Gore, Bush: Two Different Futures for the Economy

Whoever wins this presidential election will be confronted by a cooling economy and will have to deal with it as presidents have always done, by cutting taxes and pumping money into the economy.

But long term, the differences between the candidates become more interesting for investors and voters. For behind their political rhetoric, Republican George W. Bush and Democrat Al Gore have dramatically different ideas about the economy and industrial development.

And an examination of the candidates’ positions on taxes, energy, the environment and many other matters can offer insights about the direction of industries and investments in the next four or possibly eight years.

Meanwhile, however, the next president is likely to be greeted by an economic slowdown or, worse, a rise in inflation leading to higher interest rates and a recession.

Many economists expect the economy to slow to a growth rate of about 3% next year, from roughly 4.2% this year. That would mean about $100 billion less in economic output, or 2 to 3 million fewer new jobs. Whoever takes office in January will have to keep the economy moving at a pace that avoids a sharp reversal in the value of the dollar and a major downturn in the stock market.

Worse for the new president would be inflation rising above today’s already worrisome 3.5% annual rate, up from 2.2% last year. If inflation picked up, the Federal Reserve would be forced to raise interest rates, even if doing so threw the economy into a recession. The increasingly nervous financial markets today “are watching inflation right now,” says economist William Rhodes of Williams Capital Management, a New York investment firm.

If Gore or Bush do face a recession in their first year in office--as Presidents Nixon, Carter and Reagan did in their time--either man will do what is necessary, tax cuts and government spending, to get the economy humming again.

And Gore or Bush will be more fortunate than their predecessors because the next president will inherit federal budget surplus of $200 billion. Surpluses of that magnitude will persist through 2002, predicts economist Edward Yardeni of the Deutsche Bank Alex. Brown investment firm. Even a stock market downturn would not reduce the federal surpluses, because people selling stock would incur capital gains taxes that would continue to fill government coffers.

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It is in the long term that the ideas of the candidates will steer the economy in differing directions.

On taxes, a Bush administration would encourage faster economic growth in a more decentralized economy. George W. Bush’s idea is to cut taxes by reducing tax bracket levels, from today’s five brackets ranging from 15% to 39.6%, to four brackets ranging from 10% to 33%.

The reduction in brackets would help simplify a highly complex system, says Lawrence Stone, a tax expert at Los Angeles law firm Irell & Manella who served in the Treasury Department in the Kennedy and Johnson administrations.

The effect of such tax reductions would be to spur economic growth--but that would not happen immediately. Broad tax legislation such as Bush is proposing is not passed quickly by Congress. Bush’s program, even if it passed in a timely fashion, would take effect three to four years from now and in some cases not until late this decade. Its long-term importance would be to set a decentralized, lower-tax pattern for the U.S. economy--as the administration of Ronald Reagan did 20 years ago.

A Gore administration would use tax policy differently. Rather than a broad tax reduction, Gore would give tax credits and tax deductions for specific purposes.

For example, Gore would use tax credits to help families pay for after-school child care. He would have tax deductions of up to $10,000 for tuitions and fees at colleges, graduate schools and training institutions and tax-favored accounts that would enable employers and workers to finance retraining and pursue lifelong learning.

A principal aim of a Gore administration would be to pay down the national debt. Doing so would tend to hold down interest rates. The long-term importance of a Gore program is that it would increase government guidance of the U.S. economy, in the tradition of Franklin D. Roosevelt’s New Deal.

To be sure, neither candidate is an economic absolutist. Both Bush and Gore propose to use anticipated budget surpluses to finance prescription drug programs for the elderly and to expand aid to education and other purposes.

Pharmaceutical companies and firms engaged in modernizing education in the public or private sector stand to benefit in this decade no matter who is in the White House.

But in energy policy, Gore and Bush stand in stark contrast. In energy, a Bush administration would be more traditional, encouraging development of oil and natural gas in the United States. A pipeline to bring natural gas from Alaska would be encouraged, as would development of new oil in Alaska.

Tax credits and research grants would encourage technology to gasify and liquefy coal, with the aim of making coal resources usable environmentally. Companies across a broad range from electric utilities such as Duke Energy, to explorers for natural gas such as Barrett Resources of Denver, to companies experimenting with new fossil fuel delivery systems, such as Syntroleum of Tulsa, would stand to benefit in such a policy environment.

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A Gore administration, as the candidate indicated in the debate last week, would try to develop a new kind of energy industry. Gore would grant tax credits for hybrid cars and trucks powered by both gasoline and electricity. His administration would support tax credits for new kinds of electrical motors and home and commercial heating and cooling systems.

The environmental industry also would receive a new emphasis in a Gore administration. Gore would use tax credits to support fuel cell development and new water resource systems. “There would be programs for resource productivity, the reuse of water and land and many other resources,” says Grant Ferrier, head of Environmental Business International, a San Diego consulting firm and publisher of environmental newsletters.

This would be good news for companies such as Vivendi, Cadiz, Ballard Power Systems and FuelCell Energy. A Gore administration would support research in energy and environmental ideas that first surfaced in the oil-short 1970s, with the difference being that technology has improved in the intervening decades and there is more money around today.

The paradox of this election is that the effect in the short term will be business as usual, but in the next four or eight years the outcome could change the course of the economy.

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James Flanigan can be reached at jim.flanigan@latimes.com. His previous columns are available at https://www.latimes.com/flanigan.

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Comparing Candidates’ Tax Plans

The presidential candidates’ tax proposals can be compared only up to a point. Republican candidate George W. Bush proposes to cut tax liability by lowering all tax brackets. Democratic candidate Al Gore would keep brackets as they are but grant deductions and tax credits for specific purposes, such as education, medical care, energy and environmental efficiency. The illustration shows the tax effect on a couple at a specific income level and also shows liability under tax brackets in the Bush and Gore proposals.

George W. Bush Proposal

Under Bush’s proposal, a couple earning $75,000 a year and filing jointly would have a federal income tax liability of $13,845.00.

Single

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Taxable income Tax liability $0 to $5,999 10% $6,000 to $25,749 $600, plus 15% of the amount over $6,000 $25,750 to $130,249 $3,562.50, plus 25% of the amount over $25,750 $130,250 and over $29,687.50, plus 33% of the amount over $130,250

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Married filing jointly

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Taxable income Tax liability $0 to $11,999 10% $12,000 to $43,049 $1,200, plus 15% of the amount over $12,000 $43,050 to $158,549 $5,857.50, plus 25% of the amount over $43,050 $158,550 and over $34,732.50, plus 33% of the amount over $158,550

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Al Gore Proposal

Under Gore’s proposal, before calculating specific deductions or credits as they may apply, the same couple’s liability would be $15,403.50.

Single

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Taxable income Tax liability $0 to $25,749 15% $25,750 to $62,449 $3,862.50, plus 28% of the amount over $25,750 $62,450 to $130,249 $14.138.50, plus 31% of the amount over $62,450 $130,250 to $283,149 $35,156.50, plus 36% of the amount over $130,250 $283,150 and over $90,200.50, plus 39.6% of the amount over $283,150

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Married filing jointly

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Taxable income Tax liability $0 to $43,049 15% $43,050 to $104,049 $6,457.50, plus 28% of the amount over $43,050 $104,050 to $158,549 $23,537.50, plus 31% of the amount over $104,050 $158,550 to $283,149 $40,432.50, plus 36% of the amount over $158,550 $283,150 and over $85,288.50, plus 39.6% of the amount over $283,150

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Sources: Times analysis, Internal Revenue Service, Dow Jones