THE GAME of predicting the economic consequences of a president is, in a sense, a frivolous exercise: It is impossible to predict in advance the nature of the problems any president will be called upon to solve. Franklin D. Roosevelt was elected on a pledge to balance the budget, and reelected on a promise to keep America out of foreign wars. In the event, a deepening depression and Pearl Harbor made it madness to keep those promises, which were duly broken. George Bush the elder was elected on a promise never to raise taxes but, confronted with a stubborn fiscal deficit, decided to break his word–resulting in unwanted early retirement.
His son was elected on a platform that barely mentioned foreign policy, except to promise humility in dealing with foreign countries, and was converted by terrorists into a war president not noted for his deference to the United Nations. So in order to predict how a president will behave in office, and especially how he will handle the economy, it is important to guess at the issues he will face, and divine from his general philosophy the specific actions he is likely to take.
Start with the budget deficit. Both Bush and Kerry have promised to cut it in half in four years; neither has a credible plan for doing so. So we know that we are in for an extended period of loose fiscal policy. But there are differences. If Kerry succeeds in persuading Congress to raise taxes on the rich, there will be winners as well as the obvious losers–which include hundreds of thousands of small businessmen. Higher marginal rates will make tax-exempt municipal bonds more attractive to high earners. Buy if you think Kerry is headed for the White House.
Meanwhile, Bush’s benign neglect of the deficit–he has yet to veto a spending bill–means that sooner or later interest rates will have to rise, and bond prices fall, if America is to continue to attract the foreign capital it needs to fund its trade deficit. But Bush’s plan to retain lower rates for dividend income should give equity markets a bit of a boost. So if you like Bush’s chances, re-weight in favor of equities. More specifically, says Merrill Lynch’s Bob Doll in his latest advice to clients, “Bush’s tax policies stimulate spending among high- income consumers, which tend to help upscale retailers.”
Then there is the trade deficit. Here we can expect very different policies to come out of the Oval Office, depending on who wins the election. Freed from any pressure to make exceptions in order to woo voters in key states, Bush will stick with his free trade policies. Kerry, on the other hand, will be under pressure from his trade-union backers to live up to his promise to review all trade agreements, and increase the tax burden on companies operating overseas.
Neither approach is likely to make a dent in the trade deficit, and neither candidate is likely to persuade the Chinese to abandon their policy of stimulating exports by keeping their currencies undervalued relative to the dollar. So the dollar is likely to decline in relation to the euro, sterling, and other unpegged currencies–no matter who occupies the White House.
WHEN IT COMES to other issues, very different general philosophies inform the specific positions the candidates have taken. The president’s visceral reaction is to seek solutions built around individual choice and freedom; Kerry’s is to devise a government program. So Bush would meet the looming shortfall in the Social Security and healthcare programs by allowing individuals to set up tax-free accounts to help them when they retire or fall ill, and, in the case of younger workers’ pensions, indexing payments to inflation in prices rather than to increases in wages. Kerry has pledged to leave the pension system in government hands, where funds earn very little, and not to raise the retirement age, which inevitably means raising taxes to pay pensions retirees, who are increasing in number and who, inconveniently, live longer. And he proposes a government healthcare plan to provide insurance coverage for everyone, or almost everyone.
That difference matters. If individuals are allowed to manage a portion of their retirement accounts, as Bush proposes, more funds will flow into equity markets. If you are into shares, another reason to root for Bush. And if the government becomes more heavily involved in funding health care, the pharmaceutical companies, whose prices and profits have been objects of Kerry’s scorn, will face a host of new regulations and implicit or explicit price controls. If you think Kerry will be the winner, and that he can carry Congress with him for a version of what is being called Hillarycare, a reference to Hillary Clinton’s failed grab for control of the health care sector, get rid of drug company shares.
Finally, there is energy policy. Both men are pledging to end reliance on imported–sometimes, only Saudi–oil, an economic impossibility. But in the course of failing, Bush will propose tax policies that seek to encourage traditional energy producers to step-up output, while Kerry will try to help non-traditional suppliers–think wind and sun–and subsidize research aimed at reducing consumption.
There are 14 days remaining in which you can adjust your portfolios. But first you have to pick the winner in an election that is likely to be very close and, probably, contested in the courts; decide that your man can persuade Congress to adopt his programs; convince yourself that you know something not yet reflected in share prices; and believe that your man, unlike many of his predecessors, will be permitted by events to honor his pledges.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
