Thursday, November 04, 2004

After the Voting: What May Lie Ahead for Business in America

The New York Times
November 4, 2004

After the Voting: What May Lie Ahead for Business in America

From Wall Street to Detroit, there were plenty of sighs of relief as it became clear that President Bush had won another term. As one auto executive said, "Bush has been a good president to work with."

But even as stocks rose on the news, the exuberant mood of business executives was tempered by worries about continuing high prices of oil, the nation's ballooning budget deficit and the increasing cost of health care. Military contractors, for example, expect that the Pentagon budget will flatten out, forcing the government to rein in spending for new weapons programs, as it needs to put more money into the war in Iraq.

And all employers - but particularly the auto industry, which is footing the bill for health benefits for thousands of retirees - are worried about the brisk rise in medical costs and whether the administration has a realistic plan for dealing with the problem.

The telecommunications and media industries expect the White House and their regulators to continue to step back and allow greater industry consolidation, even as regulators are faced with major decisions about the future of Internet and telephone services.

But the biggest smiles yesterday came from Wall Street executives, who were pleased with the tax cuts in the first Bush term and hope for more of the same from the second.

Taxes and Health Costs Top Detroit's Wish List

DETROIT, Nov. 3 - Even though Michigan was one of the rare blue states between the coasts, many executives of the Detroit automakers were privately wary of Senator John Kerry because he was recently a co-sponsor of an ambitious Senate proposal to increase fuel economy standards substantially.

"Kerry's past projections on fuel economy were scary," said an executive from one of the Big Three Detroit automakers, who spoke on condition of anonymity. Mr. Kerry's proposal, also sponsored by Senator John McCain, was bitterly opposed by the industry and handily defeated in the Senate in 2002.

"We need somebody that's willing to work with us," the executive added. "Clinton was great to work with, he was a Democrat. Bush has been a good president to work with. Whoever gets in office, they realize we're a huge part of the economy, creating jobs, and as a politician you don't want to hamper the job producers."

The Bush administration has close ties to the industry - Andrew H. Card Jr., the White House chief of staff, served as G.M.'s top lobbyist in the 1990's.

Top items on the auto industry's wish list in the second term of the Bush administration will be renewing tax credits for advanced-technology vehicles, including hybrid cars, and relief on soaring health care costs, which have been a crippling competitive burden for domestic automakers. Automakers based in Japan and Germany do not have a similar burden of health care spending on retirees.

From the standpoint of showroom traffic, executives and industry sales analysts saw the election as a distraction that was good to put behind them.

"We always like to remove the uncertainty in the marketplace," said Paul Ballew, G.M.'s top industry sales analyst. "Having said that, even with this election bubbling along, sales have held up pretty well."

Gary Dilts, the top sales analyst at Chrysler, said, "the guys on the showroom floor think this has been a negative distraction." -- DANNY HAKIM

Investor Euphoria Could Be Short-Lived

Shares of military companies rose on news of the Bush victory yesterday, but the euphoria could be short-lived. While President Bush's re-election and the return of a Republican majority in Congress assure a robust approach to Pentagon spending, the growing budget deficit and the costs of the war in Iraq could begin to take their toll.

"We might be seeing a bit of a false dawn," said Nick Fothergill, a Banc of America Securities analyst based in London, referring to a rally yesterday that sent shares of most military contractors up 3 to 4 percent.

Mr. Fothergill said the Pentagon budget, which will come to $417 billion for the 2005 fiscal year, could come under pressure as early as 2006, as continued war costs and a rising deficit force lawmakers to make choices. "The Bush budget is likely to get cut a little early," he added.

Those sentiments were echoed yesterday by James Albaugh, head of the defense business at the Boeing Company, the nation's second-largest military contractor after Lockheed Martin. At a Goldman Sachs investor conference in New York, Mr. Albaugh predicted a flattening in military spending as the government attempts to rein in the deficit and balance the need for more troops against Pentagon weapon modernization plans, Bloomberg News reported. The 2005 Pentagon budget includes $25 billion for fighting in Iraq and Afghanistan.

