Bailout backlash (pg. 2)
Even without the credit crisis, the next President was going to inherit a damaged economy. "We still have very serious problems with the dollar, the trade deficit - problems that were hidden because of this increase in pretend wealth," says Colander.
As President, neither Obama nor McCain would be able to count on much help from the Federal Reserve. With the dollar foundering, inflation already at 5.4%, and the government needing to sell hundreds of billions of dollars in new bonds to finance the bailout, the Fed may find it impossible to keep cutting interest rates to help stimulate the economy. "When an economy is overleveraged, it strikes me that investors are eventually going to be seeking a much higher return [from bonds and loans]," says Jared Bernstein, an Obama advisor and senior economist with the left-leaning Economics Policy Institute. America's heretofore unquestioned AAA credit rating could even come under scrutiny. "There's no God-given gift of a AAA rating," the chairman of Standard & Poor's sovereign ratings committee, John Chambers, said recently. "The U.S. has to earn it like everyone else."
When the financial crisis does pass, its political legacy will remain. Resentment toward financial profiteers is reaching a fever pitch. Leave aside for a moment the fact that homeowners living beyond their means - not just greedy Wall Streeters - contributed to the economic crisis. And Hank Paulson can talk all he wants about his program to help millions of struggling mortgage holders move into comfortable payment schedules. That's not what American voters were hearing as Paulson & Co. attached multibillion-dollar taxpayer pricetags to names like Bear Stearns, Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500), and AIG (AIG, Fortune 500), even before unveiling plans to rescue banks holding bad debt, an intervention that could cost every person in the country as much as $2,300. "What we're seeing is an environment where people are being asked to shoulder enormous costs with uncertain benefits," says Schoen, who served as President Clinton's pollster.
Even before this populist eruption over the Wall Street rescue, Middle America was souring on the privileged class. There has been a growing sense in the U.S. that a stagnant tide has kept the 80-foot yachts afloat while beaching the family outboard. At the start of the presidential race, the Pew Research Center found that three-quarters of Americans agreed with the statement that the "rich are getting richer while the poor are getting poorer" - up 8 percentage points from five years earlier. Some 43% also agreed that America is divided into haves and have-nots, another big jump from past years.
Americans have always been conflicted when it comes to attitudes toward wealth - at once resentful yet tolerant because of the prospect of their own upward mobility. Obama's definition of a rich household - $250,000 a year - used to seem well within the sights of a middle-class family moving up the ladder, so there were limits to the effectiveness of any politician's populist rhetoric (and populist solutions). But in a decade when the American workforce has contributed a robust 20% growth in productivity, yet most middle-class households have less income than when they started, that higher income bracket starts looking more like a pipe dream.
Feeding the politics of envy is the parallel rise of a class of superrich: The top 1% of earners now collect the largest share of income since 1929, and there are more than 1,000 billionaires in the U.S. alone. Obama economic advisor Jason Furman has calculated that the rise in the income of the top 1% of earners, set against the drop in income by the bottom 80%, is the equivalent of a shift of $885 billion a year. Average CEO compensation has also caught the attention of the public and politicians. According to the Economic Research Institute, CEO compensation in 2007 increased 20.5%, to an average $18.8 million in February, while corporate revenues increased less than 3%.
Obama used class themes from the start of his campaign, and they fit neatly into his current condemnations of "greedy CEOs and investors who are taking too much risk" (an argument that's in line with public opinion; Gingrich's survey found that 84% blame CEOs for the financial crisis). In fact, Obama's presidential bid drew from an already written playbook. Two years earlier Democratic strategists picked up on the rising sense of economic populism and were able to capture control of Congress with help from a platform seeking to raise the minimum wage, tax Big Oil, and rein in Greedy Pharma - though opposition to the unpopular Iraq war also contributed to Democratic gains that year.
And populism isn't limited to the Democrats. Former Arkansas Governor Mike Huckabee, a runner-up in the Republican primary, responded to Paulson's $700 billion rescue plan with this blog posting: "I'm disappointed and disgusted with my own Republican Party as I watch them attempt to strong-arm a bailout of some of America's biggest corporations by asking taxpayers to suck up the staggering results of the hubris, greed, and arrogance of those who sought to make a quick buck by throwing the dice." (Hey, Huck, tell us what you really think.)