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BankRI, Lardaro on the Economy Series
October 2004

As we move into the final stretch of the presidential campaign, there is a great deal of debate about the economic visions and plans of both candidates. How will each deal with job growth? What about taxes? How large are deficits likely to be over the next four years with each candidate?
What has become all too clear at this point is how neither candidate is spelling out visions or plans with enough detail for us to judge them accurately. For example, we hear about plans to raise or lower taxes. But, which taxes? By how much? When? What is the “fine print” for each proposed tax change? And, even if a president were to propose tax changes with the specificity added, we are living in a very divided country. What will pass through the House and Senate? Will what ultimately arrives at the President’s desk bear much resemblance to what he intended?

While we do hear about projected budget deficits over the next several years for various proposals, are these projections based on accurate inputs of what the legislation that passes will ultimately contain? Ironically, I must point out that budget projections are probably the least accurate of any economic forecasts. Where weather forecasters receive awards for 30 percent accuracy, a 30-percent accuracy rate for a budget forecaster would be beyond even his or her wildest dreams!

Actually, this lack of specifics probably doesn’t matter as much as you might think. Why? Because, contrary to public wisdom, presidents don’t wield anywhere near as much power in the short-term as is commonly presumed. Surely, there are exceptions, like in the early 1970s when then President Nixon imposed wage and price controls. But generally, presidents tend to exert economic power over longer time horizons. In the short-term, THE most powerful economic figure is the Chairman of the Federal Reserve. Mere words by the Fed Chairman can and have moved world markets immediately (remember the “irrational exuberance” comment by Alan Greenspan several years ago?). And, in spite of what some candidates have recently stated, interest rate changes are largely determined by the Federal Reserve, not by fiscal policy changes (such as tax cuts).

As the world economy has become more globally integrated, and as we continue to make our way in a post-manufacturing economy, both monetary and fiscal policy have lost some of the potency each possessed in years past. Along with this, we have become less able to accurately measure key variables on a timely basis (remember the flaps about job changes that were later revised?) or to accurately project the effects of various budget changes. So, perhaps judging each candidate and ultimately the outcome of this election is more about character than is commonly believed. Not their character – ours!


by Leonard Lardaro

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