The Politics Of Boom Essays - Public Finance, Fiscal Policy

The Politics Of Boom ? 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 candidates positions on some of the major issues dealing with the economy. Mainly, the article centers around the federal budget surplus and tax cuts. This years 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 chairs term can be renewed as Allen Greenspans 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 Gores 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 1990s 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