"You're going to see a reprioritization of many of the programs that the government is funding," Bloomberg News quoted Mr. Albaugh as saying. "All big programs will come under scrutiny because of their size." Increased military spending over the last few years has contributed to a $413 billion federal budget deficit, which Mr. Bush has said he wants to cut in half.

A victory by Senator John Kerry probably would not have led to much of a change in Pentagon spending, given the Republican control of Congress and strong bipartisan support for military spending. For that reason, Byron Callan, a military industry analyst with Merrill Lynch, said the sell-off in military stocks in late trading on Tuesday, as surveys of voters leaving the polls showed Mr. Kerry ahead, was unwarranted.

One Pentagon program that Mr. Kerry singled out for cuts was missile defense. Mr. Kerry proposed using $9 billion from the program's annual budget to add 40,000 troops.

"Does Bush have a mandate to spend gobs more on defense?" asked Mr. Callan of Merrill. "I don't think so." Because of that, Mr. Callan said that yesterday's rise in the military sector was "more of a sigh of relief than a sign of a whole new direction for defense."

The Pentagon budget, while it may rise and fall under different administrations, has a momentum of its own that makes it hard for Congress to rein in. With the long periods of development required for major weapons systems and planning done in five-year increments, major changes in military spending cannot happen quickly.

"Because of Iraq, there might be some slowdown in procurement," said Paul Nisbet, a military industry analyst with JSA Research Inc., based in Newport, R.I. "But that will last for only a year or two." -- LESLIE WAYNE

For Corporations, Their Kind of Guy

For Wall Street firms, a second Bush term represents a lush dividend on the millions that their chief executives began raising for the president in the early days of his first term. Led by Morgan Stanley and Merrill Lynch, executives on the Street embraced the supply-side policies of President Bush - underscored by sweeping cuts in capital gains and dividend taxes - that brought the most pro-Wall Street moves since Ronald Reagan began cutting taxes in 1981.

Expectations are rife that the president's economic platform will be even better for business in his second term as he pushes for such initiatives as private Social Security accounts and continued emphasis on lower taxes.

"Sure there is a quid pro quo," said Mallory Factor, a merchant banker and fund-raiser for the president. "It's a pro-growth economy, lower taxes and less regulation. The market's reaction speaks for itself."

Wall Street's full-throated support for President Bush comes despite a certain coolness that the president has had for the Street. He is the first Republican president since Dwight D. Eisenhower not to have a Treasury secretary with a Wall Street pedigree, and in public speeches he has been quick to blame the excesses of the stock market boom and bust for the mini-recession he inherited in his first term.

Wall Street has remained a vigorous backer all the same. Four out of the top contributors to the president's campaign hail from Wall Street - Morgan Stanley, Merrill Lynch, UBS and Goldman raised close to $2 million among them.

But analysts warn that Mr. Bush's market-friendly tax policies will do little to lift Wall Street profits if fears of a growing budget deficit result in a sustained rise in interest rates. That, in turn, could result in lower earnings for Wall Street firms as the long bull market in bonds finally recedes. Wall Street firms have made billions in trading bonds since the collapse of the stock market in 2001.

For the time being, though, Wall Street firms are mostly applauding a second term; they expect that the temporary cuts in the capital gains and dividend taxes of Mr. Bush's first term will now be made permanent. Analysts also foresee merger and acquisition activity to be more robust under Mr. Bush than it would have been under John Kerry, given the Bush administration's tendency not to interfere with large corporate mergers.

"There is a relief that this is over," said Frank Fernandez, the chief economist for the Securities Industry Association, the industry lobby. "This administration has a good track record on pro-investment policies. We know where they stand." -- LANDON THOMAS JR.

A Prospect for Oil Prices to Help Shape Policy

President Bush's victory comes at a time of near-record oil prices, and the issue could end up shaping his administration's energy policy over the next four years.

