Americans concerned about the 1988 economy may want to keep a closer eye on Washington politicians than on reassuring economists. Whatever the econometric models say, Potomac policy-makers have no guideposts for coping with this kind of business cycle--especially not in an election year.
Bluntly put, comparison of the nature and longevity of past Republican cycles with this one suggests we are watching one of the great high-wire acts of 20th Century politico-economic management. And if Washington's fiscal Flying Wallendas manage to keep their balance through the November elections, it'll be one for the books.
Common wisdom is that presidential election years are good for the U.S. economy because the people in the White House pile on the stimuli: tax cuts, spending booms, pumped-up money-supply booms or a combination of the three. Hundreds of economic journal articles and dozens of books have been churned out in support of this Machiavellian thesis.
But the truth is less clear than the learned nonfiction. The economic past is an ambiguous prologue. Beginning with 1960, three of the last seven elections have been fought in recessions or soft economic climates. The 1960 race saw a short recession develop in the autumn before the election, one that loser Richard M. Nixon always regarded as a principal ingredient of his defeat.
Then in 1980 new Federal Reserve Chairman Paul A. Volcker put the economy into a February-March high-interest credit crunch to start squeezing out inflation. The result: another election year recession, another President squeezed out of the White House--Democrat Jimmy Carter.
The situation in 1976 was less severe; the economy had softened in the third quarter (as the Ford Administration cut back spending for anti-inflationary reasons) and appeared to flirt with recession. Later revised data showed nothing more than a pause of sorts, but the political damage was done: Republican Gerald R. Ford lost a tight race.
So much for the history. The message is that at least one important Washington economic power center--the Federal Reserve in 1960 and 1980, White House budget strategists in 1976--occasionally refused to go along with the election-stimulus scenario. Punch bowls get taken away in presidential years, too.
What's more, the political context of the 1983-88 economic recovery now displays more "caution" flags than a highway construction site. By several important yardsticks of past GOP administrations, the policy content and chronology of the "Reagan Recovery" is unique. Nerve-rackingly unique, in fact.
First, this is now the longest economic recovery under a Republican administration. Small wonder Reaganites are getting ready to pose for the Guinness Book of World Records. This has been one of the century's most enduring up-cycles.
Typically it's been Democrats who enjoy the longest recoveries because they get to take office when the economy is weak, allowing (and sometimes requiring) years of stimulus before inflation becomes a problem. Republican administrations, by contrast, frequently get elected to curb inflationary pressures that require them to apply high interest-rate cures and thus run recession risks.
Since World War II, not surprisingly, the upshot has been short GOP business cycles. Prior to the second Reagan Administration, every GOP President elected over the last 50 years presided over a slump in time for the midterm election--in 1954, 1958, 1970, 1974 and 1982. Downturns came like clockwork, messing up GOP midterm election hopes but having some benign follow-through in the next presidential election (usually too soon for the next recession).
The Reagan Administration's uniqueness is that it has 1) broken this precedent by avoiding a full national recession in 1986, 2) combined the Democratic and Republican experiences and policies in one package and 3) kept an aging recovery going right up to the current presidential election year. Politically, it really is a high-wire act, and the resultant 1983-88 economy may yet take a brutal fall in the next year or two.
Here's the genesis: The first Reagan Administration, back in 1981-82, played the old Republican ideological game. It slashed taxes, castigated big government, proposed abolishing two federal departments and tolerated high interest rates. The result of these policies (and of Carter's painful economic legacies) was a short business cycle ending in the severe 1982 recession. Thereafter, however, the Reaganites wound up taking a leaf out of Franklin D. Roosevelt's New Deal handbook. Stimulus became the planned or unplanned name of the game.
From 1983 to 1986, the U.S. money supply was expanded by about 40%--more than during any previous 20th-Century GOP administration. At the same time, the federal government began running budget deficits in the $200 billion-a-year range--the highest deficits as a share of peacetime gross national product since the New Deal. But even so, farm, mining and basic industry states remained weak. In 1986, the Oil Patch joined them as the price of petroleum collapsed.
Then in 1985-86, Washington policy-makers threw a third ingredient into the policy stewpot: They began depreciating the U.S. dollar in what has since turned into a hemorrhage. Given prior Republican commitment to sound money, no GOP Administration in this century has done anything of similar magnitude. Even more to the philosophic point, no modern GOP administration ever practiced the New Deal combination of fiscal, monetary and currency devaluation stimuli all at one time. Ronald Reagan takes after Roosevelt, his 1930s idol, in more ways than he may know.
In many respects, of course, the stimulus has been a success. The recovery that began in early 1983 has been kept alive--and is now approaching record duration. The real threat of a major slump, apparent in 1986, was avoided as currency devaluation began to take hold.
The problem is that no Republican or Democratic administration has ever had to coordinate policies like these in a world economy where U.S. dominance is eroding. Indeed, there's rising evidence that the solutions of the last few years--the deficits and currency devaluations that have breathed vigor into an anemic economy--are now dangers. Our national borrowing spree is catching up with us. International fear of Washington's inability to deal with the deficit, coupled with mounting concern about a trade and budget deficit-linked collapse of the dollar, hang over the world's financial markets like a guillotine.
The politicians are not only aware of the problems, they've put themselves in charge. For the first time, we have a former presidential campaign manager, James A. Baker III, as Treasury secretary. Similarly, for the first time, we have a former GOP campaign official, Alan S. Greenspan (Nixon's 1968 domestic research director), as Federal Reserve chairman. The recently chosen World Bank president, Barber B. Conable Jr., is an ex-New York congressman who was on George Bush's 1988 campaign committee the day his appointment was announced. And the entire Federal Reserve Board is made up of Reagan appointees, including a boyhood friend and a former aide to Treasury Secretary Baker. It's not hard to see why foreign financial observers worry that these officials might put the 1988 election ahead of sound financial policies.
Speaking in Ohio the other day, Reagan airily dismissed the idea that his Administration's policies could have had anything to do with the Oct. 19 stock market crash, although his own commission, headed by Nicholas F. Brady, a former U.S. senator from New Jersey, has just agreed they did.
It is surprising how little attention there has been to judging Reaganomics from the standpoint of past Republican economics and economic management. The change has been enormous--and the verdict is still out. So while the economists who predict prosperity through 1988 and maybe even 1989 may be correct, they could also be missing some critical dimensions. Political and historical measurements suggest that the current business cycle is the strung-out product of hybrid policies nobody's ever managed before. And the weight of their contradictions is building.