The new economic profligacy

For decades America ran huge budget deficits, only balancing the books in the last two years of the most astonishing economic boom on record. Now the two presidential candidates are rubbing their hands at the prospect of spending huge projected surpluses. They should be planning to meet the country’s real long-term financial challenges, rather than frittering the bounty away in popular tax cuts and spending. The age of sound economic leadership in the US may be about to come to an end. Antony Currie reports

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Judging by the direction of this year's US presidential election campaign, the name of James Carville is already little more than an historical footnote. Carville, for those whose memories need refreshing, was the campaign manager of Arkansas governor Bill Clinton's bid for the White House in 1992. He it was who thought up one of the most famous election slogans, just eight syllables long: "It's the economy, stupid." It was one of the three themes he deemed so crucial that he had them written up on a whiteboard and stuck on a pillar in the centre of the campaign headquarters for all to see. The other two, incidentally, were "Change vs more of the same," and "Don't forget healthcare".
No one will forget healthcare - it was an early, and damaging defeat for president Clinton, who certainly was a change from Bush and Reagan, although not always in the manner voters had hoped. But the mantra of "it's the economy, stupid" served Clinton well. So much so, in fact, that the man who takes over the White House in January has a potentially huge opportunity to forge a new path for the US.
He will inherit the strongest economy the US has ever seen, one which has been growing without interruption for eight years, and for the last four years at a rate of 4% or more.

More than 50% of the working population now owns stocks, or has a direct say in their investments through defined contribution plans, 401(k) plans, IRA accounts, mutual funds and brokerage accounts. Consumer spending has been robust, yet inflation has stayed low, and the Federal Reserve has withheld from intervening in the growth of the economy until the last 15 months, and then only with small, incremental interest rate increases which oVer hope that a period of unprecedented growth can be steered into a soft landing.
That's the good news. The bad news is that there is every chance that whoever does win on November 7 will squander this enviable inheritance. Both main candidates give the impression that they have consigned Carville's succinct prognosis to history. Yet it is still at least as relevant today as it was then, albeit with a different twist. This time it is not that people are disaffected by a poorly performing economy burdened by mistakes of the past, as in 1992. Instead it should serve as a warning to be mindful of the effect of their pledges on the economy and Finances of the future.







Greenspan: to go in 2002?

The problem lies in what is being touted as the biggest prize for the new president, the projected budget surplus. The Congressional Budget Office (CBO) has estimated that the surplus will range from $4.5 trillion to $5.8 trillion over the next 10 years, depending on which calculation method is used. Showing their conservative bent, candidates are basing their plans off the lower Figure. $2.3 trillion has been set aside for the social security trust fund, and dubbed the off-budget surplus. That leaves $2.2 trillion for the next president to toy with from what is now called the on-budget surplus.
It is a very unusual circumstance for a presidential candidate to be in, as the federal government has not had a surplus since the mid-1960s, before the escalation of the Vietnam war plunged the US into a near-20-year economic crisis. Reaganomics cut taxes but increased spending leading to an annual budget deficit of $300 billion a year by 1992.
Unsurprisingly, the candidates are falling over themselves to spend the surplus in ways that appeal to their core voters.
Unfortunately, their plans are predictable, falling back on traditional party-political agendas. Policy wonks on both sides have worked out their spending plans in reasonable detail. What's missing, and what's needed, is a clearer vision for how to lead the American economy through this period of bounty without endangering it, and for planning today how to pay bills that will fall due far in the future.
A more immediate danger is that both candidates' economic policies are founded on the assumption that the CBO's forecast is correct, and indeed the right measure, which is by no means certain.
Everyone appears to agree that it is not in the country's best interests to keep a huge surplus on the books. Even back in 1998, when a balanced budget still appeared to be a few years away, the then chair of president Clinton's National Economic Advisory Council, Janet Yellen, was telling economists that.
John Cogan, who is a senior fellow at the Hoover Institution, as well as an economic advisor for Republican candidate George W Bush, oVers a similar thesis about the desire for government to overspend . "An iron law of American politics is once taxpayer money comes into the Treasury, the legislature will spend it. Recent experience has reconfirmed this law. At the federal level, in response to the surge in federal revenues during the last few years, Congress and president Clinton have repudiated the budget caps they agreed to in 1997. The result has been the largest growth in federal appropriations since president Carter's term in Office."
So the presidential candidates are promising to spend trillions of dollars that do not yet exist, based on a forecast by an organization, the CBO, which has a terrible record for accuracy, on largely unimaginative schemes. "My worry is that the surplus burns a hole in the new administration's back pocket," says Bill Dudley, an analyst at Goldman Sachs who at the start of August issued a report with his colleagues, Bush versus Gore: A budget referendum. "There is a big risk of blowing the money in ways that are simply not appealing."
Whoever wins will want to make an impact as soon as possible. The perception of having a large surplus could also affect the dynamics of Congress, says Dudley. "The surplus appears to be so big that the mechanics of gridlock don't work as effectively as they did before."
Gridlock essentially means when one party controls Congress (as the Republicans have since 1995) and the other holds the presidency. As a result, says Dudley, "we could get both tax cuts and increased spending."
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The new economic profligacy

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