http://www.kiplinger.com/businessresource/economic_outlook/


Dear Client: Washington, May 23, 2008



For once, the media hype is right...

This election really will matter,

and not just because of the policy differences

dividing Republican nominee-to-be John McCain

and likely Democratic opponent Barack Obama.

What raises the stakes is Congress.

Democrats are poised for big enough gains

in November to give them much more control

than they have now over the House and Senate.

An Obama win would mean seismic shifts.

He’d govern with a relatively free hand

to make many of the changes he has promised.

Gridlock wouldn’t be that much of a hindrance.

But if McCain wins, he’ll be blocked

by Democrats from getting most bills he wants.

His best hope would be to slow Congress

with skilled use of the veto and bully pulpit.



The policy differences are extensive:

Income taxes. McCain would ask Congress

to make all of Bush’s tax rate cuts permanent.

Obama favors keeping middle-class tax breaks



and would add some for seniors and low-incomers. But he’d raise tax rates

for families making over $200,000 a year. Those families face an increase

even if McCain wins. Why? Because the tax cuts are due to expire in 2010,

and a Democratic Congress wouldn’t send him a bill extending all of them.



Corporate taxes. McCain wants to reduce the top rate from 35%

to 25%, but the Democratic Congress wouldn’t agree to a drop that large.

Obama would keep it at 35%. Both would close some business loopholes.

Capital gains. McCain wants to cap rates at 15%. Obama favors 20%

or higher, but he could run into opposition because Democrats are split.

Estate taxes. Neither backs repeal, but both want big exemptions.

Obama favors a $3.5-million exemption, while McCain prefers $10 million.

If McCain wins, he may push Democrats up to $5 million but no higher.

Social Security. Obama would raise the cap on earnings

subject to payroll taxes. McCain favors limited use of private accounts.



Global warming. Both men and the Democratic Congress want action,

so greenhouse gas limits are certain, probably a cap-and-trade system.

Obama might go faster than McCain, but their positions are similar.

Energy. McCain favors more nuclear plants and tax incentives

to encourage alternative energy sources. Obama would seek $150 billion

over 10 years to develop more clean energy, especially biofuels.

And he’d double vehicle fuel standards in 18 years. (More on page 2.)









Health care. Obama wants to make large employers offer insurance

or pay fees to help finance subsidies for low-income earners.

He’d bar insurers from denying coverage based on preexisting conditions,

expand Medicaid and require that all children be provided with coverage.

While Obama would build on employer-based systems now in effect,

McCain would move away from them and give individuals more control

over their health care choices. He’d do so by eliminating tax breaks

tied to employer coverage and replacing them with an individual credit

to be used for buying coverage. He’d also focus on bringing down costs.

Democrats and many companies object. An employer-based approach,

they say, is necessary to broaden the pool and make coverage affordable.

They argue that McCain’s plan would make it harder for the less healthy

to get coverage. It’s unlikely Congress would ever back McCain’s plan,

and Obama would face serious opposition, too, especially from employers.



Iraq. Obama promises to withdraw most combat troops in 16 months.

McCain says he’d keep them there as long as necessary to achieve victory

and suggests that could be in four years. Neither is totally realistic.

Obama would find it hard to withdraw so many troops that quickly.

McCain would come under intense pressure from Congress and the public

to act sooner, though the power of the presidency would give him

the upper hand. Congress’ say on foreign policy is fairly limited.

Dealing with foreign foes. Campaign rhetoric has been heated,

and it has made the two candidates seem further apart on their approaches

than they are. Obama would be more willing to talk with Iran and others,

and with fewer preconditions, but McCain would be open to talks, too.



Trade. Obama would try to renegotiate NAFTA, but it’s unlikely

he’d have much luck. He also promises to work harder to protect jobs

in future trade deals. That would slow negotiations but not stop them.

McCain wants to push ahead more vigorously but would need to compromise

to win approval from a Democratic Congress for any future trade pacts.

Housing. Obama favors a bigger government role in providing aid

to homeowners facing foreclosure. McCain says a bailout is not justified.

Federal spending. McCain would try to hold back Congress

and oppose all earmarks, but he’d have little success. Both parties

see spending on favorite programs as a way to keep constituents happy.

Obama would invest more in domestic programs, supported in part

by higher taxes. Neither would do much to limit the ballooning deficit.



Regulation. Obama clearly favors a more activist approach,

especially on workplace regs, food and drug safety and the environment.

McCain would be more cautious but not as hands-off as Bush has been.

Labor. Obama would sign new bills making it easier for unions

to organize, indexing the minimum wage to inflation and expanding the law

on family and medical leave. McCain would block all of those steps.



Immigration. There’s little difference between their positions.

Both favor tougher enforcement first, followed by a guest worker program

and some path for illegal immigrants already in the U.S. to become legal.

Judges. McCain promises to appoint conservative federal judges,

picking nominees in the mold of Supreme Court Chief Justice John Roberts.

