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Bush doin' the third-year bump


A lawyer friend once said to me, "You know, people are funnier about money than they are about sex." Indeed. And if the people in question are of the liberal persuasion, they're even funnier. For lefties, money is not only highly personal and deeply mysterious, like sex; it's also a source of guilt, shame, embarrassment and denial. Like sex.

I figure this is why the liberal press has largely ceded the field of finance and economics to voices of the right. Sure, there's Paul Krugman in the New York Times and William Greider in The Nation and Rolling Stone. But these token liberals are notable by exception. No, on matters of money and commerce the youth-obsessed, rebellious Left gladly defers to the grown-ups of the Right. We leave the Business Page to Dad.

This, of course, is a huge political concession. For while the old saying "money makes the world go 'round" is only part of the story, it's a very large part. Leaving the business press to tell the story of finance and the economy is like letting Fox News be your only political coverage. Don't be surprised by what gets left out.

Like the way that stocks go up during the third year of a Presidential term. It's like clockwork. You have to go all the way back to 1932 to find a third year of a presidential term when stocks fell--and even then it was by less than 1 percent. Why the pattern? Because incumbent presidents on both sides of the aisle have always known what Bill Clinton made his motto: It's the economy, stupid.

Accordingly, while presidents, both Democrat and Republican, justify their economic policies by appeals to their parties' grand traditions, as their terms progress they do whatever it takes to insure a happy electorate come election time.

So why do stocks go up in the third year of a president's term? Because the stock market is a "leading indicator" and so tends to anticipate the economic future by six to 12 months. Hence, its sterling record of anticipating with big gains in the third year of a presidential term the economic felicities that flow in the fourth.

Last year was no exception as the S&P 500 gained an eye-popping 28 percent in 2003, the third year of President Bush's term (the previous three years had been the worst for stocks in almost three decades). The market was telling us that come 2004, the economy would be firing on all cylinders.

And, indeed, the Bush Gang pulled out all the stops to insure just that. Together with a Republican Congress they set all the economic booster rockets at their disposal--taxation, government spending, interest rates and U.S. dollar policy--on maximum burn.

Like a party boss carrying a sack of cash through the neighborhood, Bush scheduled tax refunds to flood across the electorate in years three and four of his first term. Those always help with the votes, not to mention giving consumers a little extra buying power to prop up the economy.

Bush's man at the Federal Reserve, "Maestro" Greenspan, was doing his part by lowering interest rates to levels not seen in almost 50 years. With consumers in hock up to their eyeballs but accounting for 2/3 of the economy, what's the best way to keep 'em hitting the malls hard? Why, lower the cost of borrowing so they can borrow even more.

Over in Congress the party of prudence and fiscal responsibility decided that massive Federal Budget deficits didn't matter after all. And so it went on a tax-cutting and deficit-spending spree unrivalled since the days of Ronald Reagan. This delivered a double-barreled boost to the economy that we'll surely pay for, but only after the election.

Last and most obscure, both Bush Treasury secretaries--apostate O'Neill and his replacement, Snow--have taken the unusual step of "talking down" the U.S. dollar relative to other currencies like the Euro and the Yen. The decline in the dollar lowered the cost of U.S. goods in world markets, making them cheaper to foreign buyers. The resulting spike in foreign sales delivered a powerful jolt to U.S. exports. And so, just as the election cycle started to heat up, the crucial U.S. manufacturing sector lurched off the gurney like Frankenstein come alive.

This last came not a moment too soon for Bush & Co. as the manufacturing sector had been shedding jobs for 43 straight months. In March that finally ended as the economy created 308,000 new jobs, more than tripling expectations. Job growth continued strong in April and May, bringing a huge sigh of relief from the Bush camp. They recall only too well how Bush pere was booted from office for being too distracted by Iraq to take care of jobs at home.

I don't want to seem churlish. A recovering economy is a good thing. People finding work is a great thing. It's more the timing of it all that intrigues me--and the way these intersections of finance and politics tend to go unremarked. It brings to mind that old saying about sausage and politics: Once you've seen how they're made, it may affect your appetite.

Farnum Brown is senior vice president of Trillium Asset Management, the largest and oldest independent advisory firm devoted exclusively to socially responsible investing. www.trilliuminvest.com. He is also a former music writer for Spectator magazine and the Independent.

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