(FORTUNE Magazine) – IT'S HARD TO SPOT Vice President George Bush without an economist at hand. The Yale Phi Beta Kappa in economics figures that distinguished conservative thinkers can help him convey an upbeat economic message that will boost him back up in the polls. By contrast, Massachusetts Governor Michael Dukakis keeps his economic advisers at arm's length. His Statehouse operations chief John DeVillars says, ''Michael Dukakis prefers people on the front lines of business, labor, and government.'' In a campaign year where vagueness defines the economic policy debate, the candidates' choice of idea men provides valuable insight into how they view the economy and what they might do about it. The Bush bunch -- many familiar faces who formulated and sold Ronald Reagan's economic policies -- see a mostly rosy picture: high employment, low inflation, lower tax rates, a resurgence in exports, a strong service sector, and a comeback in manufacturing. Dukakis's advisers, an eclectic group of Harvard professors, Massachusetts entrepreneurs, Congressmen, and Statehouse strategists, perceive shadows on the economic horizon: the twin budget and trade deficits, a sinking dollar, and not enough investment in education, the environment, infrastructure, and social programs. Bush and company believe that a President should use macroeconomic policy levers -- federal spending, taxes, interest rates -- to encourage overall growth. Dukakis and crowd see macroeconomic policy mainly as a foundation for microeconomic policies designed to spur growth in certain industries and regions, and to spread wealth more broadly across income classes. Says Ira Jackson, the former Massachusetts revenue commissioner: ''More than anyone who has occupied the Oval Office, Dukakis would bring a deep, almost unique commitment to promoting jobs and redistributing growth to all Americans. It's what he thinks of when he bounds out of bed in the morning. I can't tell you how central it is to his being.'' From these perspectives spring very different policy prescriptions. While fighting to preserve the President's tax cuts, Bush would be tougher on the Pentagon than Reagan and more generous toward such domestic programs as education, drug enforcement, AIDS research, and the environment. But, says the Republican candidate, ''In most cases, I'll be building on what's happened.'' In addition to spreading jobs and wealth, Dukakis wants to improve education, transportation, day care, health care, and housing. Although he would try to shift some of the costs of these programs to business and state and local governments, Dukakis would almost certainly increase federal spending -- and taxes -- faster than his opponent. DURING AN EXTENDED Memorial Day weekend, Bush met with his top economic advisers at his family house along the craggy coast of Kennebunkport, Maine. In 1980 as he prepared for his first presidential campaign, Bush endured many summer mornings in the tiny Episcopal chapel on the point there, being tutored by some of the nation's leading conservative economists. His heart wasn't in it. ''In the chapel, as he watched his boat speed out toward the seals one brilliant morning, I could almost see tears in his eyes,'' recalls economist Paul MacAvoy, a member of President Ford's Council of Economic Advisers. ''But he toughed it out, and months later in New Hampshire, he could spew out pages on comparative advantage and monopoly capital.'' This year, with the basics behind him, Bush concentrated on how to convey his economic message to the voters. ''When two-thirds of the people in a poll think Michael Dukakis is more conservative than I am, it simply isn't in focus,'' Bush told reporters. ''But there is still time.'' Asked why he needed so many advisers after serving as Vice President for eight years, Bush shot back, doubtless with Dukakis in mind, ''It's the person who's unwilling to sit down with experts, who feels he knows absolutely everything about everything, whose judgment should be questioned.'' THE MOST IMPORTANT missing person at the Kennebunkport conclave was Treasury Secretary James Baker III, who was heading an economic mission to Africa. A friend of more than 30 years and Bush's 1980 presidential campaign manager, Baker is expected to join the Bush brigade again this summer. Among those present were the two economists with whom Bush consults most regularly: Stanford University's Michael Boskin and outspoken deficit-denouncer Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers. Also participating were former deputy treasury secretary Richard Darman, now an investment banker with Shearson Lehman Hutton; George Mason University law professor Timothy Muris, formerly executive associate director of Reagan's Office of Management and Budget; economic consultant Kathryn Eickhoff, the budget office's former policy director; and supply-sider Richard Rahn, the chief economist of the U.S. Chamber of Commerce. From the corporate world came two regular Bush advisers: Texas oilman Robert