The Next Four Years with George BushPublished: November 17, 2004 in Knowledge@Wharton
President George W. Bush's re-election lifts a degree of uncertainty from business and the economy that could drive market rallies and economic growth. Eventually, however, a second Bush term that continues to fund tax cuts along with wars in Iraq and Afghanistan could ultimately weigh down the U.S. economy, according to Wharton faculty.
With the election behind him, Bush is now likely to ramp up the pursuit of his economic agenda, which in addition to tax cuts, includes less business regulation, fewer constraints on trade, and privatization of at least part of the Social Security system.
As for leadership, the President will remain a quick and determined decision-maker, says Michael Useem, Wharton professor of management. "Now that Bush is indeed the declared winner, he will pursue a decision-making style that he has come to be known for in his first administration – which is to take the counsel of trusted advisors, listen to his inner circle, and then not hesitate to resolve differences and reach a decision."
The President makes up his mind swiftly and does not waver from that position, notes Useem, pointing out that critics contend the President's circle of advisors is too small and does not give him a diverse enough set of facts upon which to base decisions. Democratic challenger Sen. John Kerry, who was criticized as a flip-flopper, is more willing to absorb information and react to "facts on the ground," says Useem.
And despite a harsh campaign in which Kerry criticized Bush as a bullheaded and arrogant leader, the President is unlikely to change the way he leads, Useem suggests. "Everyone is capable of evolving, becoming more complex and taking on a different approach when times [change], but Bush's basic style, like Kerry's, is pretty much set. In this particular election, what you see is what you get."
Stock markets reacted to the Bush victory with a big rally, particularly since many analysts had raised the possibility that contested votes could result in no definitive winner for days, if not weeks. "A Bush victory is best for markets at least in the short term," says Jeremy Siegel, Wharton professor of finance, who also points out that in the long run stocks do just as well under Democrats as under Republicans.
"With a more Republican Senate and House, one of Bush's first priorities will be to make the tax cuts permanent, so that the Democrats don't get a chance to unwind them with a presidential victory in 2008," says Siegel. "This will be a fight, of course, since it will raise our already huge deficit."
During the campaign both candidates did their best to avoid a discussion of funding problems for Medicare and Social Security, which Siegel calls the "third rail of politics." "Neither one wanted to touch that issue," Siegel said during an appearance Friday on Louis Rukeyser's Wall Street. "We know the aging population is going to put tremendous burdens on what we must do [by way of] adjusting retirement age and benefits." He points out that Bush's agenda is likely to include programs to boost private savings accounts.
The President will also have a big impact on the economy with the appointment of a new Federal Reserve chairman to replace Alan Greenspan, whose fifth and final term is scheduled to end in January 2006, says Siegel. "The most important thing the president will do is choose a new chairman for the Federal Reserve. That's critical." Siegel cites two names mentioned as possible Bush appointees, including Martin Feldstein, a Harvard University economics professor and president of the National Bureau of Economic Research, and Ben Bernanke, chair of the economics department at Princeton University, editor of the American Economic Review and director of the Monetary Economics Program at the National Bureau of Economic Review. Siegel suggests Greenspan be appointed to run a commission that would open an honest debate on Medicare and Social Security. "Politicians clearly can't do it."
Meanwhile, according to Wharton finance professor Richard Herring, if the rest of the world could have voted, it would have overwhelmingly elected Kerry. But that does not mean international investors would have expressed their pleasure in a Kerry victory by buying up U.S. securities and bidding up the dollar in foreign exchange markets, he adds.
Despite the emotions that drove record turnout in the presidential election, Herring says, the nation's governmental structure prohibits radical change. "Although this election is being cast as momentous, in fact nothing much will change in the short run. The designers of the Constitution tried to preclude large shifts in policy." Moreover, many economic issues – "including uncertainty over oil prices and Iraq" and the resulting negative impact on consumer and investor confidence – "can frustrate even the most powerful person in the world," he adds.
Bad News for the Deficit
According to Wharton finance professor Nicholas S. Souleles, the President's most direct impact on business and the economy is likely to be in the area of fiscal policy. Souleles, like Siegel, suggests that Bush is very likely to mount a new effort to make permanent his dividend and income tax cuts, which are now set to expire in 2010. If Bush is successful, the budget deficit will balloon well above the current estimate of $2.3 trillion over the next decade. The official estimate prepared by the Congressional Budget Office (CBO) is required to be based on current law, he notes. The CBO has, however, done alternative forecasts showing that if the tax cuts are made permanent, the deficit could grow to $4.5 trillion in 10 years.
Similarly, the Bush victory makes it more likely that the war in Iraq will continue, and continue to absorb more spending than if Kerry had been elected. In 2004, the wars in Afghanistan and Iraq cost approximately $115 billion. In an alternative forecast, the CBO estimates that if not for the costs of these two conflicts, the $2.3 trillion budget would decline to $0.9 trillion in 10 years.
Yet even if Kerry had won, much of the savings from the expiration of the tax cuts would have gone to fund other initiatives, including health care, Souleles says. And while Kerry was critical of the war in Iraq, it is uncertain how quickly he would have been able to extricate U.S. troops. "In both cases the budget situation is still quite severe. Both candidates argued they would try to cut the deficit in half over time but it's not at all clear how they would do that." Souleles says the level of projected budget deficits could ultimately choke off investment in business, thereby eroding economic growth.
Good News for Employers
As for employment, Wharton management professor Peter Cappelli says the Bush victory may result in more certainty for employers. "The first thing the administration can do is create an atmosphere that allows companies to plan and feel comfortable about hiring. Instability makes them nervous in general. A change in the administration is something that" tends to unsettle the business community, says Cappelli.
For the most part, employers supported Bush, he adds. "They probably feel, and rightly so, that a Kerry administration would try and change some of the administrative regulations, protect employees more, make it harder for companies to fire people and make it more complicated for [companies] to manage."
According to Ravi Aron, professor of operations and information management, President Bush will be more open to global free trade, including the movement of jobs across national lines. "Bush has been on the defensive on the outsourcing debate," says Aron, who argues that the migration of work does not destroy jobs, but merely redistributes them. He also disputes Kerry's claims – which Bush calls "myths" – that jobs being created in the United States are lower paying than those being lost.
Bush is likely to continue to feel pressure on outsourcing and free-trade measures – including the approval of visas for qualified multinational executives – from Democrats in Congress, Aron adds. "They will try to paint him as being in league with big business." In fact, Aron says, Kerry has a fairly strong record as a free-trader, including his support for the North American Free Trade Agreement, although he calls Kerry's running mate, Sen. John Edwards of North Carolina, "a rank populist and protectionist."