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Recession Rerun?
April 16, 2002
by Irwin Stelzer
“The fact that we’re dependent on unstable countries [for oil] is a reason why I do not believe that we’re out of the economic woods yet. We’ve got to be very cautious about making bold predictions about the economy. We’re an energy-dependent nation.” That’s what President George Bush told the press last week, revealing a pair of anxieties as he contemplates the November congressional elections.
The first of the president’s worries is that the current economic recovery will peter out. His team is aware that last year’s brief and shallow recession—if that modest downtick merits the name—did not do what recessions are supposed to do: correct the imbalances in the economy. Consumers continued to spend, which had the beneficial effect of preventing
the economy from going into a steep dive. But they also continued to pile up debt, causing White House economists to worry that they might suddenly zip their wallets if the expected rise in interest rates increases the burden of payments on mortgage and credit card debt.
The other imbalance, that in the pattern of trade, also remains uncorrected. So long as America continues to attract an inflow of foreign investment capital, it can cover its propensity to buy more from foreigners than it sells to them. But if foreigners holding dollars begin to worry that America is too deeply indebted to the rest of the world, a flight from the U.S. currency could ensue, driving down the dollar, triggering inflation, and forcing the Fed to raise interest rates sooner and faster than it is anyhow planning to do.
The president’s second worry relates to oil. Saddam Hussein’s decision to close his country’s taps for 30 days in support of the Palestinian suicide bombers caused a temporary run-up in oil prices, but reassurances from Saudi Arabia, Norway, and, rumor has it, Iran, that they would make up the 1.5 million barrel-per-day shortfall soon calmed the markets.
More worrying for America is the unrest in oil-rich Venezuela. Oil workers’ strikes have disrupted supplies from that country, and late last week the military forced the resignation of left-wing president Hugo Chavez. Whether the new government proves able to end the supply disruption, remains to be seen. America’s Gulf Coast refineries are heavily dependent on Venezuela’s more than 2.2 million barrels per day of heavy crude and gasoline. Mexico hasn’t sufficient excess capacity to fill a gap of that size, and even if the Saudis were to step up production immediately it would take six weeks for the oil to reach U.S. refineries.
Petrol prices have already risen by over 25 cents per gallon (more than 22 percent), and with airline traffic recovering and the summer driving season approaching, any interruption of refinery output would drive prices up even further. Those price rises are the equivalent of a tax increase, except that the money transferred from consumers’ pockets goes into the treasuries of oil-producing countries, rather than into the coffers of the U.S. government. The result would have to be lower spending on consumer goods other than petrol, a development that would certainly make businesses reluctant to step up investment in new plant and equipment. And it is just such a rise in investment that will be required to sustain the current recovery.
It should be pointed out that the president’s concern is one part real nervousness and one part political calculation. By expressing uncertainty about the durability of the current recovery he justifies his decision to cut taxes and increase government spending as an “insurance policy” against the so-called “double dip”—a brief recovery followed by another slide.
And by worrying aloud about America’s dependence on foreign oil, Bush justifies his efforts to get Congress to approve drilling for oil in the Arctic National Wildlife Refuge (ANWR). Never mind that at prices of around $20 per barrel, production from the refuge will come to only about one million barrels a day, and that won’t happen until 2010—even if Congress acts promptly, which it won’t. That’s not enough oil to cover even the increase in
American’s use of oil between now and then.
Not that the president is wrong to be concerned about oil supplies. Most experts say that every $10 increase in oil prices cuts U.S. economic growth by somewhere between 0.2 percent and 0.4 percent—some put the figure as high as 0.6 percent. Reductions of that magnitude are hardly catastrophic for an economy that is now growing at an annual rate of between 4 percent and 5 percent, but politicians always think that more growth is better than less.
More important from a political point of view is the fact that any supply reduction and consequent price run-up, even if temporary, would heighten an emerging view that the president is not quite as much in control of the nation’s destiny as he seemed to be in the days immediately following September 11.
Remember: this is a president who was elected as a free trader, but has since imposed tariffs on imported steel. This is a president who was elected on a pledge to reform the education system, but has caved in to Ted Kennedy and the liberals and endorsed their pro-teacher, anti-pupil education bill. This is a president pledged to veto any campaign reform bill that curtailed the right of individuals to speak out on the issues, but who then meekly signed just such a bill early one morning, out of sight of the press.
Most important, this is a president who declared war on terrorists and all who house and succor them, but then caved in to the demands of Palestinian suicide bombers and sent his secretary of state to treat with one of the world’s most durable terrorists, Yasser Arafat.
No one of these retreats need be fatal. But throw even a temporary oil crisis into the mix, and voters may begin to wonder whether Bush is indeed the straight-talking, take-charge guy that they have been seeing on their television screens. If that uncertainty becomes a desire to keep control of the Senate in the hands of the Democrats, and perhaps give them control of the House of Representatives as well, Bush may find himself on a downward slide from which it will be difficult to recover in 2004.
