October 2004
The 2004 Election and the Economy
Despite reports of healthy economic growth in the most recent quarter, the surge in oil prices has renewed fears that a weakening economy may greet whichever candidate wins the election. Less than a week before the presidential election, economic policy experts discussed their respective current economic outlooks and addressed the likely impact of the election on economic policy and the economy at an October 27 AEI breakfast.
Mark M. Zandi
Economy.com
Zandi brought up six important economic points for this election: First, household finances have improved over the last year but are worse off than they were four years ago. The real median household income has declined, and there are also fewer jobs today than in the year 2000. Second, the economy's poor performance is due in large part to the consecutive economic shocks America has experienced. These include the stock collapse, 9/11, corporate scandals, the Iraq war, and soaring energy prices. Third, the recession would have been even worse without the Bush administration's economic stimulus policies. We would most likely have remained in recession until 2003 without the tax cuts.
The fourth point was that Bush's fiscal stimulus was effective only because it was so massive. The economic bang-for-buck was very low because the bulk of the tax cuts went to wealthy households that have low propensities to consume. Fifth, Zandi believes that making the tax cuts permanent would be a mistake as such an action would institutionalize the present budget deficit. On the other hand, he also disagrees with John Kerry's proposal to increase taxes for the rich. Sixth, America's economic policy needs to change. Historically, it has been designed to lower the cost of capital for businesses. Now the focus needs to shift to lowering the cost of labor for businesses. Corporations look first at labor availability and last at a nation's tax structure, so America needs to train more skilled workers.
John H. Makin
AEI and Caxton Associates
America has had a remarkably accommodating oil policy, which has contributed to steadily increasing use. Demand has shifted out to the point where the supply curve of oil is no longer elastic. The oil supply is elastic to about 82 million barrels a day, and world demand has surpassed this limit. Oil is no longer a cheap good. Its real price has risen by 100 percent in the last year. If the price of oil stays at its present level, Makin predicts we will go through a recession next year.
Right now households are behaving as if the high oil prices were a temporary spike rather than a fundamental shift in cost structure. As a result, the true effects of higher oil prices have not yet hit the economy. When they do, America is going to have to start thinking about ways to conserve oil. The country will experience a shift in the capital stock to more energy-efficient technology, and there will be a long-term shift in the supply curve as the oil infrastructure expands to meet rising world demand.
China is one of the reasons for this demand shift. The country is responsible for 40 percent of the growth in oil consumption over the last two years. It is a very inefficient oil user. American policy should focus on encouraging China to adopt more energy-efficient technology.
Jared Bernstein
Economic Policy Institute
Bernstein disagrees with George Will's assessment of this year's presidential campaign: "It's not the economy, stupid." In fact, the economy is still struggling. The present unemployment rate of 5.4 percent is low, but it is nowhere near the 4-percent rate in 2000. The unemployment rate is growing because population is increasing more quickly than jobs are being created. There has also been an increase in the share of the long-term unemployed, indicating that it is very hard to get back into the labor market for those who have been laid off.
What explains this weak job recovery? Bernstein thinks the productivity growth argument is being overplayed. Instead, he suspects a problem on the demand side, which can be seen from slower GDP growth and lower sale and purchase rates than in previous recovery cycles. Compounding the problem, firms are tapping productivity growth in a way that interacts with weaker demand to create a weak job recovery.
Wages and income have been hurt as well. Real wages have grown more slowly or declined since 2000 because of the weak job market. Only 15 percent of this decline is accounted for by inflation. Real median family income has also gone down over the last four years. Bernstein concluded by asserting that Bush's tax cuts were misguided. Bush talked Keynesian, but what he actually enacted was a strange Keynesian supply-side hybrid.
AEI intern James Moore prepared this summary.
