US economic downturn will impact this year's elections

With US presidential elections only months away and the Bush Administration's end in sight, verbal sparring by candidates has naturally intensified. The topic of choice is the economy which former Federal Reserve Chairman Alan Greenspan recently described as, 'clearly on the edge' of recession. This raises two important questions about this election.

Would a recession influence the election outcome?

The answer is yes. Remember that American voters booted Republican President George Bush Sr. out of the White House after his first term largely because of the sluggish economy. President Clinton, his successor, basked in the glow of the subsequent recovery, which Republicans felt rightfully belonged to them.

History may soon repeat itself. If the economy slides into recession before November, Republicans will get the blame and McCain, who looks to be Bush's political heir and the Republican candidate, will lose votes.

This could be politically fatal because McCain already has at least one millstone around his neck; 60 per cent of Americans currently disapprove of President Bush's job performance which puts any Republican candidate on the defensive.

This is why Bush recently gave American voters an unneeded tax rebate; a thinly veiled bid to bolster Republican popularity. This is also why he has been leaning on foreign nations to postpone currency revaluations until after the November election.

Indeed, whether the US technically enters a recession (defined as two successive quarters with negative GDP growth) may not make much difference because polls show that American consumers have already lost confidence. From an election standpoint, that may have the same effect as an actual recession.

The bottom line: Democrats stand to gain from a downturn, the Republicans lose. And with the burden of Bush's legacy, a Democrat would likely be the next White House resident.

Would the election outcome influence the US economy?

This question is more difficult to answer. The US currently has $9 trillion in debt, and pays over $400 billion in interest every year. The worrisome aspect is the budget deficit which is forecast at $350 billion for 2008.

'Stagflation'

Economists see deficit spending as desirable in the short-run to counter a recessionary economy. But long-run deficit spending, especially when an economy is otherwise robust like the US economy has been, creates inflationary pressures. This at least partially accounts for the recent fall of the dollar against other currencies. It also raises the spectre of 'stagflation' - inflation during a recessionary period.

US economic woes are driven by three notable factors. The first two are healthcare and Social Security, which provides retirement and other benefits. Both are supposed to be self-financed from Americans' earnings.

Until recently, baby boomer contributions to these programs created huge surpluses which the US government used to subsidise other expenditures. Once baby boomers retire, the outflow of benefits will dwarf the inflow of funds. These programs will no longer subsidize other expenditures, and instead the US government must make up substantial shortfalls from general revenues.

Healthcare is already negative, and in 2018 Social Security will be. Thus, the newly elected president will be under pressure to restructure healthcare, though the impending Social Security crisis will likely be punted until after the 2012 election.

The third problem is US military spending which now tallies $620 billion annually in contrast to the $500 billion spent by the rest of the world. Much of the run-up from previous levels has of course occurred since September 11th. One could argue that the real economic decision for the incoming president is whether this level of military spending is sustainable, or even necessary.

Leading American scholars and others have recently proposed that the time has come for the US to examine whether these expenditures really serve American strategic interests. This fledgling debate has raised disquieting questions about why the US government has made decisions which are arguably not in its own economic interest, and exactly whose interest these decisions serve if not Americans'.

Whether near-term reductions in military spending could realistically be achieved is an open question. The sheer scale of the expenditures means that powerful vested interests, including US defense contractors and foreign nations habituated to American military grants and aid, would create formidable obstacles to budget reductions.

Nonetheless, the debate will be spurred or quelled depending on whether the new US president also sees the world as a menacing and unfriendly place that requires a dominant military stance. Or whether he or she will begin to craft a different US policy that balances defense with other pressing US economic needs: the reduction of deficit spending, a more balanced budget, solutions to environmental problems, and investment to increase American competitiveness in global markets.

While visiting the Middle East, former President Bill Clinton once remarked that the US has two choices. The first is to use its economic might to enforce its will around the world. The second is to help lay the groundwork for a future world in which the US could comfortably co-exist.

Let us hope that the new US president heeds those words.

Dr Rod Monger is a business professor at American University in Dubai.