Friday, November 9, 2007

Economic Anxiety May Be Trouble for GOP

I was thinking about the relationship between politics and the economy upon reading this Wall Street Journal report on recent jitters in financial markets:

The credit crisis sparked by mortgage problems reared its head anew, as stocks tumbled on fears about shaky financial institutions. This time, the dollar's fall to record lows and oil's flirtation with $100 a barrel added to the worrisome brew.

The Dow Jones Industrial Average fell 360.92 points, or 2.64%, to 13300.02. The index has now wiped out all of its gains since the Federal Reserve on Sept. 18 made the first of its two recent interest-rate cuts, sparking a short-lived rally that sent the Dow to a record high Oct. 9.

Wall Street is once again nervous about how much damage remains from subprime mortgages and other bad credit, even after tens of billions of dollars in write-downs. The wave of credit-rating downgrades on mortgage securities continued yesterday, and bank shares were especially hard-hit. Shares of Washington Mutual Inc., a major lender, lost 17%, and after the market closed American International Group Inc. and Morgan Stanley reported new write-downs connected to housing problems. (See related article.)

Something else is beginning to nag at investors. The dollar and oil are pushing to opposite extremes, one to record lows and the other near record highs. Gold, an age-old refuge in times of financial turmoil, is once again above $800 an ounce. The combination of economic worries and market movements is reminiscent of the chaotic 1970s, when the U.S. was beset by inflation, recession and a stock market going nowhere.

The global economy is much different today than it was then. Inflation is generally under control, and most investors trust central banks to keep it that way. The U.S. economy, though slowing, has kept growing even as higher energy prices hit consumers.

Still, the parallel points to some challenges that policy makers are trying hard to manage. One is the threat of inflation. Another is the risk of a broad international loss of confidence in America and its currency, which has long been the place where countries with big foreign reserves put the bulk of their assets.
In testimony yesterday, Ben Bernanke, the Federal Reserve Chairman, noted that housing instability may pose deep dangers to the economy, but overall prospects remain for price stability and growth in employment.

That said, the Los Angeles Times has an interesting story today on the political economy of the 2008 elections.
Here's the introduction:

Republican strategists are beginning to fear that a deteriorating economy will pose serious obstacles for their party's presidential candidates, who may ultimately have to answer for rising gas prices and a slumping housing market.

For most of the year, the campaign has been dominated by dueling positions on the war in Iraq, national security, immigration and healthcare. But with gas prices topping $3 a gallon and home foreclosures a deepening concern, the struggling economy could trump other issues in next year's general election campaign.

President Bush is in his second term and can't face reprisal at the polls. So to the extent there is a voter backlash, it would be aimed at the president's party -- chiefly the Republican candidates vying to succeed him, GOP consultants said.

Economic forecasts are worsening: On Thursday, Federal Reserve Chairman Ben S. Bernanke said he expected a "sluggish" economy in the coming months. With millions of sub-prime mortgages due to be reset over the next 14 months, he said, more homeowners are at risk of default. The stock market has been volatile, dropping more than 393 points over the last two days.

"Any economic pain comes out of the hide of the Republican Party," said Don Sipple, a Republican strategist based in California.

"It's one more advantage for the Democrats."

Said Bill Whalen, a research fellow at the Hoover Institution and an aide in the unsuccessful 1992 reelection campaign of President George H.W. Bush: "What a weak economy does is, it lets the Democratic nominee go out and ask the Ronald Reagan question: Are you better off today than you were eight years ago?"

When the economy is not doing well, a political truism goes, the economy becomes the issue. Hyperinflation during Jimmy Carter's administration paved the way for Reagan in 1980. In the 1992 race, "The economy, stupid" became the catchphrase of Democrat Bill Clinton's successful campaign, reminding staffers to focus on the recession that emerged in 1990-91.

Now, said Scott Reed, campaign manager for Republican Bob Dole's failed presidential bid in 1996, "the economy has shot up to the No. 1 issue over the last 30 days, eclipsing Iraq. You have to remember that people vote their pocketbook."

A dip in the economy that squeezes voters would fit the narrative laid out by the leading Democratic candidates. All have said that middle-class Americans have lost ground under the Republican administration, and they have rolled out plans aimed at making healthcare and education less expensive.
Robert Samuelson made the case this week that a recession next year is possible, although economic slumps aren't all bad.

Yeah, tell that to the GOPers running against the gloom-and-doom Democratic candidates in next year's elections.