The President and the Economy

PRESIDENT George Bush and his White House aides understand fully the modern lesson of presidential elections in the United States: Presidents stand or fall on the state of the economy, whether they can be fairly blamed for it or not.

Their reading of election history explains the president's abandonment of his passive policy of relying on low interest rates to get the American economy out of the ditch in favor of new economic measures, which, ironically, may actually exacerbate the long-term problems of the economy.

Every presidential election since 1960 involving an incumbent or the retiring president's own vice president has hinged powerfully on the state of the economy, with the exception of the 1968 victory by Richard Nixon over Hubert Humphrey, which was dominated by anger and disenchantment over the Vietnam war.

In 1960, for example, alleged "missile gaps" notwithstanding, it was John F. Kennedy's promise to "get the country moving again" after the 1959-60 recession that helped propel him to victory over Mr. Nixon.

In 1972, Nixon wanted to be certain the economy would not undo his administration. He reversed the traditional Republican free-market philosophy and applied wage and price controls to stop inflation, while simultaneously leaning on the Federal Reserve Board to lower interest rates and stimulate growth.

Jimmy Carter's 1976 victory owed as much to the recession of 1975-76, and the seeming lack of stimulative action by President Gerald Ford, as it did to Watergate and the pardon of Nixon.

More recently, the same pattern has held. Ronald Reagan's reelection in 1984 over Walter Mondale owed much more to his decision to weather a severe recession early in his term in order to squeeze inflation and high interest rates out of the economy, than to his fabled skills as the "Great Communicator."

In point of fact, the American people are unforgiving about the economy: They hold the incumbent president to account for it, and President Bush and his advisers know it. Only a few months ago, Bush was content to let normal market forces, combined with lower interest rates from the Federal Reserve, lift the economy out of recession. The president asserted he did not want to take short-term stimulative action that could cause long-term problems for the economy. Yet that is precisely the course on which h e has embarked.

The president realized that Americans lock into a state of mind about the economy several months before the November election. He saw his polls go into a free fall, from over 70 percent approval to under 50 percent in a few short months.

The president felt compelled to act - as his predecessors would have before him.

In his State of the Union message, Bush proposed an increased personal exemption for children, a tax credit for first-time home buyers, and incremental investment tax credits. To these tax measures he added a decision to more quickly spend money Congress has already appropriated for transportation, housing, and farm programs. The goal: a short-term shot in the arm for the economy.

Likewise, his emphasis on passing these by March 20 - though partly designed to put congressional Democrats in a bind - comes from a careful political calculation that unless Congress enacts the measures early, the economy may not turn around fast enough to prevent his defeat in November. While his package includes long-term incentives, such as a permanent research-and-development credit, they are overshadowed by the short-term emphasis.

THE greatest danger from this typical "election-year fix" is that, as proposed, it will likely increase the budget deficit, which at its current astronomical levels has already been an impediment to the investments we must make for the US to become stronger at home and more competitive abroad. Enactment of his tax cuts, with the lower revenues they will produce, is certain; passage of the dubious spending cuts the administration has proposed to pay for the tax reductions is far less probable.

The Omnibus Budget Enforcement Act of 1990, hammered out in the secrecy of Andrews Air Force Base shortly before that year's mid-term elections, was designed to balance the budget by 1995. Instead, the US has since experienced the two largest budget deficits in its history.

For the current year, the deficit will exceed $350 billion, the single biggest in over 200 years of our nation's life, a staggering 6 percent of GNP. If the Social Security surplus is removed, the deficit is an unbelievable $400-plus billion.

As a result of these deficits, the fastest-growing item in the federal budget isn't the defense budget, nor foreign aid, nor domestic investments in education, health care, or physical infrastructure. Rather it is interest payments on the national debt, which increasingly go to Japanese and European investors.

Yet the deficit will not be a major campaign issue in the presidential elections, on either the Republican or Democratic side, because the solutions are so painful and require such sacrifice from so many constituencies that no one dares deal with the issue honestly.

All of this country's problems - from the deficit, to international competitiveness, to education - cry out for a major shift in domestic priorities for the '90s.

But we are unlikely to hear many serious proposals to address these priorities during the coming presidential elections, if Bush's economic program - with its traditional short-term, anti-recession economic proposals - is any example.