Entries for November 2006

Robert Rubin, Treasury secretary under President Clinton, recently told the Washington Economic Club that "you cannot solve this nation's fiscal problems without increased revenue." Oh, and in case you think that Rubin, a noted deficit hawk, might have been talking about imaginative ways to accelerate the economy–thus raking in more tax revenue–that's not quite what he had in mind. "I think if you were to increase taxes right now, you would have probably about zero negative effect on the economy," Rubin said in response to a question from the high-powered audience. Rubin didn't specify which taxes he was talking about, such as income taxes or capital-gains taxes or dividend taxes.

Before you buy that plasma TV for the family room or splurge on an 80-gig iPod for your office "secret Santa" party, it might be nice to know if the economy is about to tank (And nothing like today's triple-digit drop in the Dow to give one the shakes.) No surprise; forecasting such downturns is tough.

The White House has offered a pretty upbeat assessment of the economy heading into 2007: steady 3 percent growth, falling inflation, and continued low unemployment. But what if Team Bush is wrong? What if the U.S. economy slips into a recession or a period of sluggish growth with rising unemployment in 2007, perhaps because of the housing implosion? What should be done about it? To find out, I E-mailed some smart thinkers–all of whom also write must-read blogs. Here is what they told me.

"White House warns of slowdown ahead"–that's the headline that CNN.com gave to this afternoon's news that the Bush administration (specifically the Council of Economic Advisers, the Treasury Department, and the Office of Management and Budget) had lowered its economic growth forecast for this year and 2007.

It's common wisdom that most of the world is crazy-go-nuts about the Democrats taking control of Congress. Not that folks are so wild about Nancy Pelosi or Harry Reid, in particular. It's just that President Bush is so amazingly unpopular that any time he takes some lumps, it's greeted with cheers by many overseas. So I was a bit surprised to read this opening sentence in a note out today by Stephen Roach, chief economist over at Morgan Stanley: "The world is nervous about the implications of America's stunning political upheaval."

President Bush's subdued showing at his press conference Wednesday was nothing like his rather peppery performance right after he won re-election in 2004. Could it have been all just an act? Maybe Bush is actually better off having lost the House and apparently the Senate than with the GOP narrowly holding them. Hard to believe–and unless he has Morgan Freeman-esque acting skills, Bush doesn't appear to believe it himself. But the guys at Macroeconomic Advisers, an economic consulting firm with great inside-the-beltway connections, sure do. Here is the firm's contrarian take on the election outcome:

— Yesterday's elections results bring to mind this quote from a recent story I wrote about the impact of a Democratic congressional victory. As a Bush administration official put it then, "The president is going to be a veto machine."

With the first polls closing at 6 p.m. in the eastern parts of Tennessee and Kentucky and the network exit surveys beginning to slowly leak into the blogosphere, here are the latest election odds — as of 5:40 — from the TradeSports and Washington Stock Exchange online betting markets.

A lot of political junkies–particularly those on Wall Street–love to check out TradeSports, a Dublin-based betting market. There, they can see the latest odds on U.S. elections as well as the chances of various events taking place, such as capturing Osama bin Laden or airstrikes against Iran and North Korea.

What will tomorrow's elections mean for the markets and economy? To be honest, most investors, analysts, and economists I talk to are more concerned about 1) what the Federal Reserve will do next, and 2) what the eventual spillover from the bursting housing bubble will be to the rest of the economy. (Of course, many of these guys still check the betting markets and political websites throughout the day.)

If you're a politics nut who's betting on the outcome of next week's midterm elections—and whose eyes are bleeding from all the bouncy-bouncy polls—here are a few other factors to consider:

Will Democrats capture the House? And, if so, by how much? Polls on congressional races tend to be a bit spotty. To attack the question from a different angle, I checked in with Tom Brunell, a political science professor at the University of Texas–Dallas. He, along with fellow poli-sci Prof. Patrick Brandt, has constructed an economic forecasting model that attempts to predict the outcome of the battle for the House. The three main factors are the presidential approval rating, inflation, and the unemployment rate. (I first mentioned the model in my U.S. News cover story that examined the Bush economy and the midterms.) A month or so ago, the duo was predicting the GOP would barely hold the House with 220 seats. Brunell didn't want to update the model–"predicting an election on the eve of an election is like betting on a horse race with one furlong left," he wrote me in an E-mail–but I finally pressured him into it. Using the latest available numbers (Bush's rating is down, but the economic numbers are better), the Brandt-Brunell model now predicts ... the GOP will win 219 seats. But given the 6.5-seat margin of error, "it really is a coin flip right now for majority control of the House. It is anybody's ballgame," Brunell adds. So Dems may win, but no tidal wave.

So what do Americans think about President Bush's handling of economic policy? A new Wall Street Journal/NBC News poll shows attitudes are improving, with 46 percent of voters approving his management and 48 percent disapproving. That's a gain from 39 percent approval and 56 percent disapproval in June. To take a different angle on the issue, I gave a call to Richard Curtin, director of the University of Michigan's Survey of Consumers. The school's monthly poll of 500 consumers asks a question that rarely gets much publicity. Here it is, word for word: "As to the economic policy of the government–I mean steps taken to fight inflation or unemployment–would you say the government is doing a good job, only fair, or a poor job?"