Quotes of the Day

In most elections in which the incumbent enjoys an economy with a healthy 3% annual growth rate, home ownership at record levels, and inflation and interest rates that are well within control, the economy's performance wouldn't be a problem. But despite the positive indicators, George Bush continues to be under attack, with economists decrying everything from his tax cuts to the gaping budget deficit.

What's more, in a new TIME poll, 62% of Americans call economic conditions "only fair" or "poor." What's really going on here? Bush's problem, as anyone in Ohio or Pennsylvania will tell you, is jobs. Even after recent gains, company payrolls have 913,000 fewer workers than when Bush took office. The worst hit came right after 9/11, with 1 million jobs lost, but the slide persisted throughout the recovery. Most voters don't watch GDP numbers, but they know how many of their neighbors are home watching TV on a Wednesday afternoon. "They just look around and see what's going on and use that to decide how to vote," says Ray Fair, a Yale University professor who has made a name for himself predicting presidential elections using economic indicators. And so when the government announced Friday that 144,000 jobs had been added in August, both candidates jumped. Bush crowed to supporters at a minor league baseball stadium in Pennsylvania that the new jobs proved "our growing economy is spreading prosperity and opportunity." The John Kerry camp, meanwhile, argued that the number didn't even keep up with population growth. Said the Democratic challenger: "Bush is now certain to be the first President since Herbert Hoover and the Great Depression who didn't create a single new job." According to the poll, the economy is tied with terrorism as the most important campaign issue. So which candidate has the better plan?

JOBS
The August job growth was not quite enough to indicate real momentum. What's holding employment down? Each party has its whipping boy. Republicans like to blame lawsuits and regulation; Democrats point to offshore outsourcing. Economists aren't buying either explanation.

They say that orange alerts and a steady stream of bad news from the Middle East make CEOs wary of any bold hiring moves; instead companies use temps and contractors, cutting them loose whenever sales look shaky. Rising health insurance premiums make it cheaper to buy better equipment than hire a new employee. "Businesses are more interested in using technology," says Sung Won Sohn, chief economist of Wells Fargo. "They want to hire people only as a last resort."

BUSH
His economic plan relies on one of the bedrock principles of conservative thinking: cut taxes, and the economy will grow, bringing jobs along with it. But Bush has softened that position a bit with support for worker-retraining programs.

KERRY
He tries to take on health-care costs and offshore outsourcing in a single bound. In industries affected by outsourcing, Kerry would give companies a tax credit to offset the cost of worker benefits, making it cheaper to hire them.

THE BOTTOM LINE
Economists give Kerry credit for addressing the heart of the problem: workers are expensive. But economists have doubts about whether this limited policy will make a real difference. They are much less excited about Bush's tax cuts, which could fire up some consumer spending, but not enough to add jobs, and would worsen the deficit. "We can't afford them anymore," says Diane Swonk, chief economist at Bank One. Shrinking the deficit or making big changes to the health-care system, the experts say, would do more to shore up business confidence and boost hiring.

TAXES
Few economists doubt that the current Bush tax cuts, $290 billion in this year alone, helped stimulate the economy at first. Those rebate checks that arrived in the fall of 2001 helped prop up the economy during a dark period, and consumer spending helped the U.S. make its way to recovery. Now that the economy is improving, the calculus for tax cuts is different. Will cutting taxes further make a meaningful difference to the economy? And even if it does, can we afford to increase the deficit for the sake of tax relief?

BUSH
He wants to make existing tax cuts for individuals and corporations permanent. Bush argues that with reduced income taxes, families have more to spend, and with lowered corporate taxes, businesses can invest in equipment. Laura Bush gave an example in her speech at the convention: the owner of an Iowa tow-truck company who used the credits to modernize her fleet.

KERRY
Whereas Bush tries to use tax policy to spur growth, Kerry sees it as a tool of social intervention. His main proposal would raise taxes for those earning more than $200,000 a year and use that money to fund tax credits for college tuition and child care. Kerry takes a further swipe at offshore outsourcing with a proposal to start taxing corporate income earned in other countries.

THE BOTTOM LINE
Economists doubt that either plan would stimulate the economy or generate jobs. The wealthy are spending what they want to, explains Beth Ann Bovino, economist at Standard & Poor's, while everyone else is struggling with higher prices and stagnant wages.

Both candidates draw fire for ignoring what their tax plans will do to the deficit. "This is a gigantic time bomb," says David Bradford of Princeton University. As with any business, when the Federal Government runs in the red, borrowing gets more expensive. The result? Interest rates could rise, and in the long run, the government would find it more difficult to meet its Social Security and Medicare obligations.

HEALTH CARE
Almost any discussion of the economy eventually reaches the tangled thicket of the U.S. health-care system. The price of health care is climbing four times as fast as everything else, and health insurance premiums rose nearly 14% last year. Economists say the cost for employers of providing benefits is a serious drag on hiring. Workers are no better equipped to pay the rising costs, and many are going without any insurance. More than 15% of the population had no health insurance last year.

