It’s the Economy, Right? Guess Again
by LOUIS UCHITELLE
THROUGH months of campaigning, Senator John Kerry has presented himself as a centrist on economic policy, a New Democrat directly out of the Clinton mold. He has pledged to cut the deficit, move the country toward budget surpluses and recreate the booming economy of the Clinton years. As if to underscore the point, he has recruited most of his economic advisers from the former president’s administration.
But centrism is an easier position to maintain when the economy is in trouble, as it seemed to be in the early days of the campaign. Back then, Mr. Kerry could convincingly denounce President Bush as a miserable manager of the American economy. That argument is harder to make now that a stronger economy has been generating jobs, although at a slower rate in June. So Mr. Kerry is talking more boldly about policy.
Of course, the centrism still comes through loud and clear in speeches and in interviews. But in the heat of the policy debate, deficit reduction appears to be taking a back seat to what is easily Mr. Kerry’s most significant economic proposal: an expensive expansion of government-financed health insurance.
He says he would subsidize health insurance for millions of people not covered now. That is the jewel of his economic plan. An omnibus health insurance bill would be the first legislation sent to Congress in a Kerry presidency, he says. But while the centrist Kerry still advocates shrinking the budget deficit, a bolder Kerry, less noticeable so far in the campaign rhetoric, adds that if the deficit threatens to rise rather than fall, well, so be it – he’ll go ahead with his health plan anyway.
“Health care is sacrosanct,” Mr. Kerry said in a telephone interview, offering the most explicit commitment to date to a program that he estimates would cost $650 billion. That is an amount greater than the cost of all his other economic proposals combined.
“Listen,” he said, “if worse comes to worst, you make adjustments accordingly in other priorities.”
And not in health care? Mr. Kerry says that he will not have to face that choice, and that in his overall economic plan there is leeway for deficit reduction and expanded, subsidized health insurance. But if a choice has to be made, deficit reduction will have less priority. “Health care is too important,” he said.
For Mr. Kerry, who has promised to cut the budget deficit in half in four years as president, sticking his neck out on subsidized health insurance seems a shrewd shift in tactics, if not a defensive one. That is because it is tougher to blame President Bush for a bad economy when the economy has improved.
Once he could charge that the president was presiding over more than two million lost jobs and would become the first president since Hoover to end his term with fewer Americans at work than when he took office. Now the odds are rising that the president may squeak through with as many jobs at the end of his term as at the start, or almost as many.
JOB creation began to surge in February, just as Mr. Kerry was pushing the Hoover comparison in the early primaries. As of Friday, when the Labor Department announced employment numbers for June, the cumulative job loss since Mr. Bush took office in January 2001 was down to 1.1 million, less than half of the 2.6 million jobs that had disappeared as of last August, when employment finally began to turn up, slowly at first and then more rapidly.
In response, Mr. Kerry has switched his emphasis to job quality from jobs lost – specifically, to the harder to demonstrate but apparently accurate claim that the new jobs pay less, on balance, than the ones that have been lost – $9,000 a year less, on average, the Kerry camp proclaimed in a press release on Friday. His aides have also begun to split hairs. When government jobs are subtracted from the job creation, they say, the loss in the private sector remains high: 1.8 million through June.
Economic growth is a similarly slippery issue. Presidential elections are won and lost on the strength of the economy, or lack of the same. The correlation in recent decades is uncanny, and on this count the Bush presidency seemed to be in trouble through two and a half years, thanks to a recession and a floundering recovery that held down economic expansion to an average annual rate of 1.63 percent.
Not anymore. Since last summer, growth has surged. Over the nine months from July 2003 through March this year, the annual growth rate of the gross domestic product averaged a robust 5.4 percent. The numbers for the most recent quarter, which ended last week, are not likely to pull down that average by very much when they are released late this month.
“The issue is whether the Kerry campaign can get people thinking about the Bush four-year record, not just the last year,” said Alan S. Blinder, a Princeton economist who served as an economic adviser in the Clinton administration. “You can legitimately attack the four-year record, charging that Bush compounded bad luck with bad policies, and extrapolate what he would do in the next four years.”
Boiling down that complexity to a campaign slogan or a catchy phrase is tricky, however. Stumping for social change is an easier, perhaps more effective approach. And Mr. Kerry appears to be taking it – cautiously but unmistakably.
