George W. Bush faces a race between the ill-advised economic policies sown in the first half of his term and the bitter fruit that those policies are starting to bear. If the sour effects of his economic policies are evident by mid-2004, he is in deep political trouble.
For now, at least, Bush can say that the economic news is mixed. The unemployment rate went up to 6.4 percent in May. It dropped slightly, to 6.2 percent, in June -- but only because more and more people have dropped out of the labor force entirely as payrolls continued to shrink.
Economic growth came in at 2.4 percent for the second quarter of 2003. That was better than expected, but it needs to hit 4 percent or higher to reduce unemployment. Bush's cheerleaders say that will happen, in well-choreographed fashion, in the election year.
But will it? Timing is everything. George Bush the first missed his rendezvous with prosperity in 1992. And the policies of Bush I were not as damaging as those of Bush II.
Consider these several danger signs:
Deficits and interest rates. Long-term interest rates have gone up a full point in a month. Mortgages, which could be had at a bargain-basement 5 percent in late June, are back to 6 percent. The refinancing boom is slowing. The bond market is swooning.
Bush optimists contend that interest rates are going up because investors, sniffing a recovery, are shifting to stocks, leaving less demand for bonds. Dream on. Skeptics correctly point to the immense deficits resulting from Bush's three tax cuts. If unsustainable deficits loom, the money markets eventually push up interest rates.
Higher interest rates, of course, are bad for the recovery. If investors sense the risk of inflation down the road, that undercuts the Federal Reserve's ability to stimulate the economy with lower short-term rates now.
Most serious of all, if long-term interest rates are impervious to the Fed's policy of cutting short-term rates, then Alan Greenspan's sorcery has lost its power. (And deservedly so. Greenspan should have used his prestige as a central banker to discourage the Bush tax cuts instead of taking a dive as a good partisan.)
Will the true effects of the Bush deficits stay obscured until November 2004 while the Fed tries to keep growth on track? That looks less and less likely.
Trade. Like his military policy, Bush's trade policy has been a blunt instrument. Bush and his economic appointees have been pushing for more international trade with few conditions attached. In theory this is good for everyone. In practice, global trade with few ground rules has exported more jobs than it has imported.
In their recent road trip, top Bush economic officials heard that China's absorption of American jobs is killing local economies. America's trade deficit with the rest of the world continues to widen.
The Democrats may be divided on some issues, but on trade most Democrats favor conditioning trade with labor and other regulatory standards so that its benefits truly flow both ways. In an election year with a soft economy, Bush-style free trade is likely to be an ever harder sell.
Vanishing services. Ordinary Americans are saving a few bucks in their federal income taxes. Most of the breaks went to the top. But as Bush and company cut federal aid while adding costly federal mandates, local services are deteriorating. Meanwhile, many states are having to raise property and sales taxes.
Normally in this kind of downturn, Washington helps the states. This time Bush put tax cutting ahead of aid to states and communities. Congress grudgingly included an emergency $20 billion only because Democrats insisted on it. Even so, that sum is a small fraction of the state budget shortfall.
Ordinary people are also losing private health benefits and retirement income. The connection between some of these economic woes and Bush's policies are direct. In others, such as dwindling health security, the connection is more indirect; it reflects what the administration failed to do.
But it almost doesn't matter how well voters explicitly connect the dots. A bad economy spells bad news for an incumbent president.
A lot of this is implicitly about class and the tiny elite that Bush has helped. In good times Americans don't want to hear about class. Everyone expects to be Bill Gates someday. But in tough times, regular people become far more alert to who is getting most of the cookies. Bush is accountable for that, too.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in yesterday's Boston Globe.
