NEW YORK (CNN/Money) - George Bush is looking like less of a shoo-in for re-election in 2004 than he did a few months back and Wall Street is beginning to mull what this may mean.
With questions over the U.S. involvement in Iraq heating up and, more importantly, the job market remaining stubbornly tight, the President's approval ratings have slipped back down to where they were before Sept. 11, 2001.
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Justin Lahart, senior writer at CNN/Money, talks about why economists are starting to think that President Bush looks vulnerable for re-election in 2004.
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Although economists expect the economy to continue to recover through next year, many doubt that it will grow at the sort of pace that will create a meaningful improvement in the job market by election day 2004. The reason: The effects of this year's mortgage refinancing boom and tax cut will wear thin, and the economy still has many imbalances -- sown by the late-1990s investment bubble -- to deal with.
"[T]here are few levers left for the Bush administration to push at this point," wrote Goldman Sachs' U.S. economic team in a recent note. "Fiscal policy has already shifted sharply toward stimulus. Although the tax cuts have lifted spending, payrolls have been weak. This, in turn, has caused consumer confidence to decline as consumers grow more gloomy about the labor market. Undoubtedly, there is still time for the situation to improve. However, if September's uptick in payrolls is not the sign of more to come, then President Bush is going to have great difficulty in winning reelection."
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If one of the ten Democratic Presidential contenders takes the White House, Goldman's economists reckon the government would be back to gridlock. But unlike the Clinton years, the result would likely be a budget deficit that continues to grow. A Republican controlled Congress would be unlikely to roll back any of the tax cuts that got passed this year, and a Democratic President would push for higher spending "especially on entitlement programs such as healthcare."
The nightmare scenario, according to Berkeley economist (and former Clinton Treasury official) Brad DeLong, is that the Democrats regain the White House and decide that Clinton's big economic error "was in ruling like a moderate Republican."
"That White House would then say, 'The Republicans bet that they could run large deficits produced by tax cuts and that we would clean up their mess? Let's raise them: let's put all the social programs we might ever like to see in motion, double the deficit, and make it their responsibility to clean up the mess.'" wrote DeLong on his Website. "That way lies Argentina, remarkably rapidly."
Meanwhile, financial betting on who will win the White House has already begun. On Tradesports, the Dublin outfit that came up with the Saddam futures, President Bush is shown as having 62 percent chance of winning. Meanwhile, on the Iowa Electronic Markets -- a University of Iowa-run exchange that has been trading political futures since 1988 -- it appears Democrats are in the pole position.
How come? Maybe it's because trading on Tradesports is dominated by Wall Street types -- who tend to be aligned with the right -- while there is an academic (i.e., lefty) skew in the Iowa Electronic Markets.
There's probably an opportunity for arbitrage trading here.
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