'Crunch' Time For the GOP

By Robert J. Samuelson
Wednesday, November 21, 2007

Don't believe all the hype about the "credit crunch." Not yet, anyway. It's supposedly suffocating the economy. True, big banks and investment houses have suffered multibillion-dollar losses on "subprime" mortgages and related securities. But except for housing -- where lending has collapsed -- the effects on consumers and businesses have so far been modest. Should the effects get worse, however, the "crunch" wouldn't be just about economics. It could decide who becomes the next president.

People vote their pocketbooks. Up to a point, this is unfortunate, because politicians of both parties usually get too much praise or blame for the economy; their influence on it is often negligible. But politics isn't always rational or fair, and a slowing economy is already a burden that -- along with Iraq -- Republicans will carry into the election.

Consider the latest economic outlook from the forecasting firm Global Insight. Though not yet predicting a recession, it sketches an economy that won't feel good for much of the 2008 election cycle:

¿ Housing's slide continues. New home starts fall to 1 million, down from 2.1 million in 2005. By early 2009, home prices decline a cumulative 11 percent from their peak. On a median-priced home of $220,000, the loss is $24,000.

¿ Car and light-truck sales dip to 15.7 million, the lowest since 1998; they were 16.9 million as recently as 2005.

¿ Unemployment averages 5 percent, up from 4.6 percent this year.

¿ Pretax corporate profits decline 2.1 percent, the first decrease since 2001.

Moreover, Global Insight thinks there's a 35 percent chance that the slowdown becomes a recession. Two threats loom. One is oil. The forecast assumes that prices will fall from about $90 a barrel now to $76 in 2008. Every $10 above that is reckoned to raise gasoline prices 19 cents a gallon and cut employment by 100,000. The second threat is an aggravated credit crunch.

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