What are the economic implications of the presidential election dispute?
During the confusion, the stock market has been a fascinating bellwether for which candidate traders think is better for prosperity. A casual glance at the charts shows that when Gore’s prospects sink and Bush’s rise, the market takes off. When a news item seems to even-up the odds, the market tanks. Anyone watching this should dread the prospect of Gore rule.
But new economic reports have further increased the stakes. The economy is still growing, but government data releases show it grew at 2.4 percent from July to September, which is the slowest quarterly growth rate in four years. Does this signal the onset of recession or just a temporary breather from unprecedented growth rates?
No one knows for sure, because the data of history reveal nothing about the shape of the future. But a recession that begins now could complicate the picture for a Bush administration. Bush’s father was rejected for a second term in the midst of a recession. Later data indicated that the recovery stage had already begun that fall and was only inherited by his successor. Now, Bush the son might face the unhappy irony of inheriting Clinton’s recession.
But there are ways for the next president to shorten a recession if one is coming. They all involve decreasing the role of government in the economy, a task which neither prospective president backed with conviction during the campaign.
Already, the talking heads are mixed up about what slower rates ultimately mean. For example, they point to a relatively low inflation rate to argue that diminished economic growth has put less “pressure on prices.” In fact, there is no direct causal relationship between the two trends, despite the pronouncements of Alan Greenspan and the other Keynesians still roaming the bureaucracies.
In the long run, you can’t control prices by controlling the pace of economic growth — otherwise there would be no such thing as the inflationary recessions we saw in the 1970s and ’80s. Low inflation can be the result of genuine economic growth, as higher output based on a solid foundation increases the purchasing power of money. On the other hand, an economic boom and higher inflation can occur simultaneously when the Fed monkeys with the interest rate and expands credit with newly created money.
Let us hear no more, then, about how lower growth rates are yielding lower inflation rates. The policy implications of this spurious idea are scary indeed. They suggest that the government ought to deliberately drive down economic growth, under the ahistorical and just plain wrong idea that you cannot combine lower inflation with high growth.
If a recession is on its way, the new administration can address the problem by, first, doing no harm. This means that the old Clintonite solution of increasing government spending to goose aggregate demand must be rejected. Who can forget those early days of 1993 when Clinton paraded a hundred economists telling him to do exactly that? Thank goodness the Congress rejected his spending package.
Try to imagine how Gore, who appears to understand nothing about economics, would handle a recession. Like Clinton, he would push for huge increases in government spending. This can only make matters worse by draining resources out of the productive private sector and into the wasteful government sector. Sure, well-connected contractors and interest groups will get rich, but only at the expense of the rest of us.
Gore is also friendly to the idea of price controls: on prescription drugs, on oil, on medical services and on any other good that he believes is too expensive or unfairly distributed. He would continue the Clinton antitrust legacy, which is to threaten and bust up any company that hasn’t paid the Democrats enough money to deserve to be left alone. His solution to international trade troubles is to negotiate mutual policies of mercantilism. And Kyoto Al’s environmental policies would deal a crushing blow to the rights and living standards of all Americans.
All this would make a coming recession deep and long. As with the Clinton administration, the only hope is that the economic team of a Gore administration would fear the bond market more than it believes in its own leftist ideology. Fear of the markets was a major influence in keeping Clinton administration economic policy from being worse.
The failsafe remedy for recessions is to allow them to run their course. Their very existence is telling us something important about the economy: that, thanks to Federal Reserve policies, an imbalance exists between the consumption and production sectors of the economy and that this imbalance is in need of a correction. Letting a recession play itself out works to curb industries and firms that have expanded too much, too fast, and puts us on solid ground for future economic growth.
However, there are proactive measures that a really smart president and Congress can take. They can cut the taxes that injure production the most. That helps keep resources in the private sector where they do good. Ending all antitrust attacks on private industry permits them to hire and expand without penalty. Repealing regulations tears down barriers to new firms and industries, and allows consumers and producers to trade without reprisal from the state.
What is the proper monetary policy for dealing with a recession? Keep the money supply stable and don’t attempt to bail out the stock market or the financial sector. Permit interest rates to reach their natural market level. Reject the Japanese method of funneling money to the sectors in the most trouble. The Fed should approach a recession with an aloof attitude and resist all political pressures to flood the market with freshly printed dollars.
Neither Bush nor Gore is likely to take this path. But remember the first rule: Do no harm. In most cases, government is doing well just to abide by that. In this sense, the confusion over the presidential election may be the most bullish sign we’ve seen in years. Prosperity and economic recovery have their greatest friend in free markets, but their second greatest friend is paralyzed government.