2 Contrasting Views on How to Spend Surplus

The real story in this election for business is that a lot of money will be pumped into the U.S. economy in the next four years, no matter who wins.

Whether through the broad tax cuts promised for a George W. Bush administration or the directed tax credits, deductions and grants of an Al Gore administration, the federal government will disburse an estimated $300 billion to $500 billion into the economy between 2001 and 2004.

The government can well afford it. Budget surpluses, even beyond the trillions of dollars set aside for Social Security, will total $525 billion over the next four years, according to the Congressional Budget Office.

But how that money is used to affect the economy and business depends very much on the choice Americans make in the election Tuesday.

The reason this election is so fascinating--and so close--is that the Bush and Gore camps represent two distinct economic philosophies and world views.

The election of one or the other will result in decidedly different approaches to corporate profits and business policies. It will mean different approaches to the defense industry and to the $1.4-trillion-a-year complex of industries and services known as medical care.

In economic terms, it’s laissez faire versus progressive, a tendency to rely on private business to accomplish social goals versus activist government to accomplish public purposes.

For example, Bush and Gore both want to help lower-income people participate more fully in America’s middle-class economy.

To the Bush camp, that means tax cuts to put money in people’s pockets so they can spend it, save it or use it to pay down credit card debt. A Gore administration, by contrast, would use tax credits to encourage saving among low-income families. For a couple earning $25,000 a year, Gore’s retirement savings accounts would offer a $3 tax credit for every $1 of savings. It would match $1 of savings with $1 of tax credit for a couple earning $50,000 a year.

The policies would produce different economic effects: The Bush tax cuts would spur faster economic growth at the risk of forcing up interest rates. A Bush administration with broad tax cuts also would emphasize “opportunity for entrepreneurs,” as candidate Bush repeatedly has said.

The Gore credits would increase personal savings, which would tend to push down interest rates. Its aim would be to produce a more balanced, “fairer” society, possibly with slower economic growth.

Gore would depart from policies of the Clinton administration, which in recent years has pursued a more laissez-faire Bush-type course. Corporate profits grew faster than wages and salaries. That’s one reason the stock market was so exuberant.

It was a “friendly business environment,” says Raymond Dalio, director of Bridgewater Associates, a Wilton, Conn., investment firm that manages $31 billion in currencies and bonds for global investors. But he wonders whether the next administration will “move to the left” to favor labor over corporate profits.

Possibly it will. Given its philosophy and the extraordinary work organized labor is doing for the Gore campaign, a Gore administration would do more to reward labor in policies on wages and working conditions.

The two camps differ directly, for example, on including labor and environmental rights in foreign trade agreements. Gore would include them, Bush pooh-poohs such ideas.

Yet the Gore idea makes more sense, says economist and trade expert Gregory Mastel of the New America Foundation, a Washington think tank, “because it is the only way to build a consensus for trade among U.S. voters.”

Again, the election presents interesting choices, perhaps nowhere more clearly and directly than on defense.

A Gore administration, seeking to renew a weapons arsenal that has grown worn with age and use, would immediately raise spending on such projects as the $200-billion Joint Strike Fighter for which Lockheed Martin and Boeing are competing. A Gore administration would rush funding on new classes of destroyers and attack submarines. The Gore campaign is promising to increase the $306-billion defense budget by more than $100 billion--more than Bush is proposing.

A Bush administration would not rush to increase spending on such weapons. Bush would launch a restudy of the U.S. defense posture. He would reduce the big fighter programs. “Whether he would actually discontinue the Joint Strike Fighter program is an open question,” says defense expert Loren Thompson, director of the Lexington Institute, an Arlington, Va., think tank.

But a Bush administration would renew an updated program for the B-2 bomber. Northrop-Grumman has produced 21 of the stealth bombers and is currently upgrading their technology. Bush would go beyond those planes to create a bomber fleet able to fly from the United States to protect U.S. interests overseas.

“Fighters need overseas bases, which cannot be counted upon, but a bomber fleet can be dispatched from the U.S.,” Thompson says.

A Bush administration would also proceed with an antimissile defense program.

In the troubled business of medical care, where physicians are battling insurance companies over scarce dollars and hospitals are resigning from the Medicare program rather than lose money on inadequate government reimbursements, a Bush administration would offer a private- and public-sector approach. Families lacking health insurance would be offered a $2,000 health tax credit to purchase insurance. Private insurance plans would be offered for prescription drug benefits for seniors.

A voucher system would, like tax cuts, put money in patients’ hands and let them make choices. The private sector would be relied on to present reasonable choices.

“The Bush plan with vouchers would not yet cope with the increasing demands of an aging population for expensive new drugs and treatments,” says Dr. Schumarry Chao, a physician at County-USC Medical Center and consultant to private medical companies.

But vouchers would be a start on future medical finance systems in which patients would make more choices but have greater co-payments for some drugs and treatments too.

A Gore administration would use managed-care providers and state health agencies, such as California’s Health Care Financing Administration, to administer prescription drug benefits and care for the uninsured. The state agencies would be certain to bargain hard over pharmaceutical prices.

The outlook for hospital and pharmaceutical companies, and for physicians, is more of the same muddle they are in today no matter which party wins.

How stock markets and other financial markets respond to whoever wins Tuesday remains unpredictable. Stock prices have risen and fallen under administrations of both political parties.

To be sure, larger forces in world and national events may ultimately determine the direction of the U.S. economy in the next four years. But still, the fascinating point about this election is that the choice of philosophy to guide that economy is up to--you.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com. An archive of his past columns can be found online at https://www.latimes.com/flanigan.