Running Against The Bush Economy

Last spring, as President Bush basked in his Persian Gulf victory, despondent Democrats concluded that nothing short of a prolonged economic slump offered them any hope of capturing the White House in 1992. If enough average Americans were frightened about the economic future, they reasoned, a challenger might have a shot at defeating the President.

Suddenly, the Democratic pipe dream of a competitive campaign looks more realistic. The flag-waving euphoria of Operation Desert Storm has evaporated, replaced by national anxiety over the stagnant economy. Soaring state and local taxes are fiercely squeezing the middle class. The huge budget deficit is paralyzing the federal government. And the Administration's tentative response to the malaise is making Commander-in-Chief Bush look like a bumbling lieutenant on the homefront.

The Democrats might be heavy favorites to win the Presidency next year if all they had to do was convince voters that the Administration has mismanaged the economy. But that's only half the job. Polls show that voters still are reluctant to trust the economy to the Democrats. One of the half-dozen Democratic candidates has to convince voters that he has a plan to promote growth. "People are looking for someone who says, 'Let's get this country moving again,' " says Democratic analyst William Galston. "We've got an opportunity. But it has to be seized."

All the candidates have picked up on the opportunity. "They are all moving toward a middle-class, progrowth message," says Stuart E. Eizenstat, chief domestic policy aide to President Carter. "To varying degrees, they're making a clear move away from the redistributionalist message." But the Democrats must still prove that their new middle-class concerns are serious.

Ironically, New York Governor Mario M. Cuomo, who as of Nov. 26 remained a noncandidate, is getting the most media attention for his economic plan. His package, outlined for BUSINESS WEEK last summer (BW--Aug. 26), includes a deep tax cut on long-term capital gains, restoration of the investment tax credit, and expanded tax breaks for research and development. Fiscally, he would combine broad spending reductions, including cuts in entitlement programs, with tax hikes on the wealthy.

Of the declared candidates, only former Massachusetts Senator Paul E. Tsongas has developed a full-blown economic policy. Arkansas Governor Bill Clinton and Iowa Senator Tom Harkin are close behind. The others are just beginning to shape their programs.

The Democrats' emerging line of attack is to run against the economic excesses of the 1980s, just as Ronald Reagan won by running against the social-policy excesses of the 1960s and 1970s. The contenders will paint a portrait of a Reagan-Bush era in which the government allowed the U. S. financial system to crumble and America's international competitiveness to slump. Above all, they'll remind voters that the rich got richer and the middle-class got squeezed. Clinton is typical, blasting Republicans for glorifying "wealth and power over work and productivity and family."

'IMMORAL.' Although the Democratic candidates are just beginning to hammer their platforms together, they are building with many common planks: international competitiveness, health care reform, long-term investment, and the importance of education. The Democrats seem to have learned one vital lesson from three consecutive Presidential defeats: Voters don't want to hear about who gets the biggest piece of a shrinking economic pie. The '92 bunch preaches the old Democratic theme of fairness, but they remember to toss in plenty of rhetoric about economic prosperity.

Most of these Democrats have also learned to avoid being boxed in by promising fiscal responsibility. In the last three Presidential elections, Democrats have run as the candidates of fiscal prudence, embracing tax hikes to reduce the budget deficit. But this time, they are taking a page out of Ronald Reagan's 1980 playbook. The Democrats pound on Bush for allowing the deficit to get out of control and blast the red ink as "immoral." But, like Reagan, they don't let deficit worries tie their hands when it comes to campaign promises.

Many of the candidates are putting a new spin on another old Reagan trick -- bashing the out-of-touch bureaucracy. The '92 version is pitched most vociferously by Nebraska Senator Bob Kerrey: Entire Cabinet departments ought to be scrapped so the government can better address the needs of the 21st century.