Obama would go with liberals like Associate Justice Ruth Bader Ginsburg.

Guns. Obama would limit assault weapons. McCain would not.

Abortion. Obama is pro-choice. McCain says states should decide.









It's true, inflation statistics don’t match consumers' pain.

That's sparking charges that Uncle Sam is cooking the books...

deliberately holding down inflation figures...to win political points

and to reduce government costs. Even a tenth of a percentage point

translates into billions lost or gained on cost-of-living hikes

in Social Security payments, interest on the federal debt and so on.

There are flaws in the system...government economists admit it.

But the inaccuracies aren't deliberate, sinister or avoidable.

In a $14-trillion economy of 300 million people, tracking changes

in prices for millions of goods and services is no easy task.



Quality changes complicate matters. $600 today, for example,

buys a bigger, better TV than it did 10 years ago. It's deflation,

dampening the Consumer Price Index.

Ditto, buying-habit shifts.

When consumers switch to chicken

because steak becomes too pricey,

the upward push on the CPI is muted.

Shoppers know that steak costs more,

but living costs don't change much.

To get a balanced picture...

Multiple measurements help,

clueing in government policymakers.

CPI is based on a set basket

of goods and services that approximates a typical household's buying.

Core CPI removes food and energy because they can swing wildly,

up one month and down another, distorting the underlying trend.

Personal Consumption Expenditures serve as a reality check,

measuring changes in what all consumers actually spend month by month.

At times...when the economy is tanking, for example...the PCE drops

but the CPI doesn't, because consumers cut back sharply on buying.

Most of the time, however, it mirrors the CPI, telling policymakers

that the measurements of inflation are more or less on the mark.

With worsening droughts plaguing many regions of the country...

Look for lenders and investors to zero in on businesses’ exposure

to water supply risks. Power plants, food processors, mining companies

and semiconductor makers could see disruptions that hurt the bottom line.

Water shortages loom over many companies in the Southwest,

Southeast and parts of the Midwest and Northwest. Warming temperatures

that reduce snowfall in the mountains will prolong periods of drought.

The spring runoff from snow in Calif., critical to its water supply,

is forecast to be 55% of normal, forcing summer water restrictions.

Yet another redesign of paper money? It’s a growing possibility

after a federal appeals court ruled that it is discriminatory

to the blind if different denominations are indistinguishable by touch.

Almost all other nations use different sizes for different bills,

although another option is to use raised dots or embedded foil.

A size change would hurt a range of businesses, forcing fixes

to ATMs, vending machines and wallet sizes. Plus the Treasury Dept.

estimates the extra cost to be $200 million or more. An appeal is likely.









More people are working part-time, and it’s not by choice.

Reductions in and layoffs from full-time jobs pushed the ranks

of part-timers up by 306,000 in April and by 849,000 over the past year.

The total now stands at 5.2 million, the highest level since Jan. 1994.

For many workers, the change will last a long time. Cost cutting

by firms burdened by energy prices will continue well into any recovery.



One sector that’s still hiring: Pop concert production companies.

They need machinists, welders, set designers, video technicians and more

to build elaborate stages, complete with multilevel platforms, elevators,

laser light shows and high-definition video screens to enhance effects.

Stages for top groups such as Bon Jovi or U2 can cost $5 million.

The concert bar has been raised because ticket prices have spiked

and concertgoers are demanding more of an experience for their money.

Plus touring income is increasingly important to musicians,

now that music sales are falling 10% a year, to $7 billion in 2008.

Ticket sales rose 8% last year and will hit $4.2 billion this year.

Boost online sales by allowing customers to review your products.

New clients are more likely to trust reviews and make purchases

if the comments they read are good, and most are. About 80% are positive.

Reviews also provide crucial feedback, letting firms adjust accordingly.

They’re especially popular in the travel and retail industries.

Online-review software is available from Review Foundry for $490.

Bazaarvoice offers software it manages for $2000 per month and up.

PowerReviews charges for its product by taking a fee from related sales.

Israeli-Syrian peace talks won’t get far...at least not quickly.

Prospects will improve in 2009, when the U.S. has a new president

and Israel has a new leader. Prime Minister Ehud Olmert has been weakened

by multiple scandals, and Bush doesn’t want to boost Syria’s influence.

It’s unlikely that Israel and Syria can reach an accord on their own.

Both sides want a deal. The strengthening of Hezbollah forces

in Lebanon makes Israel want to engage Syria, a key Hezbollah supporter.

Israel will accept a Syrian role in Lebanon if that limits Hezbollah.

Syria is hoping for an agreement to end its isolation in the region.

Private firms will play an ever larger role in disaster relief.

They’re partnering with nongovernmental organizations to get aid

to stricken regions faster than governments or NGOs can do on their own.

China’s earthquake is a textbook example. Dozens of companies

with operations in China have donated millions of dollars for purchases

of food, medicine, blankets, telecom equipment and other supplies.

Companies benefit, too. They can often form lasting relationships

both with local governments and with the people who receive the aid.



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