Wall Street bailout could tie next president’s hands

Whether or not the $700 billion Wall Street rescue averts an economic catastrophe, it is certain to have an impact on the next administration’s political agenda.

The federal deficit, already projected to be around $500 billion for the year, could double because of actions by the Treasury and Federal Reserve to shore up Wall Street.

{mosads}Rising deficits could reinvigorate calls for congressional belt-tightening, and trim the hopes of the 44th president to spend more money on education, infrastructure, healthcare reform, or to extend the Bush tax cuts, set to expire in 2010.

While presidential candidates Barack Obama and John McCain say the massive bailout for Wall Street won’t alter their White House agendas, the reality is that the next president will face an economic and political landscape dramatically altered by the credit market meltdown.

“The next president won’t have any money to do anything,” said Stanley Collender, a budget expert at Qorvis Communications.

Congressional staff aides told The Hill that even the defense budget, sacrosanct under the Bush administration, could face some cuts next year.

Treasury Secretary Henry Paulson has emphasized that the government may eventually recoup some of what it spends to purchase the “illiquid assets” that are clogging credit markets by reselling them once things calm down.

But the immediate jump in the deficit will likely cause heartburn among Blue Dogs and other budget hawks on Capitol Hill, who may now feel like they are being forced to swallow the costs because of dire warnings from the administration about the consequences of not acting.

Coupled with the actions already taken to shore up mortgage giants Fannie Mae and Freddie Mac, and the $85 billion bailout of the American Insurance Group, the annual deficit could rise to around $1 trillion this year, a big budget hole the next president will be hard-pressed to fill.

“I think the oxygen is effectively sucked out of the room for any spending proposals come January,” said Steve Ellis of the Taxpayers for Common Sense, a budget watchdog group.

Sen. Obama (D-Ill.) has argued that he could pay for his healthcare proposal, which seeks to extend coverage to 46 million uninsured Americans, by not extending the Bush tax breaks for the wealthiest earners.

But the budget constraints could make the Obama plan a tougher sell on Capitol Hill, according to Matt Bennett, vice president for public policy at The Third Way, a centrist think tank.

“Trying to move toward universal healthcare is going to get a lot harder” because of the cost, Bennett said.

Obama’s hopes to increase money for Head Start, the early childhood development program, or to increase money in general to K-12 could also be in jeopardy.

Sen. McCain (R-Ariz.), meanwhile, may have to pull back from his hope of extending tax breaks for the wealthiest Americans.

{mospagebreak}“It’s going to be enormously difficult for both of them to go and do the more aggressive things on their agendas,” Bennett said.

Despite Obama’s and McCain’s claims to the contrary, Bruce Josten, executive vice president of government affairs at the U.S. Chamber of Commerce, agreed that the bailout is bound to limit what either can spend on social programs or on tax cuts.

The annual deficit will have a “constraining effect on what they are going to do,” Josten predicted.

Ken Bentsen, a former Democratic congressman from Texas who served on House Banking Committee, said the government may end up recouping its original expenses by selling the securities once the market stabilizes.

{mosads}But he said the immediate consequence is a budget in a “worse fiscal position” than before the bailout.

Bentsen equated the current situation to what President Clinton faced in his first year when he learned the federal deficit was twice as high as previously estimated because of an economic recession that lowered government receipts, and the continued costs of the savings and loan bailout. Progressive policies had to be put on hold then, and may face an uncertain future now, Bentsen said.

The American economy can absorb deficits better than other economies because of its dynamism, but eventually, high deficits could lead to a devaluation of the dollar, higher interest rates or an increase in inflation, said Bentsen, who is now head of the Equipment Leasing and Finance Association.

Of course, there are consequences if the bailout doesn’t work and the economy slides into a recession.

That could make the push to put new regulations on business to curb greenhouse gas emissions that much harder to do. And it could prompt further government spending, on infrastructure in particular, in hopes of kick-starting the economy.

Bennett said Japan emerged from its decade-long recession by increasing the money it spent on infrastructure. There is already a broad lobbying campaign to increase the money generated by the highway trust fund to build or repair America’s transportation system.

Democrats, meanwhile, want to tie the administration’s bailout proposal to a second stimulus that includes spending more on infrastructure.

But some lobbyists predicted that infrastructure spending will eventually also be cut, even though proponents argue that the various components of the transportation system need more money, not less.

“Anything with infrastructure is in danger, period. It pushes that spending to the back-burner,” said Howard Marlowe, who lobbies for infrastructure projects. “This country is sucking wind and this will start hurting us economically.”