 t
is often said of generals and admirals that they are always fighting
the last war. Thus, on the eve of World War II, the Navy continued
to view the battleship as its backbone, even though many analysts
(especially in Japan) saw aircraft carriers as the weapon of the future.
Indeed, many historians believe that the loss of our battleships at
Pearl Harbor was a blessing in disguise, because it forced the Navy
to turn more toward carriers.
Economists
are the same, in that they tend to view each new recession as a
replay of the last one. This often leads to the adoption of inappropriate
policies that can sow the seeds of future recessions, or at least
prolong the current recession beyond what better policies could
have achieved.
Democrats are
betting that the current recession will be a carbon copy of the
last recession, which officially began in July 1990 and ended in
March 1991. That was actually one of the mildest on record. Real
gross domestic product only fell 1.5% from peak to trough. By contrast,
real GDP fell 3.4% during the 1973-75 recession. Bill Clinton's
claim during the 1992 campaign that the U.S. economy was the worst
in 50 years was always total nonsense.
Mr. Clinton
got a favorable hearing for his charge, however, because the 1990-91
recession seemed worse than it actually was. The reason is that
the snapback from previous recessions had been faster. Economists
call these "V" shaped recessions because the economic
decline is sharp and so is the recovery. But the 1990-91 recession
was more "U" shaped — a fairly gradual decline and
an equally gradual recovery.
Therefore,
long after the recession was officially over, Mr. Clinton could
say, convincingly, that the nation was still in a recession. Indeed,
one of his first actions upon taking office in January 1993 was
to put forward a stimulus plan to combat the recession that actually
ended 22 months earlier.
Although Mr.
Clinton's stimulus plan ultimately died in the Senate, due to a
Republican filibuster, few people thought it absurd to offer a stimulus
plan 22 months after the end of the recession. The reason is that
the recovery was so anemic that many people really believed that
the U.S. economy was still in a recession.
The slowness
of the recovery is illustrated by the unemployment rate — clearly
the most politically potent of all economic statistics. In the previous
5 recessions, the unemployment rate peaked 3 months after the recession's
trough on average. However, the unemployment rate did not peak until
14 months after the end of the 1990-91 recession.
The unemployment
rate always lags the business cycle because employers are reluctant
to lay off workers until well after the recession has begun, and
equally reluctant to hire new workers until well after the start
of a recovery.
In January
1993, the national unemployment rate was 7.1% — below the recession's
peak of 7.8%, but still high by historical standards. So when Mr.
Clinton complained about a jobless recovery, there was a core of
truth to his argument.
Democrats today
are expecting a replay of 1990-91. They think that the unemployment
rate will decline as slowly this time as it did after the end of
the last recession. If many people think that the economy is still
in recession on Election Day 2002, as they did on Election Day 1992,
then Democrats will gain at the polls, possibly regaining control
of the House. That is why Senate Majority Leader Tom Daschle, Democrat
of South Dakota, torpedoed President Bush's economic stimulus proposal.
The last thing Mr. Daschle wants is action that might lower the
unemployment rate on November 5.
In truth, the
stimulus plan probably would have added almost nothing to the speed
of the economic recovery. Its provisions were too modest and would
have taken too long to impact on the economy to have been meaningful.
Its real purpose was always political — to show that the Bush
administration cares about the unemployed. That has been accomplished.
Should the recovery be as weak as Mr. Daschle hopes, it is Democrats,
not Republicans, who may suffer the consequences.
In all likelihood,
this recession will not resemble the last one. That recession was
prolonged by unique factors — particularly new bank regulations
relating to the savings and loan bailout, which discouraged banks
from lending — that are not relevant today. I expect a more
traditional "V" shaped recovery, with unemployment falling
relatively rapidly. Indeed, the unemployment rate has already started
to come down, falling from 5.8% in December to 5.6% in January.
I think that
economic conditions on Election Day are going to be much better
than they are today, despite the demise of the economic stimulus
bill. Democrats will do what they can to
obstruct the recovery for their own selfish political purposes,
but I don't think it will matter in the end.
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