Judging by the direction of this year’s US presidential election campaign, the name of James Carville is already little more than an historical footnote. Carville, for those whose memories need refreshing, was the campaign manager of Arkansas governor Bill Clinton’s bid for the White House in 1992. He it was who thought up one of the most famous election slogans, just eight syllables long: “It’s the economy, stupid.” It was one of the three themes he deemed so crucial that he had them written up on a whiteboard and stuck on a pillar in the centre of the campaign headquarters for all to see. The other two, incidentally, were “Change vs more of the same,” and “Don’t forget healthcare”.
No one will forget healthcare – it was an early, and damaging defeat for president Clinton, who certainly was a change from Bush and Reagan, although not always in the manner voters had hoped. But the mantra of “it’s the economy, stupid” served Clinton well. So much so, in fact, that the man who takes over the White House in January has a potentially huge opportunity to forge a new path for the US.
He will inherit the strongest economy the US has ever seen, one which has been growing without interruption for eight years, and for the last four years at a rate of 4% or more.
More than 50% of the working population now owns stocks, or has a direct say in their investments through defined contribution plans, 401(k) plans, IRA accounts, mutual funds and brokerage accounts. Consumer spending has been robust, yet inflation has stayed low, and the Federal Reserve has withheld from intervening in the growth of the economy until the last 15 months, and then only with small, incremental interest rate increases which oVer hope that a period of unprecedented growth can be steered into a soft landing.
That’s the good news. The bad news is that there is every chance that whoever does win on November 7 will squander this enviable inheritance. Both main candidates give the impression that they have consigned Carville’s succinct prognosis to history. Yet it is still at least as relevant today as it was then, albeit with a different twist. This time it is not that people are disaffected by a poorly performing economy burdened by mistakes of the past, as in 1992. Instead it should serve as a warning to be mindful of the effect of their pledges on the economy and Finances of the future.
| Greenspan: to go in 2002? | ||||||
The problem lies in what is being touted as the biggest prize for the new president, the projected budget surplus. The Congressional Budget Office (CBO) has estimated that the surplus will range from $4.5 trillion to $5.8 trillion over the next 10 years, depending on which calculation method is used. Showing their conservative bent, candidates are basing their plans off the lower Figure. $2.3 trillion has been set aside for the social security trust fund, and dubbed the off-budget surplus. That leaves $2.2 trillion for the next president to toy with from what is now called the on-budget surplus.
It is a very unusual circumstance for a presidential candidate to be in, as the federal government has not had a surplus since the mid-1960s, before the escalation of the Vietnam war plunged the US into a near-20-year economic crisis. Reaganomics cut taxes but increased spending leading to an annual budget deficit of $300 billion a year by 1992.
Unsurprisingly, the candidates are falling over themselves to spend the surplus in ways that appeal to their core voters.
Unfortunately, their plans are predictable, falling back on traditional party-political agendas. Policy wonks on both sides have worked out their spending plans in reasonable detail. What’s missing, and what’s needed, is a clearer vision for how to lead the American economy through this period of bounty without endangering it, and for planning today how to pay bills that will fall due far in the future.
A more immediate danger is that both candidates’ economic policies are founded on the assumption that the CBO’s forecast is correct, and indeed the right measure, which is by no means certain.
Everyone appears to agree that it is not in the country’s best interests to keep a huge surplus on the books. Even back in 1998, when a balanced budget still appeared to be a few years away, the then chair of president Clinton’s National Economic Advisory Council, Janet Yellen, was telling economists that.
John Cogan, who is a senior fellow at the Hoover Institution, as well as an economic advisor for Republican candidate George W Bush, oVers a similar thesis about the desire for government to overspend . “An iron law of American politics is once taxpayer money comes into the Treasury, the legislature will spend it. Recent experience has reconfirmed this law. At the federal level, in response to the surge in federal revenues during the last few years, Congress and president Clinton have repudiated the budget caps they agreed to in 1997. The result has been the largest growth in federal appropriations since president Carter’s term in Office.”
So the presidential candidates are promising to spend trillions of dollars that do not yet exist, based on a forecast by an organization, the CBO, which has a terrible record for accuracy, on largely unimaginative schemes. “My worry is that the surplus burns a hole in the new administration’s back pocket,” says Bill Dudley, an analyst at Goldman Sachs who at the start of August issued a report with his colleagues, Bush versus Gore: A budget referendum. “There is a big risk of blowing the money in ways that are simply not appealing.”
Whoever wins will want to make an impact as soon as possible. The perception of having a large surplus could also affect the dynamics of Congress, says Dudley. “The surplus appears to be so big that the mechanics of gridlock don’t work as effectively as they did before.”
Gridlock essentially means when one party controls Congress (as the Republicans have since 1995) and the other holds the presidency. As a result, says Dudley, “we could get both tax cuts and increased spending.”
