The candidate has been anointed and he has accepted the challenge. The United States is now supposed to have an idea of what makes John Kerry tick and, in November, we shall see whether he has what it takes to do what Bill Clinton did and defeat an incumbent George W Bush.
If defining Kerry dominated events in Boston last week, a more interesting question is whether this is an election worth winning. For those who believe any price is worth paying to get rid of Bush, the answer, of course, is a resounding yes. Yet one look at the state of the world’s biggest economy suggests that this may be a good election for the Democrats to lose. The next four years could be tough for the US — very tough indeed — and it would be fitting if Bush were left to clear up the almighty mess he has created.
There is a precedent. In April 1992 the British Labour party lost a fourth election in a row. Given the state of the economy at the time, it was a defeat snatched from the jaws of victory. A witches’ brew of unemployment, falling house prices and record bankruptcies meant John Major’s Conservative government should have been history. The then shadow chancellor (opposition spokesperson on finance), Labour’s John Smith, however, made the mistake of being honest about plans to raise taxes, with the result that the campaign was dominated by scare stories about Labour’s tax bombshell.
In the aftermath of April 1992 there was much gloom in Labour’s ranks. If the party couldn’t win in such propitious circumstances, the argument went, there had to be a serious question mark over the chances of it ever getting back into power.
But political karma meant the Conservatives got their come-uppance when, within six months, Britain was blown out of the European exchange rate mechanism, which tied currencies to each other. The sight of the British Treasury and the Bank of England impotent in the face of the overwhelming firepower of the markets was the Conservative equivalent of the International Monetary Fund (IMF) being called in to bail Labour out of a financial hole in 1976. It wrecked the reputation of the Conservatives for economic competence, and it was a humiliation from which the party may never recover.
Labour was lucky. Had it won the 1992 election it was committed to precisely the same doomed strategy of defending the pound come what may. The crisis known as Black Wednesday would have happened, but probably sooner. As the financial crisis to end all financial crises, it would have been the political kiss of death for Labour.
Clearly, the US economy in 2004 is not Britain in 1992. The US is not in recession, and unemployment is falling rather than rising. The dollar is not pegged against other currencies, so there is no fixed target for the speculators to aim at. Moreover, if you believe Bush, the economy is just dandy after four blissful years of Republican stewardship.
This, though, is a bit like saying that a sprinter has just smashed the world record in the Olympics while failing to mention the cocktail of performance-enhancing drugs that has been ingested. What has happened to the US economy under Bush is pretty simple.
In Clinton’s second term the US had its own version of the South Sea bubble; share prices for worthless IT companies soared, making consumers believe they were richer than they actually were. When the bubble burst, policy makers merrily responded by creating another bubble, this time in the property market.
Interest rates were cut so that consumers could carry on borrowing, while the government did its bit to keep the party swinging by irresponsibly cutting taxes (primarily for the rich).
The result has been predictable. A trade deficit of 5% of gross domestic product is evidence that the US has been living beyond its means.
A similar budget deficit shows that the government, too, has been failing to match what it spends with its tax revenues. In any country south of the Rio Grande, such a combination would mean that the IMF would be on the scene before you could say ”structural adjustment”.
The dollar’s role as a global reserve currency means that Washington can paper over the cracks for a while by selling government bonds to its creditors. But if the laws of economics can be bent, they cannot be broken.
The only long-term solution to the twin deficits is a dose of the medicine swallowed by Britain after Black Wednesday.
Cutting the trade gap means exports go up and and imports come down. A cheaper dollar would help exports, but it would make imports more expensive and threaten higher inflation. Higher taxes or lower spending are needed to curb consumer spending and close the budget deficit.
This combination worked in the United Kingdom, but was mightily unpopular. Unless Bush or Kerry has a brilliant plan for a perpetual bubble economy, one of them is going to have to face reality.
At the moment the Democrats have only one thought: winning. But if they lose they will at least have the consolation of seeing Bush cleaning up his own vomit. — Â