Election opens door for a new economic era

By Patrice Hill (Contact) | Monday, November 10, 2008

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The combination of economic crisis and a sea-change election gives President-elect Barack Obama an opportunity to transform the economy in ways not seen in a generation, many analysts say.

Supporters and critics alike are comparing current events to earlier transformational elections during economic crises, including the 1980 election of Ronald Reagan, which ushered in an era of lower taxes and less regulation, and the 1933 election of Franklin D. Roosevelt, which ushered in the New Deal era of greater government involvement and support for the economy.

"Clearly, President-elect Obama is inheriting the worst set of economic conditions since Franklin Roosevelt," said Bernard Baumohl, managing director of the Economic Outlook Group.

A government report released Friday showed that the economy lost more than a half-million jobs in the past two months.

"This economy has completely shut down. No one wants to spend or invest. No one wants to borrow. No one wants to lend. Everyone is focused on hoarding cash," Mr. Baumohl said. "The No. 1 priority for business is to protect their fragile margins, which means cutting jobs."

Mr. Baumohl said Washington will have to set aside the free-market policies that have governed for decades and enact "a massive government stimulus package on the order of $300 billion to $500 billion ... to jolt the economy out of its coma." He endorsed Mr. Obama's plan to increase spending on building projects for schools, roads and airports, while assisting state and local governments that are having difficulty borrowing to maintain vital services.

Public works programs, like those that Mr. Roosevelt funded to build dams and highways during the Great Depression, work better than tax rebates at creating lasting economic change, Mr. Baumohl said. They will have "a multiplier effect on the economy" by "quickly creating jobs and increasing demand for industrial material and goods," he said.

Peter Schiff, president of Euro Pacific Capital, also sees Mr. Obama's election as "the most seminal shift in political philosophy since the New Deal." But he said the consequences of escalating government involvement in the economy, as prescribed by Mr. Obama and his supporters, could be disastrous.

"In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution," he said. "The country has now hitched its wagon to the views of Barack Obama," who has "repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution."

"The president-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving," Mr. Schiff said. "Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful."

Analysts say Mr. Obama at a minimum has the opportunity to restructure and rewrite the ground rules for several critical industries - including banking, investment and automobile manufacturing - that are in crises largely of their own making. Mr. Obama has been invited to a series of summits with leaders of the world's other economic powerhouses with the goal of rewriting the rules for global finance. The first summit convenes in Washington this week.

Mr. Obama's supporters clearly have hopes that the new president and the crop of congressional Democrats that swept into office with him will usher in a new era for the economy and the nation. Environmentalists are calling his election the "New Green Deal," while labor organizations are calling it the "New New Deal."

"This was not simply a change election. It was a sea-change election that marks the end of the conservative era that has dominated our politics over the past three decades," said Campaign for America´s Future co-director Robert Borosage. "Democrats won because they campaigned as progressives, not as moderates or conservatives. On core economic issues, voters gave these legislators a mandate for reform."

Environmental groups have proposals to spend $100 billion on clean-fuel projects and carbon-reduction strategies that they say can create millions of jobs even as millions of workers lose jobs in older, energy-consuming industries such as auto and steel manufacturing. Mr. Obama has pledged to invest in what he describes as a new "green" economy led by alternative fuels and technology.

"Voters rejected the failed energy policies of the last eight years and issued a historic mandate for large-scale, transformational change," said Brent Blackwelder, president of Friends of the Earth. "They signaled that they want a fundamentally different policy - one that aggressively invests in clean and energy-efficient infrastructure, creates green-collar jobs, fights global warming and strengthens our economy."

But many economists say that budgetary constraints at a time when the government is expected to run a $1 trillion budget deficit likely will prevent Mr. Obama from enacting all the ambitious changes he seeks. They also note that significantly greater government involvement in the economy began well before Mr. Obama was elected under the Bush administration, which has been the most conservative and market-oriented since Mr. Reagan was president.

Responding to the deepening financial crisis, the government has inserted itself deeply into the economy this fall by acquiring partial ownership of insurance companies and banks and providing direct loans to businesses of all types, among other moves.

"The financial crisis is, for better or worse, driving the bus," not political ideology, said Stephen Stanley, economist with RBS Greenwich Capital. He noted that Republicans and Democrats alike in the end voted overwhelmingly for the administration's $700 billion bailout program for banks.

"Just like there are no atheists in foxholes, there are no libertarians in the middle of a financial crisis," he said. "Government was going to be taking on a larger role in the economy, and particularly in terms of overseeing the financial system, regardless of how the election turned out."

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