October 2003
Economic Policy and the 2004 Election Debate

With the policy debate running up to the Democratic presidential primary already in full swing, the 2004 general election is a little over a year away. Democratic presidential hopefuls have made it clear that they disagree with the current administration's economic and budget policies and have begun to put forth their own specific proposals. On October 10, 2003, a panel of economists and public policy experts-including Gene Sperling, former director of the National Economic Council; Robert J. Shapiro, former under secretary of Commerce for Economic Affairs; and Bruce Reed, former chief domestic policy adviser for President Clinton-met at AEI to compare and contrast the policy proposals of the leading Democratic candidates.

Robert J. Shapiro
Co-Founder and Managing Director, Sonecon, L.L.C.
Fellow, Brookings Institution

If the Democratic candidates are united in one thing, it is their feeling that President Bush has so far mismanaged the economy in a way that they are eager to improve upon. Although their individual policies vary in the methods and the level of specificity at which they have laid them out, all the candidates see a need for additional short-term stimulus for the economy and share a concern about the need to reduce the long-term deficit, which is generally believed to be vastly underestimated. There is also a consensus on education and extending health insurance to all or most of those who are uninsured, as well as a desire for additional tax relief for families sending children to college.

One of the major differences between the candidates that will play a role in the nomination fight is a difference of opinion over trade, with one camp saying any future trade agreement should include strict environmental and labor standards, and the other aligning itself with President Clinton with an aggressive pursuit of open trade. The Bush tax cuts are also being disputed: Dean and Gephardt are advocating rolling back all of the tax cuts. Dean advocates this for fiscal balance while Gephardt wants to launch new spending projects. Meanwhile, Lieberman, Kerry, Edwards, and Clark are arguing that we should roll back the tax cuts only for high-income people.

In addition, each candidate has a fairly distinctive economic position: Dean on the minimum wage; Edwards on corporate accountability; Gephardt on tax breaks for business; Kerry on training; and Joe Lieberman on manufacturing. Between now and the New Hampshire primary, middle-class taxes are going to be a significant issue as long as Dean remains the front-runner, but if Kerry or Lieberman move up, you will see trade become another important issue.

Something I think we should keep in mind is that it is still October, and we are still a year away from the election. These campaigns will evolve, and the program of the nominee is not set today. I would be very surprised, for example, if there are not candidates who propose tax cuts at some point. And we will have candidates who propose programs that expand stock ownership. The early part of the campaign is about mobilizing activists, and we are going to see it focus right now on "red-meat" issues, including attacks on the President.

Bruce Reed
President, Democratic Leadership Council

I agree with Bill Clinton that Democrats have to do three things to unseat an incumbent President in 2004: first, reassure voters that Democrats can handle national security; second, tell them some things about the Bush Administration that they do not know but would not like if they did; and third, and most important, show them what they will do for the country that Bush has not and will not. Reading Clinton's announcement speech from 1992, it struck me that the mood in the party was similar then to what it is now. Democrats were frustrated from losing and angry about the course the country was on. If we're going to get anywhere in exploiting the administration's failures, we have to do what Clinton did and turn the debate from "How much do you hate Bush?" to "What are you going to do about it?"

We see big policy differences among the candidates on health care, where some still hope that Americans are willing to pay any price and bear any burden to achieve universal health care, and others think that getting universal access to health care is too important to fail by asking for too much. Similarly, on taxes, some are willing to raise middle-class taxes; others believe that the answer to a Republican administration that has made middle-class income taxes go down is not a Democratic promise to send middle-class taxes up. The big problem that Bush is going to face is that he has limited the agenda of his second term by bankrupting himself with a five trillion dollar deficit. The great Republican hope is that the Democrats cannot deal with any of the problems they want to deal with either without raising taxes. But I think we have an opportunity to turn the tax debate on its head and make the kind of argument that Warren Buffett started making: that the American people deserve to make a choice as to whether it is right that a billionaire should be paying tax at a lower rate than his secretary.

In terms of the tax issue, a number of the candidates have good, positive ideas that are not simply in reaction to Bush. Some of them have fallen into a trap of opposing tax cuts for the middle class that Bush signed into law and that many Democrats championed in the 2001 tax debate. The average Democratic primary voter wanted those tax cuts, believed in those tax cuts, and are conditioned by Bill Clinton's and Al Gore's advocating those tax cuts over the last decade into believing they were a Democratic idea.

