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- What are the economic implications of the presidential
election dispute?
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- During the confusion, the stock market has been a fascinating
bellwether for which candidate traders think is better for prosperity.
A casual glance at the charts shows that when Gore's prospects sink and
Bush's rise, the market takes off. When a news item seems to even-up the
odds, the market tanks. Anyone watching this should dread the prospect
of Gore rule.
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- But new economic reports have further increased the stakes.
The
economy is still growing, but government data releases show it grew
at
2.4 percent from July to September, which is the slowest quarterly growth
rate in four years. Does this signal the onset of recession or just a
temporary
breather from unprecedented growth rates?
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- No one knows for
sure, because the data of history reveal
nothing about the shape of the
future. But a recession that begins now
could complicate the picture
for a Bush administration. Bush's father was
rejected for a second term
in the midst of a recession. Later data indicated
that the recovery
stage had already begun that fall and was only inherited
by his
successor. Now, Bush the son might face the unhappy irony of inheriting
Clinton's recession.
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- But there are ways for the next president to shorten
a recession if one is coming. They all involve decreasing the role of
government
in the economy, a task which neither prospective president
backed with
conviction during the campaign.
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- Already, the talking heads are
mixed up about what slower
rates ultimately mean. For example, they
point to a relatively low inflation
rate to argue that diminished
economic growth has put less "pressure
on prices." In fact,
there is no direct causal relationship between
the two trends, despite
the pronouncements of Alan Greenspan and the other
Keynesians still
roaming the bureaucracies.
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- In the long run, you can't control prices by controlling
the pace of economic growth -- otherwise there would be no such thing as
the inflationary recessions we saw in the 1970s and '80s. Low inflation
can be the result of genuine economic growth, as higher output based on
a solid foundation increases the purchasing power of money. On the other
hand, an economic boom and higher inflation can occur simultaneously when
the Fed monkeys with the interest rate and expands credit with newly
created
money.
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- Let us hear no more, then, about how lower growth rates
are
yielding lower inflation rates. The policy implications of this spurious
idea are scary indeed. They suggest that the government ought to
deliberately
drive down economic growth, under the ahistorical and just
plain wrong
idea that you cannot combine lower inflation with high
growth.
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- If
a recession is on its way, the new administration
can address the
problem by, first, doing no harm. This means that the old
Clintonite
solution of increasing government spending to goose aggregate
demand
must be rejected. Who can forget those early days of 1993 when Clinton
paraded a hundred economists telling him to do exactly that? Thank
goodness
the Congress rejected his spending package.
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- Try to imagine how
Gore, who appears to understand nothing
about economics, would handle a
recession. Like Clinton, he would push
for huge increases in government
spending. This can only make matters worse
by draining resources out of
the productive private sector and into the
wasteful government sector.
Sure, well-connected contractors and interest
groups will get rich, but
only at the expense of the rest of us.
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- Gore is also friendly to the
idea of price controls:
on prescription drugs, on oil, on medical
services and on any other good
that he believes is too expensive or
unfairly distributed. He would continue
the Clinton antitrust legacy,
which is to threaten and bust up any company
that hasn't paid the
Democrats enough money to deserve to be left alone.
His solution to
international trade troubles is to negotiate mutual policies
of
mercantilism. And Kyoto Al's environmental policies would deal a crushing
blow to the rights and living standards of all Americans.
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- All this would make a
coming recession deep and long.
As with the Clinton administration, the
only hope is that the economic
team of a Gore administration would fear
the bond market more than it believes
in its own leftist ideology. Fear
of the markets was a major influence
in keeping Clinton administration
economic policy from being worse.
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- The failsafe remedy for
recessions is to allow them to
run their course. Their very existence
is telling us something important
about the economy: that, thanks to
Federal Reserve policies, an imbalance
exists between the consumption
and production sectors of the economy and
that this imbalance is in
need of a correction. Letting a recession play
itself out works to curb
industries and firms that have expanded too much,
too fast, and puts us
on solid ground for future economic growth.
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- However, there are proactive
measures that a really smart
president and Congress can take. They can
cut the taxes that injure production
the most. That helps keep
resources in the private sector where they do
good. Ending all
antitrust attacks on private industry permits them to
hire and expand
without penalty. Repealing regulations tears down barriers
to new firms
and industries, and allows consumers and producers to trade
without
reprisal from the state.
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- What is the proper monetary policy for dealing with a
recession? Keep the money supply stable and don't attempt to bail out the
stock market or the financial sector. Permit interest rates to reach their
natural market level. Reject the Japanese method of funneling money to
the sectors in the most trouble. The Fed should approach a recession with
an aloof attitude and resist all political pressures to flood the market
with freshly printed dollars.
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- Neither Bush nor Gore is likely to take this path. But
remember the first rule: Do no harm. In most cases, government is doing
well just to abide by that. In this sense, the confusion over the
presidential
election may be the most bullish sign we've seen in years.
Prosperity and
economic recovery have their greatest friend in free
markets, but their
second greatest friend is paralyzed government.
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