The staying power of an odd recession

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 Bush suffer the same fate? There is one big difference that should work in his favour. The first Bush's recession started after the first Gulf War, while the second Bush's recession started before the second Gulf War. But the nature of this recession may remove the advantage.

With recessions, timing usually makes all the difference. Recessions typically last about a year and a half. That is why presidents like to have them early in their first term. They get it over with, so by the time re-election day rolls around economic indicators are pointing upwards. If the recession that began in 2001 followed the typical pattern, it would be over by now, and President George W. Bush would be in good shape for re-election in 19 months' time.

What makes the White House nervous is that the current recession is far from being over. Indeed, the US economy 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 beginning, the 2001 recession broke the rules. Most US recessions start when the Federal Reserve Board raises interest rates to cool an overheated economy. Then consumers put a brake on spending because they cannot afford to borrow more money. This is what happened to the first President Bush. Alan Greenspan and company in effect did him in. But the Fed did not start the 2001 recession. This one began 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. Yet this curious recession goes on.

Even though corporations still have not resumed spending, American consumers have kept buying. But there is a limit to how much consumers can spend when their jobs are disappearing and their pay cheques are under stress. The White House's worry is that consumers are now deep in debt. They were already in a hole when the recession started, but the hole is now so deep that many cannot climb out.

Low interest rates have made it easy for many cash-strapped consumers to borrow against their homes. Last year, American homeowners raised $130bn through home-equity loans, nearly double the amount they borrowed in 2001. So far this year, the home-equity borrowing binge continues. Homeowners are using the cash to buy all sorts of things they otherwise would not be able to afford - appliances, home repairs, new or used cars. But mainly they are using it to pay down mounting credit-card debt. That is smart. Interest rates on home-equity loans are only about half those on credit-card debt, and home-equity interest payments can be deducted from income taxes while interest on credit-card debt cannot.

As long as home values keep rising, borrowers are protected against a cash crunch. If they cannot make a payment, they can always take out another loan against the rising value of their home. But here is the catch. When interest rates start heading up again, housing values will stop rising and may even go down. Mortgages will become more expensive, which means fewer people in the market to buy a home. So many new homes are now being built, that some housing markets are already facing a glut. Home prices are now softening in Oklahoma, North Carolina, Indiana, Ohio, and the state of Washington.

Why would interest rates rise? Because America as a whole is deep in debt. The federal budget will have a deficit of more than $300bn this year and another $300bn next year. Over the next 10 years, the federal deficit is expected to top $1,500bn. If the president's proposed $730bn tax cut is enacted, the sum will be larger still. Huge deficits push up long-term interest rates because lenders naturally assume that they will lead to inflation.

Meanwhile, the US continues to import far more than it exports, resulting in a widening trade gap that has been financed by foreigners lending us money and buying up US assets. Total foreign debt now totals about $3,000bn. So it is no surprise that the dollar has been weakening relative to foreign currencies. A weaker dollar also fuels inflation, because everything the US buys from abroad costs more. And inflation fuels rising interest rates.

So what happens to an economy with continuing job losses, high consumer debt, and a weakening dollar? It does not rebound any time soon. Indeed, there is a significant possibility that it will not do so before the next presidential election in November 2004.

The first President Bush won the first Gulf War but lost the subsequent election because, by election day, the first thing on the minds of most Americans was the economy, stupid. Political strategists for George W. Bush have reason to worry that history may repeat itself.

The writer is University Professor of social and economic policy at Brandeis University. He was secretary of labour under President Bill Clinton and is author of "I'll Be Short: Essentials for a Decent Working Society"

"the US economy 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."

It's not the recession causing the decline in jobs.
It's politics.
It's not the decline of jobs causing the recession.
It's politics.

Polititians have made it too difficult and costly for American businesses to conduct business in the several states.
Just my own opinion

Yea, I was wondering the same thing when I read that...as I recall it seemed that was the beginning of the end.

That and the Microsoft anti-trust case.

Our gov't likes to punish success.

There have been no quarters of negative growth under Bush Two.

This statement is false on its face. The first three quarters of 2001 were all characterized by negative GDP.

For easy reference from the Bureau of Economic Analysis - National Income and Product Accounts Tables

Table 1.2. Real Gross Domestic Product
[Billions of chained (1996) dollars] Seasonally adjusted at annual rates

Line		1999 I	1999 II	1999 III	1999 IV	2000 I	2000 II	2000 III	2000 IV	2001 I	2001 II	2001 III	2001 IV	2002 I	2002 II	2002 III	2002 IV
1	Real GDP	8,733.2	8,775.5	8,886.9	9,040.1	9,097.4	9,205.7	9,218.7	9,243.8	9,229.9	9,193.1	9,186.4	9,248.8	9,363.2	9,392.4	9,485.6	9,518.2

Caution on the use of chained-dollar NIPA estimates

Bush, in addition to being a third rate President, was Reagan's biggest mistake.

Well ... I don't know if it was his biggest mistake.

I would agree he was a lackluster President and a substantial mistake of Reagan's, but for one thing.

If GHWB hadn't been #41, good chance GWB wouldn't have been #43. We went through Klintoon hell to get here, but we got a good man in the White House now.

While I agree almost anybody looks good compared to Clinton, I can't get too excited by either Bush. Unlike Reagan, neither Bush has been able to figure out that government's the problem, not the solution.

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