Mosbacher, Bush's finance chairman, and longtime friend and fellow Yalie Nicholas Brady, the co-chairman of Dillon Read who chaired Reagan's task force on reform of the financial markets. (If Bush is elected, Brady could end up Treasury Secretary.) Also participating was Emerson Electric Chairman Charles Knight. The meeting revealed more consensus than is typical among economic policy types. No adviser saw signs of imminent recession. They agreed on the importance of encouraging savings and investment through deficit reduction and modest tax incentives such as cutting capital gains taxes and extending the R& D credit, which is scheduled to expire at the end of the year. No one proposed tax increases to cut the deficit. Says Darman, who has supported higher taxes in the past: ''The deficit has come down from 7.2% of GNP to 3.2%, putting it in the range of the other industrialized countries. We've got to do better, but I believe we can do so without raising taxes.'' If that turns out to be wrong, the Bush advisers agree that new taxes should be on consumption, not savings and investment. A lawyer who taught public sector management at Harvard after he was defeated for reelection in 1978, Dukakis generally avoids big-name economic thinkers, saying, ''My experience is probably my most important guide.'' Still, he recently read some 20 briefing papers by mostly liberal economists, including Princeton University's Alan Blinder, the Brookings Institution's Joseph Pechman, and Lester Thurow, dean of the MIT Sloan School of Management. His staff consults regularly with several economists, most prominently ! Harvard's Lawrence Summers. A liberal, he served on the staff of Reagan's Council of Economic Advisers under his onetime teacher Feldstein and plays a well-matched game of tennis with his friend from the Bush camp, Michael Boskin. Summers comes by his economic smarts naturally. His uncles are Stanford's Kenneth Arrow and MIT's Paul Samuelson, both Nobel Prize winners, and his parents, Anita Arrow Summers and Robert Summers, are both economists at the University of Pennsylvania. ''Feldstein, Boskin, and I agree on the importance of encouraging savings and investment,'' says Larry Summers. ''But they are much more complacent about the economy. I believe there is more scope for government involvement in promoting growth and helping people left behind.'' Also on the campaign's short list of regular advisers are Robert Reich, proselytizer of industrial policy at the John F. Kennedy School of Government, and Rosabeth Moss Kanter, a Harvard business school professor and the co- author of Dukakis's book, Creating the Future: The Massachusetts Comeback and Its Promise for America. In addition, the governor seeks ideas from a handful of Massachusetts high-tech CEOs, particularly Prime Computer's Joe Henson, Wang Laboratories' An Wang, and Cullinet Software's John Cullinane. Increasingly, Dukakis is turning for advice to Democratic congressional leaders. On the deficit, he looks to outgoing House Budget Committee Chairman William Gray of Pennsylvania and his probable successor, Leon Panetta of California. Both have been persistent advocates of a package that includes slower defense spending, reform of transfer payment systems like Social Security, and higher taxes. On economic development issues, he has consulted liberal Congressman James L. Oberstar of Minnesota's Iron Range, a vigorous advocate of increased federal aid to distressed regions. He is considering Congressman Edward Markey's tough antitakeover idea. Dukakis likes New Jersey Senator Bill Bradley's idea that banks cut interest rates on some Third World debt and forgive certain loans outright in exchange for economic reforms. In addition, the governor seeks the Senator's counsel on matters of defense and international relations: Bradley is a member of the Senate Select Intelligence Committee. Dukakis also supports many Democratic proposals for expanded health and child care. He not only endorsed Massachusetts Senator Edward Kennedy's universal health insurance bill but also initiated a program quite like it in Massachusetts. The Kennedy bill would require business to offer health insurance to workers. According to the Congressional Budget Office, the program would cost employers $23 billion, employees $4 billion, and the federal government $500 million a year. HOW WOULD THE candidates and their advisers deal with the biggest single economic problem, the budget deficit? Like most card-carrying conservatives, Bush says he would eliminate it by slowing the growth of spending, not by raising taxes. He campaigns tirelessly for a line-item veto, which would enable the President to veto portions of spending bills. (He's not likely to have any more success at this than Reagan has had.) The Vice President has also proposed a so-called flexible spending freeze, under which parts of the budget may rise or fall but the growth in overall spending would be limited to the inflation rate -- except for that sacred cow, Social Security.

