What if it's the economy

By John Maggs

updated 5:12 p.m. ET Oct. 13, 2006

WASHINGTON - As he revs up his campaigning for the fall election, President Bush has been thinking about the economy, and about family history.

In late September, when the major electoral challenge for the Republicans was Iraq, Bush flew to Ohio for one of a series of appearances on the economy that will continue until Election Day. The destination was Meyer Tool, a midsize maker of testing products for the aerospace industry. Unlike most manufacturers -- a sector that has lost 3 million jobs since 2000 and hasn't gained any ground in the turnaround in employment that began in 2003 -- Meyer Tool has hired 125 workers in the past 12 months. Flanked by Meyer President Artyn Easton and Vice President Beau Easton, Bush noted, "We've got a father and a son who are running this company," and he complimented them for "doing what you are doing" to make the company a success.

Ten days before, in a Rose Garden press conference , the subject had again been the economy, and the president's mind drifted to another father-son team. Bush trotted out what has become his standard line on the economy: The economy is strong; it is strong because of tax cuts; and given the chance, Democrats will raise taxes to the detriment of working Americans. Despite polls indicating that Iraq and the war on terror will dominate the election, Bush suggested another possibility: "I've always felt the economy is a determinate issue, if not the determinate issue, in campaigns. We've had a little history of that in our family."

A little. Bush remembers the disastrous 1992 re-election campaign of his father, who didn't appear to recognize that Americans cared much more about stagnant wages and a sluggish economy than about his victory in liberating Kuwait from Saddam Hussein. President George H.W. Bush, in trying to project confidence (so he said later), came off as unconcerned about the effects of a mild recession (one that economists later concluded had ended just as his re-election campaign began) and about the drop in employment and wages that continued in 1992 during the slow recovery. His seeming detachment reinforced the idea that the elder, more patrician Bush was out of touch with average Americans.

Whether George W. Bush's decision to invade Iraq had Oedipal roots has been the topic of much speculation; less attention, however, has been paid to the more crucial lesson taken from the father's presidency -- the primacy of the economy in elections. The younger Bush has always explicitly acknowledged that his unwavering support of tax cuts in the face of surging budget deficits was inspired by the conservative revolt in 1992 after his father broke his pledge not to raise taxes. Likewise, faced with a tough midterm election for Republicans, Bush is hoping that many voters will look at all of the ways that 2006 is different from 1992 -- the 4.6 percent unemployment rate versus the 7.6 percent rate in September 1992, the 6.6 million jobs created since mid-2003, and the 3.7 percent annual economic growth since then. (He's also hoping that voters won't focus on the less spectacular: only 4 million new jobs and an average 2.6 percent yearly growth counting from 2001, when Republicans took over government.)

Democrats say they would welcome an election that turns on the economy, and they make their own case that most Americans have seen their living standards erode during Republican rule, largely because of tax cuts that the Democrats claim were skewed toward the rich. On the day of the Ohio visit, Democratic National Committee Chairman Howard Dean put out a statement titled "Americans Not Buying Bush's PR Campaign on the Economy," and used Census Bureau data to argue that household income dropped for most workers last year.

If past midterm elections are a guide, voters may hold Republican lawmakers responsible for Bush's conduct of the war in Iraq, but Congress was a much more equal partner in passing tax cuts and managing the economy. To the extent that voters are influenced by the economy, they are probably more likely to view their vote for a senator or representative as a referendum on recent economic policy, based heavily on tax cuts that almost all Republicans in Congress voted for repeatedly and almost all Democrats opposed. Bush believes that most voters will be alarmed at his image of Democrats intent on raising taxes -- he mentions it every time he mentions the economy. Democrats are betting that most voters are unhappy that tax cuts and income gains have gone mostly to upper-income people and want a Democratic Congress to change course.

Seeing Is Believing
One big question about this election is what voters see when they look at the economy. Will it be the full effect of five and half years of nearly complete Republican control of government? Or will they focus on a snapshot of recent conditions? Polling and other research indicate that most voters who are influenced by economic conditions (rather than national security or other issues) are swayed by events in the six months or so before an election. In 1992, George H.W. Bush found that a turnaround in economic growth in the second half of 1992 came too late to help his campaign. In 2006, job growth has been solid, if not spectacular, since February, averaging about 126,000 jobs a month, a level that has almost exactly matched the growth of the working-age population. Economic growth ran at about a 4 percent annual rate for the first six months of the year, but it is expected to slow down in the second half.

Edward Lazear, the chairman of Bush's Council of Economic Advisers, notes that while average wages had been rising at an accelerating rate since 2004, inflation had more than wiped out those gains, resulting in a drop in average wages after inflation through August of this year. Lazear said that almost all of this decline was due to the surge in energy costs beginning in 2005. Factor out energy, and real wages would be rising now, he said.

This observation bodes well for the fall, because of the sharp drop in energy prices that recently brought gasoline prices down by as much as 25 percent, below $2 a gallon in some areas. "This represents -- no, this is -- a big boost in the spending power of consumers," Lazear said.

Likewise, a moderation in long-term interest rates in the past three months is likely to boost the confidence of consumers. The slowdown in the housing sector, even in those areas where home prices are dropping, may not have a huge effect on the confidence of the average homeowner. While almost everyone will notice the drop in energy prices in their weekly purchases, only a small proportion of the population will perceive a loss in wealth from selling a house for less than they expected, Lazear said.

Democratic leaders, candidates, and their surrogates are likely to maintain their argument that the Bush tax cuts in 2001 and 2003 resulted in a windfall for the wealthy and contributed to the relative stagnation in income for middle- and low-income families. They cite data showing that most American families saw their take-home pay lag behind inflation in the past five and half years, and they say that Republican tax cuts have made the distribution of wealth and income more unequal today than at any other time since the early 20th century.

From a crassly political point of view, one question that has hung over the Bush tax cuts is why Republicans wouldn't have structured them to give a proportionally larger refund to the lower 80 percent of the income-distribution curve, which comprises vastly more voters than the top 20 percent, which got the lion's share of the benefits. Was it smart politics to give most of the tax cuts to a small number of rich folks, even if they do pay most income taxes? Wasn't it dumb to stiff the vastly larger bloc of voters who aren't rich?

Not as dumb as one might think, based on who actually votes. During the 2004 election, about 34 million voting-age people lived in households that earned $30,000 a year or less, according to the Census Bureau [PDF]. Fifteen million, or about 44 percent of them, turned out to vote. On the other hand, 19 million people from households earning $100,000 or more turned out to vote that year. The number of high-income people in the population was much smaller -- only 24 million compared with 34 million lower-income people. But they turned out to vote at nearly twice the rate -- 78 percent.

According to exit polling by CNN, 58.7 percent of voters from households with more than $100,000 a year in income voted for Bush in 2004, and 41.2 percent of them voted for Kerry.

Exit polling doesn't reveal why high-income people, in particular, voted the way they did, but we do know a related fact -- in 2004, taxpayers earning more than $100,000 a year received 59 percent of the 2001 and 2003 tax cuts. By comparison, people from families earning $30,000 or less got 8 percent of the tax-cut pie. Upper-income voters also turned out in greater numbers in 2004 than they had before. In 2000, the turnout rate for people from households earning $75,000 or more was 71.5 percent, but it rose to 76.5 percent in 2004.

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