POLITICS ASIDE, THE ECONOMY SHOULD PREVAIL
Byline: Jennifer Weitzman
NEW YORK — The state of the economy, still hovering at unprecedented levels, has been playing a supporting role in this year’s presidential contest and most financial wizards point to a rosy financial outlook as the reason why.
Partly because the country has enjoyed its longest economic boom in history, economists and financial analysts — whether they credit President Clinton or the prowess of American business — are in general agreement that it does not matter who wins the White House this November, since there are no signs the good times are ending.
“People vote with their pocketbooks,” said Ken Goldstein, an economist with The Conference Board, said. “Economic issues are secondary because people are fat and content, so in a sense, they are pushing the basic bread-and-butter economic issues down.”
Barring any act to deliberately derail the economy, economists and financial analysts said they expect it to continue to be healthy, although they expect it to moderate because of higher energy prices, less corporate profit growth and higher interest rates.
Despite reports of a slowdown, many said the issue in this presidential election is not about the economy because business has been so good, but about social issues like health care, education, gun control and the environment. In fact, people are still spending, although that too is moderating (it is expected to drop to about 3 percent from the 5 to 6 percent last year), but still in line with income growth.
But no matter how the new President — whether its Al Gore or George W. Bush — deals with this slowdown, most economists and analysts said the economic outcome would be the same.
Although their economic platforms are vastly different — Gore prefers increased government spending with a targeted tax break, while Bush talks about an even larger tax cut — both offer up blueprints on how to spend the budget surplus to stimulate the economy.
Economists said regardless of which party wins, both go against what the Federal Reserve has been trying to prevent: an economy that is growing too fast.
Richard Berner, chief U.S. economist with Morgan Stanley Dean Whitter, said one of the most important factors influencing today’s economy was the shift from a budget deficit to a surplus. Any depletion of the surplus, he said, will change the economic landscape.
“You will end up with higher interest rates and perhaps a less-efficient economy because there will be fewer resources for investment relative to the size of the economy,” Burner said.
Jim Glassman, senior U.S. economist with Chase Securities Inc., said in a year of a rising surplus, people want to either spend it or have tax cuts. Either way, it won’t matter which one you choose because the outcome effects the interest rates the same.
Still, he said, there probably would not be any major implication for the economy.
“Whoever wins, they are inheriting an incredible economy,” he noted. “Their mission is to keep the economy on the same path.”
The Conference Board’s Goldstein said, “I don’t think it’s possible to make the claim that their particular plans would lead to more robust economy. Clearly, if you give money back to the consumer in the form of a tax cut, you get more consumption, but less spending. On the other hand, if you put the money in a plan for a drug benefit program, you have less of a tax cut.”
WHOSE WAY IS BETTER
With the dynamics of politics being what they are, both are amplifying their different laundry lists of economic proposals, including debt reduction, tax cuts, spending changes, and Social Security reform, that will shape the nation’s economy.
For instance, a Gore administration would use more of the non-Social Security surplus on new spending and $500 billion in targeted tax cuts. On the other hand, a Bush administration would use most of that surplus for a $1.3 trillion tax cut across the board and some increased spending. That said, all agree that nothing is likely to be enacted until January 1, 2002, since it takes time to craft, agree and approve legislation.
Rosalind Wells, chief economist with the National Retail Federation, said that while both candidates will manage ways to spend more of the surplus, she believes the tax cut proposed by Bush would be detrimental to the economy in the long run.
“It will run counter to what the Fed is trying to accomplish because it stimulates the economy and puts money back to consumer,” she said. “The Fed sees spending as too strong, so they are responding by raising interest rates to slow the economy.”
John Pomerantz, chairman of Leslie Fay Co., said he is concerned with the Republican plan.
“I don’t know where the money will come from to fund the promises the Republican candidate is starting to say,” he said.
Devona Bolliole, Gore’s deputy national spokesperson, said Gore plans to build upon the national prosperity and harness the power of the new economy to enrich all families.
Goldstein added that by spending money on education, Gore will improve the performance in lower-performing schools and increases on medical care will allow fewer people to go broke before they die.
