July 26, 2004
by Irwin Stelzer
Some 35,000 Democrats have descended on Boston, where they will be treated to speeches replete with economic "facts" -- "facts" that will conflict with the "facts" to be offered to the 50,000 souls who will visit New York for the Republican Party's shindig. Here is a partial guide through the maze of lies, half-truths, and the merely misleading.
John Kerry is fond of saying that the Bush tax cuts benefited only the rich. Bush's reductions certainly have helped high-earners. But they also have removed four million of the lowest-earning taxpayers from the income tax roles: a family of four, earning $40,000 per year, now pays no income taxes, and a family earning $50,000 pays only half as much as it coughed up to Bill Clinton.
So is Bush right to say that lower earners are the principal beneficiaries of his tax polices? Not entirely. In addition to income taxes, Americans have their pay checks slimmed down by their payments into the social security system. Indeed, 80% of taxpayers now pay more in social security taxes than in income taxes. And that system is highly regressive: the tax is levied only on approximately the first $88,000 of earnings, so that the portion taken from the checks of really high earners is lower than that taken from those of their less fortunate fellow-citizens.
So Bush is right and Kerry is wrong: the income tax cuts helped families at all income levels. But Kerry is right and Bush is misleading when he ignores the regressive impact of social security taxes, which he has not cut.
In the end this match goes to the President, because the tax cuts benefited everyone by helping to dampen the recession and fuel the current recovery, as Federal Reserve Board Chairman Alan Greenspan told a Senate committee late last week. Since the reductions, the economy has added 1.5 million new jobs, the bulk of them in high-wage occupation and industry groups, contrary to the Kerry camp's contention that the new jobs are primarily for hamburger flippers.
Then we have the "two Americas" theme, borrowed by the Kerry campaign from his one-time primary opponent and now-running mate, John Edwards. This is a variant on the old populist cry that America is divided between the rich and the oppressed poor. The new model contends that the division is between the rich and a beleaguered middle class, plus those thrown out of work by foreign competition.
Half right. Start with those who have lost jobs because Chinese companies make furniture more cheaply than their American competitors; Asian countries make textiles and apparel at a lower cost than we can; Latin Americans make cheaper bras; and it is cheaper to operate call centers in Bangalore than in Boston. Kerry is right that these more efficient competitors have caused many American workers to lose their jobs. But he fails to mention that many of the lower-income consumers whose welfare is so dear to him have benefited mightily from the lower-cost imports that festoon the shelves of Wal-Mart. Nor has he deemed it politic to point out that American firms that have kept their costs down by outsourcing have become more effective competitors in international markets and, some studies show, have created more jobs at home than are lost through outsourcing.
Kerry is also a bit less than half right when says that the middle class is being squeezed between the stagnant wages they earn and the higher prices they pay for goods and services. True: wages are more or less stagnant, but total compensation received by workers -- wages plus fringe benefits -- increased by a healthy 3.9% over the past year.
The fact seems to be that Middle America has been doing all right in the Bush years. According to Census Bureau figures, over three million more families own their own homes than did in 2000, with Blacks and Hispanics leading the transition from renters to owners. According to White House data, "For the first time ever, the majority of minority households are now homeowners."
Before jumping to the conclusion that the president's men are pillars of virtue in these debates about economics, remember this: their claim that inflation has been tame is true in the aggregate but not in the particular. Yes, the overall cost of living, as it is officially measured, has been relatively stable. But that's because such items as used cars have gotten cheaper, and people don't buy a used car as often as they fill the tanks of their current vehicle. Prices of the things that middle-income people buy regularly -- butter, steaks, gasoline, prescription drugs -- are way up. So there is something to the Kerry claim that the middle class is beset by higher prices.
Then there is the war about higher education. Both candidates claim that America's future prosperity depends on its ability to get more and more of its citizens into higher education. Ignore for the moment the possibility that the way up the personal income ladder is through a training course in plumbing rather than through the Bush-Kerry alma mater, Yale, given what is taught in the Ivy League these days.
Kerry says that college has gotten prohibitively expensive. It is certainly true that tuition fees have gone up --by something like 33% since Bush took office, reckons my Hudson Institute research assistant, Hyun Kang. Score one for Kerry. But various forms of student aid, and the value of higher education, also have risen. Net result: college enrollments during the Bush years have risen by some 1.5 million. And the portion of Hispanic high school graduates attending two- and four-year colleges has risen from 42% to 59%.
Perhaps what finally tips the scales of the economic debate in favor of Bush is that the Kerry-Edwards attempt to divide America into fixed classes of "two Americas" ignores the most important fact of economic life in the United States. America is a mobile society. A very small percentage of those in the lowest income bracket -- perhaps 5% -- remain there for very long. There will always be a bottom 20%, but that group includes mostly those on their way up the ladder. In the end there is only one America -- a land of opportunity for most of its citizens.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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