The Politics Of Boom Essay, Research Paper

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The Economist published an article on September 30, 2000 entitled “The Politics of

Boom”. This article brings up several issues that we have discussed in Economics 103 this

semester. The article discusses the presidential election and both candidate’s positions on some of

the major issues dealing with the economy. Mainly, the article centers around the federal budget

surplus and tax cuts.

“This year’s presidential election is being fought against the backdrop of an unprecedented

economic boom”. One component of this statement is the unemployment rate at about 4%, which

is close to historic lows. In class, we learned that the different types of unemployment are

frictional (when people quit work to seek more attractive employment), structural (resulting from

technology or geography), and cyclical (associated with the downturn and recession phases of the

business cycle). Also there are underemployed workers who are working at jobs that do not

utilize their productive talents or experience, and discouraged workers who have given up looking

for work after facing many rejections.

The labor force is used in determining the unemployment rate. Those not included in the

labor force are students, retirees, stay at-home parents, people under sixteen years old and people

who are institutionalized. To find the unemployment rate you take the number of workers (labor

force) and subtract discouraged workers. Then you divide the rest of the unemployed by that

number. The natural rate of unemployment (NAIRU- non-accelerating inflation rate of

unemployment) is the rate that is consistent with the rate of inflation.

Also a part of the quotation in paragraph two, is that inflation is still “tame”, though it is

“inching upward”. Inflation is defined as an increase in the price level. Problems with inflation

are distributional effects, transfer payments, pensions, and debtors vs. creditors. Those who lose

form inflation are people living on fixed incomes, landlords, savers, and lenders. Those who gain

from inflation are borrowers and the government. The largest problem with inflation is that a

recession is the only way to combat it. Derived from inflation and unemployment, are

recessionary and inflationary gaps.

Allen Greenspan is mentioned as having played an “enormous role” in the “extraordinary

expansion” that has taken place during the last ten years. He has done this through his

“stewardship” of monetary policy. As chairman of the Federal Reserve or “Fed”, Allen

Greenspan is widely accepted as the most or second-most powerful man in the word. We learned

that there are seven members on the Board of Governors and their terms are 14 years long and

overlapping. Also they are appointed by the President of the United States. The chair, however,

serves terms of four years. The chair’s term can be renewed as Allen Greenspan’s has been and

the term ends during the middle of the Presidential term. As the chairman for the Board of

Governors, Greenspan is also a member of the Federal Open-Market Committee (FOMC).

The article explains that traditionally, a good economy favors political incumbents. Al

Gore’s campaign has focused on continuing the “broad thrust of Clontonian economic policy”, in

particular “prudent” fiscal policy. Fiscal policy is government spending and taxation policy to

achieve macroeconomic goals of full employment without inflation. Fiscal policy is used to close

recessionary and inflationary gaps. The Clinton administration practiced “fiscal tightening” in the

1990’s which they argue has made room for lower interest rates.

Taxes are sometimes used to battle gaps and achieve full employment without inflation.

Currently there is a federal budget surplus. A balanced budget occurs when government spending

equals tax revenues. If tax revenues are less than government spending there is a deficit, and if

tax revenues are greater than government spending there is a surplus. In 1992, the overall federal

budget was in deficit $290 billion which is 4.6% of the Gross Domestic Product (GDP). To battle

that Clinton used tax hikes as a part of his fiscal policy. This year, the budget is expected to see a

surplus of $221 billion which is 2.3% of GDP. Because of this surplus, both candidates are

promising tax cuts. Bush and Gore differ in the types of tax cuts they propose. Also their tax

cuts are aimed at different groups of people.

Larger surpluses are predicted for the future. The latest forecast for the ten-year budget

surplus is $4.19 trillion. Latest administration projections suggest that the on-budget surplus is

expected to reach almost $2.2 trillion over the next decade. This would be an increase of 290%

compared with the February 2000 estimate. These surpluses may never be realized however. It is

uncertain whether America’s recent rise in productivity is here to stay. Also, it is assumed that

there will not be a recession: a phase in the business cycle in which the decline in the economy’s

real GDP persists for at least a half-year. Recessions are marked by high unemployment.

It remains undecided today, nearly a week after the election, whose economic proposals

were favored among the American people. This issue is one where views differ greatly. Fiscal

policy has varied with each president from Reaganomics to the Clintonian economic policy.

Furthermore, taxes are on the mind of everyone who pays them so they have played a very

important role in this election.