Avoiding a Democratic Dunkirk

Robert Kuttner

October 19, 1992|By Robert Kuttner

IN December 1980, as the Reagan team geared up, David Stockman wrote a now famous memo titled "Avoiding a GOP Economic Dunkirk." Mr. Stockman worried that the economy, reeling from high unemployment, inflation, and the Federal Reserve's tight-money cure, would worsen on Ronald Reagan's watch.

The GOP did take losses in the 1982 mid-term elections. But by 1984 the Fed had lightened up, the tax cut of 1981 was stimulating a (short-lived) boom, and Ronald Reagan would be re-elected handily.

Like the original Dunkirk evacuation of the British fleet in 1940, the Reagan crew salvaged enough to fight another day. The Gipper would be in happy retirement by the time reality fell in on George Bush.

And perhaps on Bill Clinton, as well? If Mr. Clinton is elected, as now seems likely, he could also face an economic Dunkirk. The particulars are different, but the political perils the same.

If a soft economy slides into prolonged recession, Mr. Clinton's party would likely lose seats in the 1994 mid-term election, and face renewed policy gridlock. Absent the lucky timing that was Mr. Reagan's trademark, that could portend another failed presidency.

The risks are several:

* A deepening recession and stock market crash. The Fed has kept a feeble economy on life supports, with cheap money. Much more of the same would invite collapse of the dollar. Once Wall Street concludes that the low interest rate era is over, or that the dollar is tumbling, the stock market will likely tumble, too.

The more that reckoning is postponed, what is fairly a ReaganBush crash will be pinned on Bill Clinton. In the first presidential debate, Mr. Bush claimed the stock market was softening in fear of a Clinton election.

* An international money crisis. From late 1985 through 1988, the United States, Germany and Japan carefully managed the world's money markets. That stability was good for business. But after the Berlin Wall came down Germany pursued its own course. Treasury Secretary Baker, the architect of global money management, moved to the State Department, leaving the Treasury to his parochial successor, Nicholas Brady.

Today, nobody is managing the world's money. Germany and the United States are pursuing opposite courses, and Japan is reeling from its own financial morning-after. Absent real economic statecraft, global currency chaos will turn catastrophic.

* A deepening domestic banking and fiscal crisis. Mr. Clinton could find America's banks in even worse shape than forecast. Another bank bailout would restrict credit and spike the deficit upward. A softening economy and higher interest costs would ** only increase the deficit further.

But the biggest risk is not in the cards that history deals Bill Clinton, but in how he plays them. After all, Franklin Roosevelt and Ronald Reagan, to invoke opposite ends of the spectrum, also inherited shaky economies. Both, in very different ways, let the conventional wisdom be damned. Both stimulated recoveries, restored confidence and were re-elected handily.

Jimmy Carter inherited a weak economy, too. But Mr. Carter, fearing panic in the money markets, handed Paul Volcker the reins. Mr. Volcker reciprocated by sponsoring a wrenching disinflation in an election year. This had the twin virtue of restoring financial calm (at great cost to wage earners), and dispatching the Democrats.

Mr. Clinton's challenge is to avoid becoming another Democratic hostage of the money markets. A chorus of conservative commentators will soon conclude from the mounting crisis that "markets don't trust Democrats to manage the economy." Mr. Clinton will be urged to appoint people of orthodox views to key economic posts, to offer the requisite reassurance. He has already been urged to bring back Mr. Volcker as treasury secretary!

Orthodox advisers will tender orthodox advice: Cut the deficit, rein in spending and wait for nature to take its course. Plenty of nominal Democrats -- in think tanks, in powerful Washington law firms, on Wall Street and among Democratic fund-raisers, fervently believe this gospel. (Can't they just move to the GOP, where they belong, and let the opposition have even one party?)

If Mr. Clinton follows that advice, he will be stymied before he begins. Nature taking its course will doom the economy to another decade of stagnant living standards. And voters will again conclude that Democrats can't cut it.

Even if Mr. Clinton responds incrementally, with a bit of public works over here and some modest educational and medical reform over there, the results will be unimpressive. The fact is, our deferred social and economic problems are massive, and require massive remediation.

The best form of reassurance is to restore real economic health. That will require reversing the disastrous casino economy of the 1980s and its ideological underpinnings. It will entail more regulation of everything from airlines to health care to banks, more public investment and, for a time, more public debt. Deficit reduction needs to come, but after recovery.

The Reagan economic cure proved illusory. A cold-bath counter-cure would be even worse. And a medley of muddle-though would be the worst remedy of all. Mr. Clinton must live down the charge that he tries to please everybody. He needs to choose an economic course, hold to it, and fast.

Robert Kuttner writes a column on economic matters.

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