And the man who has played a large part in holding all the pieces of the US, and global, economy together might not be there much longer. Federal Reserve chairman Alan Greenspan has just over three years left of his fourth term in Office. It runs out at the start of the next presidential campaign, and he has indicated that he wants to stay on for as long as possible. But that will be just another two years, as he cannot remain a member of the board past 2006. Having to Find a successor in an election year might be deemed too politically-charged an issue, so better to get his successor in place early. “We could see Greenspan retire in 2002 as a result,” says Jim O’Sullivan, US economist at JP Morgan. The prospect of the master helmsman leaving just as potentially damaging Fiscal policies begin to drag the ship towards choppier waters is not reassuring.
Show us the money!
Texas Governor George W Bush, a Republican and son of former president George Bush, has outlined several attention-grabbing plans.
Restructuring social security is one of them.
The system needs it, as the baby boomer generation nears retirement and threatens to bankrupt the system within 30 years. So does Medicare, the federal healthcare safety net.
But, citing the desire to get bipartisan support, Bush’s camp refuses to give too many details. Defence spending is also one of his priorities, as is a vague ideology he calls “compassionate conservatism,” which is probably a desire to show he cares about the less well off without actually undertaking a great deal to prove it.
The vast majority of the surplus available to him will, he says, be given back in tax cuts: the easy option fall-back policy for the right wing. At present, Bush wants to give back $1.3 trillion over 10 years, and it will come in the form of cutting tax rates. He intends replacing the existing Five tax bands – 15%, 28%, 31%, 36% and 39.6% – with four new ones, 10%, 15%, 25% and 33%. He plans just $300 billion of new spending, $200 billion of which, says Larry Lindsey, Bush’s chief economic adviser, “will come from offsets, so that leaves us with more than $500 billion of the on-budget surplus left.” In contrast, he says, the plans of the main opposing candidate constitute “a spending spree of $2.1 billion”.
That other main candidate is sitting vice-president Al Gore. He has proposed more limited tax cuts, which he calls “targeted tax cuts”, of about $500 billion. That appears, in part, to be a response to Bush increasing his tax cuts to $1.3 trillion after the CBO increased its surplus forecast in June. The majority of Gore’s plans revolve around the traditional fall-back for parties of the centre and centre-left: increased spending, ranging from better prescription coverage for the elderly to another, government-sponsored entitlement programme to add to social security pay-outs. “In sum, we’ve accounted for about $1.5 trillion of the on-budget surplus,” says Professor Alan Blinder, a scholar at the Brookings Institution and Gore’s chief non-administration economic adviser. “That includes tax cuts, spending plans, and debt repayment. If we Find there’s more in the pot, we’ll do more with it. And we have a commitment to scale back, if the surpluses come in smaller than we now think.”
To give credit to the candidates, they are both talking about previously taboo subjects, and how to reform them. Both Medicare and social security are facing long-term insolvency problems as the baby boomer generation begins to retire in 2006. The latter, especially, was revered as the “third rail of politics” – it was untouchable.
Their plans for the on-budget surplus, however, are less praiseworthy. A tax cut of the magnitude proposed by Bush could provide too much of a Fiscal stimulus, causing the economy to overheat, inflation to increase, the Fed to put up rates sharply, and the economy to head towards a harder landing.
Of course, Lindsey disagrees: “What we’re proposing is incremental. It won’t come in until 2002 in the First place, and who can tell what shape the economy will be in by then. And the First cut will be equivalent to 0.2% of GDP, or about $200 billion. Clinton’s budget spending plan this year, which was a 13% increase on last year and so way above the caps set in 1997, is 0.7% of GDP. Our tax cuts won’t hit that level until 2005 at the earliest.” But the temptation and the pressure to dole out the bounty is huge.
Bush’s budget specialist Cogan says: “It seems to many in Washington that there’s never a good time for a tax cut. During the latter part of the 1980s and early 1990s, we heard correctly that there was no sense to cutting taxes while there was a deficit. But now as we face large projected surpluses, we hear the same thing.” But he knows the importance of appearing prudent. “Let’s keep this in perspective. Bush’s tax cuts are just 25% of the entire projected budget surplus, represent just 1% of GDP and are just a 5% reduction in projected revenue take over 10 years.” Cogan emphasizes that the structure of the tax cut plan is important. “Tax rate reductions create incentives for hard work, risk-taking and entrepreneurship. They promote savings and investment.”
Gore’s tax cut plans, at around $500 billion, are more modest. But by being targeted they are more complex, which is not something the US tax code particularly needs at the moment.
Blinder argues that complexity is not necessarily a bad thing. “Yes, Gore’s plans do make the tax code more complex, but the positive side to that is that the cuts are targeted. Targeting necessitates rules, and rules increase the complexity. But it means that the money gets to where it is needed, such as to improve healthcare coverage, education, or to promote greater savings.
Bush’s plan may be simpler, but it gives the lion’s share of benefits to the wealthy.”
The rest of Gore’s plans deal with spending programmes, adding a further $1 trillion to the bill and implying greater government involvement in the economy, something which would appear to Fly in the face of the lessons of the last 20 years. “One of the greatest messages of the last few years,” says Abe Gulkowitz, chief global strategist at Deutsche Bank in New York. “Is that Washington has to a large extent been marginalized. Once you have a good policy in place you only need to step in during times of emergency, or where regulations are concerned to level the playing Weld.”
