AMERICANS NOW KNOW EVERYTHING about the economy that they will know by the time they go to the polls to choose between George W. Bush’s continued stewardship and John Kerry’s plan to return the Clinton economic team to the White House. Late last week the government announced that the economy grew at the quite satisfactory rate of 3.7 percent in the third quarter, with consumers again leading the way.. That buoyed the president’s men, who are on the hustings reminding any voters who have not tuned out the politicians that sales of new homes in September rose by 3.5 percent to the third-highest level on record, that orders for durable goods rose last month, and that business spending rose in the third quarter for the sixth consecutive quarter, and by a healthy 11.7 percent. With Fall harvests “ahead of the normal pace,” according to the Federal Reserve Bank’s newest survey of business conditions, even usually grumpy farmers should be happy. All in all, says the Fed, “Reports from the twelve Federal Reserve Districts generally indicated that economic activity continued to expand in September and early October.”
The Bush team also points out that the unemployment rate is at a low 5.4 percent, that the economy has added 1.7 million new jobs in the past year, and that workers are better off since their compensation has risen in the past year by 1.2 percent more than inflation. Not a bad recovery from the devastating effects of September 11.
Kerry’s team counters that Bush is the first president since Herbert Hoover to preside over a net loss of jobs, that Bush’s massive tax cuts did nothing to ease the squeeze on middle-class families. These Americans, say Kerry, are caught between a weak labor market and the rising cost of healthcare and college tuitions. Throw in an increase in the recorded number of people living in what we define as “poverty,” and you have Kerry’s indictment of the Bush economic policy.
Whether or the extent to which all of this will matter on Tuesday no one knows. Some voters are more driven by issues such as abortion, gay marriage, and the place of religion in political life than they are by pocketbook issues. Others, perhaps most, will base their votes on their views of the situation in Iraq, with reports from a largely pro-Kerry media about missing explosives, 100,000 civilian deaths in Iraq, and continued abductions and beheadings which are drowning out news of progress in Afghanistan and large parts of Iraq itself.
A few–very few, I would guess–will be asking themselves which of the candidates is most likely to cope with the economic storm clouds that are now clearly visible. The recent downward drift of the dollar just may be signaling the end of an era in which America could, and did, live happily off the savings of other nations.
The facts are these. America’s trade deficit has passed the 5 percent of GDP that most economists feel is unsustainably high, and is headed to 6 percent, in part because the import bill is swollen by high oil prices. To finance that deficit, America has to borrow from China, Japan, and other foreigners by selling them U.S. stocks and bonds, including bonds issued by the Treasury. Foreign governments, led by China and Japan, now hold $1.2 trillion dollars in Treasury IOUs, and have a tiger by the tail. If they increase the downward pressure on the dollar by refusing to buy new Treasury bonds, they will drive down the value of those IOUs they already hold. Still, these lenders seem increasingly reluctant to buy U.S. securities.
They have reason to worry. The dollar is sinking against both the euro and the yen. Japan’s finance minister has passed the word that he is prepared to intervene in currency markets to prevent the yen from rising sufficiently against the dollar to threaten Japan’s export-led recovery.
China, meanwhile, continues to peg its currency to the dollar, so that no matter how low the U.S. currency sinks, Chinese exports will not become dearer in America, nor American exports cheaper in China. Bad news for euroland and Britain, since the euro and sterling will bear the brunt of the dollar’s fall, reducing the competitiveness of European and British goods in the American market.
There is worse. If the downward drift of the dollar turns into a precipitous decline, Alan Greenspan & Co. would have to raise interest rates so that foreigners would be willing to buy and hold Treasury bonds. Higher interest rates will cut into business investment and put further pressure on debt-burdened consumers, already hit hard by rising gas and heating oil prices. Result: an economic slow-down.
All of this means that whoever wins Tuesday’s election might wish he hadn’t. Unless, of course, he is able to tackle the government deficit by cutting back spending, pressure the Chinese into floating their currency and the Japanese into allowing the yen to appreciate against the dollar, and persuade E.U. policymakers to stimulate the region’s economy so that it exports less to and imports more from America.
Fat chance. Congress has just passed a pork-laden spending bill that represents the triumph of business lobbyists over fiscal sanity; domestic pressures are forcing the Chinese to create millions of jobs by stimulating exports; and E.U. policymakers are unwilling to adopt growth-enhancing reforms. So the next president may preside over a dollar debacle. Or worse. Economist John Makin says, “If oil stays above $50 per barrel through year-end, a recession is likely to occur in 2005.” That would bring a grim smile to the lips either of Crawford, Texas’ new full-time resident as he clears brush on his ranch, or of a Massachusetts senator with leisure time to pursue his wind-surfing and snow-boarding hobbies.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
