Resident Fellow Desmond Lachman

At times of economic crisis, a number of US presidential elections have proved to be watershed economic events. The 1932 election of Franklin Roosevelt and the1980 election of Ronald Regan spring most readily to mind as such epochal events. Judging by the many imbalances presently characterizing the US and global economy, the 2008 US presidential election is very likely to fall into that category of election. For that reason, one must hope that in this year's presidential race, the candidates go beyond mere sloganeering and pandering, and offer us a serious debate as to how the next US Administration should respond to the very serious economic challenges with which it will almost certainly be confronted.

On assuming office on January 20, 2009, the next US President will be forced to deal with the multiple economic shocks presently impacting the US economy. Not since the Great Depression has the US economy had to grapple with home prices at the national level falling at double digit rates and with housing foreclosures running at an annual pace in excess of 2 million homes. Nor has it had to do so at a time that the US economy is experiencing its most wrenching credit crisis in the post-war period, that international oil prices are increasing in inflation-adjusted terms at a pace exceeding the 1979 oil price shock, and that the US dollar's weakness is continuing to constrain the Federal Reserve's interest rate policy.

The first order of economic business of the next Administration will be to put a floor under the US housing market, whose bust has been the primary factor underlying both the US economic slowdown and the deepening credit crisis. As Marty Feldstein never tires of telling us, without some sort of government intervention to limit the pace at which home prices are now falling, there is the very real risk that the housing market will continue to be destabilized by a rising tide of foreclosures. It will do so as an increased proportion of households find themselves with ever increasing negative equity positions in their homes.

Rather than engage in a fatuous debate over whether the US economy needs a large or small government, or whether it needs some yet to be defined change in economic direction, the candidates would seem to owe it to the voters to clearly lay out some vision as to how the housing market crisis might be resolved. Would they be proposing changes in household bankruptcy laws or an expanded version of the Barney Frank-Chris Dodd mortgage reduction program?  Or might they be thinking of interest rate caps or some sort of Resolution Trust Corporation of the savings and loans era to resolve today's housing market crisis?

In a similar vein, it would behoove the candidates to lay out their views as to how they would propose to reform the financial system so as to minimize the chances of a recurrence of the sort of credit crisis which is presently afflicting the global economy. Should they not be informing us as to what they might have learnt from the Sarbanes-Oxley debacle of burdensome over-regulation of the US corporate sector in the wake of the Enron and WorldCom failures? And might they not outline how regulatory oversight might be consolidated and how investment banks and hedge funds might be regulated without jeopardizing the US competitive position in global financial markets?

Perhaps most important of all for the longer run health of the US and global economies, the candidates might clarify where they stand on the issue of both trade and financial market globalization. Over the past twenty five years, there has been broad based bipartisan support in the US for open trade and financial markets, which were widely seen to be the bedrock of both US and global prosperity over that period. Ominously, as the US economy has slowed and as job losses have risen, that bipartisan support appears to be fraying and protectionist voices are now being increasingly heard.

The long-run economic importance of this sensitive issue would seem to demand of the candidates that they clearly indicate their views on where they stand on NAFTA, the Doha round, and the US-China strategic dialogue. By the same token, one would hope that the candidates would provide some indication on how they would propose to keep global financial markets open and under what conditions they would allow the Sovereign Wealth Funds to invest in the US.

As the final phase of the US presidential race now gets underway, there is no shortage of crucial economic policy issues to be debated. Given the very high economic stakes involved, it would be a crying shame if this election campaign degenerates into the same sort of sloganeering of all too many earlier presidential campaigns and denies the voters the real debate that they deserve as to the future direction of the US economy over the next four years.

Desmond Lachman is a resident fellow at AEI.