Recession May Be First Challenge for New President

0 Comments | Insight on the News, Dec 4, 2000 | by Donald Devine

Mr. President-Elect, whoever you are, are you sure you wanted to win this election? One of the wisest sayings warns you to be careful what you wish because you just may get it -- good and hard.

The economic-growth rate for the quarter ended in September was half the previous one. New capital-goods orders fell for the third month in a row. Even with the recent rallies, the NASDAQ is off more than one-third from its high, and even the Dow Jones industrial average is down after its best days all year. Nonperforming "adversely" rated bank loans doubled the last two years. The default rate on junk bonds tripled from 2 percent in 1997 to 6 percent today. High-yield bonds have their biggest risk spread since the early 1990s. Venture Economics reported late last week that investments in new companies were down 30 percent in the last quarter.

Yes, the market rallied somewhat anyway, but it is whistling past the graveyard. Happy days are not here again. It is time to use the R-word, and it looks like the recession will hit just after the election, if it has not begun already. Remember, no one noticed the recovery in 1992, when President Bush got the blame. This election, neither presidential candidate would dare to use the R-word, even if he recognized such a decline, because he could not know how it would affect his chances. Conventional wisdom says economic bad news would help the challenger, but it could just as easily move risk-adverse voters to the experience represented by an incumbent vice president. So, mum's the word until today.

What is certain is that now it is in the winner's interest to throw the blame at President Clinton. He will have to move fast. Once the news media find a villain, they never look back. It long has been clear that Clinton needed a President Gore's good will for future legal battles and would have to take the fall for him. But it also has been clear that Clinton would positively enjoy getting two Bushes in a row to take the blame for bad economic times in a way that would benefit his Democratic Party. And he was slick and smart enough to pull it off.

Both Bushes were known for making a big distinction between politics and "governing." Politics is what one does to get elected. After safely past the election, it was then time to reach out and govern with the other party. It was not just a campaign slogan. President Bush got taken to the cleaners by crafty Democratic Senate majority leader George Mitchell because the latter understood that politics and governing must go together and recognized that the president did not understand this. Unlike Austin, Texas, with its conservative Democrats and power vested in the hands of a few reasonable leaders, if you stretch out your hand in Washington, you have it cut off. Gore has a bit of this good-government-itis, too. If the economy sinks, the president-elect must immediately use his whole campaign apparatus to put the blame for the recession on Clinton and continue in this political mind-set throughout his presidency. If he hesitates, Clinton will place the blame for the recession on him and he will be known for generations for not being able to sustain the "Clinton prosperity."

Besides playing an unfamiliar political blame game, the new president will need a bolder economic plan. Neither candidate has devised a game plan for a recession. He must invoke the example of Ronald Reagan -- even Clinton did when he had to. The president-elect must be bold, with a plan big enough to do the job. Why not propose complete elimination of the capital-gains tax, as was done by Belgium, Hong Kong, the Netherlands, Singapore, South Korea and Taiwan? One always can compromise by cutting the capital-gains tax in half. DRI/McGraw Hill estimated that one-quarter of the growth of the market in 1997-98 was the result of lowering the capital gains rate from 28 percent to 20 percent. The Cato Institute's Stephen Moore and John Silvan estimate that $7.5 trillion could be unlocked from investments held to escape the tax, more than enough to duplicate the Reagan recovery.

Mr. President-elect, you were unlucky enough to win the presidency, and now you must pay. You will be tested to act against your instincts from day one. If you feel some reluctance to play political hardball, you should do a bit of reading about one of your predecessors: Herbert Hoover also was famous for his engineer's lofty disdain of grubby politics, and he and his party have paid the price ever since.

Donald Devine is a columnist and a Washington-based policy consultant.