Fortune issue: November 13, 2000

First Principles

Bush is a Leader The Economy Can Trust

By N. Gregory Mankiw

Al Gore and George W. Bush offer starkly different views of the role government should take in our lives. If Gore is elected, the country will be endorsing an intrusive, Big Brother legislator – a man with disturbing distrust of free markets. I'll take a pass. Here's why I'm voting for Bush:

• Tax cuts    The candidates have spent too much time focusing on how big a tax cut we can afford. The truth is, no one really knows. The answer depends on how long the current productivity explosion lasts. If this technology-driven boom continues, Gore's smaller tax cut looks stingy; if it fizzles, Bush's larger tax cut seems profligate. Whatever tax plan the next President adopts, he may have to rethink it in a few years.

  What's more important is the form these tax cuts take. Bush wants to cut income tax rates and eliminate the estate tax. Gore offers ``targeted'' tax cuts – ``targeted'' being code for ``complicated''. His plan includes a bounty of caveats, and its most noticeable effect will be the amount of time you spend with your accountant.

  Of course, this will be the least of your worries. Gore's plan contains two related flaws. First, high-income taxpayers – the ones who pay the most in income taxes – don't get a penny of relief. Second, the plan provides incentives for the middle class to earn less: When a typical taxpayer earns an extra dollar of income, not only will he pay his current tax rate, but he will also lose some of the targeted tax cut. This increase in effective marginal tax rate reduces the reward for hard work. By contrast, Bush would cut marginal tax rates for all taxpayers.

• Social Security    Gore wants to keep Social Security pretty much as is, fortifying it with funds from general revenues. Bush proposes the bolder step of moving toward privatization.

  Admittedly, some of Bush's arguments are off the mark. When he compares the 2% real return a worker now gets from Social Security with the 6% real return offered by a portfolio of stocks and bonds, he neglects to mention that the Social Security fund still owes a huge amount to those now or soon to be retired. This liability – the overhang from giving earlier generations more than they put into the system – doesn't disappear with privatization. Whatever system Bush comes up with, it won't give young workers a 6% return.

  Even without this high return, however, moving toward a Social Security system that more closely resembles a 401(k) plan is a good idea because such a system takes some of the political risk out of retirement planning. Right now, a 30-year-old has little idea what Social Security benefits to expect. Doomsayers see a system heading toward bankruptcy, while others are sure the AARP will protect the elderly's benefits. The truth? No one really knows what scenario will play out. Future benefits depend on the deals politicians strike over the next four decades. The one thing we are sure of is that although private retirement accounts entail risks, they are risks you can control.

• Antitrust    Neither candidate likes to discuss the government's case against Microsoft, but antitrust policy is a key difference between the two. Gore would continue Clinton's activist policies, which its defenders say simply let's the Justice Department enforce the law.

  Not quite. The Sherman Antitrust Act of 1890 doesn't prohibit adding a Web browser to an operating system; presidential appointees of the 1990s just interpreted it that way. If Republicans had controlled the White House for the past eight years, Justice would likely never have taken on Microsoft. The browser wars would have been fought in the marketplace rather than in the courtroom, as they should have been. If Bush wins, the government might settle for a less drastic outcome than dismembering Microsoft.

• School Choice    Competition is the driving force behind the success of market economies. Our children deserve the benefit of this lesson. Bush advocates taking a step toward school competition, while Gore opposes any voucher plan that funnels public money toward private schools.

  Vouchers would allow parents to find better schools for their children than the government offers. If vouchers proved popular, they could end public education as we know it. Our educational system could use a major overhaul, and the forces of free markets are well equipped to do the job. Both Gore and Bush are products of private education, and neither seems to have suffered for it.

Taken together, these four issues show a clear pattern. Gore relies more on the intrusive hand of government, while Bush trusts the invisible hand of the market. Economists are famous for saying ``On the one hand... on the other hand...'' But in this case, not all hands are created equal.

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N. GREGORY MANKIW is an economics professor at Harvard and the author of Principles of Economics.