“I believe the private sector has always been and is the dominant mover, shaker, creator of jobs and the mover of our economy,” he said. That was the centrist side of Mr. Kerry speaking. The bolder, interventionist Kerry had this to say: There are some things beyond the scope of the private sector “that you know will improve the quality of American life and make a difference over the long run.”
Government programs are needed, he said. In the near term, most can be postponed or cut back if deficit reduction so requires. National service for young adults and universal preschool fall into that category. “Health care, however, is not one of those,” Mr. Kerry said.
Bill Clinton, in his 1992 campaign, also advocated government intervention, but more forcefully than Mr. Kerry. A $16 billion public spending program was high on Mr. Clinton’s list, and subsidized health insurance got plenty of mention, too, although he had not yet developed a specific proposal, as Mr. Kerry has.
But for Mr. Clinton, the mantra was simple: “It’s the economy, stupid.” He endlessly exploited its weak state. In the aftermath of a recession, employment did not turn up significantly until after the election, and the economy was expanding at a noticeably slower pace than it is today.
Lacking the economy as an overriding issue, Mr. Kerry is putting more stress on his specific proposals, which are radically different from his opponent’s. While the Bush administration proclaims that markets, left alone, solve social problems, the Kerry camp holds that markets, by their nature, cannot satisfy a number of legitimate needs and that government must therefore step in.
The Bush administration, for example, argues that its tax cuts strengthen markets. It says the cuts become an incentive for executives and workers who, in exchange for being allowed to keep more of their earnings, work harder, invest more and foster entrepreneurial activity. The results, the White House argues, are solid economic growth and rising income at the low as well as the high end of the work force.
The Kerry camp, by contrast, uses taxes as an incentive in a different, more specific way. It would cut them or raise them or offer credits or change tax law to alter corporate behavior. Through tax incentives, companies would be encouraged to behave in ways that are socially beneficial for Americans. But tax incentives are not enough, the Kerry camp says, arguing that government should intervene in other small ways to offset a market system’s shortcomings.
Consider jobs. A President Kerry would not withhold federal contracts from companies that moved jobs overseas. “We’re living in a globalized economy and we’re going to trade and some jobs are going to be outsourced,” Mr. Kerry said in the interview. “It would be phony for a president to stand up and say, ‘I’m going to stop that from happening.’ “
Several of his tax proposals, however, are intended as incentives to companies to keep jobs in the United States or to bring jobs back from abroad. They are not, he stresses, penalties. But he would insist that companies with federal contracts for the military and domestic security do the work in the United States. “I will put a premium” on that, he said.
He would also go a step further than President Clinton did in labor disputes, penalizing companies that use replacement workers in strikes. “I would be willing to use federal contracts as leverage” to prevent that, Mr. Kerry said, promising a penalty that the Clinton administration once announced but did not impose.
IN addition, the senator would strengthen union bargaining power. Under current procedures, a company may insist that its workers vote in a secret-ballot election to determine whether they want to be represented by a union. Such elections can take weeks to arrange, and during that time it is relatively easy for management to intimidate or harass the workers. Another method, known as card check, is faster and more insulated from management. In card check, workers authorize union representation when a majority sign cards asking for it. Mr. Kerry said he favored the card check method. “It is right and it is important,” he said.
Trade is another area in which candidate Kerry parts company with the Bush administration. He would incorporate labor and environmental standards into future trade treaties, thus giving them teeth under the enforcement provisions of a standard trade agreement. President Clinton relegated environmental and labor standards to unenforceable side agreements to win Congressional approval of Nafta, although late in his presidency he had the side agreements incorporated into the treaty itself.
President Bush has put limits on the enforcement of Nafta and of the treaties that his administration has negotiated. Those include a Central American free trade agreement, which is not expected to go to Congress until next year. “I have problems with the Central American agreement in its current form,” Mr. Kerry said, indicating that he would renegotiate it to strengthen labor and environmental provisions.
Asked in the interview about Social Security, he said it was essentially all right as it is. That is a more upbeat assessment than the Bush administration offers. The senator shuns partial privatization – the Bush plan – or raising the retirement age or shrinking the annual cost-of-living adjustment as a means of cutting benefit costs.
