On the day after the election, stocks plunged nearly 500 points. It could be signaling an early end to the Obama honeymoon. At least on the economic side, the market wants to see early cabinet appointments to key economic agencies, especially the Treasury. The Wall Street buzz is Larry Summers, a free trade, strong dollar moderate Democrat, who served under Robert Rubin and then himself was top Treasury man in Bill Clinton’s last year.
Other likely appointments are University of Chicago economics professor, Austan Goolsbee for the Council of Economic Advisors. And Jason Furman for the National Economic Council, another free trade moderate who served under Robert Rubin during the Clinton years. If names like this surface this week they could calm stock market jitters.
There are, of course, a number of investor worries that President-elect Obama might lurch to the left in organizing his administration and developing his early policies. But in this honeymoon period I have to think that Mr. Obama cannot go far to the left for the simple reason that much of his election mandate came from red states like Ohio, Florida, Virginia, and Indiana. He also won key purple states like Iowa, New Mexico, and Colorado.
Yes, they voted for change, especially economic change to rescue America from the recession. But it is highly unlikely that these states voted for a radical left agenda. It is not a reach to suggest that these red states are sending a message to Obama that he must govern as a moderate. And, in fact, Mr. Obama’s victory speech last night called for Democratic Party humility in winning the election, a strong suggestion that he doesn’t want to go over the deep end or repeat the Clinton mistakes of 1993 that resulted in a Republican landslide in 1994.
The big question for the stock market and the economy is whether Obama will attack businesses and over-regulate key sectors. Will he insist on raising tax rates on capital, investors, and successful earners? Or might he at least defer those tax hikes until 2010, while at the same time making good on his middle class tax cut pledge?
His first test may come quickly as Congressional Democrats are clamoring for a big fiscal stimulus package that might provide temporary tax rebates and huge spending increases. This sort of demand-side government- driven stimulus will not create new economic growth incentives nor would it send a message of rewarding investment, which is so desperately needed for recovery of plunging asset prices in the stock market and the housing market.
Big battles lie ahead over organized labor’s card check proposal to end the secret ballot for unionizing companies. There’s no way to avoid this. There may be similar hammer and tongs battles over cap and trade and big government health care plans. But right at the start, with respect to the economy, Obama could signal that he is truly a moderate who chooses to effectively develop and govern a new coalition that includes liberals, moderates, and conservatives from red, purple, and blue states.
This will be his challenge. The direction of the stock market will be an excellent barometer concerning the president-elect’s earliest policy decisions.