If recession hits in 2008, candidates will seek to assuage voter anger by finding someone to blame. Since blaming the Federal Reserve has little political mileage, the most likely scapegoats are globalization and immigration. In that environment, whoever is elected in November will be committed to restricting trade and possibly immigration. That would doom the US and world economies to slow growth.
A 2008 recession is not certain; the latest Moody’s Economy.com “risk of recession” is only 52%. Even though declining house prices and tightening market liquidity must affect growth, the Fed by cheapening money may postpone recession until after the November election, albeit probably worsening inflation. Without a recession, the economy will be only a moderately salient campaign issue, with neither side moving beyond its entrenched positions.
If, however, the first months of 2008 show significant economic decline, the political calculus will change. The US electorate has noticed that income gains since 2000 have been heavily concentrated at the top, and many have bought into the view that globalization, reducing US manufacturing jobs, and heavy low-skill immigration, driving down service sector wages, are largely responsible for this trend. Whatever the views of economists, the electorate may thus be receptive to protectionist and anti-immigration messages.
On the Republican side, the anti-trade message will probably be muted in favour of stronger anti-immigration rhetoric. For the Democrats, the party’s high Hispanic support will lead candidates to focus on trade, for example advocating “anti-dumping” actions against China.
Nevertheless, in a post-primary campaign lasting eight to nine months, both presidential candidates will adopt much of the other party’s rhetoric and positions. By November, whoever wins would be more committed to higher trade barriers and stricter immigration controls than any incoming president since World War II.
That would be bad news for the world economy. The Doha Round of trade talks, already moribund, is dead without strong US leadership, while protectionist US actions must inevitably bring beggar-my-neighbour retaliation. That’s how world trade collapsed in the 1930s. Trade barriers are lower now, and the volume and benefits of world trade greater, but even modest such moves could be expensive.