s opponents, such as John Kerry, have a different view of economic policy that relies on a larger government role in the economy and favors decision-making in Washington over decisions made by the millions of workers and investors who make up the U.S. economy. The Kerry plan starts with by repealing Bush tax cuts that benefit the “rich” while protecting the middle class tax cuts. Yet as the Economic Report to the President notes, there is an important distinction between the legal and economic understanding of tax incidence. Just because the law says a corporation or some other entity is paying a tax, it is not necessarily true that the tax burden falls on that entity. Depending on the laws of supply and demand, that tax could ultimately be borne by consumers as corporations pass the burden to their customers through higher-priced goods and services. Raising the capital gains tax, for example, increases the cost of capital, which may ultimately generate higher consumer prices.

Rather than embrace the fundamental reforms that are required to establish a more sensible tax code, the Kerry plan embraces the complexity of the current code enhanced with a few new tax credits. For example, to deter American companies from moving offshore, tax credits would be granted to those that stay in America. This approach treats the symptom while ignoring the cause, which is a corporate tax code that has become one of the most punitive in the industrialized world. The Kerry plan contains additional social engineering through the tax code, including tax incentives for such things as college and upgrading manufacturing.

With respect to other fiscal policies, the Kerry plan sends mixed signals. While calling for the need to eliminate corporate welfare and cut government spending—both important issues—it also advocates increased spending and more government. For example, the Kerry plan promises an additional $50 billion for states that have spent themselves into deficits, as well as government investments in research and development.

Elsewhere, the Kerry plan continues policies based on big government, including new caps on carbon dioxide that could cost the economy up to $400 billion annually along with thousands of lost jobs, a costly mandate that 20 percent of the nation’s electricity come from renewable fuels, and tighter fuel efficiency standards for cars, trucks, and SUVs.

Clarifying and comparing these approaches to economic growth may not sell as many newspapers as political mudslinging, but it does prepare voters better than the current headlines over political personalities. The Bush plan calls for a re-invigorated private sector to boost output and employment. The Kerry plan falls back on big government solutions, higher taxes, and heavy mandates on the private sector, which raises serious questions of how the plan can increase employment, especially over the long run. Rather than tuning into the latest stump speech on the evening news, voters would be better off spending some time examining the economic proposals that the candidates are putting forward.