How long will the economic expansion last?
James Carville, when working for Bill Clinton’s 1992 campaign for President, famously said “it’s the economy, stupid.” He was so committed to making sure he never forgot that maxim that he wrote it on a piece of paper he posted over his desk at campaign H.Q.
Ironically, according to the U.S. Bureau of Economic Analysis, the recession of 1991 had been mild, and it was over by the time the campaign was in full swing. What remained was a sense of insecurity in the minds of voters, concerned about the long-term security of their jobs.
That recession was of course nothing compared to the two big ones that followed. There was the one that resulted from the aftermath of 9/11, and then there was the financial crisis of 2007–2008, which precipitated the worst recession since the Great Depression of the early 1930s.
The reality is that our economy is still recovering from the Great Recession of 2008. Since we hit the bottom in the second quarter of 2009, our economy has been pretty much steadily growing. That growth has been fueled, in part, by low interest rates the Federal Reserve has been unwilling to increase out of fear of stalling the recovery prematurely.
Democrats thus claim that the current economic growth is simply a continuation of what President Obama started. Republicans claim that Trump and the Republican Congress deserve credit for its continued growth. In reality, both are correct.
The person who really is the hero of the Great Recession is Ben Bernanke. The former Chair of the Federal Reserve Board, he is the classic case of the right person being in the right place at the right time. His background as a scholar of the Great Depression while a professor of Economics at Princeton came in handy — he knew exactly what to do to avoid that level of disruption. He knew he had to dramatically increase the money supply, and thus lower interest rates, to stop the contraction and push liquidity back into the market.
If there is anything Obama did well in this period, it was to allow Bernanke to do his job. He reappointed Bernanke despite his Republican pedigree, and subsequently appointed Bernanke’s deputy Janet Yellen in an effort to continue that policy. Ironically, outside of his hands-off approach to the Fed, he did little right. Urged on by his Treasury Secretary Tim Geithner, he basically took a soft approach with the banks, and did little to relieve the pain felt by average folks.
Don’t buy the rewriting of history by Obama’s apologists. There is more he could have done, and he was urged to do so by his other advisors, including former Fed Chairman Paul Volcker and former Clinton Treasury Secretary Lawrence Summers. Obama was basically intimidated by the financial wizards of Wall Street who, we may recall, got us into that mess in the first place.
Nevertheless, Obama does deserve some credit for not getting in the way of the Fed’s recovery efforts. Ironically, by the time Trump came into office, we had pretty much reached full employment. In other words, the time came to slow down the economic growth for fear of inflation.
As economist John Maynard Keynes argued, the time to push money into the economy is during a recession — just as Bernanke did. But Keynes also said that a time of low unemployment was not a time to push money into the economy. Instead, during that time, economic stimuli needed to be reduced so the government could keep its powder dry for the inevitable next economic contraction.
Here is where Trump deserves some credit for keeping the growth going. His tax cuts, though we can argue about who they helped most, certainly pushed a lot of liquidity into the economy just at the time economic growth had reached its peak. As a result, the hot economic growth over the last few quarters is likely directly related to Trump’s tax cuts.
The problem is the timing. The economy is essentially on a spending binge right now due to the additional money available due to the tax cuts. Such stimulus has a short-term effect, however. Eventually, people adjust their expectations and prices adjust to account for these funds. The result is inflation, and that is why governments generally try to pare back economic stimuli at times like these. Unfortunately, that is exactly the opposite of what Trump did.
Neither the Republicans nor the new Fed Chair Jerome Powell are stupid, and they certainly realize this. That is why the Fed has signalled that it intends to aggressively raise interest rates going forward in an effort to head-off inflation. Similarly, that is why the Republicans in Congress are now talking about another tax cut. They know that without additional stimulus, this economic growth will come to a crashing halt. Most economists expect that to happen sometime next year.
Remember that in 1992 when Clinton attacked the first President Bush on the economy, we were already in recovery from a relatively mild economic slowdown. If the economy stalls next year, there is little chance people will be feeling better about it in 2020 when Republicans will have a hard time holding onto the White House and the Senate.
The one thing Republicans have going for them in this election, aside from the institutional advantages they have built into the system for themselves, is the strong economic growth. Nobody can dispute that. We can argue over whether this recovery belongs to Obama or Trump, but the Republicans can point to a year and a half of strong economic numbers, and their policies did have at least something to do with their continuation. If they don’t have that in 2020, it is hard to imagine a good scenario for them.
After all, despite the strong economy, they still face a potential bloodbath in 2018. In some measure that is due to the fact that this economic boom has not been widely distributed. For most middle income people, their real wages have stagnated or even gone down. It is clear that while the economy has largely recovered from 2009, most families have not. As a result, the Republicans have not benefited from their strong economy the way you would generally expect them to.
But at least it’s something. How will the Republicans justify re-election if in addition to Trump’s craziness — which shows no signs of abating — and the increasing inequality of income and wealth, they don’t even have strong economic numbers to point to? If that happens, it will be hard to feel sorry for them.
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