When President Bush returns from his trip around Asia this week, he will receive less than a hero’s welcome. The reason has nothing to do with terrorism, Iraq or North Korea. To understand Bush’s perceived failure in Asia, we have to hark back to the crude but telling phrase that defeated his father in the early 1990s: “It’s the economy, stupid.”
Many Republicans are despairing about another great “national security President” who could lose the White House because of his inattention to economic issues. In this case, however, they are the ones who are being stupid. For President Bush’s real economic error is exactly the opposite of his father’s: the elder Bush may have lost because he ignored the economy; if the younger one loses, it will be because he has fussed about it too much.
The fact is that there is nothing much wrong with the US economy today, as John Snow, the US Treasury Secretary, told me when I visited him in Washington last Friday. The economy is likely to grow by 4 per cent in the year ahead and this should create about two million new jobs, erasing almost all the 2.7 million job losses that President Bush has been accused of causing during his three years in the White House.
Mr Snow, of course, may be just a cheerleader for the White House, but his views are borne out by casual observation as well as statistical facts. Shops and restaurants are full. A renewed sense of confidence is palpable in the streets and executive suites of New York, Boston, Washington and Philadelphia, where I have been talking to businessmen and financiers for two weeks.
Turning to the statistics, growth has accelerated spectacularly since the early summer. In fact, the US economy appears to be growing more strongly today than at any time in the past 25 years. Recent figures suggest that the third-quarter GDP growth (to be announced next week) could be as high as 7 per cent. When it is taken into account that many shops, wholesalers and manufacturers met surging consumer demand by drawing down their inventories, because the boom came so fast that it left no time to schedule new deliveries and new production, the growth of final demand was probably more than 8 per cent, according to Ian Shepherdson of High Frequency Economics. This would be the strongest quarterly figure since the spring of 1978.
Unemployment, budget deficits and trade imbalances are all higher than they should be, but none of these are insuperable problems. They could all be brought under control and then gradually reduced by a combination of global economic recovery and some sensible policy changes including, probably, some modest tax increases.
Why, then, are the White House and the media in such a panic about the “jobless recovery”, the “twin deficits” and the dire implications for Bush’s chances of re-election? The obvious explanation is that it takes many months for public and media opinion to catch up with economic reality. There are, however, three more profound problems.
The first is that the war in Iraq is turning into a huge liability, but the White House is unable to admit this and is anxiously looking for other excuses to explain its declining political fortunes. The second is that many American industries, which are struggling in a world of free trade, see the combination of jobless recovery and Bush’s aggressive nationalism as a good combination to promote their longstanding demands for protection against more efficient foreign competitors. The third is that re-electing Bush was always going to be an uphill struggle, given his non-existent majority three years ago. For a while the President’s intrinsic weakness was disguised by 9/11, but now he is back where he started: in a dead heat with any plausible Democratic challenger.
The first point is obvious enough, so let me move straight to the second. If there is one thing even clearer in America today than the return of general prosperity, it is the conviction that “unfair” competition from low-wage Asian countries is destroying American jobs. This paranoia about foreign competition is promoted by the openly protectionist farm, textile and steel lobbies, but also by more respectable bodies, such as the National Association of Manufacturers. To make this protectionism respectable, it is now refocused from narrowly sectional demands for tariffs and subsidies to broader attacks on “currency manipulation”, which is allegedly behind the loss of US manufacturing jobs. Bush’s biggest mistake in the past few months has been to align himself with these protectionist campaigns.
It may be true that, other things being equal, a lower dollar would stimulate exports and create jobs. But other things are not equal. Open support for a dollar devaluation from the White House, culminating in the sort of rebuff that President Bush suffered from China last weekend, could have all sorts of unintended consequences that would far outweigh the benefits for US manufacturers and exporters.
At present the Japanese, Chinese and other Asian central banks are buying US Treasury securities worth more than $300 billion (£180 billion) every year. They are doing this to stop the dollar from falling against their own currencies, but in the process they are also supporting the prices of US shares and bonds. The protectionist lobbies want the White House to stop Asian central banks from buying all these dollars. If these demands were successful and the dollar fell abruptly, the US stock market would suffer, the Asian economies would slow and Europe would collapse into depression. In the US, inflation would accelerate, making higher interest rates even more urgent.
The more intelligent members of the Bush Administration understand the connection between the dollar, the bond market and equity prices. Why, then, does the President continue to flirt with protectionism and competitive devaluation? This is where we come to the precariously balanced condition of US politics.
The pressure to revalue Asian currencies seems to be driven largely by panic over the decline in Bush’s opinion poll lead. Until two months ago Bush felt pretty confident of re-election as a “national security” President. His main economic objective was simply to neutralise the economy as an issue. He did not need a great economy, merely one with which most people felt OK. The safest way to achieve this neutral economic background was to avoid any policy shifts that might threaten the economic recovery, upset the stock market or damage the living standard of the average American. A devaluation of the dollar against the Chinese renminbi, for example, would mean higher prices at Wal-Mart, which sources more than half its goods from China. In the past few weeks this calculation has completely changed.
Bush’s political adviser, Karl Rove, sees the 2004 election as a rerun of 2000: essentially a dead heat, in which the result will be decided by a few thousand votes in a handful of key states and precincts. Rove’s polling suggests, moreover, that the majority of voters are irrevocably fixed in their beliefs. As a result, there is little point in trying to appeal to the millions of undecided voters who normally float in the centre. In this election, there are likely to be few floating voters. Almost everybody is behaving as a hard-core Republican or committed Democrat.
In such a dead-heat scenario, pollsters believe that the election could be won by small policy changes, provided these are skilfully targeted at just a few thousand voters in marginal states. Politicos in Washington describe the exquisite sensitivity of an evenly balanced election to tiny policy changes as the “butterfly effect”, recalling the iconic image from chaos theory of a butterfly beating its wings in the Amazon and causing a typhoon in Japan.
If embracing protectionism and devaluation could be credited with saving just a few hundred jobs in Michigan or West Virginia, it might be enough to win the election. This one shift in policy might maintain the Republican monopoly of power, continue the war against terrorism and preserve America’s geopolitical dominance for the next century. Surely a flirtation with protectionism would be a small price to pay.
Perhaps, but the butterfly effect works both ways. If it meddles with the trans-Pacific currency accord that has supported the US economy for most of the past decade, the White House will be playing with fire.
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