It is often said of generals and admirals that they are always fighting the last war. Thus, on the eve of World War II, the Navy continued to view the battleship as its backbone, even though many analysts (especially in Japan) saw aircraft carriers as the weapon of the future. Indeed, many historians believe that the loss of our battleships at Pearl Harbor was a blessing in disguise, because it forced the Navy to turn more toward carriers.
Economists are the same, in that they tend to view each new recession as a replay of the last one. This often leads to the adoption of inappropriate policies that can sow the seeds of future recessions, or at least prolong the current recession beyond what better policies could have achieved.
Democrats are betting that the current recession will be a carbon copy of the last one, which officially began in July 1990 and ended in March 1991. That was actually one of the mildest on record. Real gross domestic product only fell 1.5 percent from peak to trough. By contrast, real GDP fell 3.4 percent during the 1973-75 recession. Bill Clinton's claim during the 1992 campaign that the U.S. economy was the worst in 50 years was always total nonsense.
Clinton got a favorable hearing for his charge, however, because the 1990-91 recession seemed worse than it actually was. The reason is that the snapback from previous recessions had been faster. Economists call these "V" shaped recessions because the economic decline is sharp and so is the recovery. But the 1990-91 recession was more "U" shaped -- a fairly gradual decline and an equally gradual recovery.
Therefore, long after the recession was officially over, Clinton could say, convincingly, that the nation was still in a recession. Indeed, one of his first actions upon taking office in January 1993 was to put forward a stimulus plan to combat the recession that actually ended 22 months earlier.
Although Clinton's stimulus plan ultimately died in the Senate, due to a Republican filibuster, few people thought it absurd to offer a stimulus plan 22 months after the end of the recession. The reason is that the recovery was so anemic that many people really believed that the U.S. economy was still in a recession.
The slowness of the recovery is illustrated by the unemployment rate -- clearly the most politically potent of all economic statistics. In the previous five recessions, the unemployment rate peaked 3 months after the recession's trough on average. However, the unemployment rate did not peak until 14 months after the end of the 1990-91 recession.
The unemployment rate always lags the business cycle because employers are reluctant to lay off workers until well after the recession has begun, and equally reluctant to hire new workers until well after the start of a recovery.
In January 1993, the national unemployment rate was 7.1 percent -- below the recession's peak of 7.8 percent, but still high by historical standards. So when Clinton complained about a jobless recovery, there was a core of truth to his argument.
Democrats today are expecting a replay of 1990-91. They think that the unemployment rate will decline as slowly this time as it did after the end of the last recession. If many people think that the economy is still in recession on Election Day 2002, as they did on Election Day 1992, then Democrats will gain at the polls, possibly regaining control of the House. That is why Senate Majority Leader Tom Daschle, Democrat of South Dakota, torpedoed President Bush's economic stimulus proposal. The last thing Daschle wants is action that might lower the unemployment rate on Nov. 5.
In truth, the stimulus plan probably would have added almost nothing to the speed of the economic recovery. Its provisions were too modest and would have taken too long to impact on the economy to have been meaningful. Its real purpose was always political -- to show that the Bush administration cares about the unemployed. That has been accomplished. Should the recovery be as weak as Daschle hopes, it is Democrats, not Republicans, who may suffer the consequences.
In all likelihood, this recession will not resemble the last one. That recession was prolonged by unique factors -- particularly new bank regulations relating to the savings and loan bailout, which discouraged banks from lending -- that are not relevant today. I expect a more traditional "V" shaped recovery, with unemployment falling relatively rapidly. Indeed, the unemployment rate has already started to come down, falling from 5.8 percent in December to 5.6 percent in January.
I think that economic conditions on Election Day are going to be much better than they are today, despite the demise of the economic stimulus bill. Democrats will do what they can to obstruct the recovery for their own selfish political purposes, but I don't think it will matter in the end.