The Politics of Boom



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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