This Economy Defies Cure -- No Matter Who Wins

For those who are hoping for a robust expansion, this is troubling. The consumer cannot carry the entire economic burden themselves. For the recovery to continue, it needs to be organically self-sustaining -- i.e., not reliant on government stimulus and handouts. For that, the economy requires new jobs and capex spending.

In these circumstances, how much of an impact can any president make? The answer is little, and only at the margins.

The Postbubble Environment

In the run-up to the tech/telecom/Internet bubble, a tremendous amount of overcapacity was created through massive overinvestment. This is enormously important for the future of the present economic recovery. Why? Companies will not hire or buy new capital goods unless they need to in order to meet increased demand. That won't happen when their customers have warehouses full of those very same goods.

Consider what the National Bureau of Economic Research -- the group responsible for dating the beginning and end of recessions -- has to say about it: "One could define expansions and recessions in terms of whether the fraction of the economy's productive resources that is being used is rising or falling."

In other words, when there is excess capacity and lowered utilization, there is little need to increase capacity any further. So you see anemic expansion until that excess gets worked off.

Conservative economist Arnold Kling looks beyond the industrial utilization rates to LUCY -- the Labor Capacity Utilization Index. LUCY suggests there are broad and deep structural issues within the labor market that have yet to be resolved. That does not bode well for job creation in the near future.

What does all this economic gibberish mean to whomever gets elected? First, the economy remains a long way from its potential. Kling argues it will "take years to eliminate all of the slack in the labor market." Second, unless the Fed continues to apply aggressive stimulus, GDP will remain low and possibly keep falling. And third, we are very likely to see large budget deficits for at least three or four more years.

The Japan Model

The closest comparable to the postbubble U.S. is Japan in 1989-2003. After its bubble popped, it took Japan 14 years to work off their excesses. It didn't matter much who got elected, the cure was very low interest rates -- and time.

That's the bad news. The good news is that we learned from Japan's mistakes. To its credit, the Federal Reserve cut rates more quickly and more deeply than did Tokyo's Central Bankers.

Compared with Japan, we're not so bad off.

Ten Years After A lesson for the U.S. in Japan

Source: Bloomberg

This means it shouldn't take the U.S. the same 14 years Japan needed to get through its postbubble nightmare. With any luck, the excesses from the '90s should be worked off by 2008 -- just in time to have this debate all over again.

Whoever gets elected president in 2004 will have a lot of important economic decisions to make. He will appoint the next Fed chairman, influence tax policy, and affect a host of regulatory issues. But none of these issues will rise above the broader structural environment we presently are mired in.

Stem cell research, sure. The broader markets? Unlikely.

To read TheStreet.com senior market columnist Aaron Pressman's take on the election, click here.