March 10, 2004
As an economic forecaster, I must now consider the
prospects of Senator John Kerry being the next president of the United States.
This means how likely is this event and what will happen if it occurs.
This does not mean what a President Kerry wants, but what he can
Although I feel it is unlikely that an incumbent Republican
will be turned out of office as the unemployment rate is declining, there is
intense feeling against this Republican. Republicans
tend to have an advantage in national office because more people turn Republican
as they age and more of the older population vote.
Democrats tend to be younger but less inclined to vote.
They have passion but they do not have depth.
However, if the current intensity by Democrats can be maintained, perhaps
the turnout of Democrats will be higher than normal.
Indeed, attempts by the White House to energize their conservative base
through social issues could maintain that intensity and lead to an election
On the other hand, beginning with Lyndon Johnson, Democrats
needed a southern base to win the White House, and they do not appear to have
What all this musing suggests is that there is enough
prospect of a Democrat upset that I better chart what it might mean for economic
policy and the economy.
With so many incumbent Democrats retiring from the Senate,
there is a high likelihood that the Senate will be majority Republican
regardless of the Presidential election. While
the House could shift, the Democrats have more contested seats than the
Republicans, and they already are the minority.
In short, the Congress almost certainly will remain
Normally, this would mean that current domestic policy
would be largely unchanged. A
slight shift toward education and medical problems and away from defense would
be expected. But just as a
Republican congress stalled Clinton spending initiatives but could not restore
Clinton defense cuts, a similar outcome should be expected with a Kerry
What will not be normal is the impact upon the tax code.
In the past, a gridlocked government, as a Kerry presidency would mean,
would lead to few changes in the code.
However, President Bush’s tax cuts have sunset
provisions. Even the end of the
marriage penalty and the child tax credit that were expanded this year disappear
soon before being renewed temporarily late in the decade.
Then the big sunset provision after 2010 reverts most tax law back to
In other words, President Kerry need not repeal the Bush
tax cuts, as he almost certainly will not be able to do. Rather, he only needs to wait until they expire.
Unfortunately for Kerry, the timing of these tax changes
will not coincide with his desire to increase domestic spending.
Furthermore, Kerry’s deficit reduction objectives are not that
different from Bush. Without the
tax changes until the sunset provisions are tripped, but with some prospects of
minor increases in some spending programs, one might presume the Kerry deficit
would be larger than the Bush deficit.
Also, tax uncertainty as the expiration of tax cuts
approach could impact the economy toward the end of the decade.
Of course, we will have another presidential election by then.
Of course, Kerry might seek fiscal responsibility, as
Clinton did, and seek to balance the budget in his first term.
That almost certainly would be successful on spending constraints, even
if he must wait for the tax sunsets to be triggered.
I did not hear that from the candidate so far in his campaign.
He might still seek tax reform. If he accepted a Congressman Linder type consumption tax to
displace the payroll tax and included the repeal of corporate taxation to get
Republican acceptance (an approach I certainly would recommend), this might be a
very different election campaign.
But I have heard no tax reform from Senator Kerry.
Neither have I heard any proposals to insure the Medicare and social
security programs will remain viable.
Therefore, I must conclude that some tax cuts eventually
will expire but some spending initiatives will arrive first.
The deficit will be higher under Kerry than under Bush but both will
accept rising government debt. Any
stimulus from such deficit financing could be poorly timed to coincide with a
As a result, I would see higher interest rates, slightly
more inflation, and slightly less growth under Kerry than under Bush, but the
differences would be too small to matter, at least until the Congress shifts
parties or the tax cuts expire.