WASHINGTON — Americans concerned about the 1988 economy may want to keep a closer eye on Washington politicians than on reassuring economists. Whatever the econometric models say, Potomac policy-makers have no guideposts for coping with this kind of business cycle--especially not in an election year.
Bluntly put, comparison of the nature and longevity of past Republican cycles with this one suggests we are watching one of the great high-wire acts of 20th Century politico-economic management. And if Washington's fiscal Flying Wallendas manage to keep their balance through the November elections, it'll be one for the books.
Common wisdom is that presidential election years are good for the U.S. economy because the people in the White House pile on the stimuli: tax cuts, spending booms, pumped-up money-supply booms or a combination of the three. Hundreds of economic journal articles and dozens of books have been churned out in support of this Machiavellian thesis.
But the truth is less clear than the learned nonfiction. The economic past is an ambiguous prologue. Beginning with 1960, three of the last seven elections have been fought in recessions or soft economic climates. The 1960 race saw a short recession develop in the autumn before the election, one that loser Richard M. Nixon always regarded as a principal ingredient of his defeat.
Then in 1980 new Federal Reserve Chairman Paul A. Volcker put the economy into a February-March high-interest credit crunch to start squeezing out inflation. The result: another election year recession, another President squeezed out of the White House--Democrat Jimmy Carter.
The situation in 1976 was less severe; the economy had softened in the third quarter (as the Ford Administration cut back spending for anti-inflationary reasons) and appeared to flirt with recession. Later revised data showed nothing more than a pause of sorts, but the political damage was done: Republican Gerald R. Ford lost a tight race.
So much for the history. The message is that at least one important Washington economic power center--the Federal Reserve in 1960 and 1980, White House budget strategists in 1976--occasionally refused to go along with the election-stimulus scenario. Punch bowls get taken away in presidential years, too.
What's more, the political context of the 1983-88 economic recovery now displays more "caution" flags than a highway construction site. By several important yardsticks of past GOP administrations, the policy content and chronology of the "Reagan Recovery" is unique. Nerve-rackingly unique, in fact.
First, this is now the longest economic recovery under a Republican administration. Small wonder Reaganites are getting ready to pose for the Guinness Book of World Records. This has been one of the century's most enduring up-cycles.
Typically it's been Democrats who enjoy the longest recoveries because they get to take office when the economy is weak, allowing (and sometimes requiring) years of stimulus before inflation becomes a problem. Republican administrations, by contrast, frequently get elected to curb inflationary pressures that require them to apply high interest-rate cures and thus run recession risks.
Since World War II, not surprisingly, the upshot has been short GOP business cycles. Prior to the second Reagan Administration, every GOP President elected over the last 50 years presided over a slump in time for the midterm election--in 1954, 1958, 1970, 1974 and 1982. Downturns came like clockwork, messing up GOP midterm election hopes but having some benign follow-through in the next presidential election (usually too soon for the next recession).
The Reagan Administration's uniqueness is that it has 1) broken this precedent by avoiding a full national recession in 1986, 2) combined the Democratic and Republican experiences and policies in one package and 3) kept an aging recovery going right up to the current presidential election year. Politically, it really is a high-wire act, and the resultant 1983-88 economy may yet take a brutal fall in the next year or two.
Here's the genesis: The first Reagan Administration, back in 1981-82, played the old Republican ideological game. It slashed taxes, castigated big government, proposed abolishing two federal departments and tolerated high interest rates. The result of these policies (and of Carter's painful economic legacies) was a short business cycle ending in the severe 1982 recession. Thereafter, however, the Reaganites wound up taking a leaf out of Franklin D. Roosevelt's New Deal handbook. Stimulus became the planned or unplanned name of the game.