October 6, 2004

For many election years I have looked at the policies proposed by the main presidential candidates and then simulated what those policies would produce in the economy over the next few years.  This is a useful exercise in organizing what economic issues are important in the election. 

However, this election will either have one party controlling Washington or gridlock between the two parties.  Almost certainly, the Congress will remain Republican. 

Of course, that does not necessarily mean they will remain loyal to a Bush administration.  With no obvious candidate for 2008, several Republican members of Congress will be pressing their case for that position, possibly even at the expense of the Bush agenda. 

Furthermore, a growing segment of the Republican Congress is beginning to worry about deficits.  With borrowing surging and interest rates rising, the fastest growing expenditure in President Bush’s second term is likely to be interest on the debt. 

So far, long term interest rates have been well behaved.  Certainly, inflation other than energy appears to be contained.  Can you believe that hospital fees actually fell last month? (I can’t either but that is what the consumer price survey uncovered). 

More sinisterly, high oil prices are seen as slowing economic growth.  Also, the countries with the most rapidly growing trade surpluses:  China, Japan, Saudi Arabia, Kuwait—tend to put their surpluses, at least temporarily, into 10-year U.S. government bonds. 

We certainly do not want the slow growth and we know that those trade surplus countries will find something more worthwhile for their funds eventually.  Nevertheless, those low long term interest rates have preserved home prices and even allowed a little more mortgage refinancing. 

When (and I do not mean if)  long term interest rates start to rise sometime next year, deficit fighting may become more desirable for some members of Congress than making tax cuts permanent.

Of course, there is no way that the Kerry health initiative will be enacted.  It is expensive, intrusive, and probably increases the unfunded liability of government promises.  So, should we condemn him for ignoring the long term government deficits or applaud his election because the Congress will force him to be fiscally conservative?

President Bush is no paragon of virtue in resolving our ongoing budgetary problems.  When he thought we had a $5.6 trillion surplus, he was reluctant to push his tax cuts too far. That is why they all vanish with a sunset by the beginning of the next decade. 

Now that even his most optimistic projections show a decade deficit of $1 trillion before the additional $2 trillion cost of making tax cuts permanent, he ignores the deficit. 

He also added to the unfunded liability of government promises with his prescription drug initiative (although his administration still hopes that seniors will alter their health service purchases enough to save on other medical promises.)

There is not enough cash flow in the social security system to do anything more than a symbolic privatization of retirement savings.  If the accumulated surplus is used to increase the size of the private effort, cash flow will drop much more sharply than future liabilities.  The cupboard gets bare sooner. 

Yet, an alternative, the financially responsible handling of the existing social security pool by managers, is not even hinted by either camp. 

I could go on at length about what to expect with each of the candidate’s policies.  That they are not resolving what could be the depression of 2020 as workers rebel against the policies forced upon them by disappointed elderly is very clear.  Only Greenspan dared say a word about that problem. 

In the end, I see more fiscal conservatism with a Kerry presidency than with a Bush second term.  This is not because of their policies but because of the gridlock that our separation of powers creates when no policy consensus exists. 

Initially, equity values may fall because Kerry can alter regulations and that might impair economic efficiency.  Fears of outsized court settlements also may increase, though the juries, not Washington, are responsible for that. 

However, government will not grow any faster under a Kerry gridlock than a Bush administration, and the deficits will be smaller.  Economic growth might initially languish, but a Kerry administration is more likely to work with Congress in seeking energy conservation than a Bush administration has been prone to do.

In short, gridlock may be better for our economy than one party rule of Washington (at least with the policies being enunciated by these candidates)--and I would still say that if the party was Democrat. 


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