The first President George Bush won the first Gulf War. A year later he lost the presidency because the economy was in the tank. Will the second George Bushsuffer the same fate? There's one big difference. The first Bush's recession started after the first Gulf War, while the second Bush's recession started before the second Gulf War.
With recessions, timing usually makes all the difference. Recessions typically last about a year and a half. They follow Isaac Newton's law of gravity, in reverse: What goes down inevitably comes up. That's why presidents like to haverecessions early in their first term. They get it over with, so by the time re-election day rolls around economic indicators are pointing upward.
If the recession that began in 2001 followed the typical pattern, it would be over by now, and the second President Bush would be in good shape for re-election in 19 months. But what makes the White House nervous is that the current recession is far from being over. The nation continues to lose jobs at a remarkable rate. The last two monthly job reports, for February and March, show a combined loss of almost half a million jobs. So far this recession has spawned the longest continuous decline in jobs in half a century.
From the very beginning, the 2001 recession broke all the rules. Most recessions start when the Federal Reserve Board raises interest rates to cool an overheated economy. Then consumers put a break on spending because they can't afford to borrow more money. This is what happened to the first PresidentBush. Alan Greenspan and company effectively did him in. But the Fed didn't start the 2001 recession. It started when corporations stopped buying capital goods and the technology bubble burst. In fact, Greenspan and company have cut interest rates 12 times, to their lowest level in decades. But this curious recession goes on and on.
Even though corporate spending is still in the cellar, American consumers have kept buying. But there's a limit to how much they can spend when their jobs aredisappearing and their paychecks under stress. The White House's worry is that American consumers are now deep in debt. They were already in a hole when the recession started, but the hole is now so deep many can't climb out.
Low interest rates have made it easy for many cash-strapped consumers to borrowagainst their homes. Last year, homeowners raised $130 billion through home equity loans, nearly double the amount they borrowed in 2001. So far this year,the home-equity borrowing binge shows no signs of stopping. Homeowners area using the cash to buy all sorts of things they otherwise can't afford -- appliances, home repairs, new or used cars. But mainly they're using the cash to pay down mounting credit-card debt. It's a smart move. Interest rates on home-equity loans are only about half that on credit-card debt, and home-equityinterest payments can be deducted from income taxes while interest on credit-card debt can't be.
As long as home values keep rising, borrowers are protected against a cash crunch. If they can't make a payment, they can always take out another loan against the rising value of their home. But here's the catch. When interest rates start heading up again, housing values will stop rising and may even headdownward. That's because mortgages will become more expensive, which means fewer people in the market to buy a home. With all the new homes being built right now, some housing markets are already facing a glut. Home prices are softening in Oklahoma, North Carolina, Indiana, Ohio, and Washington State.
Why would interest rates go up? Because America as a whole is deep in debt. Ourfederal budget is projected to show deficits of more than $300 billion this year and next, with a total deficit of more than a trillion dollars over the next ten years -- even without the President's proposed tax cut. Large deficitslike this push up long-term interest rates because lenders naturally assume that they'll lead to inflation.
Meanwhile, the nation continues to import far more than we export, resulting ina widening trade gap that's been financed by foreigners lending us money and buying up American assets. Total foreign debt now totals about $3 trillion, nearly the size of Old Europe -- the French and German economies combined. So it should come as no surprise that the dollar has been weakening relative to foreign currencies. A weaker dollar also fuels inflation, because everything webuy from abroad costs more. And inflation leads to rising interest rates.
So what happens when we've got continuing job losses, high consumer debt, and aweakening dollar? I'll tell you what doesn't happen. We don't get an economic rebound any time soon.
The first George Bush won the first Gulf War but lost the election because, by election day, what was on the minds of most American was the economy, stupid. Political strategists for the second George Bush have reason to worry that history will repeat itself.
