since political discussions are heating up, i thought i'd share this report a friend of mine sent me. it seems unbiased to me as it doesn't say which candidate is better, just what the climate will be if one or the other is elected President.

The 2008 Election: The Candidates’ Proposals and Constraints
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With the political conventions almost complete, the general election season is now officially underway, and market
participants have begun to focus more intensely on the candidates’ proposals. Below we outline key differences and
similarities between Senators John McCain, the Republican nominee, and Barack Obama, the Democratic nominee.
•
While their policy proposals are important, it is also worth noting the constraints that either candidate would operate under.
If elected, McCain would face a Congress controlled by the Democratic party, and both candidates will face continuing
pressure to react to economic developments and will be constrained by large deficits this year and next.
With the political conventions almost complete, the election season is now officially underway, and market participants have
begun to focus more intensely on the candidates’ proposals. Below we outline key differences and similarities between Senator
John McCain, the Republican nominee, and Senator Barack Obama, the Democratic nominee. We see four ways to consider the
election:
1. McCain vs. Obama. The presidential race is typically the primary focus for market participants in any election and is likely to
be this time as well. In our view, the details of the candidates’ proposals are less relevant than the overall approach each
candidate takes on an issue, since most specific proposals will be revised after the election and are likely to change further in
the legislative process. In evaluating McCain’s proposals in particular, an important consideration for market participants is to
judge where he is likely to compromise with congressional Democrats, given that they are unlikely to pass most of his policies as
he proposes them.
2. The end of the Bush Administration. On some issues, both candidates differ with President Bush more than with each other.
Two big examples are climate legislation and healthcare (particularly pharmaceutical) pricing. On these items, the change in
control of the White House—regardless of election outcome—could clear the way for enactment of significant policy changes.
3. An expanded Democratic majority in Congress. We expect Democrats to win roughly 15 seats in the House and around five
seats in the Senate, which would bring the Democratic total to roughly 250 and 56, respectively. This is particularly important in
the Senate, where it would mean two things: first, additional Senate seats will take the Democrats from a nominal 51-seat
majority—counting two independents—to a real working majority. This is particularly important for fiscal issues, where the
majority can use the “reconciliation” process to pass legislation with a simple majority. Second, the 60 votes necessary for most
other important pieces of legislation will be easier to attain, as Democrats might need to find only four or five Republicans to join
them, rather than at least nine today. The number of Democratic seats in the House is less important, since most legislation is
passed by simple majority, but the prospect of a larger margin is nevertheless helpful for the Democrats.
4. A more activist government? Recent NBC/Wall St. Journal polling indicates more support for a greater role for government;
52% believe the government should do more, while 42% believe it already does too much, a 20% increase over the share who
supported activist government in the mid-1990s. Recent intervention in the financial sector undertaken by policymakers from
both parties (Democrats in Congress and a Republican administration) also indicate that policy is headed in this direction, at
least for now. However, it remains to be seen whether longer-term policy discussions will also embrace a more important
government role, and this is likely to be an important variable over the next several years.
Important disclosures appear on the last page of this document.

Despite a potentially important political shift, the next President will nevertheless face at least three important constraints:
1. Fiscal: Our current estimate for the budget deficit in 2009 is $440 billion, but this has significant risk for upward revision once
we rebenchmark to the new Congressional Budget Office baseline due for release on September 9 (the White House Office of
Management and Budget projects a $482 billion deficit in 2009). While much of the deterioration will be attributed to temporary
issues—the war in Iraq, economic weakness, and the tail end of the fiscal stimulus package—some of it reflects a more
structural budget imbalance. Fiscal concerns could constrain the next president’s policy options, particularly those that require
substantial federal resources.
2. Economic: In addition to the direct fiscal impact, a weak labor market and stagnating economic activity in the second half of
2008 and 2009 are likely to dampen consumer (and voter) sentiment. The most obvious effect may be on tax policy, where
lingering economic concerns are likely to result in a more incremental increase in tax rates from current levels. That said, the
same forces could increase support for a more progressive tax policy, even if overall revenues do not rise as much as they
otherwise might. Trade policy appears to be more of a mixed bag, with a deteriorating labor market driving protectionist
sentiment, offset by the fact that trade continues to be one of the few bright spots of the U.S. economy for the time being.
3. Energy prices: The retail price of gasoline has affected consumer confidence this year (first negatively, and now positively)
and may also affect the policy debate in 2009. Our commodities analysts forecast an oil price of $148/barrel around the start of
the next presidential term, which would equate to roughly $4.35/gallon for gasoline at the pump. If so, policies that would
increase the cost of energy consumption (whether through a cap-and-trade system or outright taxation) are likely to find less
support. However, subsidization of alternative energy and opening of domestic production would rise on the agenda.
