Many economists and Bush administration officials are declaring the recession over. Their evidence is a slight improvement in some economic indicators, such as unemployment and business inventories. But my bet is that the economy will be weak for the remainder of the year and that it will be many years before we return to the prosperity of the 1990s.
Ordinarily, this reality would seriously hurt an incumbent president. But here's a second bet: Unless the Democrats radically shift their campaigning style and themes, Bush's halo effect from the Afghan war could insulate the Republicans from damage on economic issues in the mid-term elections this fall.
First, the economic news: One big economic drag is the stock market. The market was so overvalued in the late 1990s that many investors are still traumatized. Corporate earnings are not rebounding, and investors wonder how many other Enrons are yet unexploded. All the paper wealth that accumulated in the boom years made people feel like investing and spending freely. No more.
The Federal Reserve has interest rates at a four-decade low and is unlikely to reduce them much further. So further monetary stimulus to the economy is not on the table. What the Bush administration calls its stimulus package is mainly tax-giveaways to large corporations. But if consumers aren't increasing their purchases, these business breaks are unlikely to energize the economy.
Unemployment will stay moderately high this year -- at least in the 6 percent range. That's not enough to qualify as an economic disaster, but soft labor markets mean that few workers will get raises. And that dampens purchasing power. The true unemployment rate is also hidden by workers leaving the job market and immigrants going home.
Normally in a recession, both parties quickly agree on an extension of unemployment benefits for an additional 13 or 26 weeks. This time the White House is balking unless Democrats agree to support business tax cuts. As workers exhaust their benefits, purchasing power also suffers.
Although the federal government is running a small deficit, which would normally stimulate the economy, state budgets are deeply in the red. At precisely a time when government needs to make up for the shortfall of individual purchasing power, state and local governments are having to lay off workers, cut programs, or raise taxes -- all of which deepen the recession. And the White House has no interest in increasing aid to the states.
Manufacturing is especially weak. Of the 1.6 million jobs lost in the recession, 1.2 million are in manufacturing. Our trade deficit keeps expanding, and our best customers for exports, Europe and Japan, have even weaker economies than we do.
Thanks to the Fed's low interest rate policy, loans are cheaper for businesses and home buyers. But the flip side is reduced income for senior citizens, who complain that a soft stock market and very low interest rates on savings accounts leave them with depleted income. Gone are the days when widows could get a decent return from telephone stocks, utility bonds, and CDs.
Also, many large institutions are dealing with pressures of recession by shifting costs to consumers. HMOs are increasing out-of-pocket payments and reducing what they cover. And colleges, whose endowments are hard hit by the falling stock market, are announcing the stiffest tuition hikes in years.
For now, consumers are maintaining living standards by going deeper into debt. But they can't incur more debt indefinitely. So even if the recession is technically over -- meaning that growth has turned slightly positive -- we can expect a soft economy for some time to come.
Won't this hurt George W. Bush and the Republicans? Maybe not. Usually a new president's party loses seats in the first midterm election. And usually wars are bad for incumbents.
But this time the administration has played on a psychology of permanent emergency and has accused Democrats of a lack of patriotism when they challenged policies entirely unrelated to terrorism, such as trade and tax policy.
Though public opinion polls show voter sentiment more in line with Democratic views on issues such as education, health, patients' rights, and decent wages, the Democrats have been reluctant to offer more than token challenges to Bush's budget.
Democratic strategists have advised candidates to run on local issues and to be wary of attacking a popular president. So even though a lot of local problems have national causes, the November election will likely be something short of a referendum on the Enron economy. And if that's the case, count on Republicans to do just fine, recession or no.