But governments hate to be marginalized.
Already the balanced budget caps set in 1997 are effectively dead. Congress and the president both have been taking an increasingly liberal view on what constitutes “emergency spending”. It is an election year, of course, but if the legislature and the executive cannot keep spending within pre-agreed limits after just two years, the dangers of surplus-generated spending programmes spiralling out of control must be considerable. Professor Cogan has a very good point.
And watching from the sidelines is Greenspan.
Reading between the lines of his utterances has spawned a cottage industry, but he has made one fact wholly clear: he prefers any surplus to be spent on paying down the national debt. It has the knock-on effect of reducing interest rates, and therefore rates on loans and mortgages, and is one of the more subtle ways of returning cash to the population with less risk of overheating the economy.
After that, he has implied, tax cuts might be best, and only then more spending. His role, of course, is to direct monetary policy to keep in line with government Fiscal policy, and not to dictate the latter. Both candidates pay lip service to Greenspan. Bush’s adviser Lindsey was a board member of the Fed between 1991 and 1997. He wrote a very complimentary profile of Greenspan in his 1998 book Economic Puppetmasters and says that he “would never put forward a tax cut plan if I thought it would conflict with the the Fed’s objectives”.
Gore has been part of the administration in which Greenspan’s role was large, and during which his reputation has soared.
Yet the two want to make a splash if they get in, and cannot resist proposing tax cuts or spending plans which may well force the Fed to push rates up sharply. They are both so tempted by the short-term political gains of exploiting a couple of years of good Figures, after decades of bad ones, that they are putting Fiscal prudence in jeopardy.
Wishful thinking: the politicians’ downfall
It has taken Washington over 30 years to balance the budget, and less than two years after any sort of surplus is announced, Gore and Bush are staking claim to $2.2 trillion.
Now let us assume that the CBO forecast is not all it’s cracked up to be by the candidates.
| Blinder: complexity is not necessarily a bad thing | ||||||
According to a joint study by Alan Auerbach of the economics department at the University of California, Berkeley, and William Gale of the Brookings Institution in Washington DC, the CBO Figures provide too simplistic and too optimistic an outlook. The methods Auerbach and Gale use instead result in a much lower surplus for the next 10 years.
First, the CBO assumes that discretionary spending will fall to 5.2% as a percentage of GDP by 2010. In 1999 it stood at 6.3%, which is already the lowest level since 1962. Room to manoeuvre from here is slim. “Much of the decline in the ratio of discretionary spending to GDP over the past 40 years, and virtually all of it since 1990, has occurred in defence spending,” they write. “For either category [defence or domestic spending], additional cuts are likely to prove difficult to make, especially with large surpluses and a booming economy.”
Auerbach and Gale therefore keep discretionary spending constant at 6.3% of GDP for the next 10 years. That automatically raises spending for 2001 to 2010 by $744 billion. Add on the extra interest, and the $2.2 trillion on-budget surplus loses $864 billion.
The next issue they tackle is taxes, more specifically two structures – alternative minimum tax and expiring tax provisions. The First is a kind of trap set to ensnare those who try too aggressively to avoid paying their taxes. It is not indexed for inflation, however, so the 1.3% of tax payers affected by it would rise to over 15% by 2010. Auerbach and Gale see this as beyond its remit, and unacceptable enough to all concerned that something will be done to keep it targeted at about 1.3% of tax payers.
As for expiring tax provisions, the CBO assumes they will expire on schedule, whereas they are often extended a few more years. That might take $61 billion from the surplus; AMT could remove a further $94 billion.
Finally they assume that there could be a similar agreement for Medicare and government pensions surpluses as there was for social security: both Republicans and Democrats agreed to set aside all social security surpluses, which at present total $2.3 trillion, and not allow them to be used for tax cuts or spending. Gore is part-way there. “The vice-president has explicitly proposed that we take Medicare surpluses out of the on-budget surplus,” says Blinder. Bush has yet to say anything on the issue. Assuming this does happen, that takes another $802 billion over the next 10 years out of the surplus: $360 billion for Medicare, $442 billion for pensions.
In total that makes $1.821 trillion of the surplus that could well not be available, leaving the two candidates with just $350 billion in extra cash. Set against this, it’s worth noting the CBO has been conservative in other aspects of its calculations. “The CBO has always been conservative in its GDP growth estimates, for instance,” says Lindsey. “They are forecasting an average GDP growth rate of 2.7%. The average rate for 1980 to 2000 is 3.2%, so we would have to do considerably worse than that to hit CBO estimates.”
Very true, but GDP is going to have to grow at an exceptionally high rate to bring in enough receipts to offset $1.82 trillion. In the meantime, the candidates are making commitments which they may Find themselves unable to keep. That would probably be no bad thing. Much more worrying, though, is if whichever candidate who gets in continues with his plans regardless. If so, each would send the surplus careering back into deficit.
