Divide over managing US's wallet

Both President Bush and Sen. John Kerry profess to be "free traders," opposed to tariffs and other impediments to commerce.

But Senator Kerry wants any future free-trade pacts to include "enforceable" standards on labor and the environment, while Mr. Bush calls for a "level playing field," which means working to eliminate foreign subsidies, such as the support that Europe gives to its aerospace industry.

The difference is typical of the split between the presidential candidates' economic programs: Kerry's leans toward programs favorable to labor and the middle class; the president's program is often business-friendly.

Positioning themselves on the economy is vital: The economy and jobs rank among the top concerns on voters' minds, and in some polls in the past year they have even beaten out terrorism and the war in Iraq as the No. 1 issue.

Both sides have developed economic plans for the next four years. Bush's program is heavy on tax cuts and tax credits. Kerry wants to raise the minimum wage and increase spending on poverty programs.

Bush sees education as a way to improve competitiveness. Kerry wants to take away corporate tax credits that he claims encourage companies to move jobs offshore.

"Kerry is pretty much a traditional Democrat," says Larry Sabato, a political analyst at the University of Virginia in Charlottesville. "And Bush is pretty much a supply-side Republican."

No matter which candidate wins, the economic challenges ahead will be daunting. Although the budget deficits for 2004 and 2005 will be smaller than forecast, the deficits in later years are projected to grow, according to the Congressional Budget Office. By 2009, the cumulative deficit will amount to $2.6 trillion. Those estimates don't include any new tax cuts, including the $145 billion, 10-year cut just passed by Congress.

At the same time, the next president will have to manage rising healthcare and energy costs. In addition, the US trade deficit next year is expected to hit $2 billion per day. And during the next four years, the first significant wave of baby boomers will retire - placing even more strain on healthcare spending and reducing federal tax dollars.

"The economy will be more difficult to manage than the last four years because certainly interest rates will be rising, which will hurt housing, and there could be greater stresses on the financial markets," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

Each side thinks it has the right answer to these problems. Jason Furman, economic adviser to the Kerry-Edwards campaign, says the senator will change the fiscal tone in Washington. "John Kerry would pay for all his proposals," says Mr. Furman. "He would do this by requiring all government spending outside of education and security to grow no faster than inflation, and if it did grow faster, then it would be automatically cut."

An analysis by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution in Washington, concluded that Kerry's proposals would increase the budget deficit by $425 billion under current law. However, if the 2001 and 2003 tax cuts do not sunset in 2010, then Kerry's proposals would represent a tax increase of $721 billion.

To stop the loss of jobs, Kerry has two plans. First, he wants to end the tax break that corporations receive when they set up operations overseas that export products. Second, he wants to give tax breaks to manufacturing companies, businesses affected by outsourcing, and small businesses when they add net new workers in the US.

The tax break that companies receive for their offshore operations has been around for decades, well before Bush took office. Since US corporate tax rates are higher than most of those abroad, US companies get a deferment on paying taxes on foreign income until the money is repatriated. Kerry would eliminate the deferment.

Outside analysts, however, think it might just result in corporate creativity as companies try to find ways around paying taxes. "It creates opportunities for creative accounting to avoid the tax," says Leonard Burman, a former Treasury official now at the Tax Policy Center.

Giving manufacturing companies a tax break to hire new workers might help somewhat, depending on the size of the subsidy, says Adam Carasso, also with the Tax Policy Center. "Kerry comes away looking like a nice guy," he adds, "but I'm not sure how many hires it would boost because it's not like we are a little bit uncompetitive, we're really uncompetitive."

The Bush plan to create new jobs takes, not surprisingly, a different approach. Called "A Plan for Creating Opportunities for America's Workers," it focuses on education goals, tax reductions, and several new ideas, such as a pilot program for individual training accounts.

According to Tim Adams, policy director for the Bush-Cheney campaign, this outlook reflects the president's view that jobs are not created in Washington. "It's entrepreneurs and other people who take risks every day to start and expand business."

Reflecting this, the Bush platform "wants to create the right kind of environment for entrepreneurs and entrepreneurial activity and big business and medium-sized business to decide to expand and take on new risks and explore new market opportunities," says Mr. Adams.

To create this environment, Adams says the president will focus on tax reform that encourages capital formation, a new effort at tort reform, and the reduction of regulatory costs. He would also take another look at controlling healthcare costs.

Another Bush idea is for worker reemployment accounts. In return for going off unemployment early - a savings to the government - an individual receives up to $3,000 for training as well as services, such as childcare.

However, the plan, which is now a pilot program, has had mixed results, says Harry Holzer, a professor of public policy at Georgetown University. "It's less likely to create new jobs but make people take job offers more quickly," he says.

Both Bush and Kerry are far apart on the trade issue as well. Bush wants to continue to negotiate bilateral and multilateral agreements that will let in more imports and lower barriers to exports. In the past four years, he has completed trade agreements with 12 counties and is negotiating with 10 more. "Those agreements combined represent $2.5 trillion in purchasing power that is equal to 20 percent of our GDP," says Adams.

Kerry, meanwhile, wants a 120-day review of all existing trade agreements, an immediate investigation of China's worker-rights abuses, and increased funding for trade enforcement.

Proposals for the next four years


• Passed $1.7 trillion in tax cuts to stimulate economic growth. Wants to make the cuts permanent and review how to simplify the tax code.

• Calls for the jobless to get up to $3,000 for help with job searches and other expenses, in return for going off unemployment.

• Says he will cut the federal deficit in half in five years.

• Supports more free-trade pacts. Says the benefits of economic openness outweigh costs of jobs lost through outsourcing.


• Says he would restore 1990s tax rates for those earning more than $200,000, but make other tax cuts permanent. Would cut taxes on businesses by 5 percent. Would alter corporate taxes to discourage offshore outsourcing.

• Would raise the minimum wage to $7 and index it to inflation. Says spending on schools and nonoil energy sources will help create 3 million jobs.

• Says he'll halve the deficit in his first term.

• Wants a 120-day review of all free-trade agreements. Calls for stronger labor and environmental conditions on future agreements.

Other 'issues' stories:

Sept. 28

Environment: "Cheaper vs. cleaner: big differences"


Oct. 1

Healthcare: "Rival views of the government's role"


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