Seven years ago, as the economy was spiraling out of control after many years of debt-induced mania and Wall Street speculation, the George W. Bush administration and its lax regulatory policies were widely blamed — as they deserved to be — for contributing to the worst financial crisis in eight decades. Bush had overseen years of financial deregulation and tax cuts for the wealthy, while his chairman of the Federal Reserve, Alan Greenspan, had sustained the housing bubble with easy credit. But the irresponsible behavior that led to the financial crisis had been going on for many years before Bush, and both Republican and Democratic presidents -- including Bill Clinton, Ronald Reagan, and even Jimmy Carter -- had started the deregulatory madness with a drunken optimism, motivated by ideological economists, political think-tanks, and corporate lobbying. The financial liberalization movement, along with the rapid globalization of the world economy, laid the groundwork for the pre-crisis bubble and the 2007-08 crash. Policymakers and regulators deserved a lot of the blame, but the system itself deserved even more. As economic writer, Martin Wolf, writes in his book, "The Shifts and the Shocks":
“Crises are an inherent element of the market-based financial system, as we know it. They follow periods of rising fragility, created by the rise of apparently hugely profitable risk-taking generated within the system. So it was this time. Success bred excess and excess bred collapse.”
Needless to say, the financial crisis was a great boost for then-Democratic nominee, Barack Obama. According to data from Pew Research Center, media coverage for Republican candidate, John McCain, became increasingly negative as the financial crisis dragged on. Before the collapse of Lehman Brothers, coverage of McCain was 37 percent positive and 32 percent negative (with 31 percent neutral); about one month after the collapse, 69 percent was negative and only 7 percent positive. As CNN reported shortly after the election:
“In the face of what's arguably the darkest economic outlook since the Great Depression, voters say the economy was overwhelmingly the most important issue in this historic election, and was clearly an advantage to President-elect Barack Obama.”
About three decades before the 2008 election, President Jimmy Carter was challenged by Ronald Reagan, and thanks to out of control inflation (which had started well before Carter became president), and, in his final year, a recession, Reagan was elected president by a landslide (the Iran hostage crisis was also very convenient). The inflation of the ‘70s was a result of many factors, including monetary policies, the energy crises, and Nixon’s cancellation of the U.S. dollar’s convertibility to gold. It was Carter who elected Paul Volcker to be Chairman of the Fed in 1979, knowing full well that he would be raising interest rates, which would lead to a recession, in order to contain inflation. In this respect, it was Carter and not Reagan who tamed the inflation of the 70s, and in the process, ruined his chances of reelection. As Carl Biven writes in his 2000 book, "Jimmy Carter’s Economy":
“The economy fell into recession in the second quarter, the sharpest one-quarter drop in national output on record. If eleven presidential four-year terms, starting with Truman and ending with Bill Clinton, are compared, only in the Carter administration was the total output of the economy declining in the fourth year in office, the year critical for reelection... It was not Iran but inflation and unemployment that were the uppermost concerns in the minds of voters.”
Going back even further to the Great Depression, a similar story presents itself. President Herbert Hoover was dealt an awful hand, and began his presidency just eight months before the stock market crash of 1929. As his presidency dragged on, the economy kept sliding further into the hole, and his stubborn desire to balance the budget (which was, to be fair, conventional wisdom at the time), left the economy in disrepair. Unsurprisingly, FDR won in a landslide in 1932.
History clearly shows us that, regardless of who or what is to blame, the party sitting in the White House during an election-year recession faces pretty stacked odds at recapturing it, whether it is an incumbency or not. And I bring up all of this dry economic history for good reason: We are currently in a major election year, and -- in case you haven’t been reading the business news -- certain experts are beginning to seriously worry about the state of the economy. According to some analysts on Wall Street, there is currently a 50/50 chance of recession this year, and with the stock market in a tailspin of late, widespread pessimism could increase those odds. This sell-off is largely a result economic woes in China, which is facing its slowest economic growth in 25 years.
But that’s only half the story. A worldwide oil glut, fueled largely by the United State’s own energy boom, has cut the price of oil by more than 70 percent -- from $100 a barrel in mid-2014 to under $30 a barrel today. One would normally consider a drop in the price of oil (and thus gasoline) to be a good thing for the oil-desperate America, if it weren’t for the fact that a national boom in fossil fuel production (which includes the controversial hydro-fracking) has played an important part in the country’s economic recovery. Furthermore, much of this boom has been funded by Wall Street speculators. As David Dayen wrote in Salon earlier this week:
“[Many] new producers built their businesses on a pile of debt. They had to purchase equipment and fund operations until their exploration hit paydirt. Investors loaned much of this energy-related debt in the form of junk bonds, made attractive because they earned a higher yield than more traditional investments. With interest rates near zero, investors craved higher returns. So they handed out massive amounts of corporate loans to the energy sector and elsewhere. Junk bonds reached $1.7 trillion over the past five years; about 27 percent of this high-yield debt came from oil companies. This worked out fine, as long as defaults remained low and yields high. But [Paul] Krugman identifies the problem: Severe price drops have dramatic effects on oil producers, and everyone who profits from the hydrocarbon-based economy.”
Now, it’s still too soon to say whether an actual recession is really on the horizon. But the political implications of a recession should be clear. Nobody stands to suffer the most from a bad economy than Democratic frontrunner Hillary Clinton. She is the face of the Democratic establishment, and has recently decided to fully embrace the role of carrying on President Barack Obama’s legacy.
(Of course, it should be noted that the president has much less influence on the economy than he is normally given credit for, and this potential crisis has emerged from global economic problems — but try telling that to a wary public.)
And the candidate who stands to benefit the most? Unfortunately, that would be Donald Trump. If the economy were to sink, Trump and other Republicans would place blame fully on the shoulders of President Obama. Historically, reactionary populists like Trump have capitalized to great effect on economic pain and panic, both in the U.S. and abroad (the most infamous example of course being the Nazis in Weimar Germany), and there is little doubt that Trump would make an economic crisis the cornerstone of his campaign in a general election, especially if the Democratic nominee were Hillary Clinton.
Of course, there is another populist candidate who could potentially benefit from a crisis as well: Bernie Sanders. True, he is running as a Democrat, and this would logically hurt him. But he is not your average Democrat -- hell, he’s technically an Independent. Furthermore, Sanders has more anti-Wall Street credibility than any other candidate, and is highly critical of both the big banks and the fossil fuel industry. If a speculative bubble in the fossil fuel industry, funded by easy credit from the big banks, implodes -- which is looking more likely -- whose to say this would not help the cantankerous democratic socialist?
This all speculation, and who knows, the economy may be just fine. Plenty of experts believe the current panic is unfounded, and there is no doubt that Hillary Clinton is praying that this is the case. However, both Democratic candidates should seriously start thinking about how to respond if the economy does indeed take a turn for the worse.