July 14, 2004

Before political advertising begins to swamp the airwaves, I think it is a good time to review what is happening in one of the two major issues of this campaign:  the economy.

A few months ago I received an e-mail from a seventh grade student who was researching whether President Bush’s policies were beneficial or hurtful to the economy.  At the end of the questions raised, I was asked my political leanings. 

This is a legitimate question to filter out bias in the answers.  However, I responded that I was answering these questions as an economist.  By that I meant that most economists would understand how I reached my conclusions, even if some would not agree with my results.  (Economics  is an imprecise science, but it is enough of a science to have more than opinions to support conclusions.)

Both major candidates are presenting implications about the economy that really are not justified.   John Kerry has no business implying that this is the worst economy since the Great Depression.  It is true that Bush is the first president since Herbert Hoover who probably will have fewer people working when we go to the polls than when Bush was inaugurated. 

However, the economy is a dynamic system that provides outcomes well after policy has been altered.  I believe that most economists will assume that much of the economic weakness creating that outcome already was apparent before the last election.  Indeed, both Federal Reserve and tax cutting measures have aided economic performance in the past four years. 

At the same time, President Bush cannot explain why three tax plans were required to jump start the economy.  He also must address the legitimate concern that the average worker in the past year has seen raises declining while living costs are rising.  When the June estimate of average earnings adjusted for inflation is released, it almost certainly will show that the average worker received a full percentage point less in earnings gains than was suffered in price increases. 

I will give the President a little leeway, as the tax cuts did provide some additional purchasing power to offset the surge in energy, food, medicine, and education costs.  But oil production shortfalls in Iraq more than a year after the old regime was toppled, clearly is adding to gasoline costs.  If I cannot pin some responsibility for that on the President, who gets the blame?

So, is the economy strong and getting stronger as President Bush claims, or is the expansion weak and missing the ordinary worker, as Senator John Kerry avers. 

The strength of this economy probably is assured, but oil prices and a related, growing currency problem will assure less than desired economic growth.  The best the President can offer to address this issue is to prevent the lapse of some of the tax cuts that are scheduled by current legislation to expire at the end of this year. 

This does not mean Senator Kerry has any stronger policy options.  Indeed, both candidates estimate that the federal deficit will remain above $200 billion per year in 2009 if their programs are enacted.  That is not good enough.  Our surge in productivity began as the government got out of the way and allowed a surge in the private use of credit.  No concern about getting out of the way of private borrowing needs currently is expressed by either candidate.

To be sure, the Senator will alter the mix of tax benefits.  The well-to-do will lose some of their tax benefits in his administration while more benefits will be provided to lower income earners.  While this redistribution of tax burdens might marginally reduce the lost purchasing power of the average worker, real gains will come from addressing the problems caused by rising materials prices and using appropriate economic policies to provide a healthy environment as the expansion continues. 

I am hopeful that a better understanding of economic policy proposals will be forthcoming as this campaign progresses.  Does the President truly have no concern about deficits and only wishes to assure that current tax cuts are permanent?  Is that policy sufficient to address economic problems that already are developing in exhausted purchasing power by workers and potential currency related problems?

On the other hand, I was brought up with the notion that if you criticize you must also explain how you will improve.  Except for changing tax burdens, I have so far heard very little plans for improvement from the Kerry camp. 

Hopefully, the contrasts of  economic policy will be more clear than the generally incorrect claims about the economy.  We are in a recovery.  The economy is getting stronger.  There are problems that are being ignored by this administration, especially the structural deficit.  (That is the deficit that will remain even after high economic growth and employment has been attained).  Unlike the Depression, our banking system is strong.

Now what economic problems do you expect and how do you plan to address them in your next administration President Bush, or in your new administration Senator Kerry?


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