POSTCARDS FROM OHIO
Just waiting out the business cycleWere Ronald Reagan and Bill Clinton more effective presidents than Jimmy Carter and George Bush the elder, or were they just luckier? Reagan and Clinton, both two-termers, boasted long economic expansions while the latter two presidents were spurned under clouds of economic malaise.
I leave it to others to pass judgment on their performance, but no one should doubt that the business cycle's timing has an enormous influence over election outcomes. People do vote their pocketbooks, and a buoyant economy rewards incumbents, suggesting that Ohio's 20 electoral votes are George Bush's to lose. To be sure, the past 41 months haven't been kind to the Buckeye State. Our recession was longer and deeper than the national downturn, with a job loss equaling 5 percent of our peak employment, compared to a milder 2 percent toll on the country as a whole. With its high concentration of mature manufacturing industries, many saw Ohio as epitomizing the woes of globalization. Our businesses were losing market share to foreign competitors that cheated, and local firms were inexorably outsourcing jobs to China and India. Or so it was said. But reality is more complex -- and far less dire -- than depicted by that dark globalization scenario. In particular, two macroeconomic factors, each confused with the vagaries of global competition, were prominently at play in Ohio. First, downturns in the business cycle are always more severe in places like Ohio, where heavy manufacturing industry is highly concentrated. Demand for its output disproportionately slumps when profits are crimped, risk aversion is intense, and buyers postpone big-ticket purchases until better times. That's why Wall Street refers to such sectors as "cyclicals." The second factor is the exchange rate. When the US dollar soared on foreign exchange markets, rising 34 percent between 1995 and 2002, US-made goods became steadily less competitive and imports captured market shares in a range of industries. The import share of light vehicle sales, for example, climbed from 11 to 20 percent over that period. But this had little, if anything, to do with the intrinsic quality or cost of the goods we produced. Rather, it was a transitory moment when an especially keen appetite among foreign investors for US assets -- like stocks and bonds and properties, if not its merchandise and services -- temporarily elevated our currency's value. While these developments made globalization seem all the more pernicious, each was merely an aspect of the business cycle. More important, these aspects are now behind us and the burden they imposed on Ohio's economy is thankfully lifting. Consider the steel industry -- still prominent in Ohio's economy. Steel prices slid 20 percent between 1995 and 2002, in perfect lockstep with the dollar's ascent, while imports captured a growing share of the US market. Profitability eroded. The industry's woes intensified during 2000 and 2001, as recession took hold, demand collapsed and production fell 25 percent. Together, the strong dollar and the recession crippled the industry, leading to 35 bankruptcies -- including such giants as Weirton, Bethlehem, and Wheeling-Pittsburg. Now fast forward to this election year. The dollar has fallen 10 percent from its peak. An exuberant economic expansion is lifting demand for steel of all types. Imports are losing market share to domestic producers. Prices are at all-time record highs. Factories, operating at a lofty 92 percent of capacity, would be even busier if not for shortages of key raw materials. Simply put, the industry, and Ohio more generally, are on a solid upswing. As a consequence, economy-related anxiety -- and globalization angst in particular -- is receding from view. But an important question still remains: Come November, will the state's voters reward the president for their newly recovered vitality, or will they punish him for the difficulties suffered during his first three years? Of course, only time will tell for sure, but research tells us that voters have short memories. For example, Yale professor Ray Fair, an icon of election outcome scholarship, tells us that the first three quarters of an election year are at least as important (and statistically more significant) than the incumbent's entire term. If so, then the timing of the business cycle still holds the key to election results. And the incumbent, George Bush, is the likely prize-winner.
Richard DeKaser is chief economist for the Cleveland-based © Copyright 2004 Globe Newspaper Company.
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