According to Auerbach and Gale, a fully implemented Bush tax cut would rack up a deficit of $1.19 trillion. No Figures are given for Gore’s plans in this instance, but his overall package of tax cuts and spending plans is close to Bush’s tax cut costs.
This is a 10-year period we are talking about, however, so it is unlikely, if Auerbach’s and Gale’s Figures prove to be correct, that either candidate would want to continue with his plans, let alone be allowed to by Congress. The key question is how much damage either might wreak early on.
Entitlement programmes: destined for a raw deal?
Unfortunately, each of the candidates is so set on his own pet projects that they will begin to introduce them in their First budget, for 2002, due for presentation to Congress next February. Once tax cuts or spending increases begin, it is very hard for the same president to reverse them.
There are very few analysts or lobbyists in Washington and beyond who seriously expect the US economy’s most serious longer-term problems to be tackled in the First year: what to do with the government entitlement programmes, Medicare and social security.
The danger of their being put aside is that they will not get tackled at all if the present positive outlook for the surplus does indeed fall short. While it’s encouraging that overhaul of these programmes is being discussed at all, any attempt to adapt or reform them in the past has been wholly unsuccessful. Early defeat on healthcare changed the entire course of Clinton’s presidency. But, as with similar schemes in Europe, not to tackle them is to risk bankruptcy a couple of decades down the road.
For social security at least, both major parties have already agreed to keep any payment surpluses in the programme solely for use on the programme. So there is a buffer zone there for the next decade or so. The same does not apply to Medicare, or at least not yet, although Gore has pledged to set aside the $360 billion surplus for that, too.
The problem with the social security system is that it was designed for a different age, and with a different purpose. “It was set up in 1935 as a social safety net,” says Don Marron, chairman and chief executive of PaineWebber and one of six co-chairman who sat on the National Commission on retirement policy.
Established at the beginning of 1997, it concluded its investigation in May 1998, and released its Findings in March 1999.
The 1935 concept, continues Marron, “was to provide for those who really could not provide for themselves in retirement. Sixty-Five was the retirement age then, but average life expectancy was 62. It was never envisioned to be a comprehensive retirement package, but that’s what it’s evolved into. One third of our workforce is fully covered privately for retirement, one third has no savings whatsoever, with the rest in between. Which means that at least two thirds of Americans, if not more, are reliant on social security.”
While there are enough people working and contributing to the scheme, it works just Fine. At least, it does not become a crisis, even if pension pay-outs are not that high.
But the baby boomer generation, which has kept the receipts of the system at a workable level, begins to retire in 2006. “According to the trustees, payroll tax receipts are projected to fall below initial outlays by 2015,” report Goldman Sachs analysts Bill Dudley, Edward McKelvey, Joan Woodward and John Youngdahl, “and the trust fund to be depleted by 2037. By 2037, receipts would cover slightly more than 70% of outlays.”
Therein lies the problem in having politicians deal with it: it’s not due to happen on anyone’s watch anytime soon. But its causes will not disappear, and with a surplus in the trust fund, now is the time to sort out a solution. “It’s elementary, really,” says one particularly agitated analyst in Washington. “If you have it, put it to good use. If the bad times come and you haven’t Fixed it, then shame on you. Shame on you.”
Both Bush and Gore say they have a plan.
Bush’s is more vague, which Lindsey explains is intentional. “There are half a dozen plans submitted by members of Congress, all of which appear to be workable. But if Bush opts for one over the others, he may lose support from the others. He’s trying to work with Congress to get a bipartisan agreement. Otherwise he runs the risk of trying to push a plan through against Congress’s wishes, as Clinton did with healthcare, and indeed as Bush himself did with a tax cut plan in his First term as governor in Texas.”
In essence it would appear that the Bush plan is similar to that put forward by the National Commission, a plan sponsored by the Center for Strategic and International Studies, whose president and chief executive at the time was Robert Zoellick, who also happens to be an adviser to Bush, on foreign policy and international trade issues. At present, 12.6% of payroll taxes goes into social security.
The average return is between 1% and 2%. Under Bush’s plan, somewhere in the region of 2% of payroll taxes – or 17% of the social security payments – would be released for individuals to invest as they see Fit, within certain guidelines. That would probably mean bond funds, index funds and mutual funds. The commission, and Bush, are looking for returns in the region of 7%, but as these only accrue over time those near to retirement, which appears to mean those over the age of 45, possibly over 50, would remain in the current scheme. The cost would be about an $80 billion a year reduction in the social security surplus. “It’ll take about 12 to 18 months to get the money invested,” says Marron. “But within seven or eight years the system will have been paid for and will then continue to progressively fund itself. And the best part of it is that it creates an asset out of social security for the First time. This money will always belong to the individual, and cannot be taken back by a pension fund or the government when you die.”
There are problems with this type of scheme.
First, it smacks to many of privatization, and with that undermines one of the key tenets of the programme: income redistribution. It’s no idle worry on the part of low-income workers or union leaders, as social security is, according to Goldman Sachs, “the primary reason why the poverty rate for seniors has fallen sharply over time.” Next, although it may increase returns, it also increases risks on the money invested. What role government would play in shoring up any losses for a plan it has forced on tax payers is as yet unclear Third, is it economically feasible for a family on an average income to invest in index funds or mutual funds?