The first set of issues the next president will be faced with stem from challenges facing the current administration and congress.
While these issues are likely to be on the agenda next year regardless of the election result, the policy outcome will be
determined by the next president:
•
Fiscal stimulus: Later this month, the House of Representatives may pass a second fiscal stimulus package. This bill
looks unlikely to become law before the end of the year in our view, but the issue is likely to be on the congressional
agenda when the new president takes office. McCain is more likely to focus on tax measures, and might couple near-
term initiatives with longer-term or permanent measures such as his proposal to increase the dependent deduction.
Obama has endorsed a second $50 billion stimulus package, which is similar in scope to the pending congressional
proposal and would include infrastructure spending, low-income energy assistance, state and local fiscal assistance,
and a second round of rebate checks for lower-income individuals.
•
Housing and credit policy: Although these are two separate issues, from the government’s perspective they are mostly
the same since almost all of the government’s fiscal support for the credit market comes through housing-related
programs and institutions (the exceptions are the municipal and student loan markets). Obama was an early cosponsor
of the Senate proposal to refinance mortgages through the Federal Housing Administration, sponsored by Senate
Banking Committee Chairman Chris Dodd (D-CT). Given this, it is likely that he would be more likely to put additional
government funds to work, either by enhancing that program or potentially establishing a new alternative structure.
Senator McCain has also supported intervention efforts, though he appears interested in limiting the scope of such
intervention. Under either presidential scenario, Congress seems likely to debate additional housing and financial-
sector policies in 2009 (for more, see the August 15 US Economics Analyst: Mortgage Policy Limbo).
A second set of issues are also likely to figure prominently on the agenda, regardless of the election result, because of the
expiration of current policies:

•
Individual income tax rates: There are two potential motivations for action on tax policy in the next Congress:
addressing the scheduled expiration of the 2001 and 2003 tax cuts at the end of 2010, and funding other political
priorities by raising additional revenue. The outcome of the presidential election will determine not only how the
expiring tax cuts are dealt with, but also the timing. Congressional Democrats are more likely to pursue substantial tax
legislation in 2009 if Obama wins, since other major reforms—healthcare, for instance—may be addressed in the first
year and could require significant resources. In addition, two important tax items will require attention by year-end 2009,
making substantial legislation likely next year: first, Congress must “patch” the alternative minimum tax for 2009, which
requires action before year end. Second, the estate tax will phase out entirely on January 1, 2010, and Congressional
Democrats will find it politically advantageous to enact a longer-term compromise on the estate tax in 2009, rather than
waiting for it to expire. On the other hand, Senator McCain and the Democratic majority in Congress would have greater
disagreements on policy, thus the probability is greater that tax policy would remain largely unchanged for 2009 and
2010, and the eventual resolution of these issues is more likely to become effective for 2011. Despite these differences,
it is important to note that both parties support extending current rates and preferences for couples making less than
$250,000 per year. This equals roughly 60% of the total revenue from 2011 through 2018 that would be lost if all of the tax
cuts enacted in 2001 and 2003 were extended (this includes continued patching of the AMT). Obama and McCain both
support a compromise estate tax policy: Obama would extend the 2009 policy ($3.5 million exemption, 45% rate) while
McCain would provide greater relief but would stop short of full repeal ($5 million exemption, 15% rate). The most
important differences are on tax rates on income above $250,000 (McCain proposes extending the current 33% and 35%
rates, while Obama would let these revert to 36% and 39.6%); and investment-related income, discussed below.
•
Investment income tax rates: The 15% rate on capital gains and dividend income, like the other income tax rates noted
above, expire at the end of 2010, after which the rates are set to revert to 20% and the taxpayer’s marginal tax rate (up to
39.6%), respectively. Obama has suggested a 20% rate for those with incomes above $250,000 while preserving the 15%
rate for taxpayers with incomes under that amount. Such a policy might meet resistance in Congress, since this would
result in a net revenue loss to the government (compared with letting the dividend rate revert to the marginal income tax
rate) that would benefit higher income taxpayers (in 2006, over 60% of qualified dividend income is received by those
with incomes over $200,000). As noted above, legislation dealing with investment income is more likely to be enacted in
2009 under an Obama administration. If McCain is elected, any change would be more likely to take effect in 2011,
though these rates seem likely to increase at least incrementally regardless of election outcome.
