The Economy in Perspective

Economic Trends, November 2004 | Go to article overview

The Economy in Perspective


Off we go (into the wild blue or red yonder) ... We write this page in complete ignorance of the election results; ballots will not even be cast for another few days. Will the outcome matter for the economy? Of course it will. Presidents can influence legislation whether their party controls the Congress or not. Through control over the executive branch's administrative machinery, presidents also have considerable power to influence how laws are implemented on a daily basis. Laws and regulations affect so many aspects of commerce that it would be a mistake to think that presidential politics do not affect the pattern of economic activity.

But it would also be a mistake to attribute too much to presidential decisions. First, we Americans have taken comfort in the center of political and economic thinking for quite some time, and we get nervous when presidents want to lead us away from that zone for any extended time. Consequently, they do not. Second, out large, complex economy is difficult to fine-tune through policy actions alone. Laws and regulations affect certain features of out economy, but they often carry unintended consequences that undermine or distort the original objectives. Sustained macroeconomic performance, manifested in per capita income over time, has less to do with presidential decisions than with out country's support for strong property rights, deep capital markets, labor market flexibility, education, and innovation.

Nevertheless, the cumulative effects of presidential and congressional decisions, spanning political parties and ideology, inevitably affect out economy's evolution and performance. The federal government's involvement with retirement saving (through Social Security) and health care (through Medicare and Medicaid), as well as the tax treatments that apply to these activities, undoubtedly influence the private decisions of millions in regard to their own retirement and health care plans. We know that the demand for richer pensions and better health care is essentially infinite, and without program reforms of some kind, these pressures threaten to push the Treasury beyond its capacity to satisfy the claims of all participants. With the impending retirement of the baby boomers and their attendant medical needs in old age, the nation urgently needs solutions.

The retirement question comes down to how much people should save voluntarily for their own future, versus how much they should rely on a federal pension. …

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