Which Way U.S.A.?

Like 2000 and 2001, this year is likely to be the year of the unexpected. But not entirely. Turn-of-the-century periods have an unusual psychological characteristic. People tend to refocus on trends already evident and project them into the new century. The years 2000-2001 have displayed less technology worship and more traditional religion, less new world order and more disorder, and less pie-in-the-sky economics and more evidence that neither markets nor government central bankers can work magic.

It’s a bit premature, then, for events in November, December and early January to support optimism about improving economic and military conditions over the next 12 months. But should an upbeat scenario prove correct, it would replace two longtime precedents suggesting Republican political and electoral vulnerability with rare opportunities.

Since President Herbert Hoover’s day, every Republican administration has had a recession or serious regional downturn keynote party losses in midterm congressional elections. Second, U.S. 20th-century wars have usually created enough disillusionment in their first 12 to 20 months to cost the party in the White House seats in the next midterm elections.

Suppose, instead, that neither precedent holds this November because economic recovery has been building for two to three quarters and the American public is satisfied that terrorism and Osama bin Laden have been defeated. In this case, the GOP could break its midterm pattern of losing congressional strength. A gain would have major implications for policymaking and politics in the next two years.

The GOP must worry, though, that a lot can go wrong in the 10 months before elections. Forecasters are divided about the country’s economic prospects, but even some relative optimists see unemployment, a lagging indicator, rising through election day. Besides, a resurgence in the major stock indices but not in employment could be attacked by Democrats as a Wall Street recovery and a Main Street abandonment. A similar “recovery” in 1991-92 led to the defeat of President Bush’s father.

Global forces could also be negative. Deepening economic weakness in Japan and South America, in particular, already hint that bail-outs and central-bank rescue missions have run out of magic. If this problem spreads to the United States--if Federal Reserve Chairman Alan Greenspan’s unprecedented series of 11 interest rate cuts in 2001 prove incapable of heading off a second-stage decline--public confidence would probably shatter by summer. Few predict such a scenario, however.

A second round of terrorist attacks on the United States could, in theory, target economic assets. An unnerving article by Stephen E. Flynn in the current issue of Foreign Affairs magazine identifies major U.S. bridges, transportation systems, customs operations and harbors as a “soft underbelly of globalization” vulnerable to sabotage. The risks here are simply unknowable.

Where the war on terrorism is headed globally is not much clearer. Despite the White House’s war whoops against evildoers, few of the major ones have been caught in Afghanistan. Even in the E-ring, or “outer corridor,” of the Pentagon, questions are being quietly raised about how much of a victory the bombing campaign and tribal alliances achieved if Bin Laden, Taliban leader Mullah Mohammed Omar and their chief Al Qaeda and Taliban associates got away.

The British in the 19th century and the Russians in the 1980s were defeated in Afghanistan because their large ground forces were so bloodied that they had to pull out. The U.S. war effort there now faces the opposite critique: that a minimal, inadequate U.S. ground commitment required reliance on tribal allies who let the Taliban and Al Qaeda leaders get away (or didn’t even seek them out).

Capturing or killing Bin Laden would end the grumbling. Historically, Americans have put a face on their wars. In colonial times, there was King Philip’s War in New England and Pontiac’s War on the frontier. During World War I, it was “Hang the Kaiser.” Adolf Hitler was the focus of World War II. Lacking demon figures in the Korean and Vietnamese conflicts, U.S. voter commitment flagged. In 1990-91, after then-President George Bush demonized Iraq’s Saddam Hussein, the failure to topple him fostered the perception that Bush had not won much of a victory in the Persian Gulf War.

Bin Laden’s face is just as clearly stamped on the Sept. 11 attacks. U.S. failure to locate him, followed by a resumption of terrorist attacks in America and Europe, could make the bombing of Afghanistan look as effective as the U.S. military’s success in kicking Hussein out of Kuwait in 1991.

Which is why, if Bin Laden gets away, the pressure on Bush ratchets up a few notches. He might have to chase Bin Laden in Somalia, the Sudan or even in Pakistan. Defense Department war hawks like Deputy Defense Secretary Paul D. Wolfowitz and former Pentagon strategist Richard N. Perle already want to reopen a second front against Hussein in Iraq. This would be the first “legacy” war of a U.S. chief executive, and after a first round of trumpets, the electorate might start to get nervous over hints of World War III.

Escalation would reintroduce war-related politics on a large scale. Republican leaders like Bob Dole have lumped the two World Wars and the Korean and Vietnam conflicts together as “Democrat wars.” It is intriguing to ponder what sequence of events could give rise to similar terminology being used against the GOP.

A disappointing economy would increase the pressure on Bush to escalate hostilities and demand “unity.” Politicians have frequently contemplated military actions as diversions. Some Republicans charged former President Bill Clinton with ordering up cruise-missile attacks on Sudan and Afghanistan in 1998 to divert public attention from the Monica S. Lewinsky scandal. In mid-Depression 1932, when Japan invaded Manchuria, GOP U.S. Secretary of War Henry Stimson privately advanced the idea of U.S. armed intervention to counter the accelerating economic downturn.

What policymakers still don’t want to think about is the possibility that the 11 rate cuts undertaken by the Federal Reserve last year won’t produce a full-scale economic recovery. The last time that happened was also in the early 1930s, when eight Fed discount-rate cuts between late 1929 and early 1931 failed to jump-start the economy. True, the Standard & Poor’s index turned up soon after the rate cuts began, but the stock-market recovery lasted only five months, at which point economic decline speeded up. Several Wall Street investment firms expect a similar scenario today--a late-2001, early-2002 surge, especially visible in the stock market, before the market and the economy start to fall again in the spring and the middle of this year.

One can also examine the Fed-led recoveries from brief recessions in 1970-71 and early 1980. The Fed’s easing produced surges of growth in late 1971 and early 1972, and, later, in the second half of 1980. However, by mid-1973 and mid-1981, the short recovery was heading toward a deeper recession than the one before. Were this pattern to repeat, Bush might duck a recession for the midterm elections only to face a tougher one in the 2004 presidential election.

Meantime, our leaders in Washington are making fiscal fools of themselves. The Democrats are reemphasizing the deficit, partly reflecting Clinton’s insistence that they uphold his economic successes. Democratic National Committee Chairman Terence McAuliffe, the former Clinton fund-raiser, absurdly claimed that Bush wouldn’t have any coattails in 2002 “now that he has to defend a deficit budget.”

Bush properly replied that it’s entirely legitimate for government to run a budget deficit in wartime. Then, he, too, overdid it by conjuring up a new label--”economic security” legislation--for his stimulus package that disproportionately hands out corporate and upper-income tax breaks. Senate Majority Leader Tom Daschle is right to point out that the Bush package is so skewed that when poll-takers describe its contents, citizens think they’re making it up. But despite Daschle’s success in linking the deficit to GOP favoritism toward corporations and the wealthy and endangering Social Security, he’ll have little chance of cutting through national-security imagery with Clinton nostalgia and budget-balancing for its own sake.

Institutionally, we have not had a Democratic Senate conjoined with a Republican House of Representatives since the Civil War, so today’s arrangement is anomalous to begin with. Some political pundits predict that the November results could produce a Democratic House and a Republican Senate, although such a switch has never occurred in a single election.

As a “year of the unexpected,” 2002 could be a doozy.

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Kevin Phillips’ most recent book is “The Cousins’ Wars: Religion, Politics and the Triumph of Anglo-America.” What policymakers don’t want to think about is the chance that Greenspan’s 11 rate cuts won’t produce a lasting recovery.