The Tribune

with CHARLIE HARPER

The most memorable political prescription of a powerful adviser to former American president Ronald Reagan is emerging as a potentially determinative factor in the current presidential race.

That adviser was James Baker, and his prescription for success was to ensure that the US economy was surging and voters felt confident in its prospects by the time they went to the polls to vote.

It looks now like that formula may benefit the current administration and the Democratic Party just in time for November’s Election Day. Here’s some background on how we got to where we are this week.

Most observers and commentators on both the right and the left in the US agree that Ronald Reagan, a second-tier Hollywood actor from a small hamlet in western Illinois who was an early organiser for trade union representation for actors and other film industry professionals, was a president of considerable consequence.

They also agree that it was ironic indeed that Reagan is credited with significantly weakening the trade union movement after he broke a strike by federal air traffic controllers strike early in his first term as president.

Reagan, a popular Republican governor of the blue state of California before running for president in 1976, lost that primary race to the incumbent president Gerald Ford but returned to unseat a Democratic incumbent president, Jimmy Carter, in 1980.

Reagan inherited an economy still reeling from the end of the Vietnam war, an unprecedented show of unity by oil producing nations which drove up the price of gas at the pump, and credit card interest rates that rose to a staggering 20%.

Reagan, who has become a safe choice for Republican politicians to praise and cite for policy inspiration in the 36 years since he left office, also is credited with significantly ramping up military spending – hugely beneficial to his home state of California – during his presidency. And by the end of the 1980s, those enormous expenditures of federally-appropriated American dollars on military spending essentially weakened and eventually bankrupted the old Soviet Union, which was suffering social, political and economic internal strains and ultimately simply could not keep up with Reagan’s budget outlays.

Reagan famously appeared on the western side of the Berlin Wall and urged the Soviet president to “tear down this wall”. The end of the Cold War was perhaps launched with those often-memorialised words.

In the early days of his presidency, Reagan surrounded himself with a motley array of conservative aides and advisers who caused him some trouble and embarrassment on many occasions.

But by his second term in office which began in 1985, Reagan had a better cast of characters around him. One of the most influential was a Houston lawyer and veteran Republican fixer named James Baker. Baker served for a while as Secretary of State but is best known as a wise voice in Reagan’s ear.

One of Baker’s most often-expressed bromides was that most elections in America, and elections in other democratic nations, hinge on how voters view the economy at the time of the vote. “It’s the economy, stupid!” became shorthand for Baker’s thesis.

But Baker was also convinced that what he called the “political economy” could be manipulated to some extent from the White House to ensure that by the time voters went to the polls, the nation’s economy would feel to voters like things were getting better.

It’s entirely plausible that the political economy is beginning to swing now in favour of the Democrats and their candidate Kamala Harris.

This is particularly significant because aside from immigration policy mistakes and the evident failure of the Biden administration to secure the American southern border with Mexico, inflation and a general pessimism about the US economy is the sharpest tool in the GOP kit with which to attack the Democrats.

Poll after poll has suggested this, and while the current administration’s data show a real tightening of border security and Trump is widely blamed for sabotaging a good bipartisan Congressional border bill because it would have helped Biden’s reelection chances, the economy, inflation and a general pessimism have continued to drag down the Democrats.

Now that may be changing. Last month, the American central bank (called the Federal Reserve Bank) cut its prime lending rate by half a percent. This was larger than most observers had expected from the preternaturally cautious quasi-official but politically independent body that regulates monetary policy and money supply in the US by manipulating that prime interest rate. The Prime Rate broadly represents the cost of borrowing money in American commercial markets.

Many economists and commentators regard the American Federal Reserve Bank as the most powerful financial institution in the world.

Central bankers in the US and a few other countries appear ready to lower borrowing costs more quickly than most economists had expected as recently as a couple of months ago. That has led to questions about what prompted the Fed’s pivot toward a more proactive path.

And the Fed’s decision to cut interest rates by a ful half of one point has many analysts wondering whether other rate cuts could be forthcoming. And such moves, in turn, could strengthen the popular perception of the US economy just as the November elections approach.

One member of the Fed’s governing board made public remarks last month that may indicate the Fed’s thinking at this critical juncture. He said Federal Reserve Bank policymakers are trying to bring interest rates back toward a lower level at which the rates don’t suppress the American economy.

As context for this discussion, the Fed raised interest rates rapidly starting in 2022, and has left them at a high level until now.

The Federal Reserve Bank has been led since 2018 by veteran Washington and New York financial insider Jerome Powell, a reputed consensus-builder who has worked within the US financial-government complex for nearly 40 years.

Politically affiliated with the Republican Party, Powell was nonetheless initially appointed to the Fed’s board of governors by Barack Obama in 2012 and elevated to the chairmanship by Donald Trump six years later.

Three years ago, President Biden kept Jerome Powell in place for a second term as Federal Reserve chairman. At the time, Biden said his decision to retain Powell was an attempt to maintain continuity with the central bank’s policies at a time when the economy faced critical challenges, including surging inflation.

Last month’s big rate cut aims to stanch that same persistent inflation.

When Powell was reappointed in 2021, news accounts cited his new Fed policy that directed the central bank to be patient in raising interest rates in hopes of fostering more widespread job growth.

American National Public Radio reported at the time that “Powell and his colleagues believe today’s (2021) price hikes are largely the result of temporary factors tied to the pandemic, which should ease on their own as the health outlook improves.

“As chairman, Powell has steered the central bank’s aggressive response to the economic upheaval caused by the pandemic, slashing interest rates to near zero and quickly launching a series of emergency lending programmes.”

Fast forward to last month’s prime rate cut.

In announcing the move, Powell repeatedly referenced the Fed’s Summary of Economic Projections. These projections are a set of forecasts for growth, unemployment and interest rates that officials release once per quarter.

The Fed chairman cited these projections as a good summary of what the central bank might do next. Many commentators believe that these projections suggest that officials will lower rates two more times this year.

“The actual things that we do will depend on the way the economy evolves,” Powell said. “We can go quicker if that’s appropriate, we can go slower, if that’s appropriate.” But lower interest rates will stimulate a stagnant housing market.

Meantime, Trump and Kamala Harris blast away at each other about the American economy.

Trump asks voters if they feel better about their economic prospects today than they did four years ago. Because of supermarket and gas prices, it’s easy for voters to say no.

Harris reminds voters that she and Biden inherited an economic mess when they took over the White House from Trump and his casual government spending excesses.

But if Powell and the Fed push down inflation and prices drop, James Baker’s old prophecy may come true.