With the presidential election barely 18 months away, the Democrats are hoping a weak economy will give them a chance to win back the White House. It worked in 1992 when Bill Clinton defeated a popular George Herbert Walker Bush, who had driven Saddam Hussein out of Kuwait but seemed clueless how to respond to the relatively mild recession that followed the Gulf War. Clinton operatives summed up their entire winning strategy in one phrase: "It's the economy, stupid." Now, a new batch of Democrat contenders are hoping they can convince Americans it's still the economy -- but voters have gotten a lot smarter.
The American economy is so large -- more than $10 trillion -- there's very little any president can do to stimulate economic growth and create jobs in the short run. President Reagan -- who had the largest impact on the economy of any recent president -- cut taxes, encouraged the Federal Reserve board to keep interest rates high in order to bring down inflation, and slowed the growth of government spending on domestic programs. But even Reagan was only partly responsible for the tremendous expansion in the economy that began during his tenure and has continued to the present. Stable oil prices helped keep inflation low. The advent of corporate raiders forced American companies to stay lean and mean. The influx of immigrant workers and the relative weakness of American labor unions kept inflationary wage increases in check. The expansion of free trade policies in markets around the world and the explosion in technology also contributed to a healthy U.S. economy through the 1990s until now.
Bill Clinton, who is credited with presiding over a robust economy for eight years, succeeded more because of what he couldn't accomplish than anything he actually did. In his first year in office, Clinton tried to nationalize some 7 percent of the U.S. economy with Hillary's health care proposal and, luckily, failed. He increased government spending, but only modestly, thanks to the Republican takeover of Congress in 1994. He raised taxes, but only once -- which nonetheless explains why the economy grew at a slower rate in the 1990s compared to the boom period between 1982-1990. Had Clinton succeeded at the usual Democratic interventionist economic policies, his tenure would have been a huge bust.
George W. Bush inherited an economy that had already started into a cyclical downturn, which the terrorist attacks of 9/11 only made worse. There is little indication, however, that the American public blames President Bush. Although the economy grew at a sluggish 1.6 percent in the last quarter, other economic indicators are healthy. Interest rates are at historic lows; inflation is modest; consumer confidence is up; and energy prices, which had been rising, are coming back down again. The best thing President Bush can do for the economy is to ignore Democratic cries to fix it.
With its size and complexity, there is no way to jump-start the U.S. economy by government stimulus packages or other quick-fix gimmicks. President Bush's goal should be to make long-term adjustments that will allow businesses to thrive and encourage ordinary Americans to save and invest. With a closely divided Congress, it's unlikely the president will be able to win support for some of the most important changes that would affect the permanent health of the economy -- the elimination of capital gains taxes and a sizable reduction in marginal tax rates. Even moderate Republicans have resisted the president's full tax cut proposal out of fear that budget deficits will grow uncontrollably.
Of course Republicans, who control both houses of Congress and the White House, could reduce the deficit by significantly cutting government spending -- but neither the president nor GOP leaders in Congress are interested in that politically risky solution. Unlike most families, who tighten their belts and do without when faced with smaller paychecks, politicians seem unable to cut spending when there's a budget shortfall.
Nonetheless, despite Democrats' hopes that the economy will nose-dive into a double-dip recession in the next few months, most economists predict that the economy will either continue to grow at its current modest rate or actually expand more rapidly over the next year. Either way, the voters are likely to give President Bush the benefit of the doubt on the economy and re-elect him based on his leadership in fighting terrorism at home and abroad.