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Economic Reality "Bites" The Presidential Candidates

Tuesday, 15 Jan 2008 | 4:26 PM ET
CNBC.com

Received political wisdom is running smack into economic reality. It’s not yet clear which force will prove more powerful.

For presidential contenders, the collision takes place in Michigan, Nevada and South Carolina. Unlike comparatively prosperous Iowa and New Hampshire, all three suffer above-average unemployment as the U.S. economy teeters near recession.

“The economy dwarfs everything,” says Lansing-based pollster Ed Sarpolus; in addition to the nation’s highest jobless rate, Michigan ranks near the top in mortgage delinquencies and home foreclosures. That increases pressure on candidates of both parties, who so far have been constrained from more aggressive responses by lessons of recent political history.

The Republican presidential field has been slowest to propose action to avert a downturn. Why? Candidates have spent much of the campaign praising the economic performance of their party’s leader, President Bush, and reassuring conservatives of their budget-cutting bona fides.

Tax cuts represent the conventional Republican approach. But extending Mr. Bush’s tax cuts, which leading Republicans favor, won’t help soon since they’re already on the books through 2010. Additional broad-based income tax relief isn’t easy, since more than one-third of taxpayers are off income tax rolls already. Cutting the payroll tax is politically dicey since it finances Social Security benefits.

“To get a short-term boost to the economy you have to do something that reduces the tax burden of tens of millions of people, not just a few corporations or a few investors,” says GOP supply-sider Jeff Bell. “The Republican Party feels handcuffed because Social Security is controversial.”

Pressure to remove the handcuffs won’t ease soon. California, the biggest Feb. 5 primary, suffers similar woes as Michigan. Nationally, according to a recent NBC/Wall Street Journal poll, two-thirds or more of three key general election targets--independents, suburbanites, and rural voters--are dissatisfied with the economy.

Democratic candidates have hesitated for different reasons. They’ve spent years slamming Mr. Bush for excessive tax cuts, and making “fiscal responsibility” the cornerstone of their claim to economic credibility. That blunts the conventional Democratic policy tool--stimulus through government spending.

But primary pressures are now overcoming that constraint. Just before Christmas, populist Democrat John Edwards proposed $25-billion in spending on energy, job training, and unemployment programs. Last week, Hillary Clinton upped the ante with a $70-billion package, nearly half targeted to the housing crisis.

In the evolving Democratic primary race, that bread-and-butter spending targets the working class constituency that delivered her New Hampshire victory. Mr. Obama, strongest so far among independents and affluent Democrats, countered yesterday with a variant of the idea favored by Mr. Bell, the Republican supply-sider. He’d accelerate his previously announced plan for a $500 credit against each worker’s payroll tax liability; to ensure its stimulative effect, he’d abandon for now the imperative of offsetting tax increases.

Next Saturday’s Nevada caucuses, where union voters represent a crucial voting bloc, will test whether it augments Mr. Obama’s blue-collar constituency.

Michigan Preview
Presidential hopefuls pitch economic plans, with Mark Halperin, TIME Magazine senior political analyst and CNBC's John Harwood

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