The administrative costs might be prohibitive for someone with only $400 a year to invest.
According to Marron, the commission looked at a plan which already exists for federal employees, called the federal thrift savings programme. “The fees on that are eight basis points,” he says.
The sheer lack of detailed information prevents a proper analysis of its viability, although Bush has been clever to link his scheme to those already being proposed.
Detail is not a problem for Gore’s plan. It is less radical, it is also more complex, reliant on using money from the non-social security surplus, and wholly reliant on the continuation of a good economy. “Vice-president Gore’s plan is a way of Fixing social security for the next 50 years or more,” says Blinder. “The First part has already been achieved namely to keep social security surpluses separate and save them. The next step will be to transfer general revenues into the trust fund.” Gore has proposed calculating the money saved on interest payments on the national debt and putting that in the fund, says Blinder. “The earmarked funds start at about $120 billion in 2011, and doubles within four to Five years.” Is this sleight of hand? “It does rely on there being a surplus, of course,” Blinder says.
That, he says, takes care of the legal and Financial problem – namely how to use anything other than social security receipts as part of the trust fund. Next comes the economic problem. “Americans are spending a larger fraction of their life in retirement, so retirees need to get a bigger slice of the national pie,” Blinder explains. “The least painful way is to make the pie grow faster by increasing GDP. How we do that is by increasing savings and investment. We achieve that, in turn, by running budget surpluses, paying down the national debt, and so lowering interest rates. That leads to more money in the individual’s pocket and more investment in general, which should increase GDP and improve real wages, thus making the wage base of the payroll tax bigger.”
And Gore has proposed another plan to stand side-by-side with social security, called Retirement Savings Plus accounts. Blinder explains it as “an account above and beyond social security. It’s a government-sponsored, privately-run programme, like a 401(k), with a highly progressive contribution match provided by the government, not the employer.” For low-income workers, the government will put in $3 for each dollar the individual puts in, $1 for $1 for those on middle incomes, and 50 cents for each dollar for those earning up to $100,000. Nor is it purely a retirement package as individuals will be able to withdraw money for certain things, such as paying for a child’s education or buying a house. “We look upon it as a tax cut, or a tax subsidy to encourage saving,” says Blinder.
Republicans deride it as another entitlement programme which worsens, rather than solves, future funding requirements, and question whether yet another saving scheme is really necessary. Those on or near minimum wage are likely to view it as another scheme they can’t afford; while those more affluent, will view it as free money from the government. Gore’s team has estimated the 10-year cost of the accounts at $200 billion; others put it much higher. Goldman Sachs, for example, suggests that a 100% take-up rate (which they concede is unlikely) would cost $100 billion a year.
In essence, then, Gore’s plan is based on three premises: it depends on the economy continuing to grow strongly, the government running surpluses, and relies to a stunning degree on trickle-down economics. “Yes, it’s a theoretical case,” says Blinder. “But look at the last eight years, where this has been the guiding principle of the Clinton campaign, and one of the reasons why the US economy has done so well.”
Healthcare is a victim of the same dynamics, and is expected to go bust in 2025, 12 years before social security. If the latter scheme is difficult to change, healthcare is worse.
It is more complex than social security, which is mostly a matter of collecting payments and paying out allowances. Healthcare involves a complicated web of relationships and reimbursement schemes for Medicare healthcare management organizations, nursing homes, hospitals, and other institutions. The number of elderly people in Medicare is expected to double to 80 million by 2035, and the amount of people without any insurance is expected to rise from its current level of 44 million, or 18% of the population.
Again Gore is proposing shoring up the system using general funds. He also wants to add another entitlement, a prescription drug plan, before reforming the system, whereas Bush favours providing the elderly with prescription drug coverage as part of a comprehensive reform of the Medicare. He regards it as the best way of freeing the government from a self-defeating cycle created by a dire lack of policy options in the past. “The government has traditionally had one policy response to keep healthcare affordable,” says Cogan. “And that has been to slap price controls on every medical service that Medicare covers. As government healthcare costs balloon, price controls have been imposed in a failed attempt to bring them back under control. We must avoid setting up a Medicare prescription drug benefit that would lead to price controls which always reduce quality.”
For all their political attacks on drug companies and their obscene profits, the Democrats are also fully aware of the role of drug development for healthcare services.
But reform is not easy. It was president Clinton’s big policy pledge in the 1992 election, and the one he failed most spectacularly to deliver on. “One of the hard lessons of the 1993/94 failure was that incrementalism works best,” says Blinder. “We tried to do everything at once, and that was a strategic mistake.”
Reading too much into a politician’s election campaign pledges is always a lesson in futility to a greater or lesser degree. Yet it is more than likely that there shall be a surplus for at least the First term in Office.
