ANALYSTS: ODDS FAVOR RECESSION REGARDLESS OF ELECTION OUTCOME
Byline: Jim Ostroff / Joyce Barrett / Joanna Ramey
WASHINGTON — Hold on tight.
No matter who’s in the White House the next four years, it’s likely to be a bumpy ride.
Despite the feel-good programs being pushed by both presidential candidates as they head toward Tuesday’s vote, many analysts warn there’s a recession on the horizon. They say it’s simply a function of the business cycle, as the upward curve runs its predicted course in about two years.
How the President — whether it’s Bill Clinton or Bob Dole — deals with this downturn could have the most lasting impact on the country. But with the odds favoring Clinton’s return to the Oval Office, much of the industry speculation focuses on how he might react.
And for those involved with the increasing globalization of apparel retailing and manufacturing, a big question is whether a Clinton administration would pull back from his free-trade proclivities to alleviate a recession’s impact on jobs — and at the same time satisfy the demands of organized labor, which has given him solid backing.
The direction of trade, however, will depend much more on the makeup of Congress. Should the Democrats, in the strength of a Clinton victory, regain control of Capitol Hill, protectionism, many say, could have a more solid footing, at least among legislators. With Republicans continuing to hold the reins — whether Dole is elected or not — free-trade policies should prevail.
Here’s what the analysts are saying about the ramifications on the economy and trade as they look to Tuesday’s balloting.
When asked what he’s telling retailers about a second Clinton administration, Carl Steidtmann, research director for Management Horizons, doesn’t hesitate before replying: “I’m telling them this will be the last good Christmas of the decade.” Steidtmann says he’s basing his forecast on the widely held view that no matter who wins on Tuesday, the victor will face a recession sometime in the middle of his four-year term.
Some say signs of this slowdown are already being felt. Growth in the Gross Domestic Product is ebbing, and employer costs and wages are starting to inch up, which economists say are signals the current business cycle — starting with the last recovery in 1992 — has run its natural course and is on the wane.
Steidtmann forecasts that a recession will hit 12 to 18 months into Clinton’s expected second term and that it will be more acute than the 1991 recession, given the escalating levels of consumer debt and personal bankruptcies. While he said Clinton’s promised tax breaks for education may make shoppers feel good, he does not see any policy changes — aside from those made by the Federal Reserve — as having any meaningful impact on consumer spending or otherwise turning the economy around.
“I think the forces of the business cycle are much greater than economic policy,” he said.
But some speculate that Clinton could look to more far-reaching measures to attack an economic downturn.
“A recession presumes the White House will be looking for quick-fix strategies, and limited tax reform could be a very seductive option for Bill Clinton and some in Congress,” said Tracy Mullin, National Retail Federation president. “For example, tinkering with the capital gains [tax] rate is something that could have a positive effect.”
Nevertheless, Mullin said Clinton isn’t likely to resort to “knee-jerk” responses intended to jump-start an ailing economy, like raising the minimum wage again and imposing a Value Added Tax to offset government tax losses. Such actions “would create consumer anxieties, which is the last thing you want to do during a recession, when you need to prop up consumer confidence,” Mullin said.
Marvin Kosters, economic policy director for the conservative-leaning American Enterprise Institute, argued that Clinton could use a recession as an excuse to put on hold his goal of balancing the federal budget by 2002, all the while producing “dividends” for the expected presidential candidacy of Vice President Al Gore in 2000. One way of doing this is to undertake large-scale federally funded public works and education projects.
“I assume Clinton would say that we have to provide a counterthrust to a developing recession,” he said.
Tom Korologos, a senior adviser to Bob Dole and a Washington power broker, also sees Clinton turning to pump-priming in a second term but not just through Democratic job-stimulating projects.
“You could expect him to do the traditional GOP thing and cut taxes,” said Korologos, president, Timmons & Co., a lobbying firm. “Don’t forget, presidents often do the exact opposite of what you’d expect them to do,” he said, citing “Kennedy’s decision to cut income excise taxes, or Nixon’s move to wage and price controls.
“And you cannot overlook the fact that in second terms, presidents start to worry about their place in history, like Ike proposing ‘Open Skies.’ You can chart this on a graph,” Korologos said. “Of course, if there’s a crisis on China or Iran, if the Middle East starts boiling, or a scandal hits the administration, all the speculation and what [Clinton] plans [in a second term] can go right out the window.”
Eugene Milosh, president of the American Association of Exporters and Importers, said there is a likelihood Clinton might lower corporate income taxes and increase inheritance taxes to ward off recessionary pressures. He also could decide to eliminate some Customs user fees to stimulate business, but he also could raise Medicare premiums, Milosh said, cautioning that such measures would prove largely ineffectual given the global nature of the U.S. economy.
“Our wealth is tied more than ever to world markets; our current expansion is tied to these markets, and we really have no experience in dealing with a downturn in a global market,” Milosh said.
But what if Dole should, in an upset, make it to the White House? Would his promised 15 percent tax cut hold off recession? Irwin Cohen, chairman of Deloitte & Touche’s trade, retail and distribution group, said such a tax cut would be a definite stimulant to consumer spending. But it’s difficult to say whether a tax cut alone would keep the country from sliding into a recession, given the complexity of factors affecting the economy.
“I’m not so sure who’s elected will have that much of an impact on what happens. You have these natural business cycles, and the president is either the beneficiary or loser of these cycles,” he said.
Some — with links to both the GOP and the Democrats — think even less of Dole’s proposed tax cut. Herbert Stein — who was chairman of President Nixon’s Council of Economic Advisers (CEA) and now is an economist at the American Enterprise Institute and a Dole supporter — the tax cut “would make balancing the budget very difficult and unlikely, especially at a time when it will be important for the U.S. to achieve a budget surplus.”
