A market analyst sizes up effects of Nov. 4 outcome
Boston — The Washington political analyst of Smith Barney, Harris Upham & Co., Jeffrey M. Applegate, has produced what he calls "an electionomics primer." It concludes: "On balance, the short-term impact of the election outcome on the economy, and general fiscal policy in particular, is likely to be negligible."
In other words, it won't make much difference to the economy in the short run whether President Carter is re-elected or whether he is upset by Ronald Reagan.
Right now, for instance, most economists are predicting a modest recovery for the United States in 1981 wiht continued high inflation. For instance, some 40 economists surveyed by Blue Chip Economic Indicators, Sedona, Ariz., figure on average that gross national production in constant dollars will grow a lackluster 0.9 percent next year over 1980 and the consumer price index go up 9. 8 percent.
Election of Mr. Reagan might please many conservative stock investors. There is some speculation that market prices would take off in that event. But this is not likely that the election will prompt many economists to alter their economic forecasts.
Mr. Applegate, in his report, first examines the rhetoric of all three candidates on economic issues. Then he attempts to strip away the rhetoric to expose the economic realities behind it. His basic finding is that with the division of powers in the US government among the presidency, Congress, and the courts, plus the need for politicians to reflect slowly changing public opinion, any change will be evolutionary, not revolutionary. Here's his analysis of several areas.
Tax policy: "There is no chance that scheduled tax increases for this fiscal year will be fully offset by tax cuts. Rather, there will probably be a downward adjustment in the size of that tax cut to somewhere in a range of $20 to $30 billion."
Social security taxes go up Jan. 1. Also, inflation is pushing individuals into higher tax brackets. These add up to more than $30 billion.
Mr. applegate says that likely tax changes include accelerated depreciation, a capital gains tax cut, and reductions in marginal personal income tax rates. Congress could also decide to encourage savings with more tax incentives. Indexing of taxes to eliminate the impact of inflation remains improbable.
However, the Washington analyst doest figure that the precise form, timing, and magnitued of the tax bill will depend somewhat on whether Mr. Carter or Mr. Reagan is in the White House -- and on the state of the economy next year.
Budgetary policy: The nominal rate of increase in federal spending (in current dollar terms) will continue to be slower than the nominal rate of growth in gross national product (total output of goods and services). All candidates talk about the need for spending restraint. Defense outlays should continue to grow in real terms (constant dollars), probably 2 or 3 percent per year. Both the MX missile and a new bomber seem likely.
"Actual federal spending reductions, however, and a balanced budget could remain is elusive as ever," Mr. applegate adds.
Further, either Carter or Reagan will have to deal with financial strains in the social security system.
Monetary policy: Mr. Reagan has vaguely called for "stable" money supply growth. President Carter and other administration officials have criticized the Federal Reserve System for sticking too closely to current monetary targets in the short term, though not attacking those targets on a long-term basis. Mr. Applegate finds a "regrettable lacuna," or gap, in the candidates' positions in this area. They aren't at all exact in their monetary positions.
"Suffice, it to say that all of the candidates are, in varying degrees -- via continues increases in federal spending, faster growth in those outlays, or tax cuts -- on a collision course with the Federal Reserve," he says.
On other words, both Mr. Carter and Mr. Reagan will want to promote economic growth. But tax cuts will mean larger deficits.And any administration will want those deficits financed in part by the creation of new money by the Fed. Since the autonomous but not fully independent Fed will want to emphasize price stability, it could clash with the president as he seeks growth.
White House insiders maintain that President Carter's economic officials, including the Council of Economic advisors chairman, Charles L. Schultze, have become much more monetarist after their mistaken attempt to push growth too fast after the 1973-75 recession. They are more concerned with stable and modest growth, in the money supply. However, Mr. Schultze is expected to resign even if Mr. carter is re-elected, and it is not yet known who his new advisers will be. Mr. Reagan's economic advisers have a reputation for being relatively stern in monetary policy.
Incomes policy: The present wage- price standards program will continue only in the event of Carter's re-election. Even then, it could be dismantled, says Mr. Applegate. The Carter administration has been talking of using tax incentives to restrain prices and wages. But Mr. Applegate figures this has little change of congressional approval.
Industrial policy: Apart from faster depreciation, this entire policy area could turn out to be "a relative nonstarter," Mr. Applegate reckons. Congress might approve some tax incentives for companies locating plants in depressed areas. But these might not turn out to be very meaningful, he says.
Longer-run, a determined president can make a modest difference in federal spending policy. That in turn could reduce the deficit and help the Fed to control the money supply with greater ease and lower interest rates. But no president will cure inflation lightly or quickly.