George Bush should be looking over his shoulder for the ghost of Jimmy Carter.
Recent political history shows the desirability of having recessions early enough in an administration to allow a managed recovery in the 12 months before a reelection effort:
The Nixon administration produced this kind of timing in its first term and won easily in 1972.
In 1982, Ronald Reagan presided over the worst recession since World War II, but a recovery began in 1983 and the economy was in fine shape by November 1984, resulting in an election landslide.
Jimmy Carter got it backwards. Strong economic growth in 1977-78 caused accelerating inflation in1979, necessitating tight money late that year. The result was a recession in mid-1980 and Carter's unexpectedly early return to Georgia.
Against this backdrop, the political timing of the current downturn in the U.S. economy might appear to be almost ideal for the Bush administration -- if Congress and the administration manage to work their way out of the current budget impasse.
But a closer look reveals that this may not be enough to help President Bush come election day. Monetary and fiscal policy are now in an unusually weak position to encourage a recovery, so this downturn may drag on long enough to produce very bad timing for Bush. Similarities to Jimmy Carter's unfortunate business cycle experience are even possible.
Studies of voter behavior show that Americans have very short memories. They do not care how the economy was performing a year or more before the election, but they do react to its performance during the summer and fall of an election year. Incumbents do well if the economy is strong at election time, even if things were miserable a year or two earlier.
From the perspective of an incumbent, a recession that bottoms out about 18 months before the election is perfect, because a recovery can be underway, without accelerating inflation, when the voters must be faced.
Inflation tends to lag the business cycle, meaning that price increases will be modest early in a recovery when output and employment are rising strongly, thus creating an ideal time for an incumbent to face an election.
A recession in late 1990 and early 1991, which allowed the beginnings of a recovery in late 1991 and strong growth in 1992, would be ideal for Bush. He would have been in serious trouble if the anemic growth of 1989 had continued through 1991, making a recession almost inevitable in 1992.
The problem for the Bush administration is managing a recovery in 1992. An economist would normally suggest a larger government budget deficit and a more expansionary monetary policy during 1991 as the route to the desired recovery, but neither policy option is readily availble.
U.S. budget deficits have been enormous throughout the last 10 years, and there is now a great need to reduce them. The current budgetary impasse aside, the huge accumulation of federal debt, much of which is held by foreign investors, means that fiscal policy will have to be tightened rather than made more expansionary.
Normally, that would leave the option of an expansionary monetary policy, which should suffice. The Federal Reserve System, however, faces major obstacles to a more expansionary policy.
First, the consumer price index is rising by more than 5 percent per year, which is considerably faster than a few years ago, and recent increases in the price of oil will cause a further acceleration of inflation in the near future. It is hard to imagine the Federal Reserve allowing money supply growth to accelerate when oil price increases are making inflation worse.
Second, the Fed faces what may be even more severe constraints from abroad.
The huge trade and current account deficits of the 1980s have made the United States dependent on foreign capital. In order to keep Japanese and German money in this country, thereby stabilizing the exchange rate for the dollar, U.S. interest rates must be attractive.
A decline in U.S. yields, particularly when interest rates are rising abroad, could easily cause an enormous withdrawal of Japanese and German funds that would drive the dollar down sharply. Such a decline in the exchange rate for the dollar would raise domestic prices of imports, thereby seriously worsening inflation.
In addition, the United States has been committed since the 1987 Louvre Conference to exchange rate stability in recent years, and the adoption of a monetary policy that caused a return to exchange rate volatility would be unpopular among our allies.
U.S. short-term interest rates are no longer significantly above those prevailing in Germany and Japan, in part because yields in those countries have increased in recent months. Since prices are rising faster in the United States than in Germany or Japan, inflation-adjusted or real interest rates are about 2 percentage points lower in the United States than in these two competing countries. Recent press reports have suggested rising Japanese and Germany doubts about the desirability of investing in the United States.
The exchange rate for the dollar has already declined by slightly over 10 percent during the last year, which means that foreign investors have absorbed sizable capital losses here. A further decline in U.S. interest rates, particularly when inflation here remains serious, would create a large risk of massive capital flows out of this country and a resulting collapse of the dollar exchange rate.
The Federal Reserve System faces a nasty dilemma. It can either maintain relatively tight money, thus lengthening the oncoming recession, or ease monetary policy to produce a recovery, at the risk of causing a sharp decline in the exchange rate for the dollar and much worse inflation.
Alan Greenspan is unlikely to want to be remembered as the Fed chairman who restarted the inflation that Paul Volker stopped. As a result, he will probably decide to defend the dollar, even at the cost of a longer recession.
All this means a strong recovery may not be underway by mid-1992. The recession is starting early enough to allow such a recovery under normal circumstances, but the situation is far from normal. What looked like good political timing for Bush may turn out to be very bad timing.
Since U.S. dependence on foreign capital and the resulting constraints on U.S. monetary policy are the outgrowth of the Reagan administration's lack of budgetary self-discipline, this is a case of the ex-president's chickens coming home to roost on the ex-vice president.
Robert M. Dunn Jr. is a professor of economics at George Washington University.