Next President Likely to Find Economic Mess

The season of speculation has begun as to what the Presidential election will mean to the economy.

From ordinary people worrying whether the next President can preserve U.S. jobs and living standards in a rapidly changing world economy to business and investment managers who mutter nervously about the new “populism” and voter response to Jesse Jackson, Americans are wondering about who the new leader will turn out to be and what his election will mean.

Meanwhile, the stock market is subject to fainting spells and nobody seems confident of the economy. Most economists are predicting a recession between now and mid-1989--while taking note that the party in power lost the White House when the economy turned down in the election years 1920, 1960 and 1980.

Which raises some questions: Since the economy is supposed to be the most important issue for the voters, how much can any new President do to create prosperity or keep it going?

The answer is that usually he can’t do much right away, because his predecessor’s policies or the business cycle continue to govern. The effect of a new President often is not seen until the second year of his Administration, says Professor Alberto Alesina of Carnegie Mellon University, who has produced a new study on economics and politics.

Fiscal Confusion

But the office is powerful, and a President is not a clerk administering the business cycle. Once he gets the reins truly in his hands, a President can powerfully affect the U.S. and the world economy.

Unfortunately, Bush, Dukakis, Jackson, or whoever won’t be able to do much more than fight fires when he enters office, because the economy may be sliding into recession. Some economists say the business slowdown has already begun, while others say the economy is running strong and will only go into recession next year.

Thus the winning candidate will either inherit a mess or a mess-in-the-making.

Why the confusion? What is a recession anyway? It is a contraction in the nation’s business--a slowing of orders and production, a time when there is less money flowing around and businesses have trouble paying back their loans. A contraction usually goes on for one to two years and serves a purpose. It clears the economy of bad debts and marginal enterprises, and leads to a new economic expansion--which on average lasts nearly three years.

One reason for the confusion is that the National Bureau of Economic Research, a private 68-year old organization in Cambridge, Mass., is responsible for saying when the economy goes from expansion to contraction and it waits for all the numbers before making its call--often six months to a year after the recession has begun.

Transforming Adversity

Meanwhile, the stock market could affect the election results but probably won’t, says San Francisco investment manager Kenneth Fisher, a student of market cycles. The bear market this summer and fall, he says, will still be in the “water torture” phase--with slow trading and short, sharp declines.

Later, says Fisher, will come the violent end of the cycle when the market will go straight down--a harrowing greeting but also a hidden opportunity for the new President.

Others have inherited adversity and turned it to good account. President Dwight Eisenhower, for example, had no sooner taken office in 1953 than the economy turned down--after having expanded, pushed by production for the Korean War, for almost four years.

Eisenhower stopped that war and promptly suffered a 10-month recession. But in 1954 he launched the building of the Interstate Highway system and started a new expansion that lasted three years and three months.

John Kennedy came to office in 1961 at the end of a 10-month downturn that began the previous April and helped elect him. He cut taxes and the economy moved into an expansion that lasted until 1969--but included the Vietnam buildup.

Ronald Reagan was elected to stop inflation, did so with the 12-month recession that ended in November, 1982. Then followed the current five-year and four-month expansion, by far the longest in peacetime.

But by extending the long U.S. expansion through deficit financing and foreign borrowings, Reagan may have left his successor with the biggest challenge to face a President in more than half a century.

The next President will have to run an economy that somehow finds the investment to restore America’s industrial standing, while at the same time kicking the habit of foreign borrowing. To do that, undoubtedly, he will have to persuade Americans to sacrifice some of their living standard, while accepting a tax increase.

To do all that will require leadership, which when you think about it is really what Americans are looking for as they watch the candidates run the gauntlet of this incredibly long election campaign.