- The Washington Times - Wednesday, October 27, 2004

Next week’s election is shaping up as a referendum on the Republican way of running government and the economy, thanks to President Bush’s success in securing enactment of most of his economic program.

While some of Mr. Bush’s programs — such as his Medicare prescription-drug benefits — have not been in place long enough to see the full results, the best-known measures, $2.8 trillion of tax cuts, are well along in influencing the economy.

Mr. Bush’s tax cuts have produced both accomplishments and failures. Economists are nearly unanimous in crediting the personal rate cuts and rebates, which buoyed consumer spending during the recession of 2001, for helping to make that downturn one of the mildest on record and nurturing a recovery.

Economists also generally credit the generous tax incentives for business investment in the 2002 round of tax cuts with helping to spark a much-needed revival of business spending — adding a second leg to the recovery.

But the stimulus took place at the expense of record budget deficits that hit $413 billion last fiscal year. And they failed to produce the 5.5 million jobs promised by the White House. So far, only 1.8 million jobs have materialized.

“Under normal circumstances, interest rates at an all-time low and a full-speed-ahead, damn-the-deficits fiscal policy would be enough to keep the American economy afloat” and add about 250,000 jobs a month, said John Williams, a New Jersey economic consultant. “But the times are apparently not normal.”

Job growth decelerated this past summer to around 100,000 a month, according to the Labor Department.

Most economists blame high oil prices for lackluster job gains and the economy’s hesitating response to aggressive stimuli, along with the lingering threat of shocks from terrorist attacks and the conflict in Iraq.

Still, the results of the tax cuts should not have been surprising, economists say, since a large portion was focused on spurring investment through expanded write-offs and cuts in dividend and capital-gains taxes.

Profits, dividends soar

Profits for all U.S. corporations surged to a new record of more than $1 trillion this year, while dividends have grown to more than $400 billion, according to the Commerce Department.

Microsoft Corp., like many U.S. businesses swimming in cash, instead of announcing major new hiring plans or software ventures, said this spring it would provide an unprecedented $75 billion of dividends and stock buybacks for shareholders.

“The explosion in cash has been so intense that even profligate companies haven’t been able to invest it fast enough,” said Richard Berner, chief U.S. economist at Morgan Stanley.

Despite the predictable bonanza for corporate America, the results were disappointing for the White House, which had gambled that the tax cuts for corporations and high-income households would spur more business expansion and hiring.

Corporate spending on investments like computers and other labor-saving equipment did pick up, growing at double-digit rates in the last year. But while that sent productivity soaring, hiring did not keep pace.

With jobs still scarce, average wage growth fell to around 2 percent this year — about half the rate when Mr. Bush took office and well under the 3.5 percent rate of inflation. After three years of economic recovery, workers are losing earning power.

“The gap between corporate profitability and wage growth may explain why many Americans do not think the economy is doing as well as it is, and why the economy looks to be an issue in the presidential election,” said Fred Alger, chief market strategist of the Alger Funds.

“To most Americans, economic statistics don’t matter. What matters is the number on the paycheck and the price of gasoline.”

Isaac Shapiro, senior fellow at the liberal Center on Budget and Policy Priorities, said the tax cuts were poorly designed to respond to the economic slump.

More than 80 percent of the tax cuts went to investors, corporations and upper-income households in the hopes they would create jobs, he estimates. Only 20 percent went to the lower- and middle-income households who most readily spend their tax cuts and provide immediate stimulus for the economy.

The administration said the cut to 35 percent from 39.6 percent in the top tax rate was aimed at some 400,000 taxpayers who head small businesses. But Treasury Department figures show those taxpayers account for less than 2 percent of small firms nationwide, Mr. Shapiro said.

Meanwhile, the explosion of spending and tax cuts during Mr. Bush’s first term has left record deficits. Projected 10-year budget surpluses of $5.6 trillion when Mr. Bush took office have dissolved into projected deficits of $3.3 trillion, according to the Congressional Budget Office.

Legacy of debt

The nearly $9 trillion swing in the deficit outlook is due in part to the 2001 recession, the September 11 terrorist attacks and sluggish recovery.

But the estimate also assumes Mr. Bush secures enactment of much of the rest of his economic program, including permanent extensions of the tax cuts, along with reform of the alternative minimum tax and continuing expenditures for operations in Iraq, Afghanistan and the global war on terrorism.

On top of those expenses, Mr. Bush indicates that in a second term he would add $1 trillion or more to the debt though enactment of a program to partially privatize Social Security, while continuing current benefits for people around retirement age.

