November 11, 2000
As much of the country was fascinated by voting in Florida (any system that gets different results every time you count needs to be changed), I was appalled. As an economic forecaster, I am asked to present my best assumptions about economic conditions in the next two years.
Of course, it would be easy to assume that the presidential election does not matter, but I already have written that it does. Economic policies are initiated by the president, and those policies are important. So what is a forecaster supposed to do when we do not know who the president is.
The first step is to try to guess who might prevail. Although another count may generate another result, Governor Bush has won or is leading in enough states to win enough electoral votes to become president as this column is written. Furthermore, the officials in Florida responsible for certifying that election and the Congress that will accept the will of the electors all are from Governor Bush's party. Therefore, I have assumed that Bush will be President.
However, this does not mean that President Bush's program will become law. After John Kennedy won the presidency with a razor thin majority in 1960, he spent the next two years convincing the American people that his program was needed. Only after the Congressional elections of 1962 seemed to confirm his efforts did he begin to get legislation enacted.
The Republicans rule Congress, although the health of several senators might change the composition of the Senate before the next election. Therefore, they could force through a Bush program. If the American public views that tactic as unfair (and they probably would), then Republican members of Congress will face serious problems in 2002.
Indeed, Congress member Kasich, chairman of the House Budget Committee, indicated that an across the board tax cut would be difficult when he spoke on election night. That was even before the closeness of the vote was so apparent.
Therefore, most of the changes in 2001 policy will be slight and reflect bipartisan support. The estate tax will not be repealed, as Bush wished, but the exclusion may be raised immediately to $1.3 million and then be indexed for inflation. Adjustments will be made to the income tax to insure that marital status has a reduced impact upon tax burdens.
The tax deferred limits for IRAs probably will be raised to $5000 and the Keogh limit also probably will be raised. A Gore proposal, the permanency of the research and development text credit, also may be enacted.
A prescription drug program administered by private insurance companies is more likely than an additional medicare benefit, although bipartisan support could diminish here. The private investment of a portion of the social security tax burden almost certainly will not be approved.
Spending for defense will rise (something that could be assumed regardless of the election's outcome), but other spending initiatives, including further minimum wage changes, are not very likely. Perhaps some education related programs emanating from Washington may occur, but a Bush administration will, at most, send block grants to the states to encourage changed behavior in public schools. Vouchers failed in voter initiatives and will not be pursued by Washington.
The combination of all these changes may whittle the surplus down to about $200 billion from the $237 billion that occurred this year. However, more than $160 billion will be used to reduce debt while it is measured as a contribution to social security. The remaining $40 billion also will be used to pay down debt but will be viewed as a surplus to justify further tax initiatives in 2002.
Now, if all these assumptions are correct, (unlikely but what other assumptions should be made), what will this policy do to the economy.
First, Alan Greenspan will be satisfied with these conditions. He would not be thrilled by a large reduction in taxes or the long-term revenue loss that a repeal of estate taxes would generate, but they will not happen. This means the Federal Reserve will not increase interest rate targets and might even lower them if financial deterioration persists. The most likely case is that no changes in interest rate targets will occur.
Second, long term interest rates may actually fall slightly. If Bush had a mandate to distribute the surplus to households, interest rates probably would rise. These lower rates will stabilize housing near current construction levels, encourage commercial construction, and improve the ability to finance capital expenditures. As a result, productivity gains will remain relatively strong.
Third, the new people in the executive branch will be less prone to encourage regulatory restraint and anti-trust policy. Indeed, this probably will be the largest change. This might partially offset inflationary pressures being created from higher wage costs.
In summary, most of the policies on which the current economy has thrived will continue, at least until a Bush mandate can be developed. As this is good for the type of economy we currently enjoy, investors may see some price improvement in their financial assets. In short, a slower and slightly more inflation prone economy will develop but one that remains reasonably healthy. At least that is what I am telling my audiences until I get more direction from the policies of the new administration.