- The Washington Times - Tuesday, July 15, 2003

Federal Reserve Chairman Alan Greenspan traveled to Capitol Hill yesterday to deliver the Fed’s semi-annual report on monetary policy. Appearing before the House Financial Services Committee, he delivered a relatively upbeat report for the next six quarters, which will be so crucial to President Bush’s re-election campaign.

The Fed projects that the economy will grow between 2.5 percent and 2.75 percent during 2003. To be sure, that represents a major downshift from the Fed’s forecast in February, which projected growth between 3.25 percent and 3.5 percent. Still, the Fed’s July forecast suggests a robust expansion during the second half of the year. If one makes the reasonable assumption that the economy expanded at the same annual rate during the just-concluded second quarter as it did during the first (i.e., 1.4 percent), then back-of-the-envelope calculations indicate that the Fed’s revised annual forecast expects the economy to grow by a relatively robust 3.8 percent annual rate during the second half of 2003.

That growth rate, according to the Fed, should be sufficiently rapid to begin lowering the unemployment rate by the fourth quarter from its current nine-year high of 6.4 percent.

The Fed expects 2004 to be even better. Growth should be between 3.75 percent and 4.75 percent during 2004. The unemployment rate is projected to fall to between 5.5 percent and 6 percent by the fourth quarter of next year, when the election will be held.

If the Fed’s crystal ball proves to be accurate, the economy would likely play to Mr. Bush’s benefit during the campaign next year. As the American political economy has demonstrated over the years, when it comes to re-electing presidents, voters generally attribute greater significance to the sustained trend in the direction of the unemployment rate, rather than to its actual level. Thus, while the unemployment rate was a historically hefty 7.4 percent when Ronald Reagan captured 49 states in 1984, it had fallen steeply from its peak of nearly 11 percent two years earlier. When Mr. Bush’s father sought re-election in 1992, the unemployment rate was 7.3 percent. That was too close to its cyclical peak of 7.7 percent reached a few months earlier; and it was 2 percentage points higher than the unemployment rate he had inherited from Mr. Reagan.

Indeed, an unemployment rate of 5.5 percent at election time 2004 would be only marginally higher than the 5.3 percent rate that prevailed when Bill Clinton was resoundingly re-elected in 1996. Moreover, should the jobless rate fall to that level, as the Fed projects, Mr. Bush would be seeking re-election while the misery index was approaching rock bottom. Made famous by Jimmy Carter during the 1976 campaign, the misery index adds the inflation rate (measured by the consumer price index) to the unemployment rate. With inflation likely to be less than 2 percent next year, a 5.5 percent unemployment rate would produce a misery index of less than 8 and perhaps as low as 7. Not since 1956 has a president — including Messrs. Clinton, Reagan and Nixon, all of whom were re-elected in landslides — sought re-election when the misery index was below 8.

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