BUSH
His plan relies on "health savings accounts," which would shift some of the costs of health care to the consumer. Insurance would still pay for major medical expenses, but these accounts, funded by a tax-free deduction on a worker's paycheck, would cover routine care.

KERRY
He uses tax credits as a carrot to encourage employers to offer their workers health benefits. Under his plan, small businesses would get tax credits if they offer health insurance to their employees, and they could pass on the cost of insuring catastrophic cases to the government.

THE BOTTOM LINE
Both plans win limited praise. The health savings accounts would make Americans more price conscious about health care, but they could also discourage people from getting preventive care.

Kerry takes the cost directly to businesses, but economists say his plan would do little to lower health-care prices broadly. "They're all going to make a difference on the margin, but the whole system is broke," says Swonk.

DEBT
The heavy indebtedness of American consumers is nothing new. U.S. families have gradually been spending more of their household budget, about 13%, on debt payments. As long as housing prices hold up, economists say the debt burden will stay manageable. But as interest rates rise, mortgages and credit-card debt get more expensive, especially for those making less than $50,000 a year. "If you look at the low end of the income spectrum, they seem to be having more difficulty making payments," says Sohn. Over time, the deficit could worsen that effect, by making interest rates higher than they would have been otherwise. "Its effects on the economy are slow and cumulative," says Ed McKelvey, senior economist at Goldman Sachs.

"It's like driving with your emergency brake on."

BUSH
In response to criticism of the mushrooming budget deficit, Bush's chief economic adviser, Gregory Mankiw, acknowledges that the tax cuts, along with spending on homeland security, have dug a hole.

"The deficit is unwelcome but understandable," he says. Mankiw says that further tax breaks will be offset by cuts in spending. He vows that this fiscal discipline and economic growth will halve the deficit in five years.

KERRY
He proposes tougher regulations against abusive mortgage lending practices and credit-card policies. He promises to cut the deficit in half within four years through spending cuts.

THE BOTTOM LINE
Neither candidate delves into specifics of how he will trim the deficit, and both propose expensive new programs, so economists are wary of their pledges to rein in spending. When the spending caps exclude Social Security, Medicare, education, defense and homeland security, McKelvey asks, what's left?

ENERGY
Get used to gas at $2 a gallon. the higher prices are rippling throughout the economy—transport costs are partly to blame for $4 gallons of milk—but so far most families have managed by cutting corners elsewhere. Economists have been impressed by consumers' resilience, although they are concerned about how much longer families can absorb the price shocks, especially as wage growth slows. Since January wages have plodded along at 2% growth, about half the rate in 2000, says Ken Goldstein of the Conference Board.

BUSH
Approaching the issue from the supply side, he focuses on increasing domestic oil production, in particular, drilling and exploration in the Arctic National Wildlife Refuge. He also supports some tax incentives for hybrid cars and renewable energy sources like wind and solar power.

KERRY
His plan focuses squarely on the demand side, with tougher fuel-efficiency standards for cars and tax incentives for consumers who want to buy them.

THE BOTTOM LINE
Unlike Kerry, Bush scores points for addressing both the supply and demand sides of the question, but economists say changing domestic policy isn't enough. Instability in the Middle East and rising demand for oil in Asia are also driving prices up. They favor raising taxes on gasoline to discourage consumption, and allowing the market to drive demand for fuel-efficient cars. "If we don't, prices will go up anyway, but we won't get the income," says Richard Berner, senior economist at Morgan Stanley.

RETIREMENT
Alan Greenspan spelled out the bad news last month: Retirement may be a few years further away and a lot less comfortable than you might have hoped. As baby boomers retire, the over-65 population will nearly double in the next 30 years. These retirees will live longer than their parents did, but the generations that follow them simply aren't large enough to support them in retirement. "We owe it to our retirees to promise only the benefits that can be delivered," Greenspan said.

BUSH
He proposes diverting some Social Security contributions into "personal savings accounts" that could be invested just like a 401(k).

KERRY
With no specific plan, he instead promises to rein in federal spending to fund Social Security and would consider limiting benefits for wealthy retirees.

THE BOTTOM LINE
Economists warn against introducing market risk into Social Security nest eggs. As with any investment, "some people are going to lose," says McKelvey. Almost unanimously, they advocate a more immediate and equitable solution: Raise the retirement age. As for paying for Medicare, they're stumped.

Whatever the shortcomings of the candidates' plans, economists acknowledge that both Bush and Kerry are carefully calibrating their messages to voters' hopes and fears about the future. The experts may wish the candidates offered solutions to intangible problems like the deficit. Instead, they stick with near-term fixes for emotional issues like jobs. For better or worse, the candidates know that how people feel usually proves more potent in the voting booth than what the economists think.

• JYOTI THOTTAM