When Bill Clinton defeated George Bush senior in the presidential election 11 years ago, his campaign theme – “It’s the economy, stupid” – provided a neat summary of why it happened.

Bush senior had reneged on a promise (“read my lips”) not to raise taxes. Worse, he appeared to be presiding over a stagnant economy. While subsequent figures showed growth to have been reasonably brisk in 1992, this is not how it felt. Voters could only sense economic insecurity and what in its initial stages was the famous jobless recovery. Downsizing was the buzzword of the early 1990s, and the voters did not like it at all.

George W. Bush has yet to decide on a slogan for his re-election campaign, leading to the November 2004 presidential run-off. One that would fairly reflect what is most on the White House’s mind would, however, be: “It’s still the economy, stupid.”

The president knows that, for all the public admiration for his resolute response to the 9/11 terrorist attacks, and for all the military success America and her allies achieved in Afghanistan and Iraq – the latter proving a mixed political blessing on both sides of the Atlantic – victory in 2004 is far from assured.

The election will come down, as most do, to what US pollsters call “pocketbook” issues. Do people feel more prosperous, or will they be inclined to punish the incumbent for their economic disappointments? Do they feel the economy is in safe hands?

Remember that, in economic terms, the Bush era has contrasted sharply with the Clinton years. Clinton presided over an economic expansion of record duration, which came to an end almost exactly at the point he left office. His successor has presided over a recession and rising unemployment.

Under Clinton the federal government ran up spectacular budget surpluses stretching out into the indefinite future. Under Bush the opposite has been true, of which more in a moment. Most tellingly for the American public, the roaring nineties were a time when even the most incompetent investor made money in the stock market and many made a lot. For a nation of stockholders the bursting of the share-price bubble has been keenly felt.

So economic growth has become the White House’s priority. The president cannot afford to go into the election with the economy limping along and the scars of the recession and stock market slide still visible. Alan Greenspan at the Federal Reserve is playing his part in achieving this.

The Fed, against the advice of some economists, has been adopting a conspicuously growth-friendly stance, cutting its key Fed Funds rate to just 1 per cent and promising to keep it there as long as it takes. Greenspan, whose reputation also suffered with the stock market’s slide, has his own interest in the economy being seen restored to rude health.

The most dramatic shift, however, has been in terms of fiscal policy, and the return to large-scale government borrowing. Paul Krugman, the noted economist and New York Times columnist, provides a telling image in his new book, The Great Unravelling.

“Metaphors can be tricky things, but Manhattan’s ‘debt clock is as good as it comes,” he writes. “A public-spirited businessman installed the clock in 1989, hoping to shame politicians into acting responsibly. Huge numbers counted off the ever-rising national debt … But in the late 1990s a funny thing happened: the government’s tax take soared along with the stock market, and those mammoth budget deficits first shrank, then turned into record surpluses. In September 2000, the owner of the clock pulled the plug. In July 2002, with the nation once again facing deficits as far as the eye could see, he turned it back on.”

The return of big budget deficits has been the most notable economic feature of the Bush administration’s period in office. It has come, as Krugman suggests, partly from the downturn in the stock market and the economy. But the rising deficit owes much more to deliberate policy actions.

When Bush took office he was determined that there were more productive uses for the budget surplus than repaying debt indefinitely. He introduced a controversial tax cut, targeted at the better-off and costing at least $1,000 billion (independent economists suggested as much as $2,500 billion) over 10 years. This was an immediate change. The surpluses built up by a Democrat president were to be used for tax cuts by a Republican.

Then came September 11, and the need to spend heavily on homeland security – about which there was no political disagreement – at a time when the economy was in recession. Then came Afghanistan, then Iraq, with the reconstruction and policing of the latter set to cost many tens of billions more than first envisaged. Faced with this changed world, Bush could have cancelled the tax cuts. That, however, might have been too reminiscent of his father’s political error.

So the big budget deficits have got bigger. The International Monetary Fund estimates a budget deficit of 6 per cent of GDP this year – most of which is “structural” rather than cyclical – with something similar for 2004. There has, says the IMF, been a “serious deterioration” in the long-run outlook for America’s public finances and there is “a pressing need for a credible medium-term framework” for restoring balance.

The budget deficit, of course, is not the only problem. America also has a current account deficit of more than 5 per cent of GDP. When the IMF’s chief economist said recently that America had “the best recovery money can buy”, he was referring to the fact that the recovery is being bought on the back of borrowing from abroad.

Low interest rates and ballooning budget deficit are not the only ways the White House is seeking to guarantee Bush’s re-election. “Foreign exchange policy is the third leg of the macro policy stool,” says Stephen Roach, chief economist at Morgan Stanley. When G7 finance ministers met in Dubai in late September, they called for a more flexible approach on exchange rates, code for a soft dollar approach from the US government. A lower dollar will, it is hoped, provide an additional growth boost.

What will the consequences of all this? If Bush was in his final term as president, the verdict would be that he is going for growth in such a scorched-earth way as to bequeath serious problems for his successor. But he is hoping to be back, implying either that he believes it will all come right, or that he will face a nasty economic hangover, and have to take some very tough decisions. Most economists think it will be the latter.

From Business Voice, November 2003