Differing Views on the Role of the State
September 7, 2004
by Irwin Stelzer
There is an old political saying: "It is better to be lucky than good." Last week, President Bush combined those virtues: he gave a well-received acceptance speech to the Republican convention and benefited from a jobs report that suggests that his economic recovery program is working.
In his speech the president laid out his vision for America's economic future. If re-elected, he will make permanent the tax cuts he introduced to fight the recession, and reform the tax structure so as to lighten taxes on dividends and earnings. That means that taxes on consumption will have to go up. The word from insiders working on these reforms is that detailed plans for the shift to some form of consumption tax already have been drawn up.
Senator Kerry has a far different plan for the economy if he takes over the White House. He would repeal the tax cuts for families earning more than $200,000, and return the rate on top incomes to 39.6% from the Bush-created level of 35%. He has also promised to raise dividend and capital gains taxes on high earners.
This is merely one manifestation of a very profound difference between Bush and Kerry as to the role of the state in the life of the individual. Kerry believes that the government can spend a good deal of individuals' money better than can those who earn it. He sees a range of social needs crying out for funding, and has a long history in the Senate of raising taxes and supporting extensions of the welfare state.
Bush, who restated his creed of compassionate conservatism - read: big-government conservatism -- believes he can fund his prescription drug, education, and other "compassionate" programs by cutting taxes so as to increase incentives by entrepreneurs and workers to take greater risks and produce more, and hence increase tax revenues. He wants to turn America into an "Ownership Society" in which workers are free to invest a portion of their social security accounts in securities to increase the skimpy 1.5% they now earn on those retirement accounts.
Kerry would rather increase taxes to keep the national pension fund solvent. He proposes to raise the current ceiling on income subject to payroll taxes from $87,900 to $120,000. This, says Harvard professor Martin Feldstein, will so drastically increase marginal tax rates that incentives to work will be reduced, and little new revenue will flow to the Treasury.
Bush, determined to keep his free trade agenda intact, would create $3,000 reemployment accounts for workers to use as they wish to retrain if their jobs disappear overseas; Kerry hints that he will re-examine the existing trade agreements (for which he voted), change the tax structure in ways that he claims will stop the outsourcing of jobs, and find ways to satisfy his trade union backers' demand for greater protection from foreign competition.
The rivals' approaches to health care also reflect the differences between Bush's plan to give individuals a greater say in their own affairs, and Kerry's belief in a larger role for government. The president wants to give individuals tax breaks to enable them to set up their own Health Savings Accounts, while Kerry wants to use the revenues from higher taxes on "the rich" to provide a variety of government subsidies, especially to low-income workers and their families. Bush's plan would cost about $100 billion, Kerry's over six times as much.
Then there is the federal deficit. Bush continues to argue that his tax cuts will generate economic growth and therefore sufficient tax revenues to stanch the flow of red ink. Kerry thinks he can do that by raising taxes. Neither seems willing to consider the more sensible solution being pushed by Federal Reserve Chairman Alan Greenspan: cut government spending. Bush's list of programs for his second term does not have a low price tag; Kerry's wish list is even pricier.
These economic issues matter. Karlyn Bowman, Washington's premier poll analyst, says that in the key swing states Americans rank the economy as their most pressing concern. So the jobs report that was released less than twelve hours after the president accepted his party's nomination received as much coverage as the president's acceptance speech. And it was good news for the president. Not only were 144,000 new jobs created in August, but the June and July preliminary estimates were revised upward by 59,000, and average hourly earnings rose more than expected. That brings the total number of jobs added in the past year to 1.7 million, and the unemployment rate to 5.4%, the lowest since Islamic terrorists crashed their airplanes into the Pentagon, the World Trade Center, and a Pennsylvania field.
Meanwhile, the demographic time-bomb continues to tick, as the baby-boomers age, require more medical attention, and prepare to retire. The looming obligation for social security and Medicare now totals more than $46 trillion -- ten times the acknowledged "federal debt."
Once again it is the politically bullet-proof Greenspan who has it right. He told a group of central bankers, "If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels. If we delay, the adjustments could be abrupt and painful." Read that to mean that we must cut benefits, perhaps by postponing the retirement age, set half-century ago at 65 years, at a time when people weren't expected to live much beyond that age. If he is re-elected, Bush might just feel free of any need to substitute political pandering for programmatic reform, and might be able to persuade congress to adopt measures to avoid the abrupt and painful adjustment that Greenspan alone seems to see on the horizon.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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