On Dec. 5, the stock market had one of its best days ever, as it appeared that George W. Bush had finally overcome Al Gore's increasing petulant obstacles to the presidency, and Federal Reserve Chairman Alan Greenspan indicated that he might finally be willing to loosen his monetary stranglehold on the economy. The following day, however, the market gave back almost all its gains, after Gore made it clear in a press conference that he would stop at nothing to gain the presidency, and it became less clear whether Greenspan's talk would be followed by meaningful action.
To his credit, Bush is well aware of the economy's precarious condition. On Dec. 3, Vice President-elect Dick Cheney went on "Meet the Press" to say that deteriorating economic conditions threaten a recession next year. "There is growing evidence out there that the economy is slowing down," Cheney said. "We may well be on the front edge of a recession here."
In a childish display of arrogance, the Clinton administration mocked Cheney's valid concerns, which have been echoed by many respected economists. Tellingly, the administration did not send out any of its economists to refute Cheney, but rather one of its political hacks, press spokesman Jake Siewart. In keeping with the Clinton-Gore administration's history of refusing to deal substantively with issues when a personal attack will do, Siewart didn't even respond to the substance of Cheney's comments, but rather criticized his experience with the Ford administration.
This may make great fun for someone who will not be around to face the consequences, playing to a friendly crowd of liberal journalists, but it will be a lot less funny to the millions of Americans who may find themselves in the unemployment line next year if a recession does strike. It is simply irresponsible to pretend that nothing significant is happening in the economy, when a growing list of economic indicators are pointing toward a downturn next year. Consider the following:
-- The stock market is in virtual free-fall, with the tech-heavy NASDAQ market down almost 50 percent from its March peak. In the process, about $3 trillion of wealth has simply disappeared. Little wonder, then, that analysts are forecasting weak Christmas sales this year, which could spell the end for many Internet retail sites.
-- Credit quality is deteriorating. The interest rate spread between Treasury securities and high-grade corporate bonds has increased by 70 basis points (7/10 of a percentage point) since January. This is an indication that the risk of default on corporate bonds has increased, with many credit market observers seeing signs of a credit crunch. Even venerable companies like Xerox have now seen their bonds downgraded to "junk" status.
-- Real gross domestic product growth has plunged. A year ago, real GDP grew 8.3 percent. In the third quarter of this year, the latest available, it rose just 2.4 percent. And indications are that a further slowing of growth is in the cards. The initial growth estimate for the third quarter was 2.7 percent, but as additional information became available that figure had to be marked down. So far, in the fourth quarter, there are no signs of a rebound.
-- Unemployment is rising. Initial claims for unemployment benefits, a leading indicator of changes in the unemployment rate, have risen for six weeks in a row to 358,000. Just since September, initial claims have risen by 70,000, as high tech companies increase their layoffs. It is only a matter of time before the politically sensitive national unemployment rate also starts to rise.
There are many other signs as well that a recession may soon hit the U.S. economy. Indeed, some economists, such as Edward Leamer of UCLA, believe it is overdue. But the Clinton administration, knowing that whatever happens will not occur on its watch, blithely ignores the clouds growing on the economic horizon. Indeed, it would not be out of character for this administration actually to want a recession next year, because it would prove that it was Bill Clinton, and only Bill Clinton, who gave us the prosperity of the last 8 years. A recession hitting right after he leaves office would be viewed as validation of this view.
Historically, economists have looked at two economic policy instruments to forestall and mitigate recessions. First is an easier monetary policy, which is controlled solely by the Federal Reserve, and is thus out of a president's hands. Second is an expansive fiscal policy, such as a tax cut. A tax cut now could well head off an economic downturn next year, by improving incentives and consumer confidence. Yet, Clinton stands steadfast in his opposition to a tax cut now, which Congress would be happy to give him, preferring instead to risk a recession rather than give the hated Republicans a political victory in his last days in office.
George W. Bush has been trying to make the case for preventive action, but is suffering from an inability to name his key economic appointments because of Gore's stalling tactics, which are delaying final resolution of the election. Under normal circumstances, Bush would now have named his Treasury Secretary, Council of Economic Advisers Chairman and other key economic aides. They would be out there explaining Bush's economic program and hopefully preparing the way for quick congressional action next year.
The longer there is no resolution to the election, the longer Bush is prevented from organizing his administration, the greater the odds of a recession. If one occurs on his watch next year, however, the blame will not be his, but mainly that of Clinton and Gore.