Gore or Bush: both will push up interest rates

SUNDAY TIMES (London)

March 12, 2000

THE political pundits have had their say about the American primary elections, so it is time for the economists to offer a few thoughts. Last Tuesday voters decided the nature of the debate about the future of America's economy when they picked the candidates for November's presidential elections.

It will be Al Gore versus George W Bush, each a candidate of his party's establishment. In Gore's case that means a candidate of the old-line trade unions, including the anti-reform teachers' unions, the Hollywood glitterati and gays, lesbians and other advocates of alternative lifestyles. In Bush's case we have a candidate of the tax-cutting supply-siders, the traditional Republican foreign-policy establishment and social conservatives for whom opposition to abortion is the most important feature of the Republican platform.

Gore is banking on a continuation of the economic growth that has created jobs for everyone who wants to work and untold wealth for those who guessed right in America's highly volatile and selective stock

market.

This means his Democratic allies in Congress will be pressing the Federal Reserve not to raise interest rates lest the boom cool, as it did immediately before the 1992 elections, contributing to the voters' decision to turn out George W's father. The pre-1992 recession, if it can be so called, proved to be a mere bump on the upward road to economic prosperity, but it was a permanent roadblock to the senior Bush's political career.

His son remembers that. And although he is not openly rooting for a recession to do to Gore what an earlier one did to his father, he would be less than human were he not hoping the stock market will swoon, that the jobless rate will turn up and that consumer confidence will turn down.

Such an outcome would prevent Gore from running on a prosperity ticket. And it would justify Bush's call for a big cut in taxes, since a fiscal stimulus would clearly be called for if the economy were sinking into recession. This is what Bush's economic advisers are telling him will happen. They are saying the consumer and business sectors are overloaded with debt, the stock market is wildly overpriced and America's huge trade deficit is unsustainable.

Their forecast is for recession - and, with luck, soon. Whether this is a professional appraisal of the economic outlook or a wish list of those aspiring to presidential appointments is the subject of some debate.

What is not debatable is that Americans are being offered two very different economic programmes. Gore is a great believer in the power of government to fix things. He would have it adopt policies with themes as grand as controlling the world's climate and as tiny as providing paved streets in suburbs. His penchant for regulation is well known, as is his desire to expand the welfare state to include everything from free prescriptions for the elderly and free healthcare for the young to more federal aid for education.

He is also committed to including in any future trade agreements sanctions on governments that do not adopt America's labour and environmental standards. Given the opposition of emerging nations to any such attempts to price them out of world markets, that means there will be no serious extension of free trade.

If Bush succeeds in rising above his sobriquet, The Twig, and grows into a fully fledged President Bush, economics will be different. Taxes will be lower and new social programmes fewer. If the economy is still charging ahead and Bush does cut taxes, Alan Greenspan, Fed chairman, will have to respond by raising interest rates. This will be opposed by the "new economy" advocates, some of whom now claim the economy can grow at an annual rate of 9% - yes, 9%, that is not a misprint - without triggering inflation, so great is the productivity gain from new technology.

A Bush administration will also be more likely to ignore union opposition to freer trade. Texan Bush's experience with neighbouring Mexico has taught him that America needs immigrant workers if our labour-short economy is to continue to grow, and that a developing country prospering by virtue of its exports is a more stable and dependable ally.

Finally, Bush is likely to increase defence spending much more than would Gore. He is determined to shore up a "hollowed out" military that is short of missiles and too shrunken to meet its goals of fighting two wars simultaneously.

This is the choice Americans will face in November. On the one hand, they can have a Gore administration that will increase government regulation, at best manage to retain the free-trade gains made since the second world war, keep taxes where they are now and spend the surplus - if one materialises - on a variety of social programmes. On the other hand, they can have a Bush administration that will cut taxes, press for freer trade, keep the expansion of government to the minimum and fund the military more generously.

Note that both candidates plan to dip into the projected budget surplus, Gore to spend it on social programmes, Bush to spend on the military and on tax cuts. So no matter which candidate ends up in the White House, Greenspan will be confronted with a looser fiscal policy, reinforcing his already-strong notion that interest rates have only one way to go - up.