Well, Maybe That Iraq Thing Didn’t Work Out So Well, But the Tax Cuts Did
In light of the dreadful news out of Iraq and the recent third quarter GDP report that showed 7.2 percent annualized growth for that quarter, the Bush administration’s political strategy is clearly shifting away from touting its foreign adventures to dwelling on the alleged successes of its economic policy.
What’s next – Karl Rove hanging an “It’s the economy, stupid” sign in the Bush campaign war room? Could be, but maybe Karl better hold off on that sign for a while. There are a lot of very good reasons to be skeptical that this recent growth spurt will provide the Republicans with their magical re-election elixir.
Start with the fact that growth per se is overrated as a predictor of election outcomes. See DR’s September 27 post for some analysis along these lines. Or consider the fate of George H.W. Bush, who was supposed to get re-elected because of a growth spurt near election time. Or ponder the last time we had a quarter with growth this high: the fourth quarter of 1999, when the economy grew at an annualized rate of 7.1 percent. That didn’t seem to help Al Gore that much.
Move on to the possibility that 7.2 may not be 7.2. That’s because the 7.2 percent growth rate is a preliminary estimate that’s highly likely to be revised downward when the final estimate is released on November 25. A lower estimate is likely because the preliminary estimate is primarily based on data from July and August, when big bumps in disposable income and consumer spending took place. But income and spending declined sharply in September, reflecting the end of the one-time tax rebates sent out over the summer. Once these data are incorporated into the GDP growth estimate, that estimate is likely to fall, perhaps to around 6 percent or so.
That’s still good growth, but the logic of this likely downward revision also suggests that the fourth quarter will not be nearly as good as the third, since there’s no tax rebates around, or anything similar, to kick up consumer spending. In fact, Gallup just released an analysis titled “Why Aren’t Consumers More Optimistic?” based on late October data, indicating that consumers are not optimistic about the economy, even after a period when consumer spending and economic growth surged ahead. That’s consistent with the idea that an infusion of quick cash helped jack up consumer spending without changing the situation most consumers face “on the ground” in their daily economic life.
Which leads to the 800-pound gorilla in the room: the lack of jobs and continued high unemployment. As many observers have noted, the surge in economic growth was not accompanied by a growth in jobs. But without serious job growth of about 200,000 a month, consumer spending is likely to subside and growth with it. And it would take an increase of about 300,000 jobs a month over the course of a year just to bring down the unemployment rate by one point.
So high unemployment is likely to be with us for a while — unemployment that, as Louis Uchitelle pointed out recently in The New York Times, is being experienced by many Americans as not just temporary job loss, but permanently lower living standards when they are re-employed at a substantially lower wage. That dynamic of non-temporary job loss and re-employment at a different job appears to be unusually characteristic of the current downturn and recovery: according to a recent paper by economists Erica Groshen and Simon Potter, the mix of cyclical (temporary) and structural (permanent) job loss has gone from about 50-50 in the 1970’s and 1980’s to just 21 percent temporary and 79 percent permanent today.
That’s the kind of thing that makes your typical voter kind of surly. Especially the voters living in the nine states won by the victor in the last three presidential elections, where jobs have disappeared more quickly and incomes and housing prices have grown more slowly. These states — Arkansas, Kentucky, Louisiana, Missouri, Nevada, New Hampshire, Ohio, Tennessee and West Virginia — include several that are central to Democrats’ plans to take back the White House.
Nope, better not hang up that sign yet, Karl. Or maybe it should be: “It’s the jobs, stupid.”
Ruy Teixeira is a Joint Fellow at the Center for American Progress and The Century Foundation.