What will happen to the economy under a Barrack Obama administration?
The economic realities of this country will drive the presidential agenda, according to Jim Glassman, managing director and senior economist at J.P. Morgan Chase. No matter who’s in the White House, there will be more fiscal actions coming out of Washington, D.C., he predicts.
“Earlier this year we had a bipartisan stimulus package. Congress has been talking about another fiscal stimulus package for two weeks,” Glassman pointed out. “The person in the White House will govern what that package will look like.”
With the Democrats in control of all three branches of government, Glassman said it’s likely there will be faster moves on tax policy. The 2001 tax cut program is scheduled to sunset in 2010. If they want to, Democrats can fast-forward that and make those tax cuts expire sooner. His guess is that the Democrats would shift those tax cuts to another income group rather than raise taxes. Raising taxes is the worst thing an administration can do when the economy is on the ropes, he said.
The country has been focused on the housing crisis and the financial crisis all year long. Everybody has been assuming that the high cost of credit is the biggest danger, noted Glassman, who came to Grand Rapids Thursday to meet with Chase business clients.
As he sees it, something else is going on that people have lost sight of. He believes that the convulsion in the oil market over the past year has been more damaging to the global economy and the U.S. economy than the credit crisis. Oil prices went from $70 a barrel in the summer of 2007 to $145 a barrel this summer.
“If you had asked economists last year what would happen to the economy if the cost of oil doubled within 12 months, we would have told you that the growth rate of all the oil-consuming countries would slow down by about 2 percentage points,” Glassman said. “If oil stays at its current $60 a barrel price, there’s every reason to believe that this huge weight on the global economy will be lifted and the global economy will pick up again.”
Just as the oil crisis was fading away, the stock market plunged in September and October, and that set in motion a whole new set of problems. Fear took over the financial markets and drove up the LIBOR rate — the rate at which the largest financial institutions charge one another for short-term money. When fear takes over the financial markets, nobody takes risks, businesses become cautious, credit gets more expensive and nothing gets moving, Glassman said. That has all begun to change under the actions the federal government took recently, but the economy will continue to struggle over the next several quarters, he added.
When the economy is in turmoil, a newly elected president is always going to feel compelled to make a bold move to address economic problems, Glassman said. His guess is that if there is any kind of a tax initiative, it will be a tax cut for lower income individuals. From his perspective, there is nothing really wrong with the U.S. economy that has not been fixed. Most of the excess in the housing market has been fixed, oil prices have righted themselves, the federal government has taken action to deal with the financial crisis and it looks like its gaining traction, plus our partners around the world are responding to the crisis by cutting rates, Glassman said.
“There will soon be a changing of the guard, and with it is going to come a very big fiscal measure,” he said. “With all that is in motion now and with the changing climate in Washington, we’re going to come out of this thing sometime next year.”