The Politics of Risk


By Michael Mandel Suppose as a concerned voter that I want to better understand the difference in economic policies between Presidential candidates George Bush and John Kerry. It might seem perfectly reasonable to look at their respective Web sites (www.georgebush.com and www.johnkerry.com). Indeed, both sites are filled with plenty of information about Bush's "Agenda for America" and Kerry's "Plan for America," respectively.

But there's a problem. As good politicians, both Bush and Kerry are trying to be all things to all people. And based on their Web sites, it's harder than one might expect to distinguish between their economic platforms. Both candidates say they're for growth and innovation, and both are in favor of funding new energy technologies. Bush wants to cut the deficit in half over the next five years, while Kerry says he'll be able to do the same thing in four years.

LOOK DEEPER. Even on taxes -- presumably the point of greatest policy difference -- it's hard to tell their proposals apart. Bush, of course, wants to make permanent his already enacted temporary tax cuts. And Kerry proposes on his Web site to reduce taxes for 98% of Americans, cut the corporate tax rate for most companies, and completely eliminate the capital-gains tax on long-term investments in small businesses. This is hardly a clarion call for the reversal of Bush's tax cuts.

But in my view, a deep philosophical divide clearly exists between Bush and Kerry when it comes to economic policy, one that's not necessarily fully reflected in their Web sites or their speeches. It's not about deficits, or taxes, or jobs. Rather, it's about their attitudes toward risk.

Here's a broad generalization: When push comes to shove, many Democrats -- including Kerry -- prefer policies that reduce risk for individuals. Bush and most Republicans usually prefer to shift risk to individuals and away from corporations or the government.

TOP IT OFF? The best example is Social Security reform, a critical issue that the next President will likely have to face. Right now the Social Security system is facing a long-term financial shortfall of uncertain size. Depending on future economic growth and demographic changes, the size of the hole in Social Security's finances could be relatively small or absolutely enormous.

The shortfall can be plugged by several reasonable approaches, but each of them allocates future risks in different ways. For example, it would be perfectly feasible to "top off" Social Security trust funds with an infusion of funds from general revenues. That would maintain the current system where workers and retirees bear little risk, since their Social Security checks are protected against inflation and they receive the same amount whether the economy is doing well or poorly.

Instead, the government would bear all the risk. It would have to pump in more money if the Social Security shortfall got bigger -- and then finance that spending by borrowing, raising taxes, or cutting other programs.

DEPENDS ON THE MARKET. Alternatively, it's equally feasible to privatize Social Security, so that workers put at least part of their contributions into individual accounts, which can be invested in the stock market or elsewhere. This isn't necessarily bad for workers, but it shifts a lot more risk to them.

If the economy and the stock market grow rapidly, then their retirement accounts will do well. But if the economy goes into a long-term slump, then today's younger generation could end up with a threadbare future when they eventually stop working.

How do the candidates stack up? Bush favors a version of the second alternative, proposing on his Web site to set up voluntary "Personal Retirement Accounts" for younger workers. That would mean a lot more risk, though a potentially much more lucrative retirement if the economy does well.

BROADER COVERAGE. Kerry isn't quite so forthcoming, but his Web site rules out privatizing Social Security, increasing Social Security taxes, or raising the retirement age. That suggests he would keep Social Security a "riskless" program for retirees and instead consider transferring money from general revenues to make up any gap.

A similar dichotomy between Bush and Kerry shows up when it comes to tort reform. Bush proposes to reduce "the lawsuit burden on our economy" by making it harder for trial lawyers to sue corporations for products that injure people. That, of course, would reduce the risk for companies. Kerry, with trial lawyer John Edwards as his running mate, is far less likely to take such a step.

Then we come to health care, one of the key differences between the two

candidates. Kerry's plan proposes to reduce risks for individuals by extending "affordable, high-quality coverage to 95% of Americans." That includes allowing Americans to buy into the Federal Employees Health Plan, the same one used by Congress. This would ease worries for people people who don't currently have health insurance, especially when combined with tax credits and other aids for affordability.

FINDING MIDDLE GROUND. Bush's plan, by contrast, is built around expanding his program of Health Savings Accounts (HSA) -- tax-deductible accounts that consumers contribute to and then tap to pay medical costs. Over the next year or so, such accounts will become available to an increasing number of workers at large corporations, and the President wants to broaden them out to small businesses and low-income workers.

HSAs have a downside, however. Because consumers can contribute only a limited amount to their account, they may be forced to make decisions on whether to forego some tests and medical procedures. The result: increased health risk for individuals but less funding risk for company-sponsored health plans and for Medicare and Medicaid.

Whose overall approach makes more sense? The ideal solution would be to find a middle ground. For example, it may make sense either to expand the current program of health-care accounts or to partially privatize Social Security, but not both.

Americans need more certainty than they have today, but growth and technological progress require that they take risks and be flexible about adapting to change. That's the least risky approach for society as a whole. Mandel is chief economist for BusinessWeek


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