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 accomplish.

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 surprise. 

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 one now. 

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 Republican.

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 presidency. 

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 Clinton conditions.

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 recovering economy. 

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.      

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