Crude oil prices have risen more than 70 percent since Mr. Bush came to office in January 2001, pushing gasoline and heating oil to record levels.

With most of the world's oil producers pumping at capacity, high prices threaten to slow economic growth in the United States, weighing on business costs and adding hundreds of dollars a year to households' expenses.

To try to offset this, analysts said, the administration is expected to endorse drilling for oil in part of the Arctic National Wildlife Refuge in Alaska and to take some steps to limit demand.

But squaring these goals with the president's calls to reduce American dependency on oil from the Middle East could prove a challenge, especially for an administration headed by two former oilmen.

J. Robinson West, the chairman of PFC Energy, an energy adviser in Washington, noted that "one of the biggest applause lines in both campaigns came when they mentioned energy independence from the Middle East and Saudi Arabia."

"Of course, energy independence is a meaningless concept," Mr. West said, "but they will clearly try to increase oil supplies in the United States and make an effort to deal with demand."

The administration, he added, could be expected in the second term to encourage the development of hybrid cars, alternative fuels like natural gas, and renewable energy to limit the country's energy dependency by slowing the growth in demand.

Daniel Yergin, the chairman of Cambridge Energy Research Associates and author of a Pulitzer Prize-winning history of oil, "The Prize,'' said: "The big challenge is the need to increase oil production over the next 20 years in very substantial volumes. We will see a focus on policies that encourage increased and diversified oil production."

The idea of more oil drilling in Alaska - part of the recommendations put forward by an energy task force led by Vice President Dick Cheney in 2001 - has been contested for years on the ground that it could harm the region's environment.

"They'll want to put the issue in front of the American public," said Lawrence J. Goldstein, president of the PIRA Energy Group in New York. "But I don't think it will go through. There are still a lot of people in Congress opposed to it, and the new administration won't have the ability to break a filibuster."

One policy the president is not expected to change is his opposition to releasing oil from the strategic reserve to bring down prices. Quite the opposite, analysts said. Mr. Bush is expected to keep filling the reserve.

The administration's foreign policy will affect its energy policies - in particular, relations with Iraq, Iran and Saudi Arabia.

"Energy security in the United States is still focused on the Middle East," said Ian Bremmer, who heads the Eurasia Group, a political risk consultancy. -- JAD MOUAWAD

Mounting Costs and Tax Breaks

In a second term, the Bush administration expects the nation's burdensome health care bill to continue mounting at a brisk pace - from an estimated $1.79 trillion, or $6,167 a person, in 2004 to a projected $2.39 trillion, or $7,928 a person, in 2008.

As in its first term, the administration will seek to restrain the growth in spending and improve health quality by providing tax breaks, free-market incentives and greater choice for individuals in shopping for their own care.

At the same time, the administration says it will have only a limited role in regulating prices for drugs, medical devices and health services. Senator John Kerry had proposed a larger role for government in both paying for health care and controlling prices.

With the Bush victory, the shares of pharmaceutical makers like Pfizer, Merck and Eli Lilly, and for-profit health maintenance organizations like United HealthCare, Aetna and Wellpoint rose sharply yesterday. "We're seeing a big collective sigh of relief from those companies," said Kenneth Thorpe, a health care economist at Emory University.

But no matter who is in the White House, big policy challenges remain. Roughly 45 million people are uninsured in the United States, and an estimated 70 percent of them are employed. To increase coverage, the Bush administration supports creating tax credits and health savings accounts and associated health plans for small businesses. Those strategies are intended to reduce the cost of health insurance for small employers and individual workers. But those kinds of health plans typically require sizable out-of-pocket payments by individuals.

"Conservatives want to see universal health care by using tax credits and health savings accounts, and that should and will be on the agenda," said Robert Goldberg, director of the Center for Medical Progress at the Manhattan Institute, a conservative policy group.

But a major expansion of tax credits and plans with tax incentives would be very costly. Many analysts are skeptical that the Bush administration will make a major commitment to expanding these programs when it has made maintaining income tax cuts for individuals its priority and the nation is running a huge budget deficit.