He said he would ask “legitimate questions,” however, about strengthening Social Security in other ways over the long run. He questions, for example, an income ceiling for applying the payroll tax – currently $87,900 – and asks why it cannot go considerably higher.
But health insurance is a much bigger issue – and more emblematic of how differently the two candidates think.
President Bush, if re-elected, would encourage individuals to set up health care savings accounts. These would be tax deductible, and the account holders would use them to pay for health insurance or care. First, however, individuals would have to spend $1,000 or so from their own pockets in after-tax dollars. That would be the deductible. In addition, companies that now insure their workers would contribute to the individual accounts of their employees, if they wished. Or they could maintain their existing plans.
The Republican approach recognizes that corporations are reducing health care coverage for employees and tries to offset that through the use of tax-deductible individual accounts, said Steve Schmidt, a spokesman for the Bush-Cheney campaign. “By making individuals better consumers about health care,” he added, “they are more rational in the way they choose, and, in fact, that helps address the cost issue.”
The poor are addressed through tax credits. For someone earning too little to finance a savings account – $15,000 or less a year – Mr. Bush would offer a tax credit, in effect mailing out $1,000 annually in 12 monthly installments. That money would be used to buy private health insurance.
The Kerry proposal is aimed at the 40 million people without health insurance. For openers, two existing plans at the state level – Medicaid and the Children’s Health Insurance Program – would be expanded to enroll individuals and parents earning double or triple the poverty level.
The federal government would pay the entire cost for these new enrollees, who account for 26 million of the 40 million people now uninsured, according to Kenneth E. Thorpe, a professor at the Rollins School of Public Health at Emory University and a chief architect of the Kerry plan. That would consume $503 billion of the $650 billion Mr. Kerry has earmarked for health care over four years, Mr. Thorpe said.
The second major aspect of the plan would expand coverage for companies with 50 or fewer employees; many of those companies now offer no insurance. A President Kerry would set up regional health insurance pools offering the same plan that now covers federal employees. An employer would pay, say, $5,000 a year per worker, but would get back half of that as a tax credit.
Finally, men and women between 55 and 64 – early retirees, for example, too young for Medicare – and younger people who are unemployed could join a regional health insurance pool. For the unemployed, the monthly cost would be 75 percent subsidized. For the others, even their unsubsidized monthly bills would be less than the average cost of private insurance, Mr. Thorpe said.
THE cost of the Kerry plan, including special subsidies to reimburse companies for the extra cost of insuring employees with catastrophic illnesses, is $950 billion, a figure the Bush camp often cites. The Kerry campaign subtracts $300 billion in savings from efficiencies that Mr. Kerry would demand. People suffering from heart failure and diabetes, for example, would have to submit to managed care, with the goal of fewer hospitalizations.
Either way, the program could endanger deficit cutting. Mr. Kerry’s promise to repeal the Bush tax cuts on income above $200,000 may raise enough tax revenue to pay for expanded health insurance and his other programs. But that would not be enough to carry out his promise to cut the budget deficit in half in his first term, from its projected record level of more than $450 billion in the current fiscal year, which ends just before Election Day.
President Bush has made the same pledge to cut the deficit in half. What goes unsaid in the stump speeches of both candidates, however, is that most of the deficit reduction they promise is dependent on the accuracy of a forecast from the Congressional Budget Office. That forecast says, in effect, that there will be enough economic growth and tax revenue by 2008 to cut the deficit in half automatically.
But what if the forecast goes wrong? What if there is a nasty recession, or the outlays for the Iraq war exceed the $86 billion a year included in the four-year forecast – or another terrorist attack drives up spending for domestic security? The senator bridles at such questions.
To begin with, he argues, the budget office forecast may turn out to underestimate the strength of the economy in a Kerry presidency. His projects for energy self-sufficiency and the like will pump public money into the private sector, lifting employment and economic growth. That would shrink the deficit by more than he now allows for, he says.
And if that does not happen, if the deficit does not come down as sharply as the budget office expects? Having declared health care sacrosanct, Mr. Kerry is reluctant to get into contingency planning if he cannot also achieve the desired deficit reduction.
“I’m going to stick with my belief that my program is going to work,” he said. “And when it doesn’t I’ll deal in a way that keeps faith with my principles and my promises to the country. And I’ll obviously have to deal with the realities of that.”