Clinton, GOP Put Own Spin on Market Slump : Stocks: President sees correction; critics see mistakes. But analysts say politics moves faster than the economy.
While White House officials insist that last week’s stock market swoon was little more than a case of temporary indigestion, critics of the Clinton Administration are already blaming the slump on the President’s economic policies.
The President and his economic advisers are trying to calm market jitters by characterizing falling stock and bond prices as normal “corrective” moves in an otherwise healthy economy. Administration officials want to prevent last week’s retrenchment from becoming a rout when the markets open for trading on Monday.
But Administration critics were quick to predict more problems. In the official Republican response to President Clinton’s weekly radio address on Saturday, Rep. Robert S. Walker (R-Pa.) said the 9% decline in the Dow Jones industrial average since January is a signal that “taxes, deficits and regulatory drag are beginning to have an adverse economic impact” on the nation.
“Republicans warned months ago that the combination of tax increases, new government spending and regulatory overload would lead to economic slowdown,” said Walker, who called on Clinton to join the GOP in backing “a broad-based middle-class tax cut aimed at helping families with children.”
The back-and-forth analyses suggest that the Washington Establishment will not wait for the dust to settle on Wall Street before it tries to estimate the political gains and losses from the market’s travails.
While economists generally attribute declining stock and bond prices to expectations that the Federal Reserve Board will keep raising interest rates in response to accelerating economic growth, a protracted market slump could undermine support for the President’s policies.
Brookings Institution economist Barry T. Bosworth said the political hay-making is “inevitable but unfortunate” as the Fed’s efforts to keep inflation in check by raising interest rates cause investors to demand higher returns from bonds and stocks. The markets satisfy expectations by bidding down prices, which increases yields.
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“Presidents have very little to do with the short-term economy,” Bosworth said. “These are things that have a lot more a life of their own. It’s always been surprising how much Americans identify day-to-day economic events with the President. There’s an awful lot of evidence that voters vote for presidents on the basis of last year’s economic conditions. It’s a little absurd.”
A survey released Saturday suggests that, so far, Americans are not sure what to make of the recent market turmoil. A Newsweek magazine poll, conducted by Princeton Survey Research Associates on Thursday and Friday, showed that 37% of those surveyed said they still believe that the economy is improving, while 26% said it is getting worse. About 34% saw little change.
The survey showed that 47% of respondents said they believe the recent declines in stock prices represent a serious or somewhat serious problem for the nation, while 38% do not consider them a serious problem at all.
Several economists said that all the political jostling for the hearts, minds and pocketbooks of middle-class voters obscures a crucial fact: With few clearly superior investment alternatives available in sight, most investors are unlikely to abandon the market altogether.
“I don’t think smaller investors, who tend to be in mutual funds as part of their retirement packages, are going to pull out any time soon,” said analyst Michael Barker. “The general level of financial literacy among ordinary people is very high now. People understand if you’re a stock market investor there are ups and downs. They know there are corrections. They know, too, that with interest rates where they are, they can’t do better anywhere else.” At the same time, some economists warned there is no assurance that the slide has ended. With the likelihood of more signs of economic strength--personal income statistics to be released Monday are expected to show a healthy increase--anxiety about Fed interest rate hikes could increase.
Higher interest rates tend to reduce inflationary pressures by increasing the cost of borrowing and slowing the rate of economic growth.
Even if the markets settle down, there probably will be no corresponding decline in Washington’s penchant for seeking political advantage in the economy’s ups and downs. In recent months, for instance, the Administration has been quick to claim credit for signs of an improving economy, such as rising employment and increasing consumer confidence. Republicans, in turn, have called attention to contrary indicators to bolster their argument that the Administration is on the wrong track.
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In his rebuttal to Clinton’s radio address--which did not mention the financial markets--Walker said the Administration’s reliance on higher taxes to help reduce the federal budget deficit will diminish the savings and investments of middle-class Americans and put one out of five American jobs at risk. Republicans have called for bigger federal spending cuts in lieu of tax increases.
“By January of this year, the stock market began to drop, interest rates started to climb, factory orders fell, the trade deficit widened, and inflation at the wholesale level increased,” Walker said. “At almost exactly the same time that the Clinton economic plan took effect, the interest rates on 30-year Treasury bonds started up.”
While the economy continues to show “underlying strength,” Walker said, “much of that strength is leftover muscle from 12 years of economic growth” under Republican administrations.
Barker called Walker’s charge “a contentless remark” that belies Washington’s negligible short-term impact on the stock market. “The Republicans have to pray the economy slows down” before the 1996 presidential election, he said. “In the meantime, they’re just looking for little, sharp things they can stick in Clinton’s back as he races by.”
