Newswise — No one can question the broad historical significance of Barack Obama's presidential victory. But four years from now, the economy will look very much the same as it would have under John McCain.
Here's why:
"¢ The political and economic climate -- not the president -- will dictate priorities during at least the next two years, a crucial period that often determines a president's policy legacy. A deepening deficit, declining taxable incomes, and a $1-trillion financial industry bailout would limit either candidate's ability to pursue large-scale initiatives. Either candidate would have to wrestle with how to pay for past spending while conducting two wars and preparing for future entitlements as baby-boomers retire--all while trying to stave off a financial and economic collapse.
"¢ Both Obama and McCain were moderate pragmatists. While their economic philosophies differed, both candidates campaigned on a similar platform to curb spending, reduce taxes, reform health care, promote energy independence, combat climate change and recapitalize the financial sector. They disagreed largely over the details of how, not whether those policies should be implemented.
"¢ Either president would be constrained by the Democratically-controlled House and Senate, both full of new legislators with their own agendas. The worsening fiscal and economic outlook would provide plenty of cover for Democrats to reject or reshape McCain's plan to renew tax cuts on capital income, which favor wealthier households and offer little immediate economic stimulus. Obama's economic agenda may also run into trouble, however. Party affiliation does not always guarantee loyalty. President Bill Clinton suffered some of his biggest defeats (such as "fast-track" reauthorization of the North American Free Trade Agreement) at the hands of fellow Democrats.
The 2008 race was no less a referendum on the economy. After eight years of lackluster job and income growth, the global financial crisis was the final straw. Voters felt that Republicans' economic and regulatory policies placed too much faith in the infallibility of unregulated free markets.
History may echo the voters' judgment, ultimately declaring that conservatives destroyed their own legacy. The instrument of suicide may prove to have been a political strategy known as "starving the beast," which meant financing Republican priorities with deficits in order to deny resources to future Democratic administrations. For example, the Reagan Administration's deficits forced Clinton to prioritize deficit reduction over financing his own initiatives. Similarly, the Bush deficits will complicate the Obama Administration's attempts to reform health care and energy policy.
However, if the Bush deficits also prevent implementation of the remedies prescribed by economists of both parties, Republicans will pay a huge political price.
The Bush deficits cast a huge shadow. Under the Bush Administration, the national debt has doubled to $10 trillion, with deficits this past fiscal year of $455 billion growing to potentially over $1 trillion next year with the current financial bailout. In effect, the government has racked up a $120,000 debt on behalf of each U.S. family and, to avoid raising taxes, it continues annually to borrow for us roughly $5,500 per family.
At the moment, the government is making only the $250 billion "minimum payment" on the national credit card, representing about 10% of all taxes paid. That amount could skyrocket quickly, however, if interest rates on Treasury bonds are forced up by declining confidence in the dollar as doubts grow about our government's fiscal responsibility. If bond rates rise, Washington will be left with only two options, both of them ugly: hike taxes or accelerate the accumulation of our public debt, worsening the problem.
This is all simply to cover past spending, of course, and does not account for any of the current operations of the U.S. government, our military operations overseas, our financial bailout or the potential new economic stimulus packages being discussed in Washington. Economists and politicians of both parties agree that raising taxes in the midst of a recession is bad policy, making continued deficit spending a near certainty. In this context, the bold new domestic and economic policy initiatives promised during the campaigns seem years away.
Hope may be alive, but change is no longer easy to believe in.
Mark Hopkins is a professor of economics at Gettysburg College. Hopkins' research examines how the quality and flexibility of economic and political institutions affect global patterns of income inequality and growth. (photo available)
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