On The Economy -- Kerry's Negative Impact

His election would lower U.S. growth in 2005 and 2006.

I don't know who will win the November U.S. presidential election. But I will say this: If the Kerry-Edwards ticket wins, the stock market will head straight into the toilet. The first and more obvious -- but ultimately less important -- reason is that the business community has whipped itself into a complete frenzy over the boogeyman of John Edwards, who will presumably turn over his office to the most complete scum that the trial lawyers association can offer. I think that threat is quite overblown, but as usual, investors will shoot first and ask questions later. The second and more important reason has to do with fiscal policy. In analyzing the economic impact of various changes in tax rates or spending programs, it is always useful to start with the three legs of the stool. First, the impact on purchasing power. Second, the impact on financial markets. And third, the impact on productivity. The first is very simple. Tax cuts and increases in spending boost purchasing power, and tax increases and spending cuts decrease it. Of course, as we all know by now, that is less than half the answer. Any increase in the federal budget deficit raises interest rates and reduces stock prices, holding all other factors equal, and any decrease has the opposite impact. The productivity effect is the hardest to measure but is ultimately the most important. Tax cuts increase productivity by switching economic activity from the public to the private sector and giving people more incentive to work harder. Defense spending is a mixed bag; in the case of technologically advanced weapons, there is a positive spinoff on productivity, but that is offset by the lower productivity of the public sector; so it is usually a wash. Transfer payments have a clear negative impact on productivity, reducing work effort and encouraging people to squander resources. I'm not saying these three impacts are always equal, because it depends on the phase of the business cycle, the rate of inflation, and the international situation, among other factors. Nonetheless, as a starting point, the score is +1 for tax cuts and -1 for transfer payments. The evidence of the past two decades has been quite clear. Reagan cut taxes and transfer payments, and once the Carter residue had decomposed, the economy prospered. Bush the First raised taxes and raised transfer payments, and the economy went into recession. In the first two years, Clinton raised taxes and left transfer payments alone -- although he tried to introduce Hillarycare -- and the growth rate remained stagnant. In his last six years, Clinton did not raise taxes further, and he did cut transfer payments -- or rather, the Republican Congress did -- so the economy prospered. Bush the Second cut taxes and raised spending, and the results so far have been a mixed bag, with an initial recession followed by what appear to be two above-average years of growth. No one really knows what fiscal program John Kerry will introduce if he is elected, and that includes John Kerry. However, if we take his campaign promises at face value, he plans to raise taxes and raise spending. At least according to my analysis, that is the worst possible combination of fiscal policy, and is far worse than what Clinton tried. Of course, if the Republicans retain control of the Senate, he may not get what he proposes. Obviously all this is conjecture at this point. However, my conclusion would be that under a Kerry Administration, real growth would be one percentage point lower in 2005 and two percentage points lower in 2006 than would be the case under Bush. If that is indeed anywhere close to the mark, the stock market will clearly discount the slower growth well before it happens. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish