THE POCKETBOOK ELECTION

"There is a clear choice between Jimmy Carter and President Ford. The choice is: Do you want the Federal Government to spend more and more of your money and interfere more and more in your daily lives? ... Do you want your taxes raised so you can pay for those hundred-billion-dollar programs of Jimmy Carter?" [Crowd: "No! No!"]

--Gerald Ford on the stump

"Don't blame local officials when your property taxes double if the welfare load on you has been increased under a Republican Administration and when inflation goes up and housing gets scarce ... We had over 800 people who made over $100,000 a year, 240 people who earned over $200,000 a year and paid zero income taxes. When they don't pay their taxes, do you know who pays their taxes for them?" [Crowd: "We do."]

--Jimmy Carter on the campaign trail

If they could bottle and market their bombast and bluster about the U.S. economy, Jimmy Carter and Gerald Ford would become millionaires many times over. To hear Carter on the stump, the nation is heading right back to 1932, with serpentine lines of unemployed, shuttered factories and silent cash registers. After the Administration released some third-quarter statistics last week, Carter put out a statement that said they point to "a continuation of high unemployment, huge budget deficits and dim prospects for an improvement in the standard of living for the average worker."

To hear Jerry Ford, the economy is moving onward and upward, recovering nicely (thanks to excellent Republican prescriptions) from deep recession and dire inflation, shaking off the effects of a little setback in the past few months. Says Ford: "We have had a pause. We are now coming out of the dip, and I believe that all, or practically all economists recognize that the economy is continuing to improve and will get better in this quarter and in 1977."

Is the economy as bad as Carter says? Is it as good as Ford contends? The answers the voters give to those questions may well swing the election, for next to the character and personalities of the candidates themselves, the mercurial, often mystifying economy has become the main issue of Campaign '76. Moreover, voters this year have a genuine choice between the candidates' differing economic philosophies.

In describing the present situation, Gerald Ford is more accurate than Carter, and he is correct that most economists, including Democrats, believe the recovery has run into only a temporary slowdown. Nevertheless, last week's figures were troubling. The real rate of growth in the gross national product slowed further in the third quarter, to 4%, which is good in normal times but sluggish for a recovery--and not enough to reduce unemployment. Some of the sting was removed by the news that inflation in the entire economy eased from 5.2% in the second quarter to 4.4% in the third, and housing starts in September jumped 18%, to an annual rate of 1,814,000. Still, Ford was looking ahead with some apprehension to the report of the economy's index of leading indicators; it is due out this Friday, four days before the election.

Until a couple of months ago, Ford had reason to hope he would go into the election with the economy a decided plus. By hewing to conservative, grow-slow policies, he had done much to lift the country out of its worst post-World War II recession. The Consumer Price Index has been steadily coming down, from a disastrous 11% in 1974 to a merely awful 9.1% in 1975 to an encouraging 5 1/2% this year. Yet Ford's hopes were frustrated by a lot of discouraging statistics.

There was a warning signal as early as last spring, when the real rate of growth in the G.N.P. suddenly dropped by half. That was easily explained--and foreseen--because the 9.2% spurt in the first quarter was so great that it could not be sustained. Sure enough, it fell to 4.5% in the second quarter. Main reason: businessmen early in the year had been on a buying spree to replenish their recession-depleted inventories, and once they got those stockpiles up to par, they cooled their purchasing.

But then strange things began to happen. Late in the spring, consumers began to pull back, and retail sales went flat. Partly as a result, unemployment started to creep back up--from a low of 7.3% in May to 7.9% in August and 7.8% last month. Layoffs rose and help-wanted ads declined. After Labor Day, the signs of listlessness grew; there were falloffs in factory orders and commercial building contracts.

What had gone wrong? Economists could easily find reasons to fit their own politics and prejudices. The monetarists, who are mostly Republican and conservative, pointed to the sharp decline in the rate of growth in the money supply in the six months up to last February; it rose only 2.7%, v. 8.7% in the previous half-year. Since the monetarists reckon that it takes six to nine months for changes in the money supply to have an impact on the economy, they found it natural that business hit an air pocket in the late summer. Many other economists, notably liberal Democrats, pointed their fingers at the decline in the growth of the Government's fiscal stimulus. David Grove, vice president of IBM, calculates that the tax and spending changes that gave the economy a $62.6 billion boost in the last calendar year will provide only $28.4 billion worth of stimulus this year.

That decline has been due mainly to Ford's inflation-fighting fiscal prudence--holding down his budget proposals and vetoing many bills--a refreshing departure from the usual tendency of Presidents to pump up the economy during election years. Beyond that, the Government in the past six months has spent $10 billion to $15 billion less than both the Republican Administration and the Democratic Congress had expected. Nobody is sure of the reasons for this drop.

If the economy in the last three months of this year does not improve upon the 4% growth rate of the third quarter, Congress will probably act quickly to cut taxes no matter who is elected President. Yet most experts believe the economy will do better than 4% growth in this quarter and in 1977.

It should advance because incomes have edged up, profits have jumped, and interest rates are expected to decline still further. Consumer spending should increase because real disposable income has risen 2.3% so far this year, and the consumer's confidence is on the rise. For the first time in three years, most of the people polled in the University of Michigan's quarterly consumer survey thought it was a favorable time to buy big-ticket items. Housing should continue to be lifted out of its recent deep slump by the advance in personal income, the increase in new families and easier mortgage money. (One problem, however, is that the average price of a new house bought with a conventional mortgage is now $50,500.) Most important, businessmen's spending for expansion, automation and modernization should climb because pretax profits will jump by almost a third this year, to some $150 billion. Liberal Economists Walter Heller and George Perry, whose forecasts have been quite accurate, predict that business fixed investment will increase some 17% next year, to $144 billion.

Though their confidence has been somewhat dulled by the recent dip, corporate chiefs tend to be optimistic about 1977. Says J. Paul Lyet, chairman of Sperry Rand Corp.: "I am basically bullish for next year, no matter who is in the White House." General Motors Chairman Thomas Aquinas Murphy predicts that new car and truck sales next year "should eclipse" the 1973 record of 14.6 million units, including imports. Somewhat more guardedly, and reflecting the general fears that inflation could flare anew, Edson Spencer, president of Honeywell, says, "I see not a slowdown but slower, steadier growth. I'd rather see 6% than 4% growth, but I'd hate to see 10%."

There is virtually no chance that the G.N.P. will rise by anything like a dangerously boomy 10% rate next year. Members of TIME'S Board of Economists expect growth of from 4 1/2% to 5 1/2% in 1977. They also generally anticipate that inflation will be 5 1/2% to 6% and unemployment will average more than 7%, not dipping below that high level until year's end--if then.

Alan Greenspan, who is on leave from TIME'S board while he serves as chairman of the President's Council of Economic Advisers, remains confident that economic growth will pick up to close to 6% in both this year's fourth quarter and 1977. Otto Eckstein, president of Data Resources Inc., forecasts that growth will rise at a 5% rate this quarter and 5 1/2% next year. IBM's Grove anticipates about 5 1/2% in next year's first half and 4% in the second half. Beryl Sprinkel of Chicago's Harris Trust & Savings Bank expects somewhat lower growth -- just above 4 1/2% in the first half and just below 4 1/2% in the second half -- and that suits him just fine, for he reckons that slow, steady growth will hold back inflation.

The election should change this immediate outlook very little, because the basic forces of spending, taxes and money supply that will shape the economy over the next nine months or so are already at work. If Ford is elected, he will continue his rather cautious, restrictive fiscal and monetary policies. If Carter wins, he would be more of an activist, and growth might be somewhat stronger in the second half of 1977 at the risk of slightly more inflation.

In a sense, both Ford and Carter are rather unconventional candidates in their own parties. Carter has taken a far stronger anti-Big Government and antibureaucracy line than is usual among Democrats, and he also has set a more populist tone. Ford has been more of an economic conservative in action than many other Republicans. Though they have some similarities, Ford and Carter disagree on so many issues that the election will affect the longer-term future of economic policies:

SPENDING. Nowhere is the distinction between the candidates sharper than in their views of the role of Government in the economy and the risks that they would take to move the nation back to full employment.

Carter differs fundamentally from Ford in that he favors more Government intervention in the economy (despite his anti-Big Government views) and more stimulus, through spending and easier money, to spur growth.

Ford believes firmly that less Government is better and that budget deficits are the engine of inflation. His assault on spending, his advisers believe, is also the best means to combat unemployment. Their argument: when inflation slows, consumers and business men regain enough confidence to spend and invest, which in turn creates jobs. Ford says that in January 1978 he intends to present Congress with a balanced budget for fiscal 1979. That goal is virtually impossible and surely dangerous. Not only is it highly improbable that the budget deficit can be reduced by $50 billion over two years, but the shock of such restraint would invite a severe recession.

In calling for a balanced budget by 1979, Ford never specifies where he would cut. Further, in attacking Carter as a "big spender" who would increase the budget by $100 billion or more a year, he does not mention two key points. First, Carter has not committed himself to introduce any new programs in a particular year--though he often sounds a lot less cautious than that on the stump. Second, unless the economy grows enough to pay for those programs, Carter says, he would hold them back to achieve a balanced budget by fiscal 1981. For example, he says that his national health program would be phased in as money is available. He also pledges to hold federal spending to 21% of the G.N.P.; it is now 23%. Of course, he may well have to fight off pressures from Congress to make him spend more.

JOBS. Carter says he aims to bring unemployment down to 4 1/2% and inflation to 4% in 1980. Ford has offered no numerical goals, arguing that to do so might pressure policymakers into making wrong decisions in desperate efforts to achieve them. But he says that "Jerry Ford is not going to be satisfied until everybody who wants a job has a job." His prescription is continued steady growth, though slower than Democrats would like, and a minimum of Government intervention.

Carter, like Ford, recognizes that the Government cannot use fiscal and monetary stimulation to bring unemployment much below 5% or 5 1/2% without reigniting inflation. Thus, to reach his goal of 4 1/2% unemployment and create jobs for roughly 1 million unemployed people, Carter would push selective Government job programs--subsidies for companies to hire the unemployed, a plan like the old CCC to put jobless youths to work on urban clean-up and build-up projects, and the like. He argues that the programs would ultimately pay for themselves by getting people off the dole and turning them into productive taxpayers. Remembering that such schemes did not dent unemployment much during the 1960s, some of his advisers are skeptical. Still, others think they can avoid the pitfalls by focusing their efforts on people who have at least basic literacy and the competence to hold a job.

PRICE CONTROLS. While Ford has rejected intervening in private price and wage decisions, Carter says he would use the influences of the White House to get employers and labor to adopt voluntary limits. Says Jerry Jasinowski, Carter's chief staffer on economic issues: There would be "very vigorous use of the Council on Wage and Price Stability, including requirements for prenotification of major increases and hearings on them."

Lately, Carter has moderated his call for stand-by authority for the President to impose wage and price controls in an emergency. Says Jasinowski: "He continues to support that position, but only as a last resort. I would not anticipate any immediate, high-priority action to request selective stand-by wage and price authority. That would come only if there was a national emergency." In any case, Carter says that "my guess is that I would never use them."

A number of Carter advisers, notably Arthur Okun and Charles Schultze of the Brookings Institution, argue persuasively that inflation could be lowered by a "social contract" among Government, business and labor. One formula: the Government would promise workers an increase in real incomes if pace-setting unions agreed to hold wage raises below a certain level. If they did, but price rises continued to eat into wage gains, the Government would cut taxes so that incomes would still go up. Organized labor has ignored or rejected such proposals before. But Schultze thinks that unions could now be persuaded to cooperate.

TAXES. On the campaign trail, Ford reiterates that he would lower income taxes by $10 billion, in part by raising the personal exemption from $750 to $1,000. One-quarter of the cut would go to corporations, whose rates would be reduced from 48% to 46% on profits, helping them to accumulate capital for needed investment. But the President usually neglects to mention that taxes would be cut, by his own formula, only if Congress reduced spending by a like amount, which is most improbable.

To his credit, Ford has repeatedly stressed that he would reduce taxes on capital to spur investment. He would like to enact tax incentives for stock ownership, for example, by ending the double taxation of corporate income and dividends. Carter agrees on this point. The two candidates also agree that the whole tax system should be simplified --but after that they part company.

Rather stridently, Carter urges a sweeping reform of the tax system, which he calls "a disgrace." (Ford frequently points out that the U.S. tax system is largely the creation of Democratic Congresses.) His promise to unfurl a major reform program after a year or so of study has prompted great unease because Carter has not been specific about who would gain and who would lose. He has said that he would reduce the bill for "the lower-income and middle-income taxpayers," and not raise tax rates on salaries or wages.* This is a fairly realistic promise, for rates are rarely raised. He has declared that he would eliminate the special 50% exclusion for long-term capital gains, most of which is taken by people who earn $50,000 a year or more. And he would close "loopholes" not only for individuals but also for corporations, including the deferral of taxes on income earned abroad by subsidiaries of U.S. corporations and special tax breaks for exporters.

This approach has several problems. For one, eliminating the capital-gains exclusion or otherwise raising taxes on capital would discourage capital formation, which the U.S. will urgently need to develop energy, expand industry and create jobs. (Carter responds that he would take care of this by special incentives for capital formation, e.g., eliminating the double taxation of corporate income and dividends.) Most important, Carter's use of incendiary language--he condemns the exploitation of "loopholes" by the "rich" and the "powerful" --has led to fears that he is striving for an egalitarianism that could remove incentives.

It is fallacious to argue that the affluent tend to pay less than their share of taxes. In 1974, the most recent reported year, 18% of the taxpayers reported adjusted gross incomes of $15,000 to $25,000, and they paid 30.5% of all personal income taxes. Above that point, payments scaled up sharply: 5.4% had adjusted gross incomes of $25,000 to $50,000, and they paid 20.2% of the taxes; 1% had adjusted gross incomes of more than $50,000, and they shelled out 19.1% of the taxes.

Carter seldom defines just when a justifiable deduction becomes a loophole. Virtually all of the tax exclusions were enacted for some useful social purpose, which has not always been fulfilled. In some cases they have been exploited, and tightening up the exclusions for wealthy individuals and making them pay at least a minimum amount in taxes might serve the cause of equity. But it would raise relatively little revenue. If people with adjusted gross incomes of $100,000 or more were denied all deductions and exclusions--including charity, local taxes, interest payments, capital gains, and so forth--the Treasury would gain some $7 billion.

Of course, nobody wants to wipe out all those deductions. Carter got burned earlier this year when he suggested that he would favor, as part of a comprehensive tax reform, eliminating the mortgage deduction; he quickly retreated from that point. But he seems to favor a rather sweeping removal of many other deductions in return for lower tax rates. Many conservatives as well as liberals applaud this commendable, if politically difficult idea.

GROWTH. Carter would aim for economic growth of 5 1/2% a year, and perhaps more, until unemployment was brought down to the 4 1/2% range. His rather traditionally liberal Democratic view is that reasonably faster economic growth than at present is not likely to generate much more inflation as long as so much of the nation's manpower and machinery is underemployed. In fact, faster growth might well lower inflation in the short run by increasing productivity. Says Jasinowski: "Carter would not accept the slow-is-beautiful, let's-be-satisfied-with-4%-growth view that the President seems happy with."

All that is based on some debatable assumptions. Is unemployment really so severe? It is concentrated largely among women and teenagers, who are not primary breadwinners, and only 5.4% of the heads of households are jobless. Are the factories really so underused? There is some concern about the re-emergence of production bottlenecks in several industries, notably paper, petrochemicals and steel. Is demand really so low? It certainly has contributed to price rises.

