A feeble economy could help make John Kerry president. But then it would suddenly be his economy and his problem. Despite high deficits and low interest rates, both of which provide economic stimulus, this economy is barely treading water. Last month, the best the economy could manage was a paltry 32,000 new jobs. And it's now clear that the jobs created since 2001 pay several thousand dollars less, on average, than the jobs that were destroyed.
The economic growth rate fell to 3 percent in the second quarter. That's not awful, but it's not nearly as good as the growth rate of the boom years of the 1990s. And given the almost unprecedented combination of huge fiscal stimulus (large deficits) and equally huge monetary stimulus (very low interest rates) the economy ought to be doing much better.
Why isn't it? Several reasons.
The first problem is purchasing power. With less real money going to working families, people are buying less at the stores. That, of course, slows down the economy.
Second, the trade deficit keeps going up and economic activity keeps moving overseas. That means that a lot of American purchasing power goes to create jobs and economic activity outside the United States. Yes, foreign consumers do buy products from us, but the trade deficit reflects the fact that we import hundreds of billions of dollars more products every year than we export.
Third, George W. Bush's deficit is a lot less effective than it might have been. It's mainly the result of tax breaks for the wealthiest Americans -- a strategy that creates relatively few jobs. If that money had gone more to working families or to strapped state and local governments that are cutting back services and laying off workers, it would have been a better economic tonic.
A fourth reason is the rising price of oil, which operates as a kind of tax on economic activity. Though it's often missed, there's a connection between oil prices and budget policy. When deficits are huge, foreigners lose confidence in the dollar. A cheap dollar costs oil-exporting countries money, because oil exports are priced in dollars. Oil exporters make up their loss by raising the dollar price of oil. (European consumers have not suffered at the gas pump, since their oil is priced in euros and the euro has risen about 40 percent against the dollar.)
All of this is likely to get worse before it gets better. You can't run immense deficits forever without real damage, and the Federal Reserve is also beginning to raise interest rates. In the short run, smaller deficits and higher interest rates will both slow growth.
The situation in January 2005, despite superficial similarities, will not be like the one that Bill Clinton inherited in January 1993. At that time, there was also a relatively jobless recovery and a legacy of big deficits. But in 1993, interest rates were much higher. Clinton was able to strike an implicit bargain with the Federal Reserve and the money markets, trading deficit reductions for lower interest rates -- and gunning the economy. Today, however, rates have no place to go but up.
So what could Kerry possibly do?
For starters, he could reverse the composition of the budget deficit -- and provide more money for public services and for working families and less for the very wealthy. That would be a more effective stimulus. As I've written in a previous column, he could bring down the deficit by more aggressive tax enforcement directed against offshore corporations and high-income tax cheats.
Second, Kerry could think even more boldly about energy independence. Major public investment in the next generation of clean energy technology would be a three-fer. It would reduce the dependence on foreign oil and thereby reduce the trade deficit. It would reduce the prices that consumers pay for energy, and could create potentially millions of well-paid domestic jobs in a new, dynamic industry.
Third, Kerry could pursue policies to raise the earnings of working families, through more legal protection of the right to unionize and higher minimum wages and work supports such as childcare.
The effect of wrongheaded economic policies is only now being felt, and things will probably get worse before they get better. That reality may be good news for John Kerry on Election Day. But if frustrated citizens do vote to throw the rascals out, Kerry will have a lot of heavy lifting to do beginning the morning after -- or he, too, will face the retribution of unhappy voters.
Robert Kuttner is co-editor of The American Prospect. This column originally appeared in The Boston Globe.
