November 5, 2000
Modern history confirms that the United States suffers a recession within two years of voting in a new Republican President. Although the pedigree stretches back as far as Richard Nixon in 1969, this became more evident from Reagan onwards.
It is all the more unusual when you consider that Republicans, like the Tories in Britain, portray themselves as no-nonsense economic virtuosos, free of the ‘tax-and-spend’ social baggage of the Democrats.
The reason for this politically-inspired post-election slump is clear. Republicans’ campaign rhetoric is typically laced with invective about big government. When Republicans get into power, they are compelled to cut government spending to prove their credentials. Aggressive cutting of expenditure tends to cause the economy to shrink.
However, this pattern presupposes that the Democrats have left behind a fiscal mess that requires cleaning up. Otherwise, against the background of a booming economy, it is generally assumed that a Democratic contender cannot lose.
This election turns both these assumptions on their heads. The Democrat, Al Gore, should have it wrapped up in light of the supportive economic tailwind. Yet he is struggling against the same Republican policy cocktail that ensured Bob Dole was a lame duck last time round. As Clinton’s America boomed back in 1996, the Republicans — in an effort to differentiate their product — came up with the idea of huge tax cuts for all. This went down like a lead balloon, neither credible nor particularly appealing.
So why is Gore struggling in 2000? Why is George W Bush’s tax cut idea much more popular now and, if Bush wins, what will happen to the US economy?
The main reason Gore is struggling is that no one credits Clinton and Gore with the boom of the 1990s. Americans have bought the story, peddled by Republicans, that the US economic miracle of the 1990s has nothing to do with the Clinton/Gore administration and everything to do with the Federal Reserve and Alan Greenspan. Republicans contend that politicians have nothing to do with the success of the economy.
This would be credible if it was not for the fact that the same Republican camp gives all the credit for the 1980s boom to Ronald Reagan. If it isn’t Clinton’s boom now, how could it have been Reagan’s boom in the 1980s?
Despite this comical inconsistency at the heart of Republican mythology, the American public does not give Gore any economic brownie points.
The popularity of Bush’s tax-cutting plan is more perplexing. It may be best explained by the fact that as the numbers get really big, the public’s eyes glaze over. Bush talks about a trillion dollars here, a trillion dollars there in tax-cutting packages. He has also promised huge expansion of the military.
He seems to believe that he can cut taxes and increase spending without the US budget deteriorating. This is only possible if the economy accelerates into perpetuity, which is unlikely.
But people do not care. Bush’s plan to cut taxes is popular because it is straightforward. People are bored by economists blowing holes in politicians’ stories.
Bush’s promises — like his father’s “read my lips, no new taxes” utterance a decade ago — do not stack up, but many people who are now feeling richer just don’t care.
If we fast-forward to next Wednesday morning and imagine Bush has won, what next for the US economy, the dollar and the rest of the world?
Everyone knows that the US is growing at breakneck speed. Although recent numbers point to some weakening, a slowdown could be some way off. If Bush goes ahead with his tax-cutting plans, consumer spending is likely to explode. With America sucking in yet more imports, the current account deficit will rise from today’s amazing $1 billion per day and the consequent likelihood of further increases in interest rates will propel the dollar forward. As the budget slips back into deficit, yet more upward pressure will be exerted on interest rates.
With the economy at full employment, experiencing a tax-cut inspired mini-boom and interest rates notching upwards, productivity (output per head) will have to rise to make the whole adventure sustainable. It is difficult to see how productivity can rise much further in the absence of a significant boost to investment. But investment has been the weakest part of GDP in the past two quarters, which suggests that the high-tech investment boom of the late 1990s may be plateauing out.
Looking forward, the Bush formula with its rising interest rates is likely to be negative for the stock market. Without support from the Dow Jones, companies are unlikely to invest significantly. In this type of scenario, it is difficult to see the US remaining competitive without a serious and sustained fall in the dollar.
Therefore, it is likely that a Bush victory would see the US economy power ahead for maybe another year on the back of tax cuts. By 2002 a sharp slowdown would be almost unavoidable, with serious consequences for the dollar.
It seems that the Republicans are condemned by their own rhetoric. When they inherit a mess, (as Reagan did from Carter and, ironically, Bush senior did from Reagan), the ensuing cuts in public expenditure prompt recessions. When they inherit a smooth-running, well-oiled operation, as George W might next Tuesday, his tax-cutting fetish threatens to derail everything with an unnecessary and dangerous mini-boom. Either way, the Republican reputation for sensible economic management looks undeserved indeed.