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Economists rate Kerry
Due in part to gridlock, White House hopeful may have little effect on jobs, deficits, offshoring.
July 29, 2004: 12:32 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - John Kerry, the Democratic candidate for president, has promised to create 10 million jobs, cut the federal budget deficit in half and stop U.S. companies from moving jobs overseas.

But many economists think economic and political realities could make Kerry's job extremely tough.

Kerry is scheduled to accept his party's nomination at its convention Thursday night in Boston. The highlight of his economic plan, so far, has been his pledge to repeal the tax cuts given by Congress and President Bush to families making more than $200,000 per year.

Kerry plans to return the savings to middle-class and lower-income families, in the form of further tax cuts and credits, along with a plan to cut health costs.

Wall Street is unhappy about the prospect of this happening, fearing that wealthy people will have less money to invest.

In the short term, Wall Streeters say, it could give the economy a shot in the arm, since lower-income people tend to spend more of their income than upper-income people. But taking money out of the hands of upper-income people could hurt future growth, said Anthony Chan, chief economist at Banc One Investment Advisors. "That group is investing and saving. In the longer term, it would hurt."

And President Bush and some economists believe small-business owners would be hurt by such a measure, because many choose to pay personal-income tax rates.

"There's that group of small business owners, where a lot of the jobs are, for whom hiking taxes will hurt their business," said Robert Brusca, chief economist at Fact & Opinion Economics. "They already face higher heating costs, insurance costs -- at some point, they may decide there are too many costs to run a business and decide it's not worth it any more."

Still, Brusca and some other economists suggested the effects wouldn't mean the end of the economy, by any stretch.

"In a longer-run sense, I would view it as marginally unproductive, a worsening of the trade-off between growth and inflation," said Paul Kasriel, director of economic research at Northern Trust. "But will we be able to detect that? I doubt it."

Taming the budget tiger

Democrats say President Bush's legacy will be the deterioration of the nation's fiscal health. Budget surpluses from 1998-2001 turned to deficits in 2002 and 2003, and the gap is expected to widen this year, as well, to 4.2 percent of GDP, the highest since 4.7 percent in 1992.

Back underwater
Large budget deficits have returned in recent years.
YearDeficits (surpluses in parentheses)Percentage of GDP
1991$269 billion4.5
1992$290 billion4.7
1993$ 255 billion3.9
1994$203 billion2.9
1995$164 billion2.2
1996$107.5 billion1.4
1997$22 billion0.3
1998($69 billion)0.8
1999($126 billion)1.4
2000($236 billion)2.4
2001($127 billion)1.3
2002$158 billion1.5
2003$375 billion3.5
2004$477 billion4.2
* 2004 numbers are projections
Source:Congressional Budget Office

When the Baby Boomers begin to retire, near the end of this decade, the current fiscal headache could well develop into a full-on crisis, many observers warn.

Kerry has pledged to cut the deficit in half during his term, by rolling back the tax cut for upper-income earners, restoring Congressional spending curbs and closing corporate tax loopholes.

At the same time, however, he's also pledged several new tax cuts and spending programs -- including a massive health-care plan, of as-yet-unspecified cost -- leading some observers to doubt he'll actually succeed in cutting the deficit.

For example, Greg Valliere, political economist for Schwab Washington Research, said Kerry will probably be unable to repeal any tax cuts, since Congress will likely stay in Republican hands, and he could end up spending more than Bush.

Still, Bush hasn't exactly been pinching the government's pennies, either, and many economists believe some painful budget decisions will have to be made fairly soon, and that taxes will almost certainly have to rise if spending is not curbed.

"To keep these tax cuts permanent, even if it means somewhat faster GDP growth -- and that's debatable -- will mean the government gets a smaller tax take as a percentage of GDP," said Joshua Feinman, chief economist with Deutsche Bank Asset Management. "Then spending has to be a smaller share, too. We have to have some plan."

Offshoring unlikely to be stopped

One of the effects of prior presidents' free-trade policies has been a slow but steady and ever-increasing exodus of U.S. jobs overseas. Though economists consider this good news, believing the economy will be more efficient in the long run, such beliefs are anathema to politicians of both parties.

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Kerry has pledged to slow offshoring down, using a carrot-and-stick approach of giving companies tax breaks and incentives to create jobs at home and closing corporate loopholes that reward companies for operating overseas.

But will it stop the flow of jobs offshore? No more than King Canute could stop the ocean tide, many economists said.

"You can't repeal the laws of economics," said Brusca of Fact & Opinion Economics. "Wages in China are so cheap, that you'll never make labor cheap enough in the United States to compete with that."

Is gridlock good?

In any event, many economists think presidential policy has little to do with economic growth anyway, that monetary policy is far more influential -- Chairman Alan Greenspan and the Federal Reserve may truly be the Maestros of the world's largest economy. Presidents are usually just along for the ride, when it comes to GDP growth rates.

John Kerry
Economic Indicators
Layoffs and Downsizing

But they can have some longer-term influence. Economists give President Reagan credit for loosening regulations to help businesses operate unfettered. They give President Clinton credit for expanding free trade.

"These are supply-side effects," said Kasriel of Northern Trust. "A president has more to do with supply-side policies and effects than demand-side effects."

Finally, Wall Street, for all its fretting about a Kerry presidency, could get what it wants most of all in November: gridlock.

If Kerry takes the White House and Congress stays in Republican hands, little may get done, and Wall Street usually likes that. Both Reagan and Clinton struggled throughout their presidencies with a legislative branch controlled by the opposition party, and stocks did extremely well under both.

"The markets would be perfectly happy with gridlock," said Valliere of Schwab Washington Research.

But there are always exceptions to any rule, including this one. Government action will have to be taken on the budget deficit some day, and another recession, if it comes, could raise the need for some fiscal policy medicine.

"When the economy hits rough spots, gridlock is not good," said Chan of Banc One Investment Advisors.  Top of page

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