Macroeconomic Forecast

In considering where the American economy is headed over the next 12 months, it is important to remember that the economy is part of the American business environment as a whole, which includes the political system as well as the free market system. Because of this, the economy is subject to the vagaries of the political system, and the fact that 1996 is a presidential election year will have a significant bearing on the direction that the economy takes over the next year. In addition, the Republicans have gained a majority in the Congress, which gives them the ability to pass legislation (although not necessarily the ability to survive a presidential veto). This has greatly shifted the balance of power in the federal government, and has brought about changes to the economy that previously would not have been considered.

There is considerable pressure on the government to balance the budget, and there may be a constitutional amendment passed which would require that the government operate with a permanent injunction against a budget deficit. Such a move would greatly inhibit the government's ability to operate as it has in the past, since that is the situation which has led to the apparent need to reduce, if not eliminate, the federal deficit. There is little doubt that the deficit will be significantly reduced over the next several years since both President Clinton and key leaders of the Congress have made such a reduction a national priority. However, the exact way

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le change in the American culture regarding savings, that is not likely to happen in the near term (Greenspan, 1995, p. 259). Because the Fed has demonstrated that it is uniquely concerned with the inflation rate, it is unlikely that the rate of inflation will increase significantly over the next year. There is pressure to keep inflation down from the president, but Congress also needs to keep inflation in check if it is to continue to push its balanced budget strategy. So long as inflation is low and the economy is operating at a good pace, the government does not need to provide too much additional stimulus through the purchasing of goods and services. If the economy slows down, however, which is unlikely in the next year, the government will be put under pressure to step up its consumption, which would reduce the likelihood that it will be able to arrive at a balanced budget. Because the American system is approaching a major election, it is unlikely that there will be tax increases for most Americans. In fact, both parties have spoken of a middle class tax cut, which would be implemented ostensibly to fuel the economy through supply-side economics, but would have the benefit of currying favor which whoever is associated

Category: Economics - M