Here’s one possible future for the next couple of years. This is worst-case-scenary for an Obama presidency (I’ll post a best-case scenary pretty soon):
1. The recession bottoms out soon. By the end of the year, the economy is growing. The tax rebate part of the stimulus helps in this, but the rest of the stimulus hasn’t even been spent yes.
2. As the spending part of the stimulus comes online (i.e., is spent) it acts pro-cyclically fueling a boom. In 2010, growth is above-trend.
3. Obama’s ratings soar. Critics are silenced. A new era for liberalism is upon us. Health care reform and maybe cap&trade get passed into law. Democrats win by a landslide the mid-terms.
4. The bills start coming in mid-2011. Pressure starts mounting on the budget. Bond yields go up. Fiscal conservatives get a bit more air-play. A couple of scandals (some fake, some real) on stimulus money being misspent make the news. A sex scandal. Cracks in the castle.
5a. Obama is forced into crisis mode just as an election looms. The bond markets are un-forgiving and he must cut spending and/or raise taxes in 2012. It all comes crashing down very fast and Bobby Jindal wins the election by, what even a couple of weeks before the election, would be a very surprising margin.
5b. There are is a loss of confidence, but no general crash (like recessions, bubbles always last longer than you’d expect). Obama is still getting credit for the boom and wins the election handily (although by a margin that is less than he got in 2008). However, he must, belatedly, raise taxes and cut some spending. He finishes as a not-failed-but-definitely-humbler President. He takes confort in having higher ratings than W at the end of his two terms.
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Alternative worst case:
The recession continues until next election. The US enters in deflation, sending real interst rates to high values.
To approve a rescue package to finantial sector, Obama has to negotiate with the moderate wing of the Republicans (not only to avoid filibuster, but also because of the “Nay” votes of many left-wing Democrats, who want a swedish-style nationalization). The price: don’t raise taxes on the high incomes.
“Giving money to the banks” and don’t raising the taxes “on the richs” will enrage much of the Democrat base. Combined with unemployment and people being evicted from their house, some occasional riots occur.
Meanwhile, in the “red states”, the “militia movement” reborns, accusing Obama of being a tool of international bankers.
In the republican primaries, a populist candidate (a mix of Buchanan and Huckabee?) emerges, speaking in favour of “law and order”, “protect american jobs”, “low taxes” and against “big government and big bussiness”.
Most moderate, “open borders” and pro-free trade Republicans (David Brooks style?) defect from the party and give support to Obama re-election. However, this is a mixed blessing, because this will make Obama less atractive to the left.
Finally, the election day: in the side of Obama, the minorities (specially blacks) and the social liberal middle-class, but the white working class votes massivly in the Republican candidate (finishing a move that begins in 1968).
The result? Unknown.
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