The Booby Trap Presidency?
Economically speaking, did the winner of the U.S. election really get what he has been wishing for?
November 8, 2000
Indeed, looking at the country’s stock market, trends in the federal deficit and the overall state of the U.S. economy, the next President is all too likely to find the job a lot tougher than his predecessor did. Under those circumstances, the best strategy to stay in office for two terms would be to lose this year, then run again in 2004 against what might be a recession-pounded incumbent.
As [fill in name] revels in the cheers and well-wishers, he should keep in mind what happened to the eighth President of the United States, Martin Van Buren. He became President in 1836, after Andrew Jackson’s two highly successful terms in office. Shortly after his inauguration, the Panic of 1837 signaled the advent of the worst economic downturn up to that time in U.S. history.
The result, as historians know, was that Van Buren was chased out of office in the next election. Could the same fate befall this year’s victor? There are certainly storm clouds on the horizon. For starters, despite the U.S. economy’s fast growth, household debt has jumped by almost one quarter since the end of 1997.
Not to worry, we have been told: household stock market and mutual fund wealth has grown by over twice as much. But if all that stock wealth were to melt away in a down market, households will find themselves left with only the debt — a situation which will not make for happy voters.
And that’s not where the story ends. The plentiful federal surpluses that have been projected for the next ten years may not materialize after all. The Congressional Budget Office (CBO) points to higher capital gains taxes as one of the key reasons for the improvement in the federal government’s budget — and the capital gains that got taxed were those created in the stock market.
A private investment bank estimates that the rise in stock prices in 1999 alone provided an additional $91 billion in capital gains tax revenues for the U.S. Treasury in fiscal year 2000 — accounting for 40% of the year’s $232 billion surplus.
If U.S. stock prices remain at their September level, the Treasury’s take in 2001 will fall by $133 billion. That means that half of the $268 billion surplus anticipated by the CBO would disappear. And that doesn’t even factor in the record pork barreling currently going on in the U.S. Congress, which will reduce the surplus even more.
If the stock market stays down, instead of the string of good news of the past few years, every few months of the term of the 43rd President would bring another CBO announcement of a lower surplus, and (eventually) a higher deficit. That would push tax cuts — targeted or not — right out the window, along with all the other goodies both candidates have been dangling in front of the American people.
In short, the next President could be left with a lot of expensive promises — and no money to pay for them. Such a situation does not translate into high approval ratings. But worse news is already in the offing.
High oil prices, rising interest rates and imbalances in international payments indicate that the U.S. economy faces problems beyond those created in the financial markets.
The U.S. current account deficit is on target to reach over $400 billion this year, a record. Financing it requires an inflow of foreign investment of unprecedented proportions. And that foreign investment has come because U.S. markets — especially the stock market — have paid off handsomely over the past few years.
What happens when that investment payoff isn’t so handsome? Of course, the money will go abroad in search of higher returns. And, since lots of investors will want to sell dollar assets, the dollar might be in for a fall. Thus there is a good chance that the next president will become known as “Weak Dollar George” — or “Weak Dollar Al.”
But, come to think of it, that nickname is unlikely — because there may be a more memorable nickname. As inflation climbed to a level of 3.3% over the past 12 months, compared to 2.3% one year ago, the Federal Reserve has responded by raising interest rates. And even higher interest rates may lie ahead. Indeed, the general consensus among economists is that the U.S. unemployment rate is still too low.
If the Fed manages to push the unemployment rate up to 5% from its current 3.9% rate, that means some 1.5 million people will become unemployed — not exactly a vote-getter for 2004. And then there is the worst possibility — a recession.
But it doesn’t even have to go that far. An economic slow-down, combined with a weak stock market, a sharply lower budget surplus and higher unemployment could easily do the next President in. His opponent from the 2000 race — distraught as he may be at the moment — may still get to see the brighter side of life.