Economy Poses Difficult Challenge for Candidates

Most people have heard the old saying: Be careful what you wish for. And, soon after Election Day, when the balloons have deflated and the euphoria of having made history has been tempered, either Sen. John McCain or Sen. Barack Obama will quickly experience some gut-wrenching moments when confronted with the financial mess he has inherited. Past presidents Ronald Reagan, George H.W. Bush, and Bill Clinton each faced economic challenges but met them head on and made tough choices. Will Obama or McCain follow their example?

Each man has laid out ambitious economic proposals and initiatives in areas ranging from energy to healthcare to taxes, all of which would impact the federal budget significantly. Major fiscal challenges existed even before Wall Street’s meltdown. An August report produced by the Committee for a Responsible Budget projected that with a baseline budget deficit of $147 billion in 2013, the deficit impact of Obama’s tax plain would be $360 billion, and McCain’s would be as much as $482 billion. In the area of healthcare, it would be $65 billion for Obama and $17 billion for McCain. During their second debate, neither candidate satisfactorily answered the question of what plans they’d have to scrap because of the bailout and state of the economy.

Urban Institute senior fellow Margaret Simms, a member of the B.E. Board of Economists, says that in a slowing economy, individuals and businesses will pay less even under the current tax structure, which affects federal revenues. And more people will be look

ing for social support, which affects expenditures. “That means the new president will have fairly challenging tasks ahead in trying to implement any new programs, whether it’s tax reduction or expenditure expansion,” Simms says.

According to Simms, Obama will have to reduce his expectations for universal healthcare or alter the timeline of its rollout. This category is less problematic for McCain, who proposes a $5,000 credit toward the purchase of healthcare that’s offset in part by taxing employer-provided benefits. “But his proposal to expand and deepen tax cuts could be problematic because there’s not a lot of room in which to work, unless he can tremendously alter expenditures. But most of what he’s talked about doesn’t add up to large reductions,” Simms adds.

These challenges are exacerbated by a record deficit that may likely approach $500 billion and perhaps even a trillion dollars by January, as well as a probable recession. According to Leon Panetta, a former director of the Office of Management and Budget and Clinton chief of staff, in addition to the ramifications of the Wall Street bailout, the next president and Congress may face additional bailout requests from other companies and the states.
“That door is now open, and we’ll probably see a lot of people trying to come through it for additional assistance of one kind or another in the middle of this crisis,” Panetta said at an economic forum hosted this week by the Committee for a Responsible Budget.

This dramatically limits both candidates’ proposals. Panetta’s advice is to develop a five-year strategy to restore fiscal discipline and ensure that this economic hole doesn’t get any deeper. It should include entitlement reforms that address Social Security, Medicaid, Medicare, and a pay-go system to cover initiatives or tax cuts.

But the president’s greatest challenge will be political, warned Panetta, adding that Republicans will return to Congress in January with an even slimmer minority and in no mood to cooperate with some of the big economic challenges facing the nation.

“Partisanship is deep on Capitol Hill, so the real question is whether a new president can provide the leadership needed to convince this country about the issues that are going to have to be met, but also convince Congress that they’re going to have to make some hard choices,” Panetta said. “And, there’s a question of whether [the president and Congress] will be willing to ask Americans to make the sacrifices to do what’s necessary so we can reach the surface again of our economic welfare.”