If the winner squanders a potentially revolutionary opportunity, there will be no one to blame but themselves, their stay in the White House will end just over four years from now, and they will be remembered, if at all, as the architect of the best missed opportunity since World War II.
And his opponent will have James Carville’s catchphrase plastered on campaign posters all over the country.
The real question: who will run Congress?
The big change in US politics over the last 30 years is the role Congress plays. Although designed to be the force to check and balance any excess on the part of the executive, Congress rarely exercised its power after World War II. Vietnam, and then Watergate, changed this, making who controls Congress a major factor in what the president can achieve.
In 1994, after eight years of controlling both houses, the Democrats lost their majority in the House and the Senate, a situation which still holds after two more congressional elections, although the size of the Republican majority has fallen. Once the Fiasco of the 1995 and 1996 government shutdowns was out of the way, caused by a stand-off between the Clinton administration and Newt Gingrich’s Republicans, the general feeling was, and remains, that divided government is good, as it prevents either side from proposing extreme policies.
Who controls which house after the November elections is therefore almost as important to future economic policy as who sits in the White House. Lobbyists, political and economic analysts and nearly all the pollsters agree that the Republicans are likely to keep control of the Senate. But that still leaves a number of permutations possible.
Gore wins
If, come January, Gore moves out of the Naval Academy, the vice-president’s official residence, and into the White House, he will feel that he has a bigger mandate, and more leeway to push through his plans with less interference, if the Democrats have re-taken the House. There are two provisos here, however. First, he probably will not have the Senate on his side, so any progress in the House will be tempered by the majority Republicans in the upper chamber.
| Gore: policies will be closely scrutinized | ||||||
Second, he carries the stigma of the First two years of Clinton’s administration with him, where the president pushed hard on two policies. First, for a tough Fiscal policy with the biggest tax increases on record which at the time appeared to threaten election promises of more spending. It passed in the House by two votes. Second, he pushed for a shake-up of Medicare, the federal health service. But Clinton, and the First lady, Hillary, tried too hard to propose only their version of the bill, with not enough consultation. Hence it failed to get enough support from Democrat representatives and failed.
These two policies cost Democrats control of the Senate in the 1994 elections, and they will not want to repeat that in 2002.
Furthermore, they made the remaining Democrats sceptical of any policies drawn up by the Clinton administration. Gore is well aware of this. Even with a Democrat-controlled House, Gore’s policies will receive a great deal of scrutiny.
Assuming that control of Congress remains with the Republicans, few expect much to change just because there’s a new Democrat representative at 1500 Pennsylvania Avenue.
The Republicans learned in 1995 and 1996 that it was more damaging to them to try to face down the president than it was to him. Some may feel that Gore is an easier target than Clinton in part because he does not have the same widespread public appeal as his boss, and the role of Clinton’s advisers – especially Robert Rubin, then the treasury secretary – was key in having the government shutdown reflect badly on the Republicans.
But the record of congressional Republicans in the wake of that crisis is commendable. Led by House budget committee chairman John Kaisch, the Republicans managed to force a budget package on the president austere enough to speed up the balancing of the budget and the start of the surplus. In short, congressional Republicans have learnt in the last four years that, when the majority party, they are better off working with rather than confronting the president of the opposing party.
Bush wins
The direction of policy is much more likely to change quickly if George W Bush wins the presidency and the Republicans retain control of Congress. Again there are some caveats.
| Bush: suffering from nightmares? | ||||||
First, congressional Republicans are unlikely to hand over control to Bush entirely. They have benefited from a policy of constructive opposition in the last four years, and are unlikely to want to give up the power that has granted them. They are not going to allow any new president, Republican or Democrat, to follow policies which are too extreme.
Second, Bush may restrain himself. “He has a Freudian nightmare of repeating Daddy’s recession,” says Paul Donovan, senior international economist with UBS Warburg. “So we may well see him act tougher if a downturn appears likely.”
Potentially the worst of all outcomes is for Bush to win the presidency and the Democrats to win back the House of Representatives.
Democrats may want to turn their hand to a bit of obfuscation at least. As one Washington insider, a former aide to a Republican senator, puts it, “[congressman] Charlie Rangel would become the chairman of the House Ways and Means committee, and there’s no way he’ll want to see Bush’s tax cuts go through.
If Bush has a Democratic House then his term in Office will amount to little more than making speeches and visiting foreign countries.”
Bush and his advisers refute that, referring to his experience as governor of Texas. He has indeed enjoyed a great deal of success in working with both parties, even if some opponents joke that to be a Democrat in Texas is like being a Republican elsewhere.
One thing is certain if Bush wins, and that is that tax cuts will be worked into the 2002 budget which he presents to Congress in February next year. They have become such a central feature of his campaign that not to include them, regardless of the state of the economy, risks comparison with his father’s famous tax about turn: “Read my lips, no new taxes.”
