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WANNING OPTIMISM A REASON TO WORRY

A month ago, all the talk in Washington was about contested elections, slim majorities, the difficulty of governing, the burdens on the new president and the divided Congress. That was last month. These days, the serious talk, the worried talk, is about the economy.

The economy - and all the confusing signals that surround it. Lyndon B. Johnson used to despair that what he really needed was a one-handed economist. But a generation later, with the economy ever more complex, every economic observer needs two hands. On the one hand, jobs are being cut at Daimler-Chrysler and Amazon.com, an unusual old economy/new economy consensus about the future. On the other hand, the Congressional Budget Office still projects growth for fiscal 2001 at 2.4 percent, a defiant denial of a recession.

But while both hands are trying to come to grips with the contradictory economic indicators, the mind and, more important, the spirit seem to be settling on an agreement: A recession's coming.

In the Gerald R. Ford and Jimmy Carter years, the economy seemed to be animated by inflationary expectations, with catastrophic effects; the mere expectation of inflation helped fuel inflation. Now, in the George W. Bush era, we have the advent of recessionary expectations; the mere expectation of a recession may be helping to create one.

Whatever the cause, Washington is now talking recession, girding for a recession, planning its political response to a recession.

Here's the rationale: If a recession is two consecutive quarters of economic decline, then four consecutive months of declining consumer confidence, as reported last week by the Conference Board, surely must signal the onset of a recession.

A recession, of course, would provide oxygen to the movement to cut taxes, which to some conservatives is as much a political imperative as an economic one. The other important economic factor - the estimate putting the 10-year federal budget surplus as high as $5.6 trillion - merely stokes the fire, and the appetite, for the tax cut.

The rest of the political dynamic is easy to see, so often has it played out in the capital.

First there is the inevitable blame game. The Republicans will argue that the Clinton administration failed to create a credible energy policy and was addicted to income distribution and high taxes. The Democrats will argue that the economy was roaring along fine until the new president started talking it down and until greedy corporate chieftains used the first, tentative signs of a downturn to do what they wanted to do anyway, which is to appeal to Wall Street by cutting expenses and job rolls.

Then there will be the race to take advantage of the despair. The Republicans will work to cut taxes, which was a part of the Bush economic formula even before the recession was a glint in Alan Greenspan's eye. The Democrats will focus on the human costs of job cuts and will argue that more government attention and activity should be directed at the jobless rather than at a tax cut for the wealthy.

Though all the Washington principals are ready to play their appointed roles in the recession scenario, it is important to remember that the economy remains in a relatively strong position, with an unemployment rate at about 4 percent. A couple of quarters of economic contraction would still leave the unemployment rate below 5 percent, a level that economists thought was simply unattainable a decade ago.

Even so, a rise in unemployment would cause economic dislocation and distress, and even a mild or modest downturn would cut into federal and state income-tax revenues, consequently cutting into the size of the budget surplus at all levels of government. One of the major impacts of a downturn would be felt in lower corporate profits - which would also mean lower revenues. (The Office of Management and Budget already has projected almost no growth in corporate tax revenues over the next year, and a hiccup in the economy could place corporate-tax revenues below the $212 billion level projected for this year.)

The Bush administration is worried about the economy for the predictable reasons. But those reasons might not be the biggest danger for the president. The first casualty of a recession, or even of recessionary expectations, is optimism - and that very sense of optimism is at the heart of President Bush's ideology, and his appeal.

Boston Globe

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