Each of the latest crop of candidates--Clinton, Kerrey, Harkin, Tsongas, Virginia Governor L. Douglas Wilder, and former California Governor Jerry Brown--has targeted an audience of suburbanites and middle-class Democratic defectors. But they are marketing their views in very different ways. Harkin is the most traditional Democrat, hitting hard at "trickle-down economics" and backing big new government spending programs. At the other extreme, Clinton and Tsongas talk as much about productive private investment as they do about fairness. Here is a snapshot of each candidate's economic views:

--The Firebreather. Feisty Tom Harkin is an old-fashioned prairie populist with a message that echoes George S. McGovern's 1972 theme: Come home, America. Harkin never misses a chance to compare Bush with Herbert Hoover. The Bush economic program, says Harkin, "can be summed up in three words: Cut capital gains. That's his answer to everything." Harkin's answer: "Investing the peace dividend here at home and stopping the export of U. S. jobs." To Harkin that means more money for roads and bridges, government investment in private technology and research and development, and more spending for education and health care. Harkin would pay for this by abandoning foreign commitments and slashing defense spending, while hoping that public investment would pay off in a stronger economy and more federal tax receipts. "We're not broke," he told the AFL-CIO on Nov. 12. "It's just that all the money is in a few hands. Money is like fertilizer. It works best when you spread it around."

Harkin is also the most outspoken when it comes to foreign competition. "I'd get tough on trade," he says, calling on the U. S. to negotiate trade agreements that promote "high wages here and improved wages abroad." Protectionist Harkin is a fervent opponent of the planned U. S.-Mexico-Canada free-trade agreement. He backs middle-class tax cuts, including efforts earlier this year to cut the Social Security payroll tax. Harkin would pay for these cuts by raising rates on the rich.

Harkin's economic gurus include Princeton University economist (and BUSINESS WEEK columnist) Alan S. Blinder and Jeff Faux, director of the labor-oriented Economic Policy Institute, a Washington think tank.

--Mr. Personal Responsibility. Centrist Bill Clinton hammers home one fundamental message at every opportunity: Government has a responsibility to help people succeed, but individuals have the obligation to work toward their own success and to return something to society. That message permeates Clinton's economic wish list as well.

The Arkansas governor backs tax cuts for the middle class and capital-gains relief for investors in new businesses. But he doesn't believe that targeted tax breaks alone can spur the economy. Says Clinton: "We need a national strategy to create a high-wage, high-growth, high-opportunity economy."

Along with his fellow Democratic challengers, Clinton favors more spending on public works and increased investment in education. But unlike Harkin and others, Clinton is also an unabashed free-trader. And while he promises that his plan will make the U. S. more competitive in world markets, Clinton has a tough message for corporate executives: "I'm going to make it easier for your company to compete in the world, but I want the jet-setters of Corporate America to know that if you sell your companies and your workers and your country down the river, you'll get called on the carpet." How? Clinton has threatened to raise taxes on excessive executive pay.

The Clinton message grates on many traditional Democrats, who accuse him of being little more than a warmed-over Republican. Clinton insists differently. "We've got to move in a radically different direction" from Bush, he says. Then he adds: "We've got to move away from the old Democratic theory that says we can just tax and spend our way out of any problem we face." Clinton's stable of economic thinkers includes Robert J. Shapiro, vice-president of the Progressive Policy Institute, Harvard University's Robert B. Reich, and Ira Magaziner, an economic consultant.

-- Mr. Industrial Policy. Tsongas' top economic goal is restoring the U. S. manufacturing base, along with the strength of technology and financial services. He is an unapologetic fan of industrial policy and sees no shame in the government picking winners and losers. "Strategic investment in emerging technologies is part of an industrial policy which will result in some losers but will also result in some critical winners as well," Tsongas says.

He would encourage savings over consumption, a step that would reduce "the cost of capital to U. S. companies" and "our current hazardous dependence on outside sources of capital." Tsongas supports a tax cut for long-term capital gains, a tax credit for spending on research, and other incentives for investment in new ventures. He would pay for those tax breaks by raising the top tax rate on the wealthiest individuals. But, unlike his Democratic opponents, Tsongas is opposed to middle-class tax relief.

