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JAMES FLANIGAN

Gore, Bush: Two Different Futures for the Economy

October 08, 2000|JAMES FLANIGAN

Whoever wins this presidential election will be confronted by a cooling economy and will have to deal with it as presidents have always done, by cutting taxes and pumping money into the economy.

But long term, the differences between the candidates become more interesting for investors and voters. For behind their political rhetoric, Republican George W. Bush and Democrat Al Gore have dramatically different ideas about the economy and industrial development.

And an examination of the candidates' positions on taxes, energy, the environment and many other matters can offer insights about the direction of industries and investments in the next four or possibly eight years.

Meanwhile, however, the next president is likely to be greeted by an economic slowdown or, worse, a rise in inflation leading to higher interest rates and a recession.

Many economists expect the economy to slow to a growth rate of about 3% next year, from roughly 4.2% this year. That would mean about $100 billion less in economic output, or 2 to 3 million fewer new jobs. Whoever takes office in January will have to keep the economy moving at a pace that avoids a sharp reversal in the value of the dollar and a major downturn in the stock market.

Worse for the new president would be inflation rising above today's already worrisome 3.5% annual rate, up from 2.2% last year. If inflation picked up, the Federal Reserve would be forced to raise interest rates, even if doing so threw the economy into a recession. The increasingly nervous financial markets today "are watching inflation right now," says economist William Rhodes of Williams Capital Management, a New York investment firm.

If Gore or Bush do face a recession in their first year in office--as Presidents Nixon, Carter and Reagan did in their time--either man will do what is necessary, tax cuts and government spending, to get the economy humming again.

And Gore or Bush will be more fortunate than their predecessors because the next president will inherit federal budget surplus of $200 billion. Surpluses of that magnitude will persist through 2002, predicts economist Edward Yardeni of the Deutsche Bank Alex. Brown investment firm. Even a stock market downturn would not reduce the federal surpluses, because people selling stock would incur capital gains taxes that would continue to fill government coffers.

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It is in the long term that the ideas of the candidates will steer the economy in differing directions.

On taxes, a Bush administration would encourage faster economic growth in a more decentralized economy. George W. Bush's idea is to cut taxes by reducing tax bracket levels, from today's five brackets ranging from 15% to 39.6%, to four brackets ranging from 10% to 33%.

The reduction in brackets would help simplify a highly complex system, says Lawrence Stone, a tax expert at Los Angeles law firm Irell & Manella who served in the Treasury Department in the Kennedy and Johnson administrations.

The effect of such tax reductions would be to spur economic growth--but that would not happen immediately. Broad tax legislation such as Bush is proposing is not passed quickly by Congress. Bush's program, even if it passed in a timely fashion, would take effect three to four years from now and in some cases not until late this decade. Its long-term importance would be to set a decentralized, lower-tax pattern for the U.S. economy--as the administration of Ronald Reagan did 20 years ago.

A Gore administration would use tax policy differently. Rather than a broad tax reduction, Gore would give tax credits and tax deductions for specific purposes.

For example, Gore would use tax credits to help families pay for after-school child care. He would have tax deductions of up to $10,000 for tuitions and fees at colleges, graduate schools and training institutions and tax-favored accounts that would enable employers and workers to finance retraining and pursue lifelong learning.

A principal aim of a Gore administration would be to pay down the national debt. Doing so would tend to hold down interest rates. The long-term importance of a Gore program is that it would increase government guidance of the U.S. economy, in the tradition of Franklin D. Roosevelt's New Deal.

To be sure, neither candidate is an economic absolutist. Both Bush and Gore propose to use anticipated budget surpluses to finance prescription drug programs for the elderly and to expand aid to education and other purposes.

Pharmaceutical companies and firms engaged in modernizing education in the public or private sector stand to benefit in this decade no matter who is in the White House.

But in energy policy, Gore and Bush stand in stark contrast. In energy, a Bush administration would be more traditional, encouraging development of oil and natural gas in the United States. A pipeline to bring natural gas from Alaska would be encouraged, as would development of new oil in Alaska.

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