Economic Crisis Presents Opportunity, Pitfalls for Dems

What's the point of being named captain of the Titanic if the ship is only moments away from sinking? The economy the next president inherits may not be that bad, but as Democrats stand on the cusp of winning control of Congress and, likely, the presidency, it may seem like the party is taking complete control of Washington at exactly the wrong time. Then again, the mood for government spending may give Democrats the unique ability to do more than simply rearrange deck chairs on a doomed ship.

As Democrats measure the White House drapes, the party will face precious little time to turn the flailing economy around. Key economic indicators show no signs of turning around within the next two years according to some experts, and the party will have no scapegoat heading into the 2010 midterm elections, making Democrats' first months in control all the more critical. Now, all eyes are turning to a second stimulus package Democrats are considering raising in a post-election special session.

The new stimulus will likely include an extension of unemployment benefits and increased investment in infrastructure to create new jobs, while a spokesman for House Speaker Nancy Pelosi suggested the final package will include aid to the states and, potentially, a tax credit for the middle class. "We want to do this in a fiscally responsible way," Pelosi spokesman Brendan Daly said.

The size of the new stimulus is a matter that has yet to be negotiated. "The Democrats are apparently talking about some sort of $300 billion boondoggle," said Michael Steel, a spokesman for House Republican Leader John Boehner. "They don't even know what's in it, they just know they want to spend $300 billion in taxpayers money on their favorite government programs. That's exactly the wrong approach to take in an economic crisis like this."

Even some of the most fiscally responsible thinkers say the measure is so necessary that large government spending is warranted. "Government intervention of this magnitude will bring about a perceptible turn for the better, at least in the short term," said William Galston of the Brookings Institute, a former top domestic policy advisor in Bill Clinton's administration. "A lot of my deficit hawk friends are throwing in the towel, at least for the time being."

Democrats say they have already taken action to help turn the economy around. After raising the minimum wage to passing a stimulus package earlier this year, the party is now crafting a second stimulus package that has won support from such unlikely allies as Federal Reserve chairman Ben Bernanke and even the most conservative deficit hawks.

But whether the packages work as advertised remain to be seen. "I'd hope that they would work [by 2010]. I think it will take some time," Daly said this weekend. Looking forward, the party will at least get a chance to