Tsongas supports government policies that would encourage long-term thinking by corporate managers: He'd provide legal protection to directors who back long-term investment strategies over quick returns to current shareholders, for example, and he wants to explore the idea of replacing quarterly financial reports with semiannual figures. He rejects outright protectionism but says he'd urge consumers to "buy American." Among Tsongas' economic advisers: Lester C. Thurow, dean of the Sloan School of Management at the Massachusetts Institute of Technology, and George N. Hatsopoulos, CEO of Thermo Electron, a high-tech conglomerate.

-- The High-Tech Hero. Nebraska's Kerrey is trying to shape his appeal more to independent young suburbanites than to traditional Democrats. His message: "taking what we have now and developing a new program for economic growth based upon education, information, imagination, conservation, and investment." What does that mean? Kerrey backs government investment in technology through both tax incentives and direct grants. He would reorient government research labs toward economic and environmental research instead of military projects. He also favors a national, interactive telecommunications system, to be built in an "unfettered, competitive environment," that will "bring the information revolution to our homes, our businesses, and our schools."

To reduce the deficit Kerrey proposes cutting domestic discretionary spending by 25% and defense spending by up to 40% over the next decade. Together, the two might add up to $150 billion annual savings in 1991 dollars. In part, he would achieve the savings by eliminating half of all Cabinet departments. But he has not suggested cuts in entitlements, such as Social Security or farm subsidies.

His tax plan, in line with his Democratic competitors, would focus on middle-class relief. Kerrey looks at these breaks as a way to restore fairness to the tax code, not so much as a way to stimulate the economy. Thus, he would offset the revenue lost from a middle-class tax cut with a tax increase on taxpayers earning more than, say, $200,000. Kerrey has backed efforts to cut Social Security payroll taxes. He says he'd be tough on trade but supports giving the President wide latitude in negotiating international agreements. Earlier this year, Kerrey supported legislation that gave Bush "fast-track" authority to negotiate a North American free-trade agreement, which is in the talking stage.Where does Kerrey get his economic advice? From fellow Nebraskan Warren E. Buffett, chairman of Berkshire Hathaway Inc., and Harvard economist Benjamin M. Friedman.

-- The Budget Hawk. While most of his fellow Democrats are downplaying the federal deficit, Virginia's Wilder hits the problem head-on. Wilder hopes to build on his own track record in Virginia, where he has tackled a serious deficit problem without raising taxes. He'd cut federal spending by $50 billion--$10 billion from the Pentagon, $15 billion by eliminating other "low-priority" programs, and $25 billion by cutting "administrative overhead." Says Wilder: "Before we do anything else, we have to clean up the fiscal mess in Washington."

But not all of the savings would go to cut the deficit. Wilder backs a $35 billion middle-income tax cut and a new $15 billion grant program for innovative local government programs. Although he hasn't formulated a trade position yet, he told the AFL-CIO that he would have voted against authorizing negotiations on a North American free-trade plan. Wilder's economic advice comes mostly from a group of Virginia academics, such as economist John L. Knapp, and business executives.

-- The Enigma. The final announced Democratic candidate, former California Governor Jerry Brown, has not yet formulated an economic policy, according to his aides. So far, his entire message is an attack on campaign finance and the power of "corrupt special interests." In his announcement speech, Brown called for an "economic bill of rights" but never said what it would include. Brown says the nation should grow out of the deficit: "You can't contract your way out of this crisis." He says he might support a cut in the payroll tax and in long-term capital-gains taxes, but only if they are part of a broader growth package that includes infrastructure investment and a possible tax hike on the wealthy.

The Democrats are looking for votes by focusing on the economic concerns of average American voters: For the first time in recent elections, helping the middle class and promoting economic growth are mainstream Democratic concerns. But the candidates still must move beyond broad rhetoric to offer the public more specific solutions to the economy's miseries. Concentrating on economic growth is a good beginning. The new platform won't assure victory, even if the economy stays crummy. But unlike past campaigns, the Democratic message at least won't guarantee defeat.

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