He might just wake up to find that his nightmare, a second Bush doomed to a one-term presidency, was more than a bad dream.
This article first appeared in London’s Sunday Times (April 14, 2002) and is reprinted with permission.
The first of the president’s worries is that the current economic recovery will peter out. His team is aware that last year’s brief and shallow recession—if that modest downtick merits the name—did not do what recessions are supposed to do: correct the imbalances in the economy. Consumers continued to spend, which had the beneficial effect of preventing
the economy from going into a steep dive. But they also continued to pile up debt, causing White House economists to worry that they might suddenly zip their wallets if the expected rise in interest rates increases the burden of payments on mortgage and credit card debt.
The other imbalance, that in the pattern of trade, also remains uncorrected. So long as America continues to attract an inflow of foreign investment capital, it can cover its propensity to buy more from foreigners than it sells to them. But if foreigners holding dollars begin to worry that America is too deeply indebted to the rest of the world, a flight from the U.S. currency could ensue, driving down the dollar, triggering inflation, and forcing the Fed to raise interest rates sooner and faster than it is anyhow planning to do.
The president’s second worry relates to oil. Saddam Hussein’s decision to close his country’s taps for 30 days in support of the Palestinian suicide bombers caused a temporary run-up in oil prices, but reassurances from Saudi Arabia, Norway, and, rumor has it, Iran, that they would make up the 1.5 million barrel-per-day shortfall soon calmed the markets.
More worrying for America is the unrest in oil-rich Venezuela. Oil workers’ strikes have disrupted supplies from that country, and late last week the military forced the resignation of left-wing president Hugo Chavez. Whether the new government proves able to end the supply disruption, remains to be seen. America’s Gulf Coast refineries are heavily dependent on Venezuela’s more than 2.2 million barrels per day of heavy crude and gasoline. Mexico hasn’t sufficient excess capacity to fill a gap of that size, and even if the Saudis were to step up production immediately it would take six weeks for the oil to reach U.S. refineries.
Petrol prices have already risen by over 25 cents per gallon (more than 22 percent), and with airline traffic recovering and the summer driving season approaching, any interruption of refinery output would drive prices up even further. Those price rises are the equivalent of a tax increase, except that the money transferred from consumers’ pockets goes into the treasuries of oil-producing countries, rather than into the coffers of the U.S. government. The result would have to be lower spending on consumer goods other than petrol, a development that would certainly make businesses reluctant to step up investment in new plant and equipment. And it is just such a rise in investment that will be required to sustain the current recovery.
It should be pointed out that the president’s concern is one part real nervousness and one part political calculation. By expressing uncertainty about the durability of the current recovery he justifies his decision to cut taxes and increase government spending as an “insurance policy” against the so-called “double dip”—a brief recovery followed by another slide.
And by worrying aloud about America’s dependence on foreign oil, Bush justifies his efforts to get Congress to approve drilling for oil in the Arctic National Wildlife Refuge (ANWR). Never mind that at prices of around $20 per barrel, production from the refuge will come to only about one million barrels a day, and that won’t happen until 2010—even if Congress acts promptly, which it won’t. That’s not enough oil to cover even the increase in
American’s use of oil between now and then.
Not that the president is wrong to be concerned about oil supplies. Most experts say that every $10 increase in oil prices cuts U.S. economic growth by somewhere between 0.2 percent and 0.4 percent—some put the figure as high as 0.6 percent. Reductions of that magnitude are hardly catastrophic for an economy that is now growing at an annual rate of between 4 percent and 5 percent, but politicians always think that more growth is better than less.
More important from a political point of view is the fact that any supply reduction and consequent price run-up, even if temporary, would heighten an emerging view that the president is not quite as much in control of the nation’s destiny as he seemed to be in the days immediately following September 11.
Remember: this is a president who was elected as a free trader, but has since imposed tariffs on imported steel. This is a president who was elected on a pledge to reform the education system, but has caved in to Ted Kennedy and the liberals and endorsed their pro-teacher, anti-pupil education bill. This is a president pledged to veto any campaign reform bill that curtailed the right of individuals to speak out on the issues, but who then meekly signed just such a bill early one morning, out of sight of the press.
Most important, this is a president who declared war on terrorists and all who house and succor them, but then caved in to the demands of Palestinian suicide bombers and sent his secretary of state to treat with one of the world’s most durable terrorists, Yasser Arafat.
No one of these retreats need be fatal. But throw even a temporary oil crisis into the mix, and voters may begin to wonder whether Bush is indeed the straight-talking, take-charge guy that they have been seeing on their television screens. If that uncertainty becomes a desire to keep control of the Senate in the hands of the Democrats, and perhaps give them control of the House of Representatives as well, Bush may find himself on a downward slide from which it will be difficult to recover in 2004.
He might just wake up to find that his nightmare, a second Bush doomed to a one-term presidency, was more than a bad dream.
This article first appeared in London’s Sunday Times (April 14, 2002) and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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