LONDON, 7 March 2004 — A deficit expected to top $521 billion this year is the key statistic in the US presidential election campaign. But it is a surplus of another kind that is shaping the competing economic policies of the two camps.
Judging by the entourage of economic advisers that surrounds US presidential hopeful John Kerry, Clintonomics may be primed for a comeback. The senator, who this week clinched the Democratic nomination, has recycled old Clinton-era thinkers such as Alan Blinder, a Princeton economist and former vice chairman of the Federal Reserve; Laura Tyson, formerly White House economics chief and now the Dean of London Business School; and Gene Sperling, also a former economics chief.
The candidate’s top economic adviser is Roger Altman, briefly Bill Clinton’s deputy treasury secretary. Clinton’s Labour Secretary Robert Reich has written Kerry’s health care plan.
Another former Clinton economist -- the Nobel prize-winning Joseph Stiglitz -- says that there is a simple reason for the 1990s reunion. “Clearly there’s an aura of success from the Clinton years. The economy did so well it was natural for them to gravitate back to the advisers involved,” he says.
And the identity of these advisers may offer better clues to the broad macroeconomic strategy of a prospective Kerry administration than mere election rhetoric.
In 2000, few could have envisaged the seismic shift in economic policy that would accompany the arrival of President Bush in the White House. At that time government forecasters predicted a surplus over the decade to 2010 of some $4.6 trillion. Four years on, the outlook for that period is a deficit of about $2 trillion.
Yet a look at Bush’s entourage during his election campaign -- mainly recycled from the high-deficit era of Reaganomics -- would have given clear indication of how his administration would go.
Larry Lindsey, Bush Jr’s chief economist, was charged with fleshing out the economic policy details of Dubya’s ‘compassionate conservatism’. Lindsey’s expertise was in tax cuts, and that putative surplus gave him the opportunity to cut like never before -- to the tune of $1,300 billion. Glen Hubbard, who headed the White House Council of Economic Advisers, argued that the 1990s boom years were not the work of Clinton policies at all, but the long-term consequence of the feted two-band (15 and 28 percent) Reagan tax reform of 1986.
Hubbard’s most famous paper disputed the widely held belief that, between 1977 and 1988, Reaganomics had exacerbated inequality to the point that the richest 1 percent of American families had gained 70 percent of income growth. Taking account of lifetime incomes, he said, the proportion was markedly lower. So the zeal with which Bush would cut taxes, and the focus of those cuts on the rich, was clear from before he set foot in the White House. George W. Bush’s economic policy was always going to be a return to a type of Reaganomics.
So how do the two candidates’ broad economic strategies compare? “Both men aim to halve the deficit over the next four years. The key policy difference is that Bush will make his tax cuts permanent and hold back spending, while Kerry would repeal the Bush tax cuts for high-income earners to pay for his spending programs,” says Ian Morris, US economist at HSBC.
Stiglitz is unconvinced by Bush’s plan. “The basic outline of Bush’s economic policy is reckless. Tax cuts for the rich is disguised as a stimulus which did not provide much stimulus but a large deficit. With Kerry’s plan we will get more stimulus with less deficit and more equity. The economy is still anemic. We need more stimulus, and you can’t do that with tax cuts,” says the Nobel prize- winner.
Bush’s sums simply don’t add up, he says. “The truth is that Bush is lying when he says that he’ll halve the deficit. Expansion of the military and making his tax cuts permanent means that there is no way he’ll cut the deficit in half,” he says.
Kerry is specifically planning to reverse Bush’s tax cuts for those earning above $200,000 to pay for $72bn worth of healthcare reform. But HSBC’s Morris points out that clashes with Congress are likely to stifle the deficit-cutting verve of whichever candidate is elected. “Deficits of $400-$450 billion are likely until 2008 and beyond under both men. This would raise the public debt-to-GDP ratio from 37 percent currently to 45 percent in 2008,” he says.
