This business cycle could get vicious
IN 1975, POLITICAL scientist Edward Tufte and economist William Nordhaus put forth a theory of the political business cycle. Usually, "business cycle" refers to the normal ups and downs of the economy. Their insight was that the business cycle is influenced by politics.
These scholars documented that incumbent presidents often used their influence with Congress and the Federal Reserve to artificially pump up the economy for their reelections and dealt with the resulting damage once they were safely returned to office. Richard Nixon's 1972 landslide nicely fit the pattern. So did Lyndon Johnson's "guns and butter" economic program of 1967-68 (except that the Democrats were undone by the Vietnam War).
The theory later fell into disfavor. Neither Jimmy Carter (defeated in 1980) nor George H.W. Bush (defeated in 1992) could manipulate the economy well enough to save their jobs. Carter fell to stagflation and Bush I to recession and a jobless recovery.
But the political business cycle is back with a vengeance, and this time the morning after will be a corker. The only question is whether the damage will be visible before or after Election Day.
President Bush has unleashed the most massive fiscal stimulus program since World War II, with immense deficits that only grow after 2004 as the biggest tax cuts for the wealthiest kick in. He has timed the relatively meager breaks for the middle class for this (election) year.
Meanwhile, Fed chairman Alan Greenspan (up for reappointment in June) is doing his part to fuel the election-year boom. Despite his own misgivings about immense deficits -- he was far from shy about this during the 1990s -- Greenspan has loyally kept mostly silent when it comes to Bush's deficits. More important, Greenspan is pumping up the recovery with low interest rates notwithstanding his earlier concerns about the danger of economic bubbles.
Thanks to this short-term hyperstimulation, Bush might well have his election year recovery. For now, corporate profits are up, the stock market is booming, and there is even a trickle of job growth.
But there is not a reputable economist -- left, right, or center -- who thinks this act can continue beyond a year or two. Bush's own treasury secretary, John Snow, and his chief economist, Greg Mankiw, both warned about this danger in their previous lives.
As the deficits spin out of control, interest rates will rise. If Bush is reelected, the deficits would also be used as justification for a round of cuts in social outlays that would make Bush's program cuts to date look like mere tinkering.
Meanwhile, serious social challenges like the retirement of the baby boomers and the spiraling of health care costs would be shifted from society back to the individual through proposed privatization of Social Security and health plans that made the subscriber pay ever more of the costs out of pocket (or go without). The larger fiscal and economic mess would be left for Bush's successor after Bush was safely in his presidential library.
Not only has Bush taken short-term political manipulation of the economy, in Tufte's sense, to new and cynical extremes; he has invented a wholly new kind of political business cycle in the form of programs and policies that look impressive only in the short run and turn out to be disasters later on.
Exhibit A is the recently enacted Medicare drug benefit program. Consumers won't experience the fraud firsthand this year since the program doesn't become available until 2006. Nice touch, that. As the law is written, less than half of actual drug costs for most participants will be covered. And seniors will get only one chance to decide whether to opt for the (inadequate) Medicare program or to stay with (increasingly unregulated) private drug insurance coverage that could deteriorate over time.
No Child Left Behind, Bush's big education program, is even worse. It creates perverse incentives for districts to dumb down tests and "lose" dropouts in order to make schools look better. It adds impossible mandates that states and districts have to finance locally. By 2005 the program is likely to collapse of its own weight, but in 2004 Bush is parading as an education president.
Iraq fits the pattern. We have Saddam's head on a platter this year -- and the likelihood of greater regional instability, nuclear proliferation, and anti-Americanism afterwards.
Some of Bush's time bombs may be delayed until after the election. Some could explode prematurely before the election. But all of them could, and should, backfire on Bush now -- if voters are paying attention.
Robert Kuttner's is co-editor of The American Prospect. His column appears regularly in the Globe.
© Copyright 2004 Globe Newspaper Company.