If the economy moves ahead an average of 2.6% a year through the early 1990s, as projected by the Congressional Budget Office (it grew 2.9% in 1987), Michael Boskin says such a freeze would produce a balanced budget in four or five years. Bush has not settled on the specifics yet. But a freeze won't be painless. Even if he decides to hold defense spending at zero real growth -- the average of the past several years -- Bush will still have to offset about $134 billion of real increases that are built into the rest of the budget. The Vice President's advisers believe a credible deficit reduction plan will take care of about $55 billion of that shortfall by lowering interest rates two percentage points, thus lowering the carrying costs on the federal debt. The rest would have to come from such politically entrenched programs as Medicare and farm price supports, which have recently grown much faster than inflation. If taxes are needed, Bush's advisers would be content in the near term with higher excises on alcohol, cigarettes, and gasoline. The prospect of a sales or value-added tax anytime soon scares them: It would raise too much money. A comprehensive 5% value-added tax would produce $77 billion in its first full year. Says Boskin: ''I worry that such additional revenue would work its way into increased spending. But down the road, once spending is brought under control and we've lived with tax reform for a while, we might be able to replace some parts of the current tax system with features less inhibitive of savings and investment.'' Dukakis also talks about budget cuts in the areas of defense and agriculture. But he talks more about additional spending. Among the programs he has discussed, if not formally endorsed: a plan to spend $30 billion over five years for home health care for the elderly; a $2.5 billion proposal for child care; a $500 million regional development fund; and unspecified additional amounts for education, still more health care, transportation, housing, and small business. On the revenue side, he has left himself open on the tax question: ''No serious candidate can say no new taxes.'' Like their Republican counterparts, Dukakis's advisers also believe in consumption taxes. Summers, in particular, likes the idea of higher taxes on alcohol, tobacco, and gasoline. But in an interview, the candidate rejected them. ''Taxes must be imposed based on the ability to pay,'' he says. He would rule out a value-added tax, sales taxes, or higher excise taxes because they are regressive. His preference: higher taxes on corporations, and a bigger hit for the wealthy. The candidate has expressed interest in taxing the capital gains of foreign investors in the U.S. Summers would also raise taxes on short-term stock profits in an effort to dampen speculation on Wall Street while raising revenues. As long as the candidates are running for office, they can't mention Social Security cuts, but their economic advisers can. Speaking for himself, Bush adviser Boskin, who is regarded as an expert on Social Security, argues, ''It's unnecessary to provide full cost-of-living allowances to retired millionaires.'' He would reduce the benefits for upper-income recipients and transfer the money to those at the low end of the scale, particularly elderly widows. Summers, the Dukakis man, would increase taxes on Social Security benefits for the wealthy. On the international monetary front, Bush and Dukakis are closer than their rhetoric suggests. Both candidates and their advisers recognize that the key to a stable dollar is a credible deficit reduction package. Once that is achieved, both would probably support a Baker-style program of international cooperation to stabilize the dollar. Says Dukakis: ''On the way to deficit reduction, we can discuss some approach to currency stabilization within broad ranges.'' The candidates part company on Baker's Third World debt plan. Officially, Bush supports the Treasury Secretary's approach, which encourages further bank lending to debtor nations in exchange for such reforms as tax cuts and foreign investment incentives. Dukakis favors Senator Bradley's debt relief proposal. On trade, both camps recognize that the pure free-market gospel preached by Reagan in his first term didn't work. Bush and Dukakis promise to push foreigners harder to open their markets to American goods. Both oppose an oil import fee and Congressman Richard Gephardt's proposal for automatic U.S. retaliation against countries with persistent trade surpluses. UNLIKE BUSH, Dukakis has embraced the notion of ''conditional protectionism,'' advocated by Reich and others. A business that wanted to qualify for import relief would be required to make some changes: Companies might have to invest; labor might be forced into wage concessions. Reich and Summers would also convert import quotas into auctionable rights that would be sold to a company or country for the highest bid. Reich would use the estimated $3 billion a year in auction proceeds to expand worker retraining programs. Says Reich: ''The best guarantee against protectionism is an adjustment mechanism that makes it easy for workers to get retraining and for communities to diversify economically.'' Boskin agrees that retraining is critical, but questions the federal government's role. Says the Bush adviser: ''Federal