The Clinton years
On the whole, the record of the last eight years is very positive. Having come to power partly on the correct assumption that voters were dissatisfied with the economic performance of the Bush administration, Clinton has done a good job of turning the situation around. Or perhaps it’s better to say that he did a good job of overseeing the recovery. From the outset he was willing to cede as much decision-making as possible to those around him who knew best. Which meant Robert Rubin, formerly co-chairman of Goldman Sachs who joined the administration as chairman of the president’s National Economic Advisory Committee and who in 1995 became treasury secretary; Alan Greenspan, appointed Federal Reserve chairman by Reagan in 1987, and re-appointed by Bush, although not until early 1992, several months after his term officially ran out; and Lloyd Bentsen, Clinton’s First treasury secretary.
| Clinton: let the right men get on with the job | ||||||
These three men fast developed a solid and lasting working relationship, repairing the damage done during the Bush administration. As soon as Bush was elected, one of his spokesmen told the press that while the new president and Greenspan had a good relationship, Bush would like to see lower interest rates. It was the First of many attempts, overt or otherwise, to cajole Greenspan over monetary policy, and was a portent of how bad relations were to become. By the Final year of the Bush presidency, treasury secretary Nicholas Brady, a college contemporary and friend of Greenspan, halted the weekly breakfasts which had long been a custom between treasury secretary and Fed chairman.
In contrast, his relationship with the Clinton administration appeared to be very close very quickly, to the extent that he was credited at the time with persuading Clinton to increase taxes in 1993. It’s a dubious honour, since the Fed chairman is supposed to be apolitical. “There was a feeling that Clinton had struck some kind of deal with Greenspan in 1993,” says Kim Wallace, an analyst for Lehman Brothers in Washington and a former aide to senator George Mitchell. “Greenspan would have to raise interest rates sooner than he might otherwise have to, by up to a year, if the executive did not rein in the budget deficit by increasing taxes.” Rubin has denied it, Greenspan has denied it, and members of the Fed at the time have denied it, but the story persists.
Clinton did raise taxes, by $250 billion over Five years, one of the biggest tax increases ever. And it worked, reining in spending and allowing for a more tolerant monetary policy from Greenspan. Clinton also put a great deal of trust in Rubin. “He’d be out of town on vacation, Fly-Fishing somewhere, when his secret agent’s phone would ring,” recalls one insider. “And it would be president Clinton, looking for Rubin to explain some economic theory or other.”
The weekly breakfast meetings were restored under Bentsen, and blossomed when Rubin took over. Unlike Brady, Rubin would never try, publicly at least, to influence the Fed chairman into raising or lowering rates, instead sticking to his own brief. The lack of bickering and second-guessing, added to the mutual respect they had for one another, became a crucial factor in how the US administration was to respond to the Financial crises First in Asia in 1997 and then in Russia and globally in 1998. Even Larry Lindsey, George W Bush’s chief economic advisor, agrees with this. “If I give Clinton credit for anything, it is for not criticizing Greenspan.” Another of Bush’s advisors, professor John Cogan of the Hoover Institute, adds that Clinton also deserves credit for walling off the social security surpluses from the rest of the budget surpluses.
So one of Clinton’s successes was a forthright policy move – being bold enough to raise taxes – which risked abandoning too many election pledges but in the longer run acted as an effective check on the economy overheating. Another was to choose the right men for the job and allow them to get on with it. His third success was more political, and one which few Republicans will regard as a success: realizing that congressional Republicans were strong enough to force total gridlock, and therefore acceding to most of their demands for a balanced budget. John Kaisch, Republican chair of the House budget committee deserves much of the credit for pushing this through, but Clinton at least had also learnt from the government shutdown of 1995 and 1996 that cooperation was best.
These are three very good lessons which both major candidates would do well to remember.
Meet the advisers, and the next top officials?
The economy is not the strong point of either candidate. So both have surrounded themselves with those more in the know. Many of Gore’s team, of course, come from the present administration, whereas Bush has built a large team based around those who served in his father’s. Some are just advisers who will want to play no role thereafter – rather like Alan Greenspan in the 1968 election. He advised Richard Nixon, yet declined an oVer to join the administration.
But others will be seeking key positions in government, should their boss win. Which people might Fill those top slots is something both camps refuse to discuss. “It simply does not come up,” claims Larry Lindsey, Bush’s chief economic adviser, somewhat unconvincingly. His counterpart on Gore’s team, Alan Blinder, says that the choice of key staff in the administration “is probably something a candidate might think about while taking a shower. There really isn’t the time to sort that out, let alone the desire considering we’re so far away from election day.”
Choosing the economic team for the administration, however, is one of the First things the new president must do because just a month after taking Office in January he is due to present his First budget proposal to Congress.
The Gore team
Gore wants to take some of the credit for the economic boom of the last eight years, yet also wants to appear to be his own man. So he cannot distance himself too much from Clinton’s advisers without running the risk of seeming to distance himself from the president’s policies as well. He has a much smaller team than Bush.
| Summers: likely to stay on at the treasury if Gore wins | ||||||
Gore has the advantage of being able to call on a variety of people still in Office. Chief among these is Larry Summers, the treasury secretary, although some are not sure how well the two work together. There was an incident which soured the air between them when Summers was chief economist at the World Bank before joining the Clinton administration in 1993. He wrote a letter which appeared to ridicule the environmental concerns held by Gore. That tension has largely passed, but neither Gore nor Clinton has ever enjoyed quite the same rapport with Summers as they did with his predecessor, Robert Rubin. It is likely, though, that Gore would keep Summers in place for the foreseeable future.
