What a mess the next president and Congress will face! Fiscal discipline is in a shambles, a bad situation made worse by the Senates eager embrace of another $100 billion in unfunded programs to pass the financial rescue/bailout package. We will almost certainly add to the long-term problem with one or more economic stimulus packages in January, probably worth another $100 billion or more in infrastructure broadly defined.
[IMGCAP(1)]We will also certainly contribute even more to the problem with a series of additional tax cuts, all unpaid for. And there is a likelihood that we will need another financial rescue package, possibly centered on the huge morass of credit default swaps, which will mean another huge outlay.
Of course, some of this is necessary; we are in a time of triage to prevent the global financial system from collapsing, and we are likely to have a weak economy for some time to come. I was on a panel in New Haven, Conn., last week with Robert Shiller, a prescient Yale economist, who had constructed a chart tracking housing prices since the 19th century in relation to other economic indicators. The past decade is dramatically different from any earlier era, as housing prices deviated wildly from other leading indicators, dropping back only in the past year or so but still way above the historical norm. This means we have some ways to go before the housing market stabilizes.
For most Americans, that means a continuing double hit. Our houses have been our primary nest eggs the one big asset we could fall back on, appreciating steadily, available for short-term needs through renegotiated or second mortgages, and the safety net for retirement or to help our kids get a start. No more and for those who also have 401(k) accounts or other retirement plans to supplement, their value is down substantially as well. All of this is happening, of course, as baby boomers near or reach retirement age.
Congress and the president will be pushed to find ways to create a better safety net, to add some cushion as more Americans fall and to reassure people that help is on the way and that some of the other headaches we face, including health costs and coverage, will be ameliorated. But doing anything substantial costs money, and lots of it, and money for government programs is in very short supply. At the same time, Congress and the president will have to address the long-term fiscal situation, which is disastrous. Our unfunded liabilities many trillions of dollars from Medicare, Medicaid and Social Security threaten deeply our economic system; unless ameliorated, we will have deficits much larger in terms of our economic size than we have ever experienced before.
Not surprisingly, neither Sen. John McCain (R-Ariz.) nor Sen. Barack Obama (D-Ill.) has been willing to address these problems frontally. Whoever wins will have to do so. But lets face it doing so at a time of economic trauma, when new and soon-to-be retirees are reeling from the decline in their house values and the decline in their retirement plans, will be even more difficult.
We also know that dealing with these problems requires broad bipartisan leadership consensus. The dynamic over the financial rescue/bailout bill does not give much comfort that we can find consensus about anything significant. I am grateful that Congress eventually stepped up to the plate and passed a plan. But the attitude in the House as the issue arose a defiant willingness to ignore the joint efforts of the president, Treasury secretary, Congressional leaders and presidential candidates, along with the major players in the economic arena outside government is not a portent of better times ahead.
Neither is the tone of the presidential campaign as it enters its final month. The McCain campaigns decision to go sharply negative and personal and the Obama campaigns willingness to counterpunch may satisfy the bases of both parties, but can only make more difficult the effort for bipartisan cooperation. Plus it sets the stage for very tough decision-making early in the next presidential term. The difficulty will be compounded by the departure of the solid core of Republican moderates who might be expected to provide the glue in the middle for bipartisan solutions. There will be a substantial addition of moderate Blue Dog Democrats, but they need counterparts on the GOP side to make things work.
The burden will be on the next president to move swiftly on Nov. 5 to get a government in place and to set priorities to take advantage of the period immediately after the inauguration, when voters will demand action and when any sign of recalcitrance on the part of Congress will be met with serious backlash. Getting the first 75 days after the election right and then getting the first 100 days of the new administration in order are absolutely critical to the ability of government to function for the next two years at least.
Norman Ornstein is a resident scholar at the American Enterprise Institute.