•
Infrastructure spending: In 2009 Congress will reauthorize the highway bill, which provides most federal transportation
infrastructure funding. The current program expires September 30, 2009. The Democratic majority has indicated that
infrastructure investment will be a priority, and this seems likely to be an important issue in 2009 particularly if Obama
wins. McCain has campaigned against excessive spending—with infrastructure projects featuring prominently in his
rhetoric—and proposed suspending the federal gas tax, which is the main source of funding for surface transportation
spending.
A final set of issues are longer-term in nature and are not associated with specific deadlines:
•
Health reform: Health reform is likely to feature prominently on the congressional agenda in 2009. Obama proposes an
expansion of government healthcare subsidies combined with structural reforms designed to encourage employers to
offer benefits or pay premiums for coverage through a government-sponsored alternative, and Congressional
Democrats look likely to pursue such a plan next year. The Obama campaign estimates that its plan would increase
federal spending by roughly $50 billion to $65 billion per year. McCain proposes to replace the current exclusion of
employer-sponsored benefits from taxation with a standardized insurance deduction, and would bolster state-run high
risk pools for those that are otherwise uninsurable. The cost of McCain’s proposal would be substantially less than
Obama’s—his campaign estimates around $10 billion per year—but as a result it is unlikely to provide coverage to
nearly as large a group. Health reform is likely to be a dual-edged sword for the sector: on the one hand, increased
subsidies will increase volumes and decrease bad debt from unpaid services. On the other hand, insurers could face
additional competition from government programs, and healthcare pricing—particularly pharmaceuticals—could come
under additional pressure. This last point, it should be noted, is one area in which both candidates endorse
substantially similar policies.
•
Tax Reform: In addition to the expiring tax cuts, more fundamental tax reform may be debated next year. McCain has
proposed a simplified alternative individual income tax, which would be budget-neutral and feature two rates and few
preferences. For his part, Obama has proposed an option to file a dramatically simplified tax return for those with
relatively few income sources and deductions. Both candidates would “patch” the alternative minimum tax indefinitely.
On the corporate side, McCain has proposed reducing the corporate tax rate to 25% by 2015 along with a number of
other changes that the Tax Policy Center estimates would reduce corporate tax revenues by roughly $800 billion over
ten years (roughly 20% of projected corporate tax revenues over this period). Obama has proposed reallocation of
multinational tax deductions, though the specifics of this proposal are not entirely clear. It is worth noting that the Ways
and Means Committee Chairman Rangel released his own tax reform proposal last year, which is also likely to figure
prominently in any reform discussion (for more see The Rangel Tax Reform Proposal: Winners and Losers, U.S. Daily
Comment, October 25, 2007).
•
Climate change: Both candidates support schemes to stabilize and ultimately reduce carbon emissions, and their
positions are closer to each other than either is to the Bush Administration, which has opposed mandatory emissions
reductions. That said, the candidates differ on the amount of credits to be auctioned (Obama proposes an immediate
auction, McCain supports the free initial allocation of most permits) as well as the ultimate target (Obama proposes an
80% reduction from 1990 levels by 2050, McCain supports a 60% reduction). However, the recent defeat in the Senate of
the Lieberman-Warner bill, which both candidates support, indicates that whatever climate policy is eventually enacted
is more likely to be determined by the composition of Congress than control of the White House, so this is one area in
which the candidates’ general support of such legislation may be more important than their specific proposals.
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Energy policy: McCain and Obama differ on energy policy in most areas. Obama opposes most suggestions to expand
domestic oil and gas production, such as opening the Outercontinental shelf (OCS) and the Alaskan Natural Wildlife
Refuge (ANWR), though he has recently signaled some flexibility on offshore drilling. McCain has in the past opposed
these initiatives as well, though he has come more recently to support repeal of the moratorium on OCS production.
Both candidates have spoken favorably of nuclear energy, but while Obama appears to support incremental expansion,
McCain suggests a more aggressive approach, including construction of 45 new plants. Though they both support
climate change legislation, McCain opposes requiring electric utilities to produce power from renewable sources.
Obama supports legislation to require a 20% renewable portfolio by 2020 (such legislation failed to pass the Senate in
2007). Given regional politics surrounding this issue, a renewable standard may be difficult to enact regardless of the
election outcome. By contrast, we expect extension of existing renewable subsidies (mainly for solar and wind
installations) under either election outcome.
Alec Phillips
September 4, 2008

Goldman Sachs Economic Research
US Economic Research Group
Copyright 2008 The Goldman Sachs Group, Inc. All rights reserved.