Note to President-elect Barack Obama: Terrible economies make for topsy-turvy politics. A sky-high "misery index" of runaway inflation and elevated unemployment helped Ronald Reagan defeat incumbent Jimmy Carter by a landslide in 1980. But the horrendous 1982 recession took a huge chunk out of the Gipper's popularity. Recall that Reagan had just a 35 percent job approval rating at the start of 1983. (The dissipation of political capital even pushed him to raise taxes.)
Reagan might have been a one termer, but then the economy took off like Carl Lewis at the Los Angeles Summer Olympics. The economy surged 4.5 percent in 1983 and a mind-blowing 7.2 percent in 1984 as unemployment dropped from a high of 10.8 percent in December 1982 to 7.2 percent in November 1984. Reagan won by an even bigger landslide in 1984 than in 1980, and a 25-year "long boom" was underway. Surely Obama, another presidential victor who won by a hefty margin and inherits a lousy economy, hopes the overall pattern will repeat itself. Recall an ominous passage in his otherwise joyous election-night speech: "The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term." That was a call for patience until prosperity returns.
Ill winds. But Obama may face a trickier economic and political challenge than Reagan did. Here's why: Let's assume the current downturn turns out to be as painful as the 1990-91 recession. Minneapolis Federal Reserve President Gary Stern has likened today's situation to "the head winds environment" following that downturn. Among the "head winds" Stern cited: an imploding real estate bubble, a construction bust, a banking crisis, and a credit crunch. Sound familiar? The nation's gross domestic product contracted sharply at the end of 1990 and the start of 1991. But even after the economy started expanding again, the unemployment rate kept rising until it hit 7.8 percent in June 1992 vs. a low of 5.2 percent in June 1990. President Bush lost the 1992 presidential election to Bill Clinton because of the economy.
Two years later, it was the Democrats' turn to feel the brunt of widespread economic anxiety as the Republicans captured both the House and the Senate. Even though the economy had been growing for 14 straight quarters by then and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was only "fair" or "poor," and 66 percent thought the nation was headed in the wrong direction. That's right—3½ years after the 1990-91 recession ended, the economy was still weighing negatively on voters.
And the 2008-09 recession may actually be far nastier than its 1990-91 twin. Economists at Goldman Sachs expect a jobless rate of 8.5 percent by the end of 2009, climbing a bit in 2010, for the biggest cumulative rise in unemployment since the Great Depression. And the current quarter might show the most severe GDP shrinkage since 1982. So we could get the sharp contraction of the 1982 recession with the jobless recovery that came after the 1991 downturn. Obama has a full agenda: healthcare, climate change, middle-class tax cuts, and energy and infrastructure investment. He might want to push those items sooner rather than later.