While health savings accounts will probably be expanded in the new Congress, according to Frank B. McArdle, a health policy specialist at Hewitt Associates, a consulting firm, he noted that "there will be no big shift, but a continued gradual shift toward an individual consumer marketplace."

Another change may come on the medical malpractice front. With a larger majority in the Senate, the Bush administration, analysts say, may well be able to win approval for legislation capping medical malpractice payouts, which Democrats have thwarted in the past.

Support for medical liability limits seems to be gaining ground nationally, with Florida, Nevada and Oregon passing state referendums capping malpractice payments on Tuesday. The votes on Wyoming's malpractice referendum were still being counted yesterday afternoon.

Despite the Bush victory, many industry experts expect a greater government role in health care in the long run. The pharmaceutical industry offers a good example. By the end of 2006, when the new Medicare drug benefit program is in full operation, the government will be paying for half of all prescription drugs purchased in the United States, Richard Evans, an analyst at Sanford C. Bernstein & Company, estimated.

The appeal of using that buying power to curb price increases may prove irresistible, Mr. Evans said. "Bush isn't going there for political or ideological reasons, but he may eventually go there for economic reasons," he said. "For the pharmaceutical industry, I think the Bush re-election means we're taking the long road to government price influence instead of the short road under Kerry." -- STEVE LOHR and MILT FREUDENHEIM

Bigger, Faster, and Less Regulated

WASHINGTON, Nov. 3 - Significant technological advances are rapidly changing the telecommunications and media industries, and giving a bigger role to Washington policy makers in determining industry winners and losers.

In the coming months, the Bush administration and its appointees at the Federal Communications Commission face major decisions about telephone services over the Internet, new wireless services and making broadband service more widely available.

As a result of the election results, those policy makers will probably embark on a course that continues to favor the four regional Bell companies and the nation's largest media conglomerates.

Tuesday's outcome also significantly increases the chances that Congress will begin to overhaul the Telecommunications Act of 1996 next year. The landmark law, which reshaped the regulatory landscape, has already begun to come under heavy assault in regulatory decisions and court rulings.

The Senate Commerce Committee, a central player in crafting any legislation, will now come under the control of Senator Ted Stevens, Republican of Alaska, who has a close working relationship with the new senior Democrat on that committee, Senator Daniel Inouye of Hawaii. (The current Republican head of the committee, Senator John McCain of Arizona, is stepping down as chairman, and the ranking Democrat, Senator Ernest F. Hollings of South Carolina, is retiring.)

Many telecommunications regulations defy traditional partisan politics, and regulatory issues arose only briefly in the presidential campaign when Senator John Kerry said he opposed the administration's efforts to relax the ownership rules that had prevented the nation's largest media companies from expanding. For his part, President Bush said throughout the campaign that he was committed to making broadband service ubiquitous by 2007, although he and his aides offered few specific plans to achieve that goal.

Both the administration and its appointees in important regulatory positions have maintained for months that they intend to relax regulations to encourage investment in new technologies and to provide incentives for companies to expand high-speed Internet services.

In the coming weeks, the F.C.C., in response to an appeals court decision, is expected to issue new wholesale telephone rate rules that are all but certain to be significantly more favorable to the regional Bells than the old rules. Officials said the outcome might have been significantly less favorable to the Bell companies had Senator Kerry prevailed.

Administration officials, as well as top regulators at the F.C.C., have also said they prefer to take a deregulatory approach to rules governing telephone services over the Internet.

The administration has also supported efforts to relax rules that have restricted the nation's biggest media companies from expanding and entering new markets.

Last June, a federal appeals court in Philadelphia ordered the commission to reconsider its rules, issued last year, that would ease the way for media companies to grow. The commission has yet to respond to the order, either by announcing an appeal to the Supreme Court or by re-examining the rules.

The administration is expected to continue its policy of approving most proposed corporate mergers as the telephone and other technology industries continue toward consolidation. -- STEPHEN LABATON