This week, the Federal Reserve shifted its "balance of risk" policy advisory from recession threat to neutral. On the surface, this may not seem like a big a deal, but that's a mouthful coming from Fed Chairman Alan Greenspan, and it has significant meaning on both the economic and political frontlines.
On the economic side, the Fed statement confirms that official Washington now believes the recession is definitely over, and that a stronger-than-expected recovery has begun. How strong? Today, what we're looking at is much more of a normal recovery cycle than most people -- including Greenspan -- expected a month or two ago. In fact, we're actually looking down the barrel of a non-inflationary economic recovery, one that will provide basketfuls of profit.
But that's just the pretty economic picture. As we exist in a political economy, Greenspan's recovery statement provides what could very well be a positive backdrop for the Bush Republicans as they head toward this year's midterm elections.
A robust economic recovery instantly removes two Democratic trump cards: First, naturally, the recession card itself no longer trumps. Second, by implication, even a small budget deficit will soon evolve into a growth-driven surplus as the economy regains its stride. Tack on the president's successful and popular prosecution of the global war against terror, and the economic turnaround virtually insures that the GOP will maintain control of the House this fall, while leaving the door wide open for the return of a Republican-controlled Senate.
While it may be true that all elections are local -- perhaps especially so in an off-year -- the prosperity factor (including a healthy stock-market rise) is a major plus for Republicans. And not just because Bush will simply be in the White House during a prosperous period (the old Clinton trick). The GOP can take a lot of credit for this return to prosperity.
The lower tax rates passed last year have provided more stimulus than people think. On the supply side -- although it's slow-paced -- George W. Bush's marginal rate reduction has already generated improved cash-flow incentives for individuals and small businesses. On the demand side, as Bush's rate cut made for tax overestimates, tax refunds are now running at a record pace. And let's not forget the 3-year cash bonus for business depreciation expensing. This is the second tax cut Bush got through Congress, and it will be a big plus for the recovery.
Giving credit where it's due, the Fed correctly injected much-needed cash into economy after 9-11, and this also helped lift the economy back on its feet. But in effect, the Fed only restored the liquidity base it eviscerated two years ago. And here's where we find a key lesson: It was the Fed's senior-moment, mistake-ridden tightening policies of 2000 and early 2001 that sent the economy into a downward deflationary spiral. Despite what some Democrats would like you to believe, that downturn had nothing to do with Bush tax cuts or fiscal irresponsibility on the part of the GOP.
Still, national Democrats like Tom Daschle and Dick Gephardt continue -- amazingly -- to play this old recessionary hand. They are still harping on recessionary budget deficits, and they're even criticizing the Bush war strategy. It's almost baffling. If ever there were political nonstarters, these are they. But Daschle and Gephardt should keep talking. Their miscalculations could be setting their party up for an unexpected tumble this November.
Recent history shows us just how important the economy -- over most any other factor -- is to the voting public. In 1994, the Clinton Democrats were routed in the congressional races because of the collapsing stock market and skyrocketing interest rates that followed the administration's 1993 tax hikes. In 1998, however, Democrats ran better in the midterms because of a strong stock market and a roaring economy, both of which followed a capital-gains tax
cut the year before.
Tax cuts in hand, the Bush Republicans are in a position more like that of the Clinton Democrats in 1998. And they are there without the Monica chronicles. In fact, they're scandal-less, making them look even stronger politically.
Can the GOP regain the Senate? Maybe. Will they hold the House? Absolutely. They have a robust recovery on their side.