Tags: Election 2008, Martin Hutchinson

Election 2008: U.S. Economy Cries "No mas" to the Democrats

By , Money Morning •

"Election 2008" is an ongoing Money Morning series that looks for profit plays emanating from the presidential election campaign.

By Martin Hutchinson
Contributing Editor

In Tuesday's Pennsylvania Democratic Presidential Primary, Sen. Hillary Rodham Clinton achieved the absolute bare minimum she needed to prolong her battle against Barack Obama. And she still had a slight hope of somehow squeaking through to land the party nomination.

But that's not the "real" story here.

In view of the irresponsible and damaging economic promises that are emerging from both contenders, the already-wheezing U.S. economy may be about to cry for mercy from the relentless and prolonged assault. And the longer the Democratic Primary War continues, the greater the fallout for the U.S. market.

We all understand the dynamics of U.S. presidential politics. In the primaries, contenders make promises designed to appeal to the most-committed, core supporters of their party. Republicans promise tax cuts so massive that they would immediately put the Federal budget into terminal collapse; they promise extra military programs; and they talk about a new batch of moral initiatives designed to make U.S. teenagers straighten up - once and for all.

Democrats, on the other hand, promise an impenetrable wall against foreigners taking away high-paying union jobs; plus social programs designed to rescue anybody suffering financial or emotional difficulties; and a spectacular new environmental assault against multinational corporations that will return the entire planet to room temperature.

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Only the most simple-minded voters take these pledges seriously. The problem is that once the candidate is elected, some percentage of their campaign "promises" will need to be put into effect - presumably in order to reassure voters about the high integrity of politicians. Make 10 pledges, you can get away with implementing two; make 50, and you will have to implement at least seven or eight, if not 10.

Once the primary season is over, the game changes. Now the candidates are looking for the elusive "soccer mom" independent, who has all kinds of needs and desires but who above all wants to be reassured that the next president won't do anything rash or expensive, because it might cost too much money or damage the economy.

The focus goes on to tiny little non-partisan initiatives, exquisitely crafted to win a particular voting bloc, but each only moderately expensive and hardly any of them economically damaging. More of these have to be implemented after the election - maybe 5 out of each 10 - so their aggregate effect is quite expensive and damaging, but no one initiative can be blamed for this problem.

Then, after the election, the politicians go back to rewarding large campaign donors and potential campaign donors in the usual ways, with the occasional populist panic when a crisis occurs.

The problem now is that the Clinton/Obama primary contest has gone on too long.

On trade, both candidates, who had been considered fairly moderate and rational, have already:

  • Come out against a perfectly benign free trade agreement with Colombia.
  • Have promised to renegotiate the North American Free Trade Agreement (NAFTA), already in effect for 14 years.
  • And have made threatening noises against the evil multinationals that "outsource" good U.S. jobs to Third World markets.

Obama, for example, has proposed substantial tax breaks for those "Patriot" companies that keep jobs in the United States, and that pay union wages and benefits. If either candidate is elected, and puts into effect half of the protectionist policies they have supported, world trade will be thoroughly obstructed, and will probably decline in total. That's a highly undesirable outcome; the only time we've seen this previously was in the 1930s.

Then there's housing. Both candidates want to spend at least $30 billion to bail out the scorched U.S. housing market, helping defaulting homeowners through federally guaranteed loans that forgive part of the principal. Clinton even wants to add a feature, proposing the government buy foreclosed houses in the hope of reselling them later on.

This would all create an artificial price floor under the housing market, which sounds like a good idea until you realize that since the market prices would be artificial, there would be few free-market buyers supporting the market. That "reality" brings with it a high probability of a further downward lurch in home prices that could devastate market confidence and damage the U.S. housing market for years - if not decades - to come.

Both candidates have healthcare plans, and are currently accusing each other of being too mean to consumers. Only on the subject of taxation does the competition not run to who can give the biggest benefits; here the argument is who is calling for the bigger tax increase for the rich - sticking it to the rich is a key aim of many Democrat primary voters, however counterproductive it may be economically.

Once Clinton or Obama has been anointed as the Democratic nominee, the rhetoric will change radically. Gone will be all the hostility to multinationals, foreign competitors and those of higher incomes. Likewise, you'll also be able to watch and see as the lavish handouts to subprime homeowners and the uninsured suddenly disappear.

In will come soothing statements about the candidate's commitment to world trade and fiscal responsibility, combined with explanations of how their health and housing plans will be carefully targeted at those most in need.

From the U.S. economy's point of view, that day cannot come soon enough.

[Editor's Note: Money Morning Contributing Editor Martin Hutchinson has personally interviewed the economic advisors for candidates McCain, Obama and Edwards, and concluded that Obama and McCain would be the best candidates for investors. He wrote about the "Potomac Primaries" in mid-February. For a full report on the "presidential profit plays," please click here. The report is free of charge].

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