Business Environment Forecasting - Reducing the Uncertainty Risk of Corporate Decision-Making

Author: (English) James Morell
Publisher:
Publish Date: 2006-05-01
Features: The U.S. economic policy and political structure maintain a system of checks and balances, where each power institution is independent yet mutually constrained to achieve equilibrium. Legislative power is held by the parliament, while the federal system effectively ensures the interests of regional powers and industrial groups are adequately represented. As the highest executive head, the President's responsibilities include drafting the annual budget proposal and reporting it to the parliament. The budget plans of the House and Senate are prepared independently by each chamber, while the federal budget plan must undergo lengthy negotiations, debates, and revisions before being finally approved by the parliament. Therefore, it is very difficult to pass a fiscal policy aimed at removing all obstacles to economic development. Additionally, we must remember that U.S. state governments also have the power to tax and can independently formulate their own budget plans. In the 1960s, the financial costs of the Vietnam War nearly bankrupted the U.S. economy. People had long believed that the strong U.S. economy had created a great society, one that was materially abundant, capable of providing both guns and butter, and would never face shortages. However, this belief was misplaced. The war's outcome led to a long-term massive trade deficit and a rapid rise in both domestic and international debt. The tax-cutting policies of the 1980s triggered another round of economic overheating, and the U.S. fiscal situation became even worse than during the Vietnam War. At this point, public attitudes shifted. During the 1990s, people tended to adopt more conservative and restrictive policies toward public spending. After some communist regimes evolved peacefully, the corresponding reduction in defense spending helped shrink the U.S. budget deficit. By the early 21st century, data showed that sustained budget surpluses would eventually eliminate the national debt at some point in the future. The benefits of this outcome might include the gradual removal of the burden of interest costs on the annual budget in the future. However, forecasters must heed some cautionary words, noting the political pressures of tax cuts and increased spending on health and education, and maintain a cautious attitude toward future budget changes. From the brief review above, it is clear that fiscal and monetary policies are unlikely to be coordinated. The Federal Reserve must adjust interest rates at appropriate times to address situations where fiscal policy occasionally overrides monetary policy.
The EU The U.S. policy in the 1990s moved toward low budget deficits and low inflation. This was actually part of the overall development direction of the global economy. In Europe, the adoption of the Maastricht Treaty limited EU member states to achieving a series of economic targets, including low budget deficits, low inflation rates, and low interest rates. As we analyzed earlier in this chapter, policies evolve over the long term. Therefore, this low-budget-deficit model may persist for another generation or longer, unless disrupted by a major war. Like the U.S., there is a significant difference between monetary and fiscal policies in the EU. However, the European Central Bank (ECB) is relatively more independent than the Federal Reserve. It has a more specific target for low inflation, but (so far) it is also more secretive about its own calculations, the target for money supply growth, and the target for foreign exchange rates. For the European Central Bank, evaluating the EU's fiscal policy is extremely difficult because the EU is not a federal system. The EU's central budget is small, and its management has little power to influence the policy and development process of the entire EU economy. The EU's independent member states retain the power to formulate their own budgets. Although all member states are bound by the Maastricht Treaty, forecasters still need to analyze each member state individually and make separate predictions. The economic cycles of EU member states are not perfectly synchronized, which is similar to the U.S., where the economies of individual federal states are never perfectly aligned with the national economy in terms of cyclical development. P42-P43