As the scale of the government's intervention transforms the nation's fiscal landscape, neither presidential candidate seemed ready yesterday to readjust his campaign promises to match a changing reality that could push the federal budget deficit next year toward $1 trillion.
Sens. Barack Obama and John McCain indicated they will not stand in the way of the Bush administration's $700 billion rescue of U.S. financial markets, and each offered his own proposals for making it more palatable to voters: Obama laid out a plan to overhaul federal contracting and save an estimated $40 billion a year, while McCain proposed an oversight board to monitor the bailout.
But advisers in both campaigns said they are not about to shelve their own plans to get the economy back on track -- or embrace more aggressive budget-cutting measures -- in the face of a short-term surge in the federal deficit.
"This is a major fiscal problem in the short run, but it doesn't alter the long-run fiscal picture," said Jason Furman, Obama's economic policy coordinator. "The biggest challenge we face in our economy over the next year is getting it moving again, creating jobs and relieving the squeeze on families. That's our overriding priority for the next year."
Said Douglas Holtz-Eakin, McCain's chief economic policy adviser and a former director of the Congressional Budget Office: "In terms of the numbers, obviously the landscape has changed. In terms of the [underlying] challenge, no, I don't think there is much change."
Given the drama on Wall Street, economists of all economic stripes say the candidates' reluctance to adjust to the new landscape, as well as their focus on such peripheral issues as lobbying ties to mortgage giant Fannie Mae, are turning the campaigns into a sideshow. The sheer size of the bailout could give the next president political cover to address long-festering fiscal problems, such as the burgeoning costs of Medicare and Medicaid, yet neither of the men vying for the job has shown an interest in taking advantage of it, they say.
"The U.S. fiscal situation is dramatically deteriorated from what it was," said Martin N. Baily, a former chairman of President Bill Clinton's Council of Economic Advisers. "There is a debate which we need to have that is becoming more urgent: Our fiscal picture does not add up."
Bruce Bartlett, a Treasury official in the Reagan administration, said: "This is just a terrific opportunity for both of these guys to do a do-over. Most of these proposals were formulated when they were running to get their party's nominations. It looks ridiculous to keep peddling ideas that are no longer viable, as if nothing has changed. Then whoever is elected is at least elected on a plan that makes sense."
Even before the bailout plan was announced, the Congressional Budget Office estimated this month that the deficit for fiscal 2009 would reach $438 billion, already a record in dollar terms. If Treasury needs half the money it has sought for the bailout plan in 2009, as well as money already promised to seize Fannie Mae, Freddie Mac, Bear Stearns and the insurance giant American International Group, the deficit could approach $900 billion. As a percentage of the economy, that number would rival the highest deficits in history, recorded in the Reagan administration, said Rudolph G. Penner, another former CBO director, now at the Urban Institute.
Some, or even much, of that money could be recouped as the government tries to sell off the assets it plans to buy, but by the time the bailout is resolved, Washington will have to confront the retirement of the baby-boom generation as well as soaring Social Security and Medicare costs.
By buying the bad debt of collapsing financial firms, the government could stop panicked investors from withdrawing money, freeing up lending, boosting home sales and lifting the economy. But the current crisis, in large part, was created by a nation -- its individuals, companies and government -- living beyond its means, borrowing to prop up overconsumption. Swapping the private debt of banks and homeowners with public borrowing by the federal government changes nothing, said Douglas W. Elmendorf, former Federal Reserve Board economist now at the Brookings Institution.
And while Obama and McCain have pledged that they would live within some fiscal constraints, neither has offered enough details about how they are going to pay for promised tax cuts, health-care plans and energy spending, said Leonard E. Burman, director of the nonpartisan Tax Policy Center.
"Both of them would dig the hole way deeper," he said.
Campaigning yesterday in Green Bay, Wis., Obama outlined proposals to tighten federal ethics and contracting rules and bring unprecedented scrutiny to the legislative process, including through a new clearinghouse to assess corporate tax breaks.
His speech, outlining an 11-page "Plan to Reform the Greed and Excesses of Washington," built on the regulatory overhaul for the financial services industry that he proposed last week. To curb the influence of lobbyists, Obama would have all bill writing be conducted in public. Congress holds public hearings on legislation, and lawmakers debate and vote in the open, but the conference committees where final language is crafted meet mostly behind closed doors.
Obama also would create a government agency "charged with identifying recipients of corporate subsidies and evaluating the effectiveness of these subsidies in promoting growth and opportunity." All corporate tax breaks would be easily searchable on a government Web site, and if the new entity deemed a provision to be a dud, it would be targeted for elimination.
McCain, seconding calls from Democratic leaders in Congress, said yesterday that any bailout bill must include an oversight board to account for the expenditures of public money. He said that executives of financial firms receiving federal bailout money should see their salaries limited to $400,000, the highest pay of a federal worker -- in that case, the president.
"We will not solve a problem caused by poor oversight with a plan that has no oversight," McCain said at a rally in Scranton, Pa.
Beyond the speeches, much of the day continued to be consumed by the kind of attacks and counterattacks that have dominated the campaign recently.
Among the issues yesterday: the $42 million "golden parachute" that McCain economic adviser Carly Fiorina received in 2005 after being ousted from Hewlett-Packard, a new McCain campaign ad suggesting Obama was "born of the corrupt Chicago political machine," a new Obama campaign ad criticizing McCain for a news article in which he suggested opening health care to competition "as we have done over the last decade in banking," even the New York Times' coverage of McCain.
McCain said Obama had "declined to put forth a plan" to deal with the Wall Street meltdown, an assertion that is exaggerated at best. Obama said McCain "has fought time and time again against the common-sense rules of the road that could've prevented this crisis," neglecting to mention that his new brain trust on the crisis includes two Clinton administration Treasury secretaries, Robert E. Rubin and Lawrence H. Summers, who helped negotiate the deregulation of the financial services industries in 1999.
In an interview on Friday, Rubin said the law, named after its now-retired congressional sponsors -- Phil Gramm (Tex.), a top McCain economic adviser; Jim Leach (Iowa), who heads Republicans for Obama; and Thomas J. Bliley Jr. (Va.) -- "had no impact, zero," on the current crisis.
"I would hope the two candidates would have tried to bolster confidence and stop sniping over this," Penner said.
Staff writer Michael D. Shear contributed to this report.