Essay on Bush and Kerry on the Economy

In terms of the economic picture, historically the key to presidential election outcomes, the facts favour Mr. Bush, but this is far from a sure thing. Although the so-called “misery index” (the sum of inflation and the unemployment rate) is still fairly low, it is rising (see chart). Moreover, George Bush senior lost in 1992 notwithstanding the fact that the index was falling in the run-up to the election. A “perception lag” made it possible for the Clinton campaign to successfully argue: “it’s the economy, stupid!”. In 2000, Al Gore managed to lose the Electoral College vote despite the lowest election-year level on the misery index in over 30 years.

For markets of course the key question is what (if anything) would be different under a President Kerry compared to a second term for Mr. Bush. This Research Note tries to give an overview of the economic policy platforms of the two candidates and the challenges that lie ahead.
The defining economic policy issue of Mr. Bush’s presidency clearly has been taxes. Contrary to prior claims by many of his critics – including famous economist and editorial-writer Paul Krugman – the 2003 tax cut did in fact have a noticeable impact on growth and helped to jump-start the economy in mid-2003. However, the tax cuts do still provide the Democrats with a convenient stick with which to beat the administration. This is because people with high incomes do especially well out of them.

Given that this is unlikely to be offset by a cyclical boost to revenues – we estimate that the US federal budget currently has a structural deficit of around $300bn – actually keeping all the tax cuts would probably require cuts in expenditures on a scale that is far from realistic. So far, Mr Bush has not shown much appetite for controlling spending...................

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