The Tightrope for Bush or Dukakis

In two days, the American people will go to the polls to choose their 41st President. While Wall Street may have its favorite, others believe that no big changes will result from either candidate’s election.

That investors tend to vote Republican is nothing new. The Republicans--rightly or wrongly--have for years been perceived to be the party of Big Business. Remember the words of Charles E. (Engine Charlie) Wilson, the former head of General Motors who later became secretary of defense in the Eisenhower Administration: “What is good for the country is good for General Motors, and what’s good for General Motors is good for the country.”

We saw this attitude in action last month. On Wednesday, Oct. 19, the first anniversary of 1987’s market crash, stocks took a tumble when rumors surfaced that the Washington Post was about to run a story that could damage Vice President George Bush’s election chances.

However, years ago, another presidential candidate, Gov. Al Smith of New York, used to say: “Let’s look at the record.” If Wall Street were to do so, it would be surprised at the results.

My colleagues and I at Manufacturers Hanover have examined how the economy has performed during the four Democratic and six Republican administrations of the past 40 years. We treated each four-year administration as a brand new one without regard to whether its party (or its President) had occupied the White House in the previous four years.

The comparisons are for the end of the first, second, third and fourth years. In the case of the current Administration, we closed off the tally at the end of 1987, so no forecasting was necessary.

As you can see from the table, the results are rather interesting--and, in some cases, go against the conventional wisdom.

For example, the economy as measured by the real gross national product, has clearly grown faster under Democratic presidents than under Republicans. This is so whether you examine just the first year, the first two, three or all four. Not surprisingly, corporate profits did better under Democrats than Republicans, while the unemployment rate was lower.

Inflation started out higher under the Republicans but ended up slightly better after four years. The budget and trade pictures were clearly worse under Republicans than under Democrats.

The financial markets, in retrospect, turned in about the same performance under either party’s leadership--if you go out four years. Stocks started out doing better under the Democrats, pulled ahead in the second and third years of a typical Republican regime--then ended up even after four years.

For their part, the bond markets initially did better under the Democrats (interest rates were lower)--but after four years, the results were pretty much the same.

Is the past a prologue for the next four years, or is there something different that will constrain the next President’s economic management? The philosopher Santayana notwithstanding, history never quite repeats itself, for one thing. For another, either Bush or Gov. Michael S. Dukakis would have to contend with the following:

Lack of a mandate. If the polls are right, neither candidate is likely to win by the kind of overwhelming majorities enjoyed by Ronald Reagan in 1984, Richard M. Nixon in 1972, Lyndon B. Johnson in 1964 or Franklin D. Roosevelt in 1932 and 1936. This means less bargaining power, when it comes to selling new programs to the Congress and to the American people.

Neither boom nor bust. The American economy is neither overheating the way it was in 1980, nor at the bottom of a Depression, as in 1932. Another famous expression--”If it ain’t broke, don’t fix it”--might well be kept in mind by the next President because there is no overwhelming need for changing economic policy.

Twin tower deficits. Even if he wanted to shift gears, the next President will be constrained by Washington’s huge budget and trade deficits. Not only will any new program have to be accompanied by new revenues, but many old programs will have to be cut, regardless, in order to reduce the budget deficit. If and as the budget deficit comes down, interest rates and the dollar will follow, allowing the trade deficit to decline as well.

Twin tower debts. The national debt is now at its highest level relative to the gross national product since the early 1960s. And, unlike then, interest rates are much higher (meaning that more of the budget must go to servicing the debt) and more is foreign-owned (meaning that these interest payments are leaving the country and are not being recycled into our domestic economy). This debt will continue to grow as long as Washington runs a deficit in its budget--and, for that matter, even after a budget surplus develops, because of the compound interest effect.

On the foreign trade side, after being a creditor nation for 70 years, the United States became a debtor nation in 1984 and is today the largest debtor nation in the world, with a net foreign debt almost three times as large as that of Brazil, the second-largest debtor nation. While we don’t have bank payments to make, we are paying interest, dividends, rents and profits to foreign investors instead of to ourselves.

Other problem areas. Space doesn’t permit a full examination, but let me note in passing that the next President will also have to deal with the question of the debts of the developing countries, and their impact--not only on our banking system, but on our farmers and others whose export markets have suffered because these nations can no longer buy our goods. This leads me to remind you that the Farm Belt has problems, as does the Oil Patch because of the decline in oil prices.

Addressing these problems may require infusions of money, as will bailing out the multitude of thrifts, whose assets now include depressed real estate and so-called junk bonds. If the economic expansion, now winding up a record-breaking sixth year, should falter, some issuers of these junk bonds may well find it difficult to continue paying interest.

Which brings me to the subject of debt in general. Never have consumers and businesses been as deeply in debt as they are today. Besides addressing these other problems, the next President must ensure that the U.S. economy avoids a recession, for if it doesn’t, our troubles will multiply.

Whoever wins Tuesday’s election, the best of luck--and watch your step.