show recovery, but most voters aren't sharing
economic picture seems to be brightening, and
just in time for President George W. Bush: three
months of decent job growth; the stock market
bouncing back; industrial production up smartly
in May; oil prices peaking and starting to subside.
But even if these indicators keep improving, I
suspect the average voter will continue to experience
a soft economy. The latest (June 16, USA Today)
polls show 58% of voters disapproving of Bush
on economic issues. That number, his most negative
ever on the economy, has steadily worsened despite
months of improving economic news. Its unlikely
to change much between now and November.
starters, the job growth isn't translating into
broad-based wage growth. Even after three months
of good job creation, there is little pressure
to raise wages. That's why the May core inflation
rate -- without volatile indicators like energy
and food -- is just 0.2%. There's no wage pressure.
economy still has about 1.9 million fewer private-sector
jobs than when Bush took office. So many discouraged
workers have left the labor market that the participation
rate remains well below what it was in 2001. Indeed,
if it had remained constant, unemployment would
be at 7.3% rather than the official 5.6%. When
Bush's first tax cut was passed, the Administration
projected that there would be about 139 million
jobs by now. Instead, there are barely 132 million.
STARTLING INDICATOR of the recovery's limited
economic impact is the proportion of economic
growth going to profits and to wages. Corporate
profits have increased by more than 50% during
this recovery, compared with just 0.8% in wage
increases, according to Economic Policy Institute
calculations based on Commerce Dept. statistics.
In the eight previous recoveries, wages increased
an average of 12.3%, and profits about 35%. This
recovery's unprecedented skew explains the stock
market rebound. It also explains why the average
voter isn't sharing the prosperity and lacks confidence
in the President despite the relatively good overall
statistics. To add insult to injury, the typical
consumer is facing higher gas prices and rising
rates, likewise, will become more of a drag between
now and November. Alan Greenspan, ordinarily Delphic
in his pronouncements, has all but declared that
the Federal Reserve will begin raising rates,
probably at the June meeting of the Federal Open
Market Committee. The only question is how much
and how fast.
investors are soothing themselves with the mantra
that the market has already priced the expected
higher rates into stock prices; therefore there's
little to worry about. But think again. Higher
rates will slow the economy and harm the President's
standing with ordinary voters in three respects.
First, of course, they will dampen the recovery
generally -- that's the whole point. More narrowly
(and more perversely), higher rates and softer
labor markets will reduce worker bargaining power
just when lower unemployment is generating a little
pressure for shared gains. Federal Reserve Chairman
William McChesney Martin's famous punch bowl is
being taken away selectively.
rates will also undercut the one element that
has been sustaining consumption in the face of
sluggish wage growth -- the ubiquitous home equity
loan. Consumers with adjustable home equity loans
face higher monthly charges on past and future
consumption. And homebuyers will pay more for
new fixed-rate mortgages, which are already almost
200 basis points above their 2003 low, and rising.
So while stock prices may escape a serious correction
and the overall job numbers are improving, the
average voter is unlikely to feel the improvement
in the pocketbook.
is a certain political justice in this. With core
inflation and wage pressure still low, the Fed
nonetheless is raising rates. Why? In part because
of the immense structural budget deficits. Those
deficits, of course, are the result of the collusion
between President Bush and Chairman Greenspan,
who uncharacteristically gave Bush cover to enact
three irresponsibly huge tax cuts. At the time,
it looked as if Greenspan was shifting from prudent
central banker to partisan Republican tax-cutter.
Now, Greenspan is belatedly reverting back to
Fed chairman, moving to cool the economy right
on the eve of Bush's re-election. If this damages
the economy, it will serve both men right.
Kuttner is co-editor of The American Prospect
and author of Everything for Sale.
Posted: June 28, 2004