Bear Market for Bush?

Oh, they could find a way. After all, the GOP has been here before–in 1991. After Bush Sr. muscled the Iraqis out of Kuwait, he was surfing on a crest of popularity higher than his son now enjoys or anything Reagan ever saw. Still, less than two years later, Bush Sr. was evicted from office–because he lacked a coherent program for reviving the economy after a relatively mild and short-lived recession. He also lost because he seemed completely inattentive to the anxieties of American workers and investors. To jittery voters, it seemed as though, to borrow a phrase from Clinton, Bush Sr. didn’t “feel our pain.”

This president is also vulnerable–though the well of support among conservatives enjoyed by George W. Bush runs far deeper than it ever did for his father. But there is no denying the economy has performed rottenly. And, if we suffer another year of a bear market and stagnant growth in the private economy (the public sector has been growing like gangbusters), voters may again rebel against a successful wartime president.

Not long ago, I sat through a Ted Kennedy slideshow presentation on the economy. It was depressingly persuasive. To summarize a 20-minute talk in two sentences: Under Clinton, the budget deficit and unemployment went way down, while the GDP, jobs, and the stock market soared upward. Under Bush, the deficit and unemployment went up, while the GDP, jobs, and the stock market went down. The Democrats are preparing to Herbert Hooverize George W., and they’ve got a lot of ammunition to do it with.

In particular, if the stock market doesn’t recover soon, Bush will be running headlong against history in his reelection bid. Since Bush was inaugurated in January 2001, the Dow Jones has fallen 20 percent and the Nasdaq has tumbled 45 percent–though the mini-rally since the end of the Iraq war is helping to reverse these declines. Still, the stock market collapse has led to a liquidation of $5 trillion in wealth–some of which has been absorbed by foreigners, but most of it by American shareholders. These losses are bigger than the GDP of virtually every country in the world.

So I got to wondering how many times in the last 100 years a president has been reelected when the stock market fell during his first term, as it has under George W. Bush. Not once has this happened. Twice a president came up for reelection after a term in which the stock market fell, and both incumbents got the boot. They were Herbert Hoover and Jimmy Carter–not the kind of company Bush wants to keep.

Bush has two advantages in defending himself on the economy. First, most Americans acknowledge that the recession and stock market collapse began under Clinton. This was an economic tailspin that Bush inherited rather than created. The stock market hit its peak in the spring of 2000–about nine months before Bush was inaugurated. Signs of an economic slowdown first emerged in the third quarter of 2000. Moreover, voters seem to understand that the 9/11 attacks created a jolt to the economy from which we are still recovering. Bush’s other advantage is that the Democrats are countering his tax cuts with moldy 1970s-style governmental expansionism that few Americans buy into. The Democratic stimulus package is pitifully unimaginative: more spending on infrastructure, on aid to states and cities, on expanded welfare benefits. Polls show the public is skeptical that the Bush tax cut will work, but even more distrustful that big government solutions are the key to growth.

SO BUSH may well coast to victory, even in a bear market, but why tempt fate? The political penalty for a lousy stock market should be even stiffer now, because of the sudden emergence of the new investor-class voter. The 2000 election was the first in which a majority of voters owned stock, up from about 20 percent as recently as 1976. Pollster Scott Rasmussen reports that Bush won a slight majority of these shareholders in 2000; and Republicans got nearly 55 percent of them in 2002. In 2004 these wealth-depleted voters might not be so forgiving to GOP incumbents.

In fact, it’s a bit of a mystery why investor-class voters didn’t abandon the GOP in 2002. The answer seems to be that Republicans caught a lucky break. It turns out that, for the average family, the loss in household wealth from the stock market freefall has been almost completely offset by the increase in value of the other major asset held by Americans: their homes. Home values have continued to rise since 2000 as a result of the 30-year lows in interest rates. This helps explain why consumer spending has remained robust even as Wall Street keeps liquidating wealth. But it also carries with it a flashing danger signal: If the housing market bubble pops, and stocks and housing prices take a parallel tumble–and that is a big if–then the economy could be in real trouble.

Which is to say the Bush administration would be wise to pursue a course that firms up its weakest point: the stock market. Wayne Angell, the former Federal Reserve Board member and now a guru on Wall Street, tells me, “Few policymakers seem to understand that the overall U.S. economy simply can’t improve until the stock market recovers.”

The obvious prescription is a battalion of investor-friendly policies. So far, Bush’s record has been spotty at best in this regard. Bush is a free trader, but we have had steel quotas. Bush is against big government, but he signed and even praised the most expensive and protectionist agriculture bill in American history. Bush is a free marketer but has approved multi-billion dollar bailouts of the insurance and airline industries. Bush says he wants to create a more pro-business regulatory environment, but economist Brian Wesbury reports that the Federal Register, a good proxy for federal rule-making, has been rapidly fattening with new pages in the past couple of years. In sum, the government is growing like weeds under Bush.

Bush’s tax policies have been well-intentioned, but he was forced to make compromises that neutered the impact of his 2001 bill. Bush’s critics sneer that his tax cuts haven’t stimulated the economy. But the supply-side, wealth-inducing aspect of the first Bush tax cut doesn’t take effect, for the most part, until 2005. So far the top income tax rate has come down by only one percentage point. That’s hardly going to generate a flurry of economic activity.

So what economic policy options does Bush have now to reverse the stock market slide? First, he must salvage his stimulus package and get the wayward Senate Republicans, namely Olympia Snowe of Maine and George Voinovich of Ohio, back on board. The battle to save the tax cut isn’t over by a long shot.

Bush was right to call for acceleration of income tax cuts. The economy needs steroids now, and the president should ask Democrats who voted for his plan in 2001 why it makes sense to cut taxes in 2005 and 2006, but not now. The dividend tax cut will instantaneously increase stock values when it’s passed. Economists have a range of estimates of how much stock valuations will increase as a result, but most fall in the 5 to 15 percent range. Now that would make investors happy.

Also, Bush must slam the breaks on this horrendously costly spending spree on Capitol Hill. In just two and a half years, the 10-year budget outlook has gone from a benign $3 trillion surplus projection to a gloomy $2 trillion deficit. That is about as bearish a turn of events as one can imagine. “There are a surprisingly small number of people in Congress in either party who have a philosophical commitment these days to smaller government,” complained Arizona Republican congressman Jeff Flake, after some 350 House members approved a $400 billion pork-spending bill earlier this year. If, between now and the elections in 2004, Bush would start to simply say no to all new spending, no to all new regulations, no to all industry bailout requests, the stock market would take note and reward him.

Twelve years ago, when Bush Sr. was basking in the afterglow of his Gulf War triumph, his administration had a brief opportunity to pass almost any legislation it wished for. The White House called for a $150 billion highway bill (“jobs, jobs, jobs,” as Bush Sr. put it). That was the beginning of the end of papa Bush’s presidency. This President Bush has now arrived at his own defining moment of domestic policy. He should strong-arm Congress into passing his stimulus bill–intact. He should reject the half-loaf non-stimulus alternative that the Senate has offered. If he fights for the tax cut, there’s a good chance he will win. And if he loses, he can still solidify the loyalties of investor-class voters by fighting their battle.

That’s how this president can defy history and survive a bear market.

Stephen Moore is president of the Club for Growth.