The perilous Bush recovery
WASHINGTON
Bush is also atop an increasingly inflationary system -- in one sense confirming evidence of a recovery that is real, but one whose main elements are injurious to ordinary Americans. It is also a system where long-term interest rates are on the rise -- reflecting not only concern about more inflation, but also about the impact of astronomical budget and trade deficits and a low-valued dollar. Rich people have more juicy tax cuts to look forward to; ordinary Americans, their wages essentially flat, can expect an even tighter squeeze. The country's economic geniuses regarded last week's news that the economy's output has been rising for nine consecutive months with a large yawn -- in part because the first quarter's increase in the total production of goods and services was up by less in the preliminary estimate than expected, in part because of some mildly disturbing results in output measurement. Not the least of these involves inflation -- quiet since the tight money policies of former Federal Reserve chairman Paul Volcker wrung the wretched excess of the 1970s out of the system. The inflation part of the first quarter's gross domestic product was up an eyebrow-raising 3.2 percent, more than double the previous quarter's pace. The government noted that roughly a third of a percentage point of the increase during the January-March period represented the modest increase in civilian and military pay legislated last year. The proper interpretation, however, is that inflation appears to be coming back, powered by increases in the cost of necessities. In addition, the business world is awash in comment from executives that pricing power is more and more with them. Given the impact of this trend and the hemorrhaging federal budget deficits, it is not surprising that interest rates are rising from their historic lows as well. The danger for the economy is that these trends could choke off a business recovery before it succeeds in returning employment levels to where they were before the boom of the '90s ended, and before the standard of living for most Americans improves. In politics, this mixed-bag nature of the continuing recovery challenges both Bush and John Kerry to define reality for most Americans. Bush is entitled to his optimism. This is indeed a recovery; its most important component (consumer spending) increased by slightly more in the first quarter than it did in the final three months of last year. The contribution of the federal government, though, is eye-popping. Federal spending shot up by more than 10 percent in the first quarter after a flat fourth quarter of 2003; within that total military spending was up fully 15 percent, while nondefense expenditures were nearly flat and state and local spending were down . The spending, moreover, comes on top of three straight years of whopping tax cuts. With that kind of unprecedented federal stimulus, a recovery of some sort was inevitable. Kerry, however, has an equally valid point in focusing on the condition of families. The jobs are coming back, but it will be well over a year before employment might return to pre-2001 levels, and too many of the new jobs are minimum-wage service positions. More important, the federal tax cuts for ordinary people have been overwhelmed by state and local tax increases, cuts in family services like child care, higher gasoline prices, higher health insurance expenses, and higher education bills. My favorite symbol of their looming argument involves housing, a major contributor to the recovery from both mortgage refinancing and new construction. The president always mentions the record percentage of Americans who own their own dwelling, which is still rising. On the other hand, Americans' equity in their homes is at the lowest level in two generations, and foreclosures and personal bankruptcies are also at unprecedented levels. Rising interest rates can only exacerbate those trends. So far, the Bush campaign has spent almost no money advertising the merits of the president's record. By contrast, Kerry's ads often mention economic conditions, and he is about to begin spending at a much higher rate. That would seem to mean that Bush needs a longer run of favorable news to make the economy a genuine plus for him; for now, it remains Kerry's issue. Correction: Tuesday's column misidentified John Marshall, who was America's fourth chief justice, not the first.
Thomas Oliphant's e-mail address is oliphant@globe.com. © Copyright 2004 Globe Newspaper Company.
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