Professor Alan Blinder, Gore’s ex-administration lead economic adviser, is the probable candidate were Summers not to be kept on. He is the Gordon S Rentschler professor of economics and co-director of economic policy studies at Princeton University, as well as a visiting fellow at the Brookings Institution in Washington DC, an independent think tank on public policy. He is a governor of the American Stock Exchange, was vice-chairman on the board of governors of the Federal Reserve for two years; and was a member of president Clinton’s council of economic advisers between 1993 and 1994.
He has been mentioned in connection not just with the job as secretary of the treasury if Gore is elected, but also as national economic adviser to the president. He has even been touted as a possible candidate for chairman of the Federal Reserve, were Greenspan to resign early.
There are two other civilian advisers worthy of note, both of whom were former members of the administration. First is Laura D’Andrea Tyson, chair of the president’s council of economic advisers from 1993-95, then the national economic adviser until 1997, when she returned to the University of Berkeley, where she is now dean of the Haas business school.
Tyson is thought unlikely to return to government.
The other is Robert Rubin, the former co-chairman of Goldman Sachs who left to be Clinton’s national economic adviser before being elevated to treasury secretary in 1995.
An experienced and widely respected individual, Rubin is now co-chairman of Citigroup. Although many would like to see him return to Office, he has made enough comments for people to deduce that he has had enough of formal involvement in politics. Nonetheless, he is still touted as a likely Democrat choice to succeed Greenspan at the Fed, although Republicans might well oppose it due to the large amount of ill-will Rubin and the Republicans generated during the 1995 and 1996 government shutdowns.
Bush brings in the chips off the old block
Texas governor George W Bush has a formidable team of economic advisers, more organized and better resourced than any previous challenger.
It is also made up largely, if not completely, of men who served under his father. The man chiefly responsible for setting up the team is George Shultz, who was secretary of state throughout the Reagan administration. He is now a distinguished fellow at Stanford University’s Hoover Institution.
| Lindsey: George W Bush’s likely choice as treasury secretary | ||||||
“About two-and-a-half years ago George [Schultz] invited governor Bush to his house on campus to discuss politics and policy matters, and invited half a dozen of us along,” says John Cogan, a senior fellow at the Hoover Institution. “We spent the afternoon over tea and cookies discussing a wide range of issues with him, and all of us were very impressed with Governor Bush. After he left, George [Shultz] turned to us and said ‘that could well be the next president of the US. Then at the end of the year we were invited down to Austin, Texas, for more detailed discussions on budgetary and tax affairs.”
Those at the initial meeting with Cogan, a budget and Fiscal policy specialist, are now also engaged in the campaign. Michael Boskin is a specialist in tax and budgetary affairs as well as on world economic growth, and served as chairman of the president’s council of economic advisers during the Bush presidency. Also present was Martin Anderson, the Keith and Jan Hurlburt senior fellow at Hoover, who has served every Republican president since Nixon, advised Reagan during both his 1976 and 1980 presidential bids, was on his economic policy advisory board from 1982-1989, and was a policy adviser for Bob Dole on his 1996 bid.
Shultz may have brought these people on board, but the head of Bush’s economic team is Larry Lindsey, who is the Arthur F Burns scholar in economics at the American Enterprise Institute for Public Policy Research in Washington DC, a right-wing equivalent to Brookings. He was a governor of the Federal Reserve between 1991 and 1997, special assistant for policy development to president Bush between 1989 and 1997, and senior staff economist for tax policy on Reagan’s council of economic advisers between 1981 and 1983.
Boskin has been mentioned as a possible treasury secretary, but Lindsey would appear to be the more likely choice if George W Bush wins in November. He is also thought to be interested in succeeding Greenspan at some point, although most consider him too partisan a choice to receive congressional approval.
Other Bush advisers include Marty Feldstein, Glenn Hubbard and Bob Zoellick. Feldstein was chairman of the council of economic advisers and chief economic adviser for Reagan between 1982 and 1984. He is now the George F Baker junior professor of economics at Harvard.
Hubbard is Russell L Carson professor of economics and Finance at Columbia University, and served under Bush’s father as deputy assistant secretary at the treasury between 1989 and 1991. Zoellick served as undersecretary of state for economics at the state department, and as deputy chief of staff at the White House under Bush senior, and held several positions at the treasury under Reagan. He spent Five years as executive vice-president at Fannie Mae until 1998, and is now a resident fellow at the German Marshall fund, a policy unit focusing on transatlantic relations, a research scholar at Harvard, and a senior international adviser for Goldman Sachs.
Lindsey and Boskin are the favourites for the top economic jobs, while any or all of the rest, but especially Cogan, Hubbard and Zoellick could be given roles either as undersecretaries or on the president’s council of economic advisers.
