A couple of years from now, the National Bureau for Economic Research will apply its oracular hindsight to tell us when the Recession of 2008 began. For all we really know, the downturn may already have come and gone, or it may be an illusion. The last two recessions were grossly misapprehended while they were in progress. The elder President Bush’s, which sunk his reelection hopes, ended months before Bill Clinton declared the economy to be in its worst shape since the Great Depression. The recession that began during Clinton’s last half-year in office became visible after he left, giving the media the opportunity to assign blame to Bush the younger.
In light of those past misconceptions, we may want to be modest about pronouncing on the state of economic affairs. Still, it can’t be encouraging that growth has been extremely sluggish for two quarters in a row and that the buildup of inventories could foreshadow a contraction in the current quarter. Politicians and commentators will naturally show no reticence at all in portioning out blame and touting “solutions”, most of which will look extraordinarily like what they wanted to do anyway under any circumstances.
What makes recession-solving hard is that the only thing we know for sure about the business cycle is that we don’t understand it. Too many forces push economic activity up and down; too many of them are hard to measure; too many have effects whose causes are obscure. It isn’t too bold, however, to suggest that a big determinant of what entrepreneurs do today is what they expect in the future. That, in turn, depends to a large extent on the anticipated political climate. One reason why the recovery from the 1991 recession went so widely unnoticed was that it didn’t pick up steam until the Republican Congressional sweep in the 1994 elections. The slowdown in 2000 stemmed not just from doubts about whether the Internet guaranteed a permanent boom but also from uncertainty about the qualities of the Presidential candidates, both of whom looked, from some angles, like feckless political heirs.
Perhaps, then, it is significant that the current plateau follows the Democrats’ return to control of Congress, the collapse of popular support for the GOP and the widespread expectation that the next President will be a man (or woman) who firmly believes we can tax our way into prosperity. Does the prospect of a firmly liberal, pro-tax, anti-trade, pro-regulation government buck up businessmen’s animal spirits, so that they invest more capital and hire more workers to meet future demand?
It may be that this year’s electorate is so discontented that reasoning about the causes of its discontents will be futile. On the other hand, the American public isn’t immune to reason. Higher taxes, more government regulation, stiffer trade barriers (pace Lou Dobbs) and military weakness are rarely election winners. The Democratic Party’s stands in those areas may turn out, come November, to be more significant to voters than the Democratic Presidential candidate’s relations with Norman Hsu or Jeremiah Wright.