A recession was supposed to rescue the Democrats in next
November's midterm election. Even if they had little else, Democratic
strategists expected, they could bash Bush for a weak economy. But the recession
evidently is over almost before it began, and it's not even April. The
unemployment rate has declined for two straight months and may not reach 6
percent. Economic growth has turned positive. Other standard economic indicators
-- inventories, consumer spending, factory orders, and so on -- suggest an
economy in recovery. This surprising turn raises two questions: First, is the
recovery real and durable? And second, what does this do to the Democrats?
Seemingly, they are stuck with an unelected Republican president who had the luck
first to stumble into a security crisis that allowed him to impersonate
Churchill, and then into a quick economic turnaround for which he can credit his
Reaganesque tax cut.
Most economic commentators viewed September 11 as the coup de grâce to
a faltering economy. The dot-com bust already had occurred, and the Federal
Reserve had already overreacted to full employment (peaking at 3.9 percent
joblessness) with several earlier interest-rate hikes. The economy, further, was
already on the downward slope of one of its regular bouts of overbuilding.
September 11 was a shock to consumer confidence, devastating to particular
industries such as tourism and travel. So it looked to be a standard
business-cycle downturn, made worse both by the stock market bubble and by the
blow to consumer confidence -- a longer, deeper recession than usual.
Why, then, the sudden recovery? For one thing, the Fed's shift to very low
interest rates worked. Homeowners refinanced mortgages, and some $50 billion of
the proceeds went to revive consumer spending. Automakers took advantage of cheap
interest rates to offer deals that buyers couldn't refuse. For another, the war
effort provided economic stimulus. Some of the tax cut -- as demanded by
Democrats -- actually went to ordinary consumers. The budget went from surplus to
(Note, incidentally, that all the above is purely Keynesian. You fight a
recession with deficit spending and cheap interest rates to revive consumer
spending. Bush's 2001 upper-bracket tax cut, most of which hasn't taken effect
yet, had little to do with it; his latest tax cut, for business, was only just
enacted. But then consistency has never been the man's problem.)
But is the recovery sustainable and what are its politics?
There are still some nasty overhangs and special circumstances,
which suggest that this economic expansion may be a lot weaker than the boom of
the late 1990s. For one thing, the first quarter of 2002, on which the optimism
is based, was unusual. The winter was the mildest on record. Oil prices and
inflation were very low. A lot of pent-up consumer spending, artificially
suppressed after September 11, was concentrated in early 2002. So the boom could
Corporate earnings, one of the most important indicators of a thriving
economy, are still very depressed (which helps explain the big corporate push for
tax cuts as a kind of bailout). Nor are we entirely finished with the
morning-after headache from the late 1990s. During the stock-bubble years,
several trillion dollars were invested in dubious schemes that will never return
a nickel. According to some calculations, when you net out the positive earnings
of real high-tech companies against the money squandered on empty ventures, the
net return on all technology ventures since 1995 is about zero. And this does not
just describe totally crackpot, capital-consuming start-ups of the sort lampooned
in Doonesbury. It includes major industries.
For instance, tens of billions of dollars' worth of optical fiber laid in the
late 1990s is now "unlit" excess capacity. Very major industries, such as
telecommunications and airlines, are unlikely to turn sustainable profits anytime
soon. Other industries, such as health insurance and hospitals, are squeezed
between the forces of cost containment and consumer indignation. Hotel occupancy
in major cities is still below normal. Air travel has not returned to its
pre-September 11 peak. Commercial real estate is overbuilt and depressed.
Though the stock market had a very impressive bull run in early March, the
costs of irrational exuberance have not been fully paid off. During the 1990s,
the stock market grew at almost four times the growth rate of the real economy.
You might say that the market took in advance its gains for the current decade
and the next one. Even with the correction from its earlier peaks, the stock
market is very overvalued relative to actual corporate earnings or any reasonable
prospect of future earnings. To the extent that people felt rich in the 1990s
because of paper gains in the stock market, and spent more freely, that source of
economic stimulus is nearly tapped out. Consumer debt is at near-record levels,
and consumer savings is about zero.
It's also not clear how many more Enrons there are to depress investor
confidence. In an exhaustive study, David Levy of the Jerome Levy Forecasting
Center has calculated that the Standard and Poor's 500 large corporations
systematically overstated earnings in auditor-approved annual reports over two
decades, by something like 20 percent. This provides further evidence for the
likelihood that the stock market remains overvalued and is unlikely to repeat its
performance of the 1990s.
So this could well be a "double-dip" recession, like five of the last seven
downturns -- with one or two quarters of growth, a recovery that peters out, and
then recession again. In some respects, this recovery is reminiscent of the one
that undid George Bush the First. Technically, the economy came out of recession
in late 1991. But the growth rate was unimpressive, and by November 1992 a lot of
voters still felt that their personal recession was not over.
Which brings us back to the Democrats. When it comes to the way
economies influence elections, what matters less is the average public impact
than the concrete effect on particular publics. Indeed, if the news declares the
recession over and your personal situation is gloomy, it's a double insult. And
because of the peculiarly skewed nature of the Bush economic program -- in case
you were taken in by the rhetoric, the program benefits rich people -- no
foreseeable recovery is likely to do much for core Democratic constituencies. A
lot of swing constituencies are up for grabs, too.
Take, for example, wage workers. Unemployment may stay in the 5 percent to
6 percent range if Bush lucks out, but that's not sufficient to create the kind
of tight labor markets that yield raises, especially at the bottom. Only in the
last two years of the late economic boom, when unemployment was around 4 percent,
did real gains start accruing to lower-wage workers. Moreover, the unemployment
rate has stayed moderate only because more than a million people have exited the
job market. The economy shed more than manufacturing jobs during the supposedly
shallow recession, and many of these may never return.
And it's not just any wage workers who are hurting. The minority unemployment
rate rose fastest. Immigrants are also often the last hired and first fired. And
new entrants to the workforce, whether college grads or not, are finding fewer
opportunities this year.
Or consider the elderly. The combination of low interest rates, a very low
dividend payout rate, and a relatively flat stock market leaves seniors with
depressed purchasing power. Add soaring drug prices and escalating costs of
supplemental health insurance and you appreciate why older Americans are
financially stressed, whether the economy is nominally in recovery or not.
Working parents face a similar dilemma. For those not in the nanny class, good
day care is costly and hard to find. Outside the middle class, more former
welfare recipients are losing jobs, reversing the decline in welfare spending,
and leaving states with less money to spend on child care. Workers in other
occupations related to public outlay -- teachers, nurses, social workers,
direct-care workers in nursing homes -- are also squeezed, and these workers
happen to be mostly female.
So, recovery or not, look who's hurting: wage workers, old folks, young
people, minorities, immigrants, working parents, and women. If that list has a
vaguely familiar ring, it's because it sounds a lot like the Democratic voter
coalition -- at least when these folks are politically animated. George W. Bush
has tried to peel off many voters in these groups with slogans that don't match
his record, but slogans are no substitute for the lived experience. Bush's
program delivers nothing for these people.
The economy may or may not stay officially out of recession, but it still will
feel like recession for a lot of potential voters. All the Democrats need to do
is offer them something. That impulse used to be second nature to Democrats.
Today it's almost radical.