Electoral-economic cycles: 1972 and 2004, deja vu all over again

A long time ago I wrote a book Political Control of the Economy
(Princeton University Press 1978), which sought to show the
links between elections and economics (the political business
cycle, political parties and macroeconomic policy, support for
incumbents and economic performance). The chapter on the
electoral-economic cycle featured detailed evidence about the
1972 stimulation of the economy for the re-election campaign of
Richard Nixon. I was wondering when someone might comment
on the run-up to 2004, where both monetary and fiscal policy are
extremely stimulative. Here’s a start from the Boston Globe:

.

.

THIS BUSINESS CYCLE COULD GET VICIOUS
By Robert Kuttner, 1/7/2004

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.

.

.

This story ran on page A15 of the Boston Globe on 1/7/2004.
Copyright 2003 Globe Newspaper Company.