Gene Sperling
Council on Foreign Relations

One criticism of how the Democrats handled themselves in 2002 was their exceptional timidity in taking on the fiscal irresponsibility of the party. When people become timid like that, it builds up anger in the party. Howard Dean, like Mario Cuomo in '84, came off as somebody who was willing to shoot hard during a very timid period for the party. And you are going to see other candidates recognize that. When Democrats talk about tax policies, they are trying to talk about a positive agenda, one of fiscal responsibility, health care, and education. And if you talk about these things without talking about how you would pay for them, you will not have credibility. The administration deserves credit for their strategic skill in putting the candidates in this box where they have to talk about the difficult issues of raising taxes in order to credibly speak about their positive agendas.

President Bush has a four-part economic message strategy. They want you to think that nothing is the responsibility of the administration: they have been victims of circumstance, and whatever happened is due to Clinton, or Ken Lay, or Bin Laden, and we should be grateful they were there to deal with this perfect storm. This is a very strong message. They will also try to make President Bush look more in touch with the public. Third, they will pass supply-side tax cuts, hoping the economy gets better at some point, when they can claim causation between the growth and the last tax cut. The last thing is to convince the public that you did not start enacting economic policy until you can claim the last thing you did caused an economic recovery.

The Democrats are going to have to do more than just point out that there have been three million jobs lost-they have to put out a positive agenda that fixes whatever critique they have. There is an element of truth to what President Bush is saying: he did inherit a slowing economy; he had to deal with September 11; there were corporate scandals that were not his fault. The Democrats will have to remind the public what President Bush did not do to fix these problems and not let him get away with using them as excuses. In May 2001 the administration did not have a stimulus plan in any of their budgets, except for that which was put in at the last minute by the Democrats. After September 11, they could have had a strong tax cut going into the Christmas shopping season in 2002, boosting consumer confidence and reviving the hotel and travel industry. Instead they started a fight over retroactively repealing the corporate alternative minimum tax. And now with states in significant contraction, their fundamental focus is to go indirectly to lowering capital gains and dividend taxes in hopes of an indirect wealth effect through a raise in the market.

So what can Democrats do to show they still have a positive plan better than what the President has done? Democrats should do what Clark and Kerry have done and talk about reprogramming some of the money from the tax cuts into state relief, homeland security, and new job tax cuts. Democrats also have to show the long-term trade-off, in that the cost of this tax cut is more than three times the cost of what it would have been to fix Social Security. We will probably hear this once we have a nominee. Third, though it makes sense to focus on wealth creation and encouraging investment, this administration has gone too far. Taxing a fireman who works overtime 25 percent plus Social Security while somebody sitting around watching their wealth faces zero taxation requires some explanation. The Democrats then have the opportunity to ask if this tax agenda fits the values of the economy, and John Edwards does that.

The Democrats must propose a plan that displays optimism and growth. They must have an alternate growth agenda from the Bush agenda, and it cannot just be a critique.

Eric Engen
American Enterprise Institute

If I were in a position to advise the administration, I would make four points: First, the economy is nowhere near as bleak as many are trying to make it out to be. GDP growth is much higher and the unemployment level is lower than after the last recession in 1990-1991. Perhaps the Republicans should paraphrase a particularly adept politician on this, and come up with a phrase like, "The economy is recovering, stupid." Second, the centerpiece of the Bush economic program, the tax cuts, have significantly boosted the economic recovery. Business investment is turning around from its slump in 2001, and the contraction in the stock market has ended, with the stock market up 20 percent this year. The third point is that the current deficit is not as big a problem as it is currently made out to be, and it is not caused solely by the tax cuts. Looking at the period after the 1990-1991 recession, the deficit-to-GDP ratio was 3.5 percent, which is similar to this period we are in now.

The final point is that the real deficit and budget problem is in the long term, when entitlement spending on Baby Boomer's retirement explodes. In order to raise the money needed to cover these expenses simply with taxes, taxes would have to be more than doubled. What we have not seen from the Democratic side is a serious proposal to deal with that, and this is where the Bush administration has the opportunity to get out ahead on this most important budget issue. A sound, detailed Social Security reform proposal for the administration to run on in this next election would be one of the better things that they could do to deal with this true long-term budget problem.

AEI research assistant Jonathan Lieber prepared this summary.