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Well, Maybe That Iraq Thing Didn’t Work Out, But the Tax Cuts Did

In light of the dreadful news out of Iraq and the recent third quarter GDP report that showed 7.2 percent annualized growth for that quarter, the Bush administration’s political strategy is clearly shifting away from touting its foreign adventures to dwelling on the alleged successes of its economic policy.

What’s next--Karl Rove hanging an “It’s the economy, stupid” sign in the Bush campaign war room? Could be, but maybe Karl better hold off on that sign for awhile. There are a lot of very good reasons to be skeptical that this recent growth spurt will provide the Republicans with their magical re-election elixir.

Start with the fact that growth per se is overrated as a predictor of election outcomes. See DR’s September 27 post for some analysis along these lines. Or consider the fate of George H.W. Bush, who was supposed to get re-elected because of a growth spurt near election time. Or ponder the last time we had a quarter with growth this high: the fourth quarter of 1999, when the economy grew at an annualized rate of 7.1 percent. That didn’t seem to help Al Gore that much.

Move on to the possibility that 7.2 may not be 7.2. That’s because the 7.2 percent growth rate is a preliminary estimate that’s highly likely to be revised downward when the final estimate is released on November 25. A lower estimate is likely because the preliminary estimate is primarily based on data from July and August, when big bumps in disposable income and consumer spending took place. But income and spending declined sharply in September, reflecting the end of the one-time tax rebates sent out over the summer. Once these data are incorporated into the GDP growth estimate, that estimate is likely to fall, perhaps to around 6 percent or so.

That’s still good growth, but the logic of this likely downward revision also suggests that the fourth quarter will not be nearly as good as the third, since there’s no tax rebates around, or anything similar, to kick up consumer spending. In fact, Gallup just released an analysis titled “Why Aren’t Consumers More Optimistic?”, based on late October data, indicating that consumers are not optimistic about the economy, even after a period when consumer spending and economic growth surged ahead. That’s consistent with the idea that an infusion of quick cash helped jack up consumer spending without changing the situation most consumers face “on the ground” in their daily economic life.

Which leads to the 800 pound gorilla in the room: the lack of jobs and continued high unemployment. As many observers have noted, the surge in economic growth was not accompanied by a growth in jobs. But without serious job growth of about 200,000 a month, consumer spending is likely to subside and growth with it. And it would take an increase of about 300,000 jobs a month over the course of a year just to bring down the unemployment rate by one point.

So high unemployment is likely to be with us for awhile—unemployment that, as Louis Uchitelle pointed out recently in The New York Times, is being experienced by many Americans as not just temporary job loss, but permanently lower living standards when they are re-employed at a substantially lower wage. That dynamic of non-temporary job loss and re-employment at a different job appears to be unusually characteristic of the current downturn and recovery: according to a recent paper by economists Erica Groshen and Simon Potter, the mix of cyclical (temporary) and structural (permanent) job loss has gone from about 50-50 in the 1970’s and 1980’s to just 21 percent temporary and 79 percent permanent today.

That’s the kind of thing that makes your typical voter kind of surly. Especially the voters living in the nine states won by the victor in the last three presidential elections, where jobs have disappeared more quickly and incomes and housing prices have grown more slowly. These states—Arkansas, Kentucky, Louisiana, Missouri, Nevada, New Hampshire, Ohio, Tennessee and West Virginia—include several that are central to Democrats’ plans to take back the White House.

Nope, better not hang up that sign yet, Karl. Or maybe it should be: “It’s the jobs, stupid”.

Comments

I think Clark said it better.

Bush now wants to proclaim "Mission Accomplished" to the economy. Once again, he's wrong.

A year from now is an eternity.

The only significant thing about Bush's current troubles, and it is most significant indeed, is that the flight deck - so to speak - is cleared of 9/11 wreckage and bodies.

Now heretofore cowardly democrats can perhaps find some cojones.

I only thing I would add to another excellent analysis by Ruy is that the 7.1 percent growth in 4Q 1999 (the result of a one time surge in business spending for Y2K) didn't do the stock market or economy much good either. The Dow peaked in Jan 2000 and the S&P and NASDAQ peaked a few months later. Economic growth faltered soon after and - as Ruy points out - may not yet be sustainably back.

Ruy, you sound like someone grasping for straws. Every poll shows Bush's coming demise despite his respectable approval ratings. You find a dark cloud to place in front of every silver lining like this recent economic report. While your logic still almost always has some merit, you increasingly sound like someone who is reaching too hard.

I think that all of this economy talk is nonsense right now. We just don't know what's going to happen, so it's useless to speculate.

Regarding Bush's poll numbers, I think those are also meaningless, since the Wurlitzer is sitting on idle right now.

I think this was well-written and explained. Thanks.

I like the Clark quote.

Democrats need to be careful about appearing to "hope for bad things" in order to gain political advantage. We won't help ourselves by talking down signs of a short-term recovery. Ultimately, it's very hard to predict how the economy will behave in the next twelve months. It's very volatile, and so there's no good basis for the formation of a message that can last until Nov 04. At least there isn't yet.

What we do know is that the Republican tax cuts have put the country on the path to long-term insolvency. Unless manna (or dollars) start falling from heaven, there's just no way that we can grow ourselves out of the hole that Bush et al have been digging for us. That's something that will stay true regardless of short-term economic ups and downs. But it's probably not a message that will resonate if the short term news is positive.

It's only a start, and a shaky one at that, but the latest numbers are fair to celebrate as a nation. For a moment, and then we need to figure out what's next. As you've pointed out, there are lot of signs that this will not continue.

And, like you allude to, any recovery in jobs and spending that doesn't continue isn't going to back up the tax cut strategy. I'd say this is more of a stabilization quarter than a recovery quarter -- some of the people that lost jobs are finding employment, somewhere, again, but not at what they were hoping. With that comes spending a bit more on the things they had to put off while they were jobless.

So, yeah, my call? It's stabilization. We'll see respectable growth next quarter, then minor growth in the one after that. At about that time, though, weaknesses in state and federal programs created by the tax cuts are going to get pretty bad -- all of the deferred or cancelled spending is going to add up quickly, and it's going to be awkward for Bush to explain.

NB: I'm not at all qualified to make this sort of assessment; it's just a strong feeling based on a lot of reading.