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After the election, expect an economic showdown

By Ron SchererStaff writer of The Christian Science Monitor / October 31, 1988



New York

No matter who takes over the White House, it is likely he will find himself on a collision course with the Federal Reserve Board over how fast the economy should grow. The next president, with the looming budget deficit on his mind, will want to see the economy grow at a healthy clip to boost government revenues.

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Fed chairman Alan Greenspan, meanwhile, has been trying to keep the economy from boiling over into an inflationary froth.

``In the hardball of budget reduction, the only tool for a home run is the economy,'' explains Deborah Steelman, a domestic policy adviser to George Bush.

``Michael Dukakis has a program to stimulate the economy, and Alan Greenspan won't step on that if Michael Dukakis is president,'' says Rob Shapiro, a domestic issues adviser for Dukakis.

``At this juncture [Fed policy] will err more in the line of restrictiveness than stimulus,'' Mr. Greenspan told Congress this summer.

Clearly, the winner of the election will need to have a little chat with the Fed chairman.

Lyle Gramley, a former Fed governor, notes it is traditional for the president-elect to ask for such a meeting. ``The new president can make it a high order to get together to let their hair down,'' says Mr. Gramley, chief economist for the Mortgage Bankers Association.

When they meet, the president-elect may well find himself getting a haircut. Greenspan, in his testimony before Congress, has made it clear that he considers the goal for long-term economic growth to be no more than 2 to 2 percent per year in real terms.

To enforce that view the Fed has raised the discount rate, the rate it charges member banks to borrow money. The discount rate, in turn, has pushed up other market interest rates.

As the Fed chairman is likely to point out to the new president, the unemployment rate is only a little more than 5 percent. The nation's factories are operating at near peak capacity. The labor force is growing each year at 1.5 percent, and productivity is ticking up at 1.2 percent. Thus, if policy makers can keep the economy on a stable footing, this allows only 2 to 2.5 percent annual growth.

``It's not that Mr. Greenspan would object to faster growth,'' Gramley says, ``It's just that if we were growing faster, we would blow the economy out of the water.''

For the candidates' part, optimism in the face of an election is not unusual.

``Historically, the performance of the economy has fallen short of the candidates' expectations,'' says Donald Strazheim, chief economist at Merrill Lynch & Co. A Merrill Lynch analysis of the economic assumptions of the presidents finds ``outyear'' estimates (projections made for three or four years down the road) are far too optimistic. ``They see blue sky forever,'' Mr. Strazheim says.

For example, in 1975 Gerald Ford projected 4.8 to 6.5 percent annual real growth through to 1980. The reality was growth of 5.3 percent in 1978 to a recession in 1980. Jimmy Carter and Ronald Reagan were likewise overly optimistic.

The current economic reality of slower growth will soon hit whoever sits in the Oval Office. Last week, the government reported that its overall measure of the economy's growth, the gross national product, grew at a 2.2 percent annual rate for the third quarter. This is below the 3.4 percent the administration projected for the year. The GNP would have been stronger, except for the summer drought.

The need to reduce the federal budget deficit is the main reason behind the candidates' optimistic assumptions. If taxes are not raised and the economy grows at only a 2 percent rate, the president-elect will have to sharpen his budget ax.

A lower economic growth rate will mean the next president has to make $24 billion in budget cuts to meet the Gramm-Rudman deficit-reduction targets for fiscal year 1990, figures Lincoln Anderson, a former Reagan administration official.

The Gramm-Rudman law requires that the deficit be reduced to $110 billion in 1990 from $146 billion next year. On Friday, the government reported that the deficit for fiscal year 1988, which ended Sept. 30, came to $155.1 billion, only $1 billion over the target.

``The bottom line is that there are going to be reductions in current services,'' says Mr. Anderson, an economist at the Wall Street firm Bear, Stearns & Co.

Advisers from both candidates say they expect to work with Fed chairman Greenspan. Nicholas Brady, the current Treasury secretary (and reportedly, Bush's choice to continue in the job) already meets regularly with the Fed chief. Mr. Shapiro of the Dukakis campaign expects no problems if the governor wins. Dukakis and Greenspan ``are both smart, hard-working men,'' he says.

But, as both candidates are likely to find out, when there are differences of opinion, the Fed chairman usually wins. ``He has reality on his side,'' Gramley says.