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 toa faltering economy. The dot-com bust already had occurred, and the FederalReserve had already overreacted to full employment (peaking at 3.9 percentjoblessness) with several earlier interest-rate hikes. The economy, further, wasalready on the downward slope of one of its regular bouts of overbuilding.September 11 was a shock to consumer confidence, devastating to particularindustries such as tourism and travel. So it looked to be a standardbusiness-cycle downturn, made worse both by the stock market bubble and by theblow 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 ofthe proceeds went to revive consumer spending. Automakers took advantage of cheapinterest rates to offer deals that buyers couldn't refuse. For another, the wareffort provided economic stimulus. Some of the tax cut -- as demanded byDemocrats -- actually went to ordinary consumers. The budget went from surplus todeficit.
(Note, incidentally, that all the above is purely Keynesian. You fight arecession with deficit spending and cheap interest rates to revive consumerspending. Bush's 2001 upper-bracket tax cut, most of which hasn't taken effectyet, had little to do with it; his latest tax cut, for business, was only justenacted. 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 ofthe late 1990s. For one thing, the first quarter of 2002, on which the optimismis based, was unusual. The winter was the mildest on record. Oil prices andinflation were very low. A lot of pent-up consumer spending, artificiallysuppressed after September 11, was concentrated in early 2002. So the boom couldstill fizzle.
Corporate earnings, one of the most important indicators of a thrivingeconomy, are still very depressed (which helps explain the big corporate push fortax cuts as a kind of bailout). Nor are we entirely finished with themorning-after headache from the late 1990s. During the stock-bubble years,several trillion dollars were invested in dubious schemes that will never returna nickel. According to some calculations, when you net out the positive earningsof real high-tech companies against the money squandered on empty ventures, thenet return on all technology ventures since 1995 is about zero. And this does notjust describe totally crackpot, capital-consuming start-ups of the sort lampoonedin Doonesbury. It includes major industries.
For instance, tens of billions of dollars' worth of optical fiber laid in thelate 1990s is now "unlit" excess capacity. Very major industries, such astelecommunications and airlines, are unlikely to turn sustainable profits anytimesoon. Other industries, such as health insurance and hospitals, are squeezedbetween the forces of cost containment and consumer indignation. Hotel occupancyin major cities is still below normal. Air travel has not returned to itspre-September 11 peak. Commercial real estate is overbuilt and depressed.
Though the stock market had a very impressive bull run in early March, thecosts 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 decadeand the next one. Even with the correction from its earlier peaks, the stockmarket is very overvalued relative to actual corporate earnings or any reasonableprospect of future earnings. To the extent that people felt rich in the 1990sbecause of paper gains in the stock market, and spent more freely, that source ofeconomic 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 investorconfidence. In an exhaustive study, David Levy of the Jerome Levy ForecastingCenter has calculated that the Standard and Poor's 500 large corporations systematically overstated earnings in auditor-approved annual reports over twodecades, by something like 20 percent. This provides further evidence for thelikelihood that the stock market remains overvalued and is unlikely to repeat itsperformance of the 1990s.
So this could well be a "double-dip" recession, like five of the last sevendownturns -- with one or two quarters of growth, a recovery that peters out, andthen recession again. In some respects, this recovery is reminiscent of the onethat undid George Bush the First. Technically, the economy came out of recessionin late 1991. But the growth rate was unimpressive, and by November 1992 a lot ofvoters still felt that their personal recession was not over.
Which brings us back to the Democrats. When it comes to the wayeconomies influence elections, what matters less is the average public impactthan the concrete effect on particular publics. Indeed, if the news declares therecession over and your personal situation is gloomy, it's a double insult. Andbecause of the peculiarly skewed nature of the Bush economic program -- in caseyou were taken in by the rhetoric, the program benefits rich people -- noforeseeable recovery is likely to do much for core Democratic constituencies. Alot of swing constituencies are up for grabs, too.
Take, for example, wage workers. Unemployment may stay in the 5 percent to6 percent range if Bush lucks out, but that's not sufficient to create the kindof tight labor markets that yield raises, especially at the bottom. Only in thelast two years of the late economic boom, when unemployment was around 4 percent,did real gains start accruing to lower-wage workers. Moreover, the unemploymentrate has stayed moderate only because more than a million people have exited thejob market. The economy shed more than manufacturing jobs during the supposedlyshallow recession, and many of these may never return.
And it's not just any wage workers who are hurting. The minority unemploymentrate rose fastest. Immigrants are also often the last hired and first fired. Andnew entrants to the workforce, whether college grads or not, are finding feweropportunities this year.
Or consider the elderly. The combination of low interest rates, a very lowdividend payout rate, and a relatively flat stock market leaves seniors withdepressed purchasing power. Add soaring drug prices and escalating costs ofsupplemental health insurance and you appreciate why older Americans arefinancially stressed, whether the economy is nominally in recovery or not.
Working parents face a similar dilemma. For those not in the nanny class, goodday care is costly and hard to find. Outside the middle class, more formerwelfare recipients are losing jobs, reversing the decline in welfare spending,and leaving states with less money to spend on child care. Workers in otheroccupations related to public outlay -- teachers, nurses, social workers,direct-care workers in nursing homes -- are also squeezed, and these workershappen to be mostly female.
So, recovery or not, look who's hurting: wage workers, old folks, youngpeople, minorities, immigrants, working parents, and women. If that list has avaguely familiar ring, it's because it sounds a lot like the Democratic votercoalition -- at least when these folks are politically animated. George W. Bushhas tried to peel off many voters in these groups with slogans that don't matchhis record, but slogans are no substitute for the lived experience. Bush'sprogram delivers nothing for these people.
The economy may or may not stay officially out of recession, but it still willfeel like recession for a lot of potential voters. All the Democrats need to dois offer them something. That impulse used to be second nature to Democrats.Today it's almost radical.
