Business Times - 07 Nov 2008
Paradigm change, Clintonomics redux, or just muddling through?
By LEON HADAR
WALL Street may have suffered some sense of anxiety in the aftermath of Barack Obama's presidential victory with the Dow Jones falling more than 300 points. That nervousness seems to fit with the conventional wisdom that Wall Street has traditionally preferred Republicans in dealing with the economy.
But interestingly enough, the Democrat Obama has been more successful than candidate John McCain, the representative of the pro-business Republican Party, in collecting election campaign contributions from leading members of the American financial industry.
Mr Obama also performed better than Mr McCain in New York, New Jersey and Connecticut where Wall Street investors make their home.
In fact, most investors were rooting for Mr Obama. According to renowned financial commentator Jim Cramer: 'Obama is a recession. McCain is a depression.'
Mr Obama has also gathered heavyweight advisers such as two former Clinton administration Treasury secretaries, Larry Summers, the former Harvard president, and Robert Rubin, the Wall Street investor, not to mention former Fed chairman Paul Volker and, yes! Warren Buffett.
But even if one applies the best-case scenario in predicting the effect that an Obama administration would have on the economy, it's clear that the president-elect has his work cut for him.
And while he will take office only on Jan 20 next year, he is expected to select his top economic advisers, including his Treasury secretary, as soon as possible and direct them to cooperate with President George W Bush's economic team during the transition period.
Political and economic pundits speculate that either Mr Summers or a former deputy of Mr Summers, Timothy Geithner, the president of the Federal Reserve Bank of New York, would be selected as Treasury secretary.
There is also some talk on Wall Street and in Washington of bringing back Mr Rubin or keeping current Treasury Secretary Henry Paulson.
The other question is whether the new president would follow in the footsteps of the last Democratic president, Bill Clinton, and pursue his kind of centrist economic agenda that enjoyed the full support of Wall Street, or whether Mr Obama would embrace a more progressive and left-leaning economic policies.
Will Obamanomics remain committed to free-market principles that encourage economic growth, including reducing the deficit and liberalising global trade, or will it move in a more populist direction by placing an emphasis on social spending, redistributing wealth and 'protecting' US jobs from foreign trade?
During the election campaign and especially in the aftermath of the financial meltdown on Wall Street, Mr Obama did use a populist rhetoric, blasting President Bush and the Republicans for failing to create well-paying jobs and provide workers with medical insurance.
He criticised incredible high compensations granted to top business executives while the wages of the ordinary workers remained flat.
'The Bush tax cuts give those who earn over US$1 million a tax cut nearly 160 times greater than that received by middle-income Americans,' Mr Obama said.
And the Democratic candidate proposed to replace the laissez-faire policies of the Republicans in favour of increasing government intervention in the economy - more regulation of the private sector, more spending on ambitious domestic programmes, including a new government-mandated healthcare system, and on subsidising the creation of new 'green' jobs, and more reassessment of current and future trade deals, including the existing Nafta, as part of an effort to protect workers and the environment.
But the expectation in Washington and on Wall Street is that the new president is going to refrain from articulating what would amount to a coherent and ambitious economic doctrine - along the lines, say, of FDR's New Deal.
Instead, they expect Mr Obama and his advisers to invest most of their energy on muddling through the current financial crisis and on applying a mishmash of fiscal and monetary policies, to renew trust in the financial system and re-energise the American economy.
It will certainly be very difficult for critics to accuse Mr Obama of pursuing a 'socialist' agenda and of trying to use government to intervene in the economy, after the Republican Bush administration ended-up nationalising several huge financial institutions and promoted a large government-backed economic stimulus plan.
In fact, this Republican White House has presided over the most dramatic shift of power from Wall Street to Washington.
This has made it easier for any successor to use to continue using government power to shape the American economy, including by expanding the deficit.
Among the steps that the Obama administration is expected to take in the next year will probably be a new economic stimulus package of US$50 billion to jumpstart the economy and a new tax relief effort to help the strolling middle class.
The new administration could also decide to invest in the manufacturing sector and create new green jobs, to support small businesses and new programmes to repair the nation's infrastructure, and to raise the minimum wage.
With a clear Democratic majority on Capitol Hill, the Obama administration will almost have no difficulties getting its economic policies approved by Congress.
But a Democratic Congress could also put pressure on Mr Obama to 'get tough' with America's trading partners, and especially with China that has been blamed by many lawmakers for securing a competitive trade position vis-a-vis the US by maintaining the value of its currency artificially low.
But Mr Obama's advisers insist that notwithstanding his populist rhetoric during the campaign, the president-elect remains committed to free-trade principles and is not expected to initiate any new policies to 'punish' China or other trade partners.
But Mr Obama is also unlikely to move in any dramatic fashion to revive the global negotiations on liberalising trade.
Instead, as he focuses most of his effort on saving the American capitalist system, the new president will probably place the global trade issues on the policy back-burner.
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