The following was excerpted from a session held during NAREIT's 2004 Institutional Investor Forum in June. Hamid Moghadam, chairman and chief executive officer of AMB Property Corporation (NYSE: AMB) and NAREIT's chair, moderated a panel discussion featuring three leading economists providing their outlooks for the economy as a whole and the REIT market specifically. The panel featured Richard Berner, chief U.S. economist with Morgan Stanley, James Glassman, chief U.S. economist with J.P. Morgan Securities, Inc., and Mickey Levy, chief economist with Bank of America.

Hamid Moghadam: What are the different policy implications of the presidential election? Do you think the election itself will have an immediate impact?

Photo by Carla Osberg Left to Right: Richard Berner, Morgan Stanley; Mickey Levy, Banc of America Securities; and Jim Glassman, JP Morgan

James Glassman: The election outcome will be very significant for financial markets. At present, we don't know how to handicap the outcome because the polls indicate the race is very close. The market seems to be ignoring the race because the outcome will be determined by a small margin—10 percent or so—of voters who are undecided. My guess is that investors will begin to pay more attention to the election race later this summer and fall.

I think there is a big difference between the two candidates. George W. Bush's agenda centers on tax reform—partially dismantling some of the Great Depression-era programs, partially privatizing Social Security, edging toward a consumption-based income tax and pushing ahead on free trade.

John Kerry's economic program is less clear at present. His economic policy would be more “Clintonesque,” I suppose. Regarding taxes, many of the items that are slated to sunset would be allowed to sunset. I don't think a Kerry administration would be as enthusiastic about globalization and free trade as the Bush administration is.

Mickey Levy: With regard to economic policy I think there are huge differences. What becomes crucial here is the outcome in Congress, because the Ways and Means Committee in Congress is the tax writing committee and legislation must go through Senate Finance. If Kerry were to become president, his first initiative would be a tax initiative that would likely raise the highest marginal rate on personal income from 35percent back to 39.6 percent. That would create a very quick asset reallocation from taxable to tax-free bonds. Portfolio managers will not wait until the first week in December to respond. The market will start to adjust their portfolios in anticipation of a tax policy change.

Photo by Carla Osberg Richard Berner and Mickey Levy

When you said Kerry might become “Clintonesque,” remember that in 1993 Clinton wanted to raise tax receipts without raising marginal rates. So he eliminated the taxable maximum in the Hospital Insurance (HI) portion of FICA contributions. Right now the taxable maximum is $87,000—and FICA taxes amount to 7.5 percent for employer and for employee on wages up to that amount. And some people in the Kerry camp have talked about raising and then eventually eliminating the tax max on the old age and survivors insurance and disability insurance portions, which for households with wages above $87,000 would mean a non-deductible increase in taxes. These higher taxes would have dramatic negative impacts on the economy.

Regarding trade, the one thing I would notice about Kerry is his advisors are making him smarter, whereas six months ago he made protectionist statements about trade. Since then, president Bush floated some initiatives to block trade—the steel tariffs and quotas on textiles with China. And I think everybody has learned from those mistakes, so now Kerry is quiet about trade, despite his protectionist leanings.

But I agree with Jim that this is a critically important election for economic policy. We all have to look at Congress and see what happens. Do we move toward a stalemate or do we move toward something else?

Richard Berner: Regardless of who is elected to the White House you're not going to see a lot of changes in economic policy quickly. If George Bush is reelected I don't think he's going to get his tax cuts made permanent. And if John Kerry is elected I don't think he's going to raise taxes significantly because I think both will be a product of the circumstances.

The circumstances are that while cyclically our budget situation doesn't look bad right now, I think in a few years, if real interest rates go up, people will think twice about where the budget situation is going. I thought hard about what might be the catalyst for us to do something about the budget situation that we face, not just in the next couple of years but over the next 15 or 20 or 30 years. The answer is I really can't come up with an answer.

I actually think the election in the Senate is much more important than the election for the White House. If we have a Democratic Senate, then I think you will get gridlock in Washington if George Bush is reelected. Whereas if the Republicans retain control of the Senate then I think that will give you different outcomes.

And last, what's fascinating to me is that in the wake of the corporate governance scandals of the past couple of years, we've seen a re-regulation of corporate America that has been almost breathtaking in its scope. You're going to start to see some of the features of the Sarbanes-Oxley Act that have yet to be implemented come to the fore. For example, the requirement that auditors attest to financial and other controls in each company will become a requirement in the next year or so. That could be pretty onerous for most of the CFO community.

That re-regulation has come with all three branches of government, both Houses and the White House, under the control of the Republicans. It strikes me that it's a product of the circumstances rather than of who's in control politically. And my guess is that the pendulum, which has swung toward re-regulation, is going to take at least three or four years to swing back to neutral.