Yet the hard facts are that unemployment is steep by any measure and that the jobless rate among heads of households is twice as high as in late 1973, when the recession began. The Federal Reserve Board calculates that U.S. manufacturing industries are running at 73% of capacity, down from 83% in 1973; the industrial production index did not rise at all in September.

Thus many economists, mostly Democrats, argue that the economy today has enough unused capacity that it can grow faster without risking more inflation. Consumer and corporate demand is not so strong that more rapid growth would generate a significantly faster rise in prices over the next couple of years. Virtually all of the present inflation is caused by rising costs of raw materials and labor. Indeed, some members of TIME'S Board of Economists believe that consumer prices will go up by 5 1/2 to 6% next year, regardless of whether fiscal policy is somewhat more or somewhat less stimulative, largely because of wage increases.

Ever since he became President, Ford has erred on the side of caution --or so it appears in hindsight. Of course, he deserves much credit for bringing down inflation. But after the economic summits that he convened in the autumn of 1974, he ignored all the warnings of recession and proposed an unwisely tight fiscal policy, with income tax surcharges for individuals and companies. By December the economy had plunged, and in January 1975 Ford had to admit his error by proposing a tax cut of $16 billion. In fact, that was too modest. Congress increased it to more than $22 billion.

Once more this year. Ford demanded a $395 billion ceiling on spending. Congress enhanced the stimulus by setting spending at $413 billion. Again, all the evidence--the recent slowdown in growth, the continuing high unemployment--shows that Ford's policy was too conservative. Democrats say Ford and his policymakers constantly stress the dangers of growing too fast, but often underplay the costs of growing too slowly --the cost of output lost. In consequence, needs go unmet, unemployment remains high, and strains develop in society.

Data Resources' Eckstein says that unless the economy picks up rather smartly in the next month or two, "it will need another push in early 1977." Walter Heller calls for a one-shot $15 billion tax cut as soon as Congress returns to Washington in January. IBM Economist Grove has put all the figures through his computers, and concludes that the economy could stand a further $18 billion stimulus--through a quick tax cut or more spending--without suffering further inflation. Indeed, the increased demand created by the extra money would enhance productivity and thus tend to hold down prices.

By contrast. Republicans argue that the economy is on the right track and warn against pushing it faster. Says Treasury Secretary William Simon: "If we embark once again on a course of excessive fiscal and monetary policies, we will only rekindle another round of inflation and an even worse recession." Adds Alan Greenspan: "All the items that should be in place for a fairly solid advance in 1977 are there. No fiscal-policy action is required now." Besides, as he notes, the $10 billion to $15 billion of budgeted money that was not spent in the past six months may be spent in the months ahead, giving the economy a delayed lift. Concludes Murray Weidenbaum of Washington University: "Policy is at the undramatic middle ground, where it belongs right now. I cannot see any really substantial change in policy that would not worsen inflation."

In sum, people who vote their pocketbooks will have a distinct choice. If Ford is elected, there is every reason to assume that the economy will continue its gradual recovery. The President will follow policies that are fairly safe and sure, if a bit slow--the "undramatic middle ground." Voters who want to go faster can find in Carter considerable promise of change, some of it not fully spelled out. His economic policies would undoubtedly be more exciting, and growth would probably be speedier. The policies would also be riskier. Just how much so would depend on whether Carter in office could stick to the sensible qualifications that he and his economic advisers usually attach to their policies --for instance, Carter's pledge that he would not start new programs until recovery provides the revenues to launch them--or whether political and other pressures would sweep them along further and faster than they expect.

* Despite Carter's denials, Ford often charges that the Democrat would boost taxes for middle-income people because he once offhandedly suggested in an A.P. interview that there might be increases for people above "the mean or median level of income." Mean, or average, family income is $15,546; the median is $13,719.

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