Barring a major terrorist incident, this election may turn on citizens’ perceptions of their economic circumstances. Not surprisingly, both sides spin each new government statistic. Republicans point to expansion across all job categories. Democrats counter that current job growth pales in comparison to previous recoveries.

Yet the deeper question is whether this expansion is sustainable. Today’s economy rests on speculative housing, labor and international currency markets. John Kerry’s success may depend on his ability both to articulate underlying insecurities and to project a response more compelling than any presented by Bush – or even by President Clinton.

Democrats brag that Bill Clinton’s courage in cutting spending engineered a fiscal surplus and allowed the Federal Reserve to reduce interest rates. Low interest rates encouraged business investment and job creation. Bush, how-ever, has squandered the surplus on tax cuts for the wealthy, thereby slowing economic growth.

This story is at best misleading. Incomes for poor and working-class Americans picked up only during the final two years of Clinton’s presidency. That brief boom was based on speculation in stocks, especially high-tech firms that boosted the average price to earnings ratio from the historic norm of 15 to 1 to 30 to 1. Increasing stock prices encouraged high-tech firms to issue new stock and expand. Many middle-class professionals felt newly wealthy and spent accordingly.

Neither Clinton nor the Fed ever discouraged this irresponsible ride. Eventually, massive overcapacity in high-tech and grossly inflated profit expectations led to an inevitable collapse. Reductions in consumer spending, decreasing government revenues – especially from capital gains taxation – and growing unemployment followed.

Bush’s tax cuts have been a partial but inadequate answer. The wealthy spend less of any tax cut than do poor and working-class citizens. Cuts in dividend taxation have done little for the overall stock market.

Some of the money fleeing the stock market went into speculation in the housing market. Real estate trusts, time-shares, new office complexes, vacation homes and housing expansions all became as much investment vehicles as useable assets. Dean Baker, one of the few economists warning in the late 1990s about the stock bubble, reports that the rise in home prices since 1995 has outpaced the overall rate of inflation by more than 40 percentage points. “This sort of run-up in home prices has no precedent,” he says. New England at 60 percent and Maine itself at 44 percent have both exceeded even this average.

With the equity in their homes increasing, many citizens have borrowed larger amounts relative to their income for further consumption. Without these loans even this modest recovery would stall. Yet as they borrow more, their job picture remains insecure. Economists lack good data on outsourcing of middle- class professional jobs and the problem may be exaggerated. Nonetheless, job loss is no longer confined to manufacturing and the threat to outsource can do as much as the deed itself. The Bureau of Labor Statistics reports that 60 percent of recently displaced workers found jobs less remunerative than their previous work, as compared with 47 percent a decade earlier.

Thus, many middle-class Americans are mortgaged to the hilt and heavily dependent on jobs vulnerable to outsourcing threats or technological obsolescence. Their homes and health care could be wiped out by slight declines in real estate markets or job losses.

The U.S. economy itself may be dependent on unsustainable values of the dollar in international currency markets. U.S. consumers buy more foreign goods than foreigners buy of our goods. These trends too are getting worse. At some point foreign central banks are sure to become skeptical about the worth of our currency and start selling dollars, depressing their value. The cost of imported commodities would then rise. Inflation and foreign currency crises could burst the housing bubble or the housing bubble itself could evoke concerns from foreign central banks.

John Kerry cannot effectively address working- and middle-class insecurities and the dynamic that feeds them merely by campaigning against federal deficits or appealing to the Clinton legacy. His commitment to spend some of the sums recouped by taxing incomes in excess of $200,000 for job retraining is a step in the right direction. But retraining is hardly cost effective or politically palatable without jobs at the end of the rainbow.

Kerry has proposed spending $30 billion over 10 years on alternative energy and mass transit, but this amounts to only about 2 percent of the annual cost of imported oil. A more ambitious program, combining tax credits, capital and operating subsidies for trains and public transit, and new Rand D initiatives, could lower the average middle-class citizen’s home heating and transportation costs, reduce dependence on foreign oil, and make U.S. manufacturing more competitive.

Federal deficits for such purposes amidst our current economic sluggishness are both productive and politically defensible. John Kerry’s political future may depend on his willingness to match the boldness of his vision to the depth and extent of current insecurity.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net