training programs have not delivered much bang for the buck.'' A longtime labor ally, Dukakis would vigorously support such traditional union demands as an increased minimum wage, tougher enforcement of workplace safety and health standards, and notification of plant closings. But he also sees himself as a cheerleader for a new cooperative relationship between business and labor. One of Kanter's contributions to the Duke's campaign is to provide him with examples of companies such as Ford Motor Co. where worker- management cooperation has produced better-quality products -- and higher profits. Striking a favorite Kanter theme, Dukakis tells audiences, ''I want to make the once proud 'Made in America' label a symbol of quality again.'' Bush aides, who used to consider this Democratic music, are now rushing to co- opt it for the Veep. Dukakis and his lieutenants would be tougher with Wall Street than Bush, who is likely to continue Reagan's free-market policies. The governor, who backed the tightening of an antitakeover law in his state, sees a ''merger epidemic'' in the country, diverting money and talent into trading companies instead of building them. Taking aim at Reagan's laissez-faire attitude toward mergers, Dukakis promises to appoint Justice Department and Federal Trade Commission officials who ''know the difference between antitrust and antifreeze.'' Perhaps the deepest split between the two camps comes over the issue of industrial policy, which Reich heralds and Boskin calls ''very dangerous.'' As conceived by such early high priests as New York investment banker Felix Rohatyn, industrial policy envisioned tripartite boards of business, labor, and government selecting industries for big federal subsidies. Dukakis and company reject this expensive, top-down planning approach. Instead, they talk about small, strategic federal investments, matched by larger state, local, and private sector contributions. But despite its small-scale formulation, Dukakis's new industrial policy is founded on the same underlying idea that government can and should try to influence the course of economic growth. DUKAKIS INSISTS that the Administration already has an industrial policy, but one that is ''too weighted to defense.'' The governor wants to shift some federal resources from defense to economic development programs that would help troubled industries and regions. Says Reich: ''The goal is to figure out ways to ease the transition out of older industries and technologies and to spur the development of new ones on a shoestring.'' For mature industries, Dukakis plans to take his Massachusetts Industrial Services Program national. It provides ailing companies with management advice, retraining for laid-off workers, and occasional loans. Says Dukakis: ''As part of an overall economic policy, we should be working on basic industries, investing in new technology, and modernization. Auto, steel, textiles, energy are all industries we need if we are to remain competitive.'' To help emerging industries, the governor would extend the R&D tax credit and shift funding from some defense-related research to commercial projects. Bush and his advisers like neither the notion of industrial policy nor Dukakis's particular brand. They oppose cutting defense to fund economic development projects and social programs that mostly benefit the middle class. The exception is education, where Bush believes new investment is needed. Says Boskin: ''Even if one accepts Dukakis's most wildly optimistic view of how successful his programs have been in Massachusetts, it's a huge leap of faith ; to say they could generate the same results on the federal level. My fear is that they'll become a huge sinkhole for new federal spending. I find it ironic to be talking about taking such risks when employment is up, inflation down, exports booming, and manufacturing turning around.''

The Bush team advocates a macroeconomic approach to economic development. Instead of targeting industries or regions, they would increase investment incentives by cutting capital gains taxes. Bush's advisers believe such a cut would help spur investment while helping to close the budget gap. A recent study by the Treasury supports the Bush campaign's claim that a capital gains cut from a top rate of 33% to 15% would increase revenues as much as $5 billion a year. The Dukakis camp prefers an analysis from the Congressional Budget Office that concludes the cut would cost the Treasury $3.9 billion a year. NO MATTER WHICH advisers get their man into the White House, one economic priority is clear. The next President will have to address the budget deficit. While this reality is the underpinning for much of what Bush and Dukakis say, neither seems ready to face the challenge head-on. Both candidates claim that they will cut spending growth in defense and agriculture, but their plans for doing so are unspecific and optimistic. Candidate Bush says a flexible freeze on spending will do away with the deficit -- but only if Congress agrees and the economy goes exactly right. Candidate Dukakis wants many of his new economic policies to be financed partly by business, forgetting that passing the buck only hides the real cost of such programs -- consumers will ultimately pay. If the advisers' aim is economic realism, they still have a long way to go.