Morrison Cain, senior vice president of government affairs with the International Mass Retail Association in Arlington, Va., said: “No balloon can be up forever, but you want someone who won’t steer the economy into the cliffs and not add on so much baggage the balloon won’t go up. I would question how long this boom will continue if Gore were elected.”
He said Gore’s agenda omitted some large unknowns, such as the cost to business and drags to the economy like the global warming package and the patient’s bill of rights.
Cain also argued that across-the-board tax cuts a la Bush are more likely to a have broader economic effect than targeted tax cuts a la Gore.
Most Bush supporters agree that by giving money back to people you allow them to have more choices and more resources, which will drive the economy.
Ray Sullivan, spokesman for Gov. Bush, said under a Bush presidency, a portion of the budget surplus will be returned to workers and families in the form of tax cuts that will help the economy continue to grow and ward off a slowdown or a recession.
“Gov. Bush will improve the economy by using our prosperity to address important issues like education and Social Security and also by cutting taxes, which will return more of the people’s money to the people to use as they see fit and not the government,” Sullivan said.
He added that prosperity was not created by the government, but by the hard work of the American people, that innovation and productivity are functions of workers, not of government.
“Gov. Bush’s plan empowers those families to continue those trends as opposed to Gore, who puts more control into the hands of government,” Sullivan added.
CHECKS AND BALANCES
Clinton’s economic run may soon be running out, but no matter who wins the election, the free lunch of great growth with no inflation will disappear. To combat that, some suggest the two parties share the branches of government.
Diane Swonk, chief economist with Bank One Corp., said the best thing for the economy would be a split between the two parties.
“That would allow for more gridlock, since both plans have faults because they both involve spending the surplus,” Swonk said.
“You do that when times are down, not good,” Swonk said, adding that both programs suggest the biggest shift towards fiscal stimulus since Vietnam, which was also done in a full-employment economy and it delivered the inflationary consequences of the Seventies.
“Economists are concerned about the impetus to spend the surplus and not save or buy back debt or shore up Social Security,” Swonk said. “The tax cuts or spending increases could add extra fuel to an economy that doesn’t need it and could cause inflation in a benign inflation environment.”
She warned that the country may be in a situation now where “the pot is close to a rolling boil and even if we turn down the heat, it will spill over.” So if that premise rings true, she said the notion that fiscal policy could become highly stimulatory would be a disaster for inflation.
“You are heating up the flame by over-stimulating the economy with tax cuts or increased spending,” Swonk said.
Focusing in on the differences, Swonk said Gore has the right incentive to pay down the debt, but his tax cuts are not as well thought out. Still, she said Bush’s program has too many tax cuts, but with the right incentives behind them.
For now, it is too close to call how people will vote in the congressional races. But whoever wins in Washington, almost all experts wish for a split government.
“The big worry in the financial market isn’t who wins, but whether you have one party controlling both,” said John Lonski, an economist with Moody’s Investor Services. He said the equity markets took off and economy started to boom following the 1994 congressional election that transferred power in Congress.
Still others said neither Gore nor Bush will have a strong impact on the economy, since the person with the pulse on the economic outlook is Alan Greenspan. They said its Greenspan who controls the interest rates, which is more important in keeping the economy in check.
To be sure, while Clinton has enjoyed a richer America on his watch, many economists said today’s prosperity cannot be credited to the president alone. After all, they said, Clinton came into office at a time when proposals to reduce the deficit into a surplus were being shaped. What these economists do credit Clinton for is allowing the Federal Reserve to do its job at keeping inflation down.
“The combination of a surplus and the Fed benefited the economy by freeing up resources for the investment which lead to the boom we enjoyed over the past seven years,” Berner said.
“The important actor isn’t the president,” said Maureen Allyn, chief economist at Scudder Kemper Investments, adding that Greenspan deserves the credit for steering today’s good fortunes.
“The financial market probably gives him 90 percent of the credit; Clinton 10 percent for not screwing up,” she said.
Still, she said she found it interesting that the financial world is not the focus of the presidential election.
“As long as Greenspan is there and continues to manage the economy, it’s in good hands and Clinton leaving shouldn’t have anything to do with economy,” Allyn said. “We still have the same hand at the helm, which is more important than the hand at the helm at the White House.”
