The next president will tax and spend
The winner must fix a broken economy. Some think higher taxes and bigger budget deficits are the only solution for Obama or McCain in the first term.
NEW YORK (CNNMoney.com) -- It's finally here. By the end of today, we should know who the 44th president of the United States will be. And whoever wins probably will do so because voters decided that he has the best plan to repair this shattered economy.
But what do economists think of Barack Obama's and John McCain's platforms?
Unfortunately, many that I spoke with seem to be taking their cues from that Richard Pryor movie "Brewster's Millions." They are selecting none of the above.
"I'm not sure if either one of them could get us back on track anytime soon," said Keith Hembre, chief economist with First American Funds in Minneapolis.
"The biggest issue for the economy is that there was an overextension of credit and overinvestment in real estate. Neither of the candidates has been particularly specific about how to address that," he added. "The debate has been more back--and-forth about taxes. That's important in the longer term but what we're really faced with now is a deficiency in demand."
Simply put, the credit crunch is wreaking havoc on the economy. Even though this has yet to be declared a recession, most Americans seem to think we are already in one and that it is worse than the recessions of the early 1980s, 1990s and 2001.
So despite their differences, economists think that whoever wins will really have to focus more on addressing the financial crisis and less on promoting their various plans for reforming taxes and the energy and healthcare sectors -- at least in the first year of their term.
"The reality is that no matter who becomes president, their hand is already dealt. Neither will get to their agenda items right out of the gate," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago.
"We are trying to save capitalism from itself. A completely laissez faire attitude doesn't work. But on the other side, clearly we don't want to have the government owning banks for the rest of our lives," Swonk added.
What that means is that whoever moves into the Oval Office on Jan. 20 is very likely to be quickly greeted with a second stimulus bill on his desk to sign (assuming that one isn't passed by the lame duck Congress and signed by President Bush before his term ends.).
"I have a feeling a lot will be done before whoever is elected today will be sworn in," said David Resler, chief economist with Nomura Securities International Inc. in New York. "Since both McCain and Obama are senators, the winner is likely to lead an initiative from Congress to put new fiscal policies in place."
And since both candidates have expressed a desire to help troubled homeowners, it is uncertain if an Obama-approved package would differ all that much from one endorsed by McCain.
"Whoever gets elected, we will probably get a pretty big stimulus bill and that will include relief for homeowners in risk of foreclosure," said Stuart Hoffman, chief Economist for PNC Financial Services Group in Pittsburgh.
In addition, even though McCain and Obama have tended to focus most of their attacks on each other's differing tax policies, economists believe that taxes eventually will head higher for many Americans regardless of who wins.
That's because the government has already allocated lots of money to the various programs that have been implemented in the past few months to address the weakening economy, such as the stimulus plan from earlier this year and the Treasury Department's Troubled Asset Relief Program, or TARP.
"I wouldn't expect either candidate to raise taxes next year given the financial situation we're in right now. But whoever wins will probably have to raise taxes in the second half of their term," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm.
"But all this stuff -- TARP, tax rebates and the like -- it costs money and has to be paid for. And the only way to pay for it is through higher taxes," he added.
With all this in mind, the next inhabitant of the White House is likely to be dealing with a larger budget deficit, despite claims from both candidates about how they intend to rein in various forms of government spending.
"In the short-run, fiscal stimulus that includes more spending is important and the next administration is likely to run up a heck of a big deficit over the next fiscal year," said Hoffman. "When the economy is this weak and the threats are significantly on the downside, the budget deficit is going to have to go up."
Resler agreed. But he added that the next president will have to be careful to not raise taxes to pay for the programs needed to foster a recovery until the economy is firmly out of this soft patch. And he said that might not be until 2010.
"Both candidates will face constraints on how soon taxes can be raised," Resler said.
"The deficit impact will need to be addressed somewhere down the road. But the economy limits your options on that front," he added. "The prospect of higher taxes won't be completely off the table but it would be dangerous to push tax increases in the next 12 months." 
