What will it take to get the U.S. economy going in the right direction again? Only time will be able to deliver a conclusive answer to President-elect Barack Obama and an anxious American public.
“Beginning in January, 2009, Obama may face the most extraordinary pressure regarding the economy any president has seen since 1933,” said Mike Barnicle, political and social commentator for the New York Daily News and MSNBC.
Barnicle was a guest panelist Thursday afternoon for a post-election online seminar – “2008 Presidential Election: Implications for high-net-worth individuals, business owners, and families” sponsored by Wilmington Trust.
“Every facet of American life, including our citizens, the media and the business sector are all searching and hoping for rapid solutions to the economic crisis, which happens to be the biggest problem since FDR (President Franklin Delano Roosevelt),” he said.
Barnicle added it’s very important that the new president work quickly to regain the confidence of the American public, since people tend to be impatient and in search of instant gratification.
Investments, housing and savings
The commentator stated he believes Obama should immediately examine regulations for the financial services industry and look at housing industry regulations. Regarding housing, he said help should be provided to allow people to remain in their homes. This could include changes to current bankruptcy codes and some type of moratorium on foreclosures. Barnicle said that by looking at the overall picture, we can expect another economic stimulus package next year.
The new administration will likely address the need for Americans to sacrifice by avoiding all extravagant spending and to save more money. While a stimulus check will put money in people’s pockets, Barnicle said that instead of purchasing a new wide-screen plasma television, putting some money away will also help improve the economic situation in the long run.
Taxes and rebates
A debate is already underway in Washington, D.C. about whether direct spending or tax cuts will better stimulate the economy. Another panelist, Adrian Cronje, PhD, chief investment strategist for Wilmington Trust Investment Management, said specific, targeted, legislation is needed regarding tax rates. Cronje added that historically, income tends to be distributed more under a Democratic president, and there’s a strong possibility the wealthy may experience an increase in taxes under Obama.
“This is the first time since 1960 that we have a Democratic president and a Democratic Congress in a recession,” said Cronje. “So the major questions become: ‘Is there a need for a stimulus package’ and ‘should there be tax relief for the middle class?’ Cronje replied it is also important for the national economy to determine who benefits from middle class tax relief, and what impact will this have on our economy in the short and long terms.
As the country prepares for the new administration, many are concerned about higher income taxes.
"Even without Congressional action, we’re headed for income tax increases, and we won’t be surprised if they come sooner, and there are a lot more changes coming for the estate tax,” said Kroch.
Currently a married couple may shelter $5 million in estate taxes, but next year the amount goes up to $3.5 million per person, or $7 million per married couple. She said in a magic moment in 2010, the estate tax will be repealed for one year, but in another magic moment in 2011 it comes back at a lower rate from 2001.
Kroch said we can anticipate a higher income tax rate in the future for those earning more than $250,000 per year.
“One silver lining for high-net worth taxpayers is the possibility that investments in small and start-up businesses will be favored. President-elect Obama has talked about eliminating capital gains on those, but we have not heard details about how that tax would look,” she said.
Kroch stated that no matter what the president’s agenda is, it’s the Congress that enacts legislation.
“Even if the Senate does not hit 60 members on the Democratic side, it’s quite possible that on a number of issues, there will be a coalition of moderate Republicans joining moderate Democrats to get to the 60 votes,” Koch said. (At the time of publication Democrats held 57 Senate seats, with a recount underway in Minnesota, a runoff pending in Georgia and the indicted Ted Stevens, a Republican, in limbo in Alaska.)
She concluded that despite challenging and uncertain economic times, there are opportunities for savvy taxpayers and investors who gather enough information for advanced planning.
Growing the economy green
Ultimately, the panel agreed that many factors, political and economic, will determine the fate of U.S. economic health. Barnicle expects the new administration to help the “Green Industry” grow by spending money to encourage new research and development of new technologies.
It was also suggested that new programs to improve the economy may arise next year that would resemble Works Progress Administration packages during the FDR era from 1935 to 1943 when the country faced perhaps its most difficult period of economic distress.
Ailing autos
Regarding the automobile industry, the group said what course of action is necessary to revive the auto industry has been a source of great debate within Obama’s transition team. Barnicle stated no one wants the auto industry to disappear. That could cause the loss of about 5 million jobs, but he questioned the viability of handing General Motors a big check now, and then having the auto maker come back next year and ask for more money.
Patience and perserverence
Finally, the panel was also questioned about the length of time required for IRAs and stock portfolios to regain a level of relative normalcy and their full value prior to the recent financial crisis.
“Under proper conditions, investments could be fully restored within four to five years,” said Cronje. “The president may have to make some decisions that may be unpopular for about 12 to 18 months, but as the economy improves over time, then his popularity will likely return,” he said.
