It's the Economy (Again), Stupid

What if Iraq isn't the biggest campaign issue by the time the presidential election rolls around?

He was much more cryptic than that, but what happened next couldn't have been more obvious; on Tuesday, world markets went into a swoon, driven by plunging Chinese equity prices and a report of weakened durable goods orders in the United States. The Dow Jones Industrial average fell 416 points.

This forced the current Fed Chair, Ben Bernanke, into action. He reassured us that the markets were working well and that there was no single cause for the big sell-off on Tuesday. And he stepped on Greenspan's "recession" speculation, reiterating the central bank's expectation that the economy will grow by 2.5 percent to 3 percent this year -- less than the 3.3 percent growth we had in 2006, but still no recession. "There is really no material change in our expectations for the U.S. economy," Bernanke told the House Budget Committee, the day after the sell-off. "...There is a reasonable possibility that we'll see strengthening of the economy sometime during the middle of the year."

The Dow rose 52 points on Wednesday, and by Thursday Greenspan was backpedaling in Tokyo. He told a business seminar there that while a recession was possible, it was not probable. Soon the markets seemed to have righted themselves, but for a minute Iraq was not all we could talk about.

As hard as it is to imagine, it is impossible to dismiss that in 2008, Iraq as an election issue may be eclipsed by economic instability, both at home and abroad. Bernanke's assurances of modest growth, for example, were predicated on a stabilized housing market -- which we do not have -- and the completion of "inventory corrections" in the manufacturing sector, which has been on a rollercoaster ride for a few months now. It grew in February, shrank in January; grew in December, shrank in November.

And in regard to a stable housing market, we seem headed in exactly the wrong direction. This week the news was full of bad omens: Mortgage defaults are on the rise at the same time federal regulators are warning banks that they do have enough money set aside to cover losses from loans that go bad.

Nationally, the loan-loss reserves set aside by banks are at the lowest level since 1990, and while no one is predicting a run on banks, the one thing we have learned from the war in Iraq -- the great principle of our times -- is that things can turn out much worse than anticipated. Much, much worse.

Every conversation in Washington these days has as its central context the outcome of the 2008 presidential campaign. And not surprisingly, there is a growing sense that the election is the Democrats' to lose; it's hard to see how Republicans recover from Iraq, especially with the candidates they have now.

There is, of course, the concomitant Democratic angst over which inventive ways they will find to squander their opportunities, but for the most part there is a healthy confidence that Iraq is going to be the issue -- and that spells doom for Republicans.

Let's give credit where it is due: Republicans are the ones making it so tempting for Democrats to hope, still voicing support for the war and still standing by their president. But 67 percent of respondents in a Washington Post/ABC News poll disapproved of Bush's handling of Iraq. You would think John McCain had never encountered the concept of collateral damage.

The 20 months until Election Day may as well be 20 years. Things can change -- but maybe not so much in Iraq. The Administration does not know this, but in a very fundamental way, the war in Iraq is over. It is completely unsustainable in the existing political climate.

A majority of Americans, 64 percent, say it's not worth fighting, and 85 percent of those asked in the Washington Post/ABC News survey said we should set a deadline and be out of there in a year. Almost half, 46 percent, said the deadline should be six months. How does a lame-duck president with a 35 percent approval rating keep fighting such an unpopular war?

Badly. Until something or someone -- and here I have Congress in mind -- stops him. But at this point there may be little in the way of surprises to come in Iraq. As outraged as Americans are about the war, they are not yet feeling instability in their own lives. If the economy begins to go south, too, the White House may be looking back at today's 35 percent job approval rating as the good ol' days. In 2008 it could be the economy again, Stupid!

Terence Samuel is a political writer in Washington, D.C. His weekly TAP Online column appears on Fridays.

To subscribe to The American Prospect click here: http://www.prospect.org/

Be sure to check out our profile on MySpace.com: http://www.myspace.com/theamericanprospect

Students, search for us on http://www.facebook.com/