Charles L. Schultze, CEA chairman under President Carter, hit the Dole tax cut plan as “a terrible idea, since it would require total federal [spending] cuts of 35 percent across the board by 2002.” Schultze, a Brookings Institution senior fellow, said that even if such draconian spending cuts could be made “they would more than offset any positive economic effects you’d get by cutting taxes.”
Analysts have said that organized labor, which has poured tens of millions of dollars into the president’s reelection campaign, will use a recession to call in its chits. Clinton, some say, could come under labor pressure to adopt a protectionist trade policy, arguing that this will save American jobs.
However, Art Gunderheim, UNITE’s director of international trade, doesn’t see Clinton suddenly embarking on a protectionist strategy to ward off a recession. The President’s trade policies have largely been directed away from union interests and tied to his foreign policy goals, such as granting China most-favored-nation status and following through with the North American Free Trade Agreement.
“Now it’s clear the administration is intent on getting China into the World Trade Organization, which is another example of benefiting foreign policy instead of other [elements],” Gundersheim said.
Recession or not, Gundersheim said, the administration will continue to push the WTO to require that Third World market access to developing countries be contingent on adherence to minimum labor standards. This position, which critics view as a form of protectionism, has been in the fore in the global debate over conditions at offshore garment contractors. Gundersheim anticipates this interest, and administration support, to only increase.
Seth Bodner, the National Knitwear and Sportswear Association president, also finds it unlikely for Clinton to become bearish with world trade in an economic downturn.
“Some have said that especially during a recession, Clinton would use [World Trade Organization] safeguard procedures to limit imports,” on the pretense that these were hurting the U.S. market, Bodner said. “But this just won’t happen, because the economic power structure in the U.S. never would permit it, and besides, Clinton regards as inevitable the globalization of the workplace.”
Robin Lanier, an International Mass Retail Association trade vice president, said that recession or no, Clinton will be able to slough off labor union demands. “Of course, he will be beholden to unions — but Clinton will not be running for reelection, so when there’s a call for unilateral actions that violate the WTO rules, he’ll be able to resist these,” Lanier said.
In fact, Julia Hughes, chairman of the U.S. Association of Importers of Textiles and Apparel, averred that Clinton would thumb his nose at protectionist calls — especially during a recession. “Many now believe that a second Clinton administration will be focused on free trade, because he wants to establish himself as a world leader,” Hughes said.
As one congressional Democratic aide put it: “Clinton won’t change his mind on trade. We’ll see bilaterals with Asia, bilaterals with the European Union and bilaterals with Latin America.”
Nevertheless, tracking illicit textile transshipments from China is expected to draw attention from either a Clinton or a Dole administration, predicted Ron Sorini, senior vice president government relations and international development, Fruit of the Loom Inc. Sorini also predicted that worker rights would be addressed by either administration.
An economic downturn, however, could change the entire trade picture, one House staffer said. “If we have huge trade deficits or a recession, that’s when legislation starts moving and trade becomes a whipping boy,” the staffer said. “If there are surges in textile or steel imports, they may seek relief. Typically, when there is a downturn in the economy there is a downturn in trade policies.”
Whatever happens in next Tuesday’s election, the first trade item expected to be considered in the House is an extension of fast-track negotiating authority.
Whether the House is controlled by Democrats or Republicans, some version of fast track is expected to be advanced so that the administration can conclude talks to bring Chile into the North American Free Trade Agreement.
If Democrats regain the House majority, Republican objections to a provision permitting negotiations on labor and environmental standards under fast track likely would be a moot point.
China’s trade status is expected to be the biggest issue confronting Congress next year, and a resolution may not hinge on political dominance, since backers of extending permanent trade privileges to China along with opponents of its current privileges hail from both parties, observers say.
If reelected, Clinton is expected to travel to China early in 1997 to meet with Chinese leaders.
Items on the agenda likely will include China’s accession to the World Trade Organization, its human rights policies, its treatment of Taiwan and Hong Kong, and its MFN status with the U.S.
Other items left on the trade agenda could be influenced by who runs Congress. Since all trade items originate in the House, turnover there could have the most impact.
If Republicans maintain their House dominance, plans to reorganize trade agencies likely will continue, predicted Lanier.
House Trade Subcommittee chairman Phil Crane (R., Ill.) and Ways and Means Committee chairman Bill Archer (R., Tex.) have promised to hold hearings early in 1997 on the operations of the Committee for Implementation of Textile Agreements, which was the subject of a critical government report in September. Democrats are expected to drop any reorganization attempts at Commerce, Lanier said.
If Democrats take charge, Rep. Richard Gephardt (D., Mo.) is expected to be House Speaker. His close ties to organized labor, which opposed NAFTA, could turn the direction of trade policy, Capitol Hill watchers predict, especially if labor is given credit for returning the House to the Democrats.
“There’s no question that labor will have a toehold on trade and economic issues on Capitol Hill,” one Democratic aide said.
A Democratic majority could give an edge to a bill sponsored by Rep. John Spratt (D., S.C.), aimed at opening foreign markets to domestic textile exports under threat of heavy penalties against their products, observers say.
Also, a fight to create a voluntary labeling system for apparel, designating whether child labor has been used, would be more likely to advance under Democratic leadership, aides said.
Plans to broaden trade privileges granted to the 24 Caribbean nations, which has been shelved the past three years, may be stifled under a Democratic majority, one aide predicted.
Although there is opposition from textile state representatives, Democrats are also seen as likely to endorse one free trade initiative, a plan to promote textile and apparel imports, a House aide said.