Democrats in Congress, especially Senate Majority Leader Tom Daschle, are staking their political lives on the current recession being a replay of the 1990-91 downturn. That is why they scuttled the Bush administration's economic stimulus package. Doing so increases the odds of a prolonged downturn and makes it easier to blame the administration when it happens. Democrats are betting that the administration will get all the blame because historically presidents always get blamed for what happens on their watch, regardless of their responsibility.
It is not a bad bet on Daschle's part. Although George W. Bush is not up for re-election this year, many Republicans in Congress are, including every House member. If the economy is still sour on Nov. 5, enough voters may blame Bush's party to give Democrats control of the House and increase their majority in the Senate. Such an outcome would frustrate Bush's agenda and give Democrats a big boost going into the presidential election in 2004.
The biggest problem with Daschle's plan is that no two recessions are the same, and it is very unlikely that this one will be a replay of the last one. Indeed, it is likely that the economic recovery this time will be much more robust than that after the last recession's trough in March 1991. That recovery was so lackluster that on Election Day 1992, a goodly number of Americans thought the country was still in a recession -- even though it was technically long over.
Throughout the summer of 1992, Democratic presidential candidate Bill Clinton traveled the country saying that the economy was the worst in 50 years. Even though there was no substantive basis for such a charge, nevertheless it rang true for enough voters to give him the White House. He was helped by the perception that incumbent George H.W. Bush was disengaged from economic issues and overly preoccupied with foreign affairs. The first Bush administration's failure to put forward a meaningful economic stimulus plan greatly contributed to this impression.
Thus Daschle is thinking that if he can prevent a stimulus plan today, voters may once again blame another President Bush for being overly concerned with foreign policy and insufficiently concerned with the suffering of the unemployed and other victims of a slow economy.
In a short space, it is impossible to explain all of the differences between the current recession and the last one. But following are a few of the most important.
-- Federal Reserve. The biggest difference between now and then is that Fed policy was much tighter at the beginning of the recession in 1990 than in 2001. In July 1990, when the recession started, the federal funds interest rate stood at 8.25 percent, even after 6 rounds of rate cuts. This meant that the economy was starved for liquidity, causing market interest rates to be very high. Interest rates on even the highest quality corporate bonds were near 10 percent. In March 2001, when the current recession began, the Fed funds rate was at 5.5 percent and corporate bond rates were around 7 percent. The Fed has also eased monetary policy much more aggressively this time.
-- Credit crunch. Contributing to the tightness of monetary policy in 1991 were higher capital standards imposed on banks by an international convention. This prevented banks from making new loans and forced them to liquidate many existing ones, as well. As a consequence, when the Fed did ease monetary policy it had little effect. Banks simply used the additional liquidity to stock up on government bonds, while businesses were unable to get loans for any purpose.
-- Taxes. In 1990, the first President Bush foolishly retracted his no-new-taxes pledge and signed legislation raising the top tax rate from 28 percent to 31 percent. The economic significance of this action is that markets are much more sensitive to the direction of tax rates than their level. By breaking faith with the voters as he did, the elder Bush opened the door to Bill Clinton's bigger tax increase in 1993. Today, by contrast, tax rates are coming down, albeit slowly. And people have much more faith that the current President Bush will resist Democrat pressure to raise taxes.
Consequently, there are many economists who believe that this recession may already be over. The indications are that the economy bottomed in the 4th quarter and will be growing smartly by the 2nd quarter of this year. With initial claims for unemployment already down by 100,000 in just 4 weeks, we may have even seen the unemployment rate peak already.
Daschle may win his bet. But I am inclined to think that the economy will improve much sooner and faster than he does. That could spell bad news for Democrats on Election Day.