Magazine article Newsweek

The Ghost of Herbert Hoover: The Great Plans of Bush and Gore Presume That Prosperity Continues. What If It Doesn't?

Magazine article Newsweek

The Ghost of Herbert Hoover: The Great Plans of Bush and Gore Presume That Prosperity Continues. What If It Doesn't?

Article excerpt

The great irony of this tight presidential election could be that the winner ultimately becomes the loser. The campaign has been conducted on the premise of uninterrupted prosperity. This perpetuates good feeling and creates huge budget surpluses to pay for vast campaign commitments. But the economy could, just as easily, disappoint. The new president would then strain to fulfill commitments. He would look bad compared with Bill Clinton, and prolonged economic underperformance could permanently damage his reputation and his party's prospects. Remember Herbert Hoover.

It's always better politically to take office closer to the bottom of a business cycle (Bill Clinton's good fortune and Ronald Reagan's, too) than to the top (President Bush's misfortune). Memory then becomes a powerful psychological tailwind. People remember bad times and better appreciate the good. Going the other way is a political typhoon. There are endless bad surprises and many angry casualties. A mediocre politician can easily succeed when times are improving. Even the most skilled may fail when they are not.

Prevailing economic wisdom supports the campaign's exceptional optimism. Indeed, private economic forecasts are more confident than the government's. The Blue Chip Economic Indicators newsletter collects 49 private forecasts. In October, none predicted a recession for 2001. Over the next decade, these forecasters expect average economic growth of 3.3 percent. By contrast, the Congressional Budget Office expects 2.8 percent. If the CBO had used the higher figure, its 10-year projection of budget surpluses would have been hundreds of billions of dollars higher than its $4.6 trillion.

Yet ill omens abound. Consider:

Oil prices: As they rise, people have less to spend on everything else. The United States now uses almost 20 million barrels of oil a day, about 54 percent of it imported. Every $1 increase in the price per barrel costs $20 million a day; that's $7.3 billion a year. A $10-a-barrel increase costs more than $70 billion annually. Oil prices are now about $33 a barrel, up from $22 a year ago.

The stock market: Its slide could cause investors--feeling poorer and more worried about the future--to spend less and save more. From their peaks to last Friday, the Dow Jones industrial average was down 13 percent, the Standard & Poor's 500 10 percent and the Nasdaq 32 percent. Some prominent stocks have dropped even more. Microsoft ($65.19 last Friday) was off 46 percent from its peak, AT&T ($27) 56 percent and Amazon ($30.81) 73 percent.

Consumer debt: Overborrowing could cause credit losses and more cuts in consumer spending. Debt payments are now approaching a record 15 percent of disposable personal income, reports Susan Sterne of Economic Analysis Associates. Much of the debt is concentrated among the poorer half of families, notes Stuart Feldstein of SMR Research Corp. Credit standards loosened in the 1990s, he says. Home mortgages became easier to get. Down payments dropped. Credit-card approvals rose. Feldstein expects personal bankruptcies to increase 10 to 20 percent in 2001 and, possibly, to surpass 1998's record of 1. …

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