Another Campaign, Another Dimension
Sometimes when I tune in to political campaigns, it’s like being sucked into a science fiction or fantasy film. One enters another dimension where the laws of economics too often are suspended.
In this political dimension, some people are allowed to say almost anything without being seriously taken to task. Let’s look at a few of the hot topics in the current race for the White House.
Job “Loss.” According to Senator John Kerry (D-MA) and his supporters, the economy stinks and new jobs cannot be found. In reality, economic growth has been pretty solid for more than a year now. Quarterly real GDP growth averaged 4.7 percent from the second quarter of 2003 to the second quarter of 2004 (latest data available). That is well above the post-World War II historical average. Over the same period, investment has been expanding at a rapid clip. Real gross private domestic investment moved along at a quarterly average growth rate of better than 14 percent.
It is not surprising to see that job growth has picked up. On the payroll survey, which focuses on established companies, the bottom was hit in August 2003 at 129.789 million employed, and from then to September 2004, the payroll survey showed an increase of 1.8 million jobs. Meanwhile, the household survey, which captures more entrepreneurial activity including the self-employed, registered its trough in January 2002, with 3.8 million jobs subsequently added through September 2004.
Tax Cuts for the “Rich.” Then there is the tax-cut myth. Senator Kerry and his allies proclaim that the Bush tax cuts of 2001 and 2003 primarily benefited the wealthy. There are multiple problems with such an assertion, including that Bush’s tax cuts have been across-the-board. Among the most important, though, is the fact that most businesses – roughly 90 percent according to IRS data – pay the personal income tax, as sole proprietorships, partnerships and S Corporations, for example. That means small business owners, who generate economic growth, spur innovation and create jobs, directly benefited from the tax cuts. Also, the capital gains tax cut and expanded expensing of capital investments by small businesses improve incentives for inventing in, starting up and/or expanding businesses.
So, the Bush tax cuts have benefited anyone concerned with economic growth and job creation. Indeed, it is not a coincidence that the economy started picking up real steam in the second quarter of 2003, just when the Bush tax cuts were accelerated and expanded.
Hiking the Starting Wage. How about the minimum wage? A host of politicians out on the campaign trail, including Kerry, talk about the need to hike the minimum wage.
But the economics of increasing the minimum wage are clear, and not in any real dispute among economists. Inexperienced, low-skilled workers are hurt due to being priced out of the marketplace, and many businesses – particularly, small firms – face higher costs that translate into reduced returns and/or fewer resources for wages for other employees, for benefits, for hiring, or for growth and expansion. A minimum wage increase is an economic loser.
Re-Importing “Low Cost” Drugs. Another favorite of Senator Kerry’s is re-importing prescription drugs from countries like Canada. U.S. seniors pay more for drugs than in other countries, so it’s only fair to import drugs from those nations – right?
This, of course, ignores a variety of issues, like safety and whether there would be enough drugs available to import. But the darkest aspect of this story goes unmentioned by too many in politics. Re-importing drugs from Canada and nations in Europe, for example, would mean importing the government price controls imposed in those countries. There’s a reason why the U.S. is the world leader in producing new and improved medicines – we do not impose price controls. Price controls limit the returns on investment, which means that there would be far fewer incentives to undertake the considerable risks and high costs of researching and developing new medicines. If politicians really want to destroy the ability to produce new medicines, and thereby increase the number of deaths, then drug re-importation and price controls are the right policies.
“Global Warming.” Finally, despite the fact that the science and data are in dispute, politicians continue to forge ahead with irresponsible rhetoric and costly proposals about so-called global warming. For example, Kerry’s environmental plan specifically states: “John Kerry and John Edwards will take the action required to reshape the carbon profile of our economy and put us on a long-term path toward meaningful reductions in emissions and, ultimately, stabilization of greenhouse gas concentrations in the atmosphere at levels that will prevent harmful changes to the earth’s climate.”
The only sure thing about such an agenda is not that it will somehow help the environment, but instead that it will severely damage the U.S. economy. For example, Senators John McCain (R-AZ) and Joseph Lieberman (D-CT) offered legislation requiring U.S. businesses to reduce greenhouse gas emissions. A study commissioned from Charles River Associates by United for Jobs and the American Council for Capital Formation projected a reduction in household purchasing power of more than $2,200, a 43 percent hike in electricity costs, and a loss of some 600,000 jobs.
These are just five myths. Many more are being floated in the political dimension. It’s up to the rest of us to stay well grounded. Voters need to check out-of-this-world political rhetoric against straightforward economic reality.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
