Deal not in History

With the Presidential election only 50 days away, traders and investors have begun to guess at the prospects for the economy under the reign of two candidates with very different notions of the role to be played by government.

If re-elected, President George Bush will want his tax cuts made permanent and the tax system reformed so as to ease the burden on incomes and increase it on consumption. Senator John Kerry would increase taxes on families earning more than $200,000 a year.

Bush would try to save the social-security system by allowing citizens to invest a portion of their payments in higher-earning equities. Kerry would save it by increasing the social- security taxes paid by those earning more than $87,900 a year.

Bush would try to meet the problem of those without healthcare insurance by allowing individuals to set up personal medical-cost accounts and small businesses to pool their risks. Kerry would have the government subsidize healthcare costs for the uninsured.

On balance, the Bush plan should be more attractive to investors than the Kerry program, especially since the Democratic candidate also is more prone to introduce regulations than is Bush.

But then there is history. In recent times, the economy has performed better under Democratic presidents than under more openly pro-business Republicans.

Republicans from Dwight Eisenhower to George W. Bush have presided over economies that grew on average at 2.6% a year. In contrast, the average GDP (gross domestic product) growth rate under Presidents Kennedy, Johnson, Carter and Clinton was about 4%. Only three presidents during this time left office with unemployment higher than when they were sworn in: Republicans Nixon and Ford, and the first President Bush.

Shareholders, too, have done better under the Democrats. Between 1953 and the end of the Clinton administration in early 2001, share prices rose at about 10% a year when Republicans controlled the White House, well below the 15% achieved under Democratic administrations.

If the decline of more than 10% in Standard & Poor's average of 500 stocks during the present Bush administration is included, Republicans have done even less well for shareholders. But the healthy profits picture makes it premature to include George W. Bush in this tally, as share prices might recover by year-end.

Don't let these numbers fool you into thinking that sitting presidents control the course of the economy. They don't, at least not entirely and not directly.

For one thing, every president inherits an economy shaped by his predecessor.

Richard Nixon inherited the inflation caused by Lyndon Johnson's unwillingness to choose between guns and butter during the Vietnam War. And George W. Bush inherited an economy that was weakening in the final months of the Clinton administration.

Bill Clinton was luckier -he inherited the recovery taking hold in the last months of the elder Bush's one and only term, and a banking system that his predecessor had restored to health.

Of course, some presidents squander and others build on their inheritance. The first President Bush squandered the tax and regulatory reforms bequeathed to him by Ronald Reagan. Clinton capitalized on the peace dividend he inherited from Reagan to put America's fiscal house in order.

Then there are what Harold Macmillan famously said he feared most: "Events, dear boy, events." Johnson had Vietnam, Carter the emergence of the OPEC cartel, and the incumbent president had September 11.

Just as some presidents use the legacies left by their predecessors more wisely than others, so it is with "events." Some respond less wisely than others to the events that occur on their watch -- two of the least wise being Nixon's response to inflation by instituting wage and price controls, and Carter's slaughter of the animal spirits that John Maynard Keynes pointed out drive business investment.

Contrast that with Reagan's boosting of the national psyche, and his signal to Paul Volcker, then Federal Reserve Board chairman, that he would take the political heat if Volcker would jack up interest rates to wring inflation out of the economy, and with George W. Bush's response to recession and terror by cutting taxes to stimulate the economy.

But presidents are not all-powerful. Not only are they bound by what they inherit from their predecessors, and are the victims or beneficiaries of events beyond their control; they are constrained in their responses by two facts of political life.

Congress will have its say, and the Federal Reserve Board might not do exactly what the incumbent president would wish. Recent examples of this were Alan Greenspan's refusal to help the first Bush in his re-election campaign by stimulating the nascent recovery, and his insistence on raising interest rates (thereby cooling the housing market and consumer demand) during the second Bush's campaign for re-election.

If you believe that history repeats itself, Democrat Kerry might be your man. But you will have to forget the mess that Democrat Carter made of things with his dithering in the face of inflation.

If you believe that history teaches that lower tax rates stimulate growth and that antipathy to regulation is an ingredient of a successful economy, then Bush is your man, but you will have to avert your eyes from the government deficit.

And if you believe that the West Country poet John Wolcot had it right more than 200 years ago when he urged: "Deal not in history ... 'twill prove a most unprofitable trade," you will just have to peer into the future, and decide which candidate has the wit and decisiveness to pilot the economy during the ongoing war on terror.

A version of this article appeared in The Sunday Times (London).