Emanuel Weintraub, president and chief executive officer of Emanuel Weintraub & Associates, added that the issue is how the Fed manages money so that businesses can borrow more freely and thus keep the unemployment rate down.
Lonski of Moody’s said the biggest danger facing the U.S. economy is increasing oil prices.
“As workers feel their purchasing power diminishing because of the run-up in energy prices, they could have a stronger incentive to receive higher wages or seek a new job,” Lonski said.
Allyn added that oil prices are becoming very concerning, and even though she does not expect prices to go beyond $40 to $50 a barrel, she said it needs to be watched carefully because the past oil price spikes have caused economic turmoil.
“We are in a high-risk area, which is the wild card,” Allyn said. “In the past, higher energy prices were accompanied with a war or shortage, which could lead to a recession and the potential for political tumult and a threat to consumer confidence.
THE CONSUMER CARD
Another driver of today’s continuing rosy outlook is the historic level of consumer confidence.
Bud Konheim, ceo of Nicole Miller, said the only real effect a president has on day-to-day business is whether or not he instills confidence.
“When people are worried about the future, their pocketbooks could be filled, but it just doesn’t matter,” Konheim said. “Yet, if the near and long-term future is bright, it is better since people are spenders when they feel good about their ability to make money.”
To Konheim, the candidate that does not instill confidence is Bush.
“If I am not confident how he is running his campaign, then I can’t be confident if he gets to be president,” he said. “Bush looks like he can’t chew gum and walk.”
On the other hand, if Gore gets in, Konheim said he could build upon the confidence Clinton instilled.
Weintraub predicts it’s going to be a merry Christmas for retailers in all segments.
“When people work and feel confident about their job, that feeling fuels the economy,” he said, adding that consumers from mainstream America, which earns between $30,000 and $50,000, to upscale luxury shoppers, will continue shopping.
Jeffry Aronsson, ceo of Oscar de la Renta, said, “A momentum and inertia has been established and will continue to roll no matter who wins.”
He said as long as the vital signs of a strong economy remain and consumers feel good about the future, “I don’t see the outcome of the election having a significant impact.” He said both candidates would want that to continue and will do everything possible to maintain this course of prosperity.
In the event of a slowdown, Aronsson said that he sees things getting better in the luxury business.
“When times are good or perceived not so good, customers keep coming back because of our specialness,” he added.
So if the president has little to do to steer the economy, what does in the long run?
Most said the real driving force behind today’s economy is the technological innovation and the wave of investment and neither Bush nor Gore will do anything to stop that. The growth in those sectors provided such a tremendous thrust to job growth and investment opportunities, many economists said even when a slowdown creeps up, the new economy has only just begun.
Looking down the road and beyond 2002, economists and technology executives agreed that the course of the economy has less to do with Washington, but with individual companies and startups.
“A lot of the spadework has been going on over the past two decades,” Chase Securities’ Glassman said. “It was not an accident this happened.”
Others point to the deregulation of industries — from the airlines to the financial world — that allow market forces to truly direct the economy because there are simply fewer government regulators looking around and checking out price controls.
Another outside element to a lasting economic bliss is what is going on outside U.S. borders. While there are lots of concerns that growth has peaked in Japan and in Europe, Allyn said that might turn out good for the U.S., since it might help prolong its expansion.
“We could continue to attract money to fund the high-tech investment we have been doing,” she said.
Still others said that both candidates’ proposals don’t mean a thing, since no one knows what the surplus will look like in the next five to six years.
Jonathan Gruber, a professor of economics at M.I.T., said one would be hard pressed to find an economist to predict what will happen, since they have no idea why the economy is doing what it is doing now.
“The very notion to have low unemployment and low inflation (at the same time) doesn’t fit the classic model,” he said.
Goldstein of The Conference Board, said, “They are making proposals based upon if we could pile up $2 trillion to $4 trillion (a figure both candidates, as well as the congressional budget office agrees upon) in surplus over the next 10 years.”
The only thing everybody agreed upon is that nobody predicted the economic boom during the Clinton presidency, and nobody really knows what will happen under the next president.