Mr. Bush also would like to expand tax-free savings accounts in a second term, and is considering major tax-reform proposals, such as replacing the income tax with a nationwide sales tax or consumption tax.

Mr. Kerry also has grand budget plans. He is proposing $2.2 trillion for new health care, education and other programs that will add to the deficit. He is proposing to pay for $860 billion of those programs by repealing Mr. Bush’s tax cuts for people with incomes greater than $200,000 a year.

Mr. Kerry has pledged to reinstate the pay-as-you-go budget rules for new spending programs and tax cuts that were in place during the 1990s. The rules helped Congress achieve budget balance and surpluses during that era. Mr. Bush has resisted reinstatement of any rules that would deter the enactment of tax cuts.

Economists say the huge budget deficits will be the biggest economic problem for the next president to tackle, along with escalating health care costs and finding ways to finance the vast Social Security and Medicare programs on the eve of the baby boomers’ retirement.

The budget deficits loom as a threat to the economy’s future because they drive up long-term interest rates and contribute to record trade deficits of more than $500 billion a year. Financing those deficits requires $1.5 billion in new loans from abroad each day, with most of the financing recently coming from the central banks of China and Japan.

Federal Reserve Chairman Alan Greenspan has warned that foreign lenders may not always choose to put their money in U.S. securities. If they stop doing so, there could be a financial collapse that sends the dollar plummeting and U.S. interest rates soaring.

“History has shown that countries in our [deficit] position have experienced sharp adjustments and unhappy endings,” said John E. Silvia, chief economist with Wachovia Securities. The problem, he said, is a culture in Washington of “never saying no to anyone.”

Even without adding new spending programs or tax cuts, the budget office estimates it would take the repeal of all of Mr. Bush’s tax cuts to balance the budget — or a freeze in discretionary spending far more draconian than any considered by Congress.

While both candidates have been slow to embrace the deficit challenge, Mr. Kerry has zealously seized on problems in other areas such as health care, education and jobs, and is proposing federal solutions.

Health care targeted

Economists and businesses increasingly blame soaring health-insurance costs for creating barriers to employment and sapping workers’ earning power.

Most Americans are insured through their employers, which have been hit with cost increases exceeding 50 percent in the last four years. Many employers have dropped coverage altogether, and those who offer insurance have had to cut into wages to pay for it.

Mr. Kerry is proposing to spend $1.3 trillion over 10 years on health care, primarily through a new program of backup catastrophic coverage for employers that would alleviate some of the burden on businesses, according to American Enterprise Institute estimates.

The Massachusetts senator also would provide health insurance tax credits, promote wellness programs, and expand the Medicaid and child health programs.

Mr. Bush’s $128.6 billion health care plan is aimed primarily at controlling costs through the creation of small-business insurance pools, limits on malpractice claims, and a system of medical savings accounts designed to make consumers more cost conscious about health care spending.

Both candidates are promoting alternative sources of energy to reduce dependence on volatile sources of foreign oil.

Mr. Bush wants to open up more federal lands to drilling for oil and gas, including the Arctic National Wildlife Refuge. Mr. Kerry is pushing for greater energy conservation through higher fuel-efficiency standards for cars, trucks, buildings and appliances.

Mr. Kerry’s campaign has milked public discontent with the weak job market and declining wage gains. He has proposed punishing corporations that create jobs overseas while shuttering plants in the United States.

Mr. Kerry would provide $12 billion of tax credits to manufacturers who create jobs at home while ending a loophole that enables U.S. companies to avoid taxes on earnings at their foreign subsidiaries — money that often is used to expand employment overseas.

To encourage companies to bring their money home and use it to create jobs here, Mr. Kerry would provide a one-time tax “holiday” for repatriated foreign earnings. And he would cut corporate taxes by 1.75 percentage points overall.

Mr. Kerry also says he would step up trade sanctions on other countries that flood U.S. markets with cheap goods in violation of international trade rules. The tempo of trade cases pushed by the Bush administration also has picked up as the election approaches.

Economists are dubious that the Kerry proposals would work.

“Kerry has correctly emphasized that domestic production is often taxed at a higher rate than production abroad, but his prescriptions will not boost U.S. jobs,” said Gary Clyde Hufbauer of the Institute for International Economics.

Rather than bring jobs and production back to the United States, the plan more likely would spur U.S. companies to sell their foreign subsidiaries or reincorporate in tax havens overseas, he said.

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