Financial Upheaval Narrows Options of Next U.S. President
Financial Upheaval Narrows
Options of Next U.S. President
Sometimes events reshape a presidential campaign. Sometimes they reshape the world the candidates seek to lead.
This week's Wall Street earthquake is such a big event that it is doing both. Much chatter is being devoted to how the market tremors are affecting the campaign -- whether they help Sen. Barack Obama by reinforcing his "change" message, whether Sen. John McCain has hurt himself with his initial declaration that the fundamentals of the economy remain sound, and so forth.
A sea change is underfoot says WSJ's Jerry Seib. As the government commits billions of dollars to bail out financial institutions, the next U.S. president will be restricted on spending for other programs. (Sept. 19)
Here's the more important reality: Already, even before it is fully played out, the crisis means the next president -- that would be President Obama or President McCain -- will enter office with handcuffs on. Options are being reduced for the next president every day, as the real and psychological costs of the crisis mount.
Consider just some of the ripple effects:
The domestic agenda of the next president is shrinking. Nobody, anywhere, knows how much of a financial burden the federal government has taken on in the past few weeks, but the cost of bailing out Fannie Mae, Freddie Mac and American International Group Inc. -- to say nothing of the potential cost of riding to the rescue of American auto makers, which looks increasingly likely -- could conceivably run into the hundreds of billions.
The government's cost for bailouts ultimately may turn out to be less onerous than some of today's darker projections, depending on how markets evolve, of course. But no matter. Whoever is putting together a new economic plan for a new administration in January won't dare to base it on a rosy scenario.
Instead, when the clouds are this dark, you budget to buy umbrellas, and that's what the next president will have to do. Something else he may have wanted to spend money on is going to have to wait. Can the government assume the cost of a large part of the nation's health-care system as well as the financial system right now, for example?
Tax increases will be harder to sell. Sen. McCain is right: A period of a shaky economy is a bad time to talk about increasing taxes. And the economy as well as the markets figure to still be shaking in January from the shocks delivered. That's a problem for Sen. Obama's proposal to increase the capital gains tax.
But tax cuts get problematic as well in this environment. Though tax cuts to juice up a lagging economy make a lot of sense, the amount of tax revenue the feds bring in also will be a bigger issue -- especially if the Chinese and world financial institutions grow leery of continuing to loan money to finance American spending. Can the government afford to both bail out financial giants and take the big hit to its own revenues that would come from, say, eliminating the alternative minimum tax, as Sen. McCain proposes? Or are the government's needs for money now just too great? Either way, the next president's path on taxes is getting more complicated.
McCain and Obama after participating in a forum on national service at Columbia University Sept. 11.
The federal deficit will become more than a footnote in the plans of the next president. Let's face it: Nobody has worried about the deficit very much in the past few years. Yes, the Congressional Budget office recently reported it more than doubled this fiscal year to $407 billion, and will rise to $438 billion next year. That's still only about 3% of gross domestic product, half as much in the dire budget days of the early 1980s.
But all that is before any bills for Fannie Mae, Freddie Mac and AIG are absorbed -- and before the government absorbs any additional costs for the baby boomers now moving into Medicare and Social Security. Again, the nightmare cost scenarios for the government may not come to pass, but psychologically and politically the deficit figures are likely to get more attention going forward.
Anyone want to talk about privatizing Social Security in this environment? Not likely. Imagine the national wailing and gnashing of teeth that would be going on right now if Social Security funds were in the hands of failing private financial institutions instead of the government.
Yes, that's an overly simplistic and short-sighted view of the case in favor of a partial privatization of the Social Security system. But in political terms, the arguments for privatization just suffered a huge body blow, and it's likely going to be a while before Republicans put them back on the table.
The mega question -- what is the role of the U.S. government in the nation's economy? -- isn't just on the table, but at the center of the table. The next administration will have to decide not just what financial firms the government ought to own and run, but how heavy the government's hand should be. These are questions the country faced in the Great Depression, and to a lesser extent during the savings-and-loan crisis of the 1980s, but they are back with exclamation points, and will be dumped in the lap of the new president.
Sen. McCain started to address the issue Thursday in a speech calling for the creation of a new agency, the Mortgage and Financial Institutions Trust, to identify and fix weak financial institutions. Yet an even bigger question will hang over the next administration. In many ways, the election of Ronald Reagan in 1980 and his rousing advocacy of free markets ushered in a generation-long period in which Americans' confidence in the government as a vehicle for addressing problems sank, while their confidence in markets as the vehicle for doing so rose. Will events of 2008 begin to reverse that trend?
The question goes to the very relationship between the public and private sectors. The next president alone can't answer it, but he will have to lead the country in finding an answer.