By Robert Kuttner
The 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.
For 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.
The 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.
ONE 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 health-insurance costs.
Interest 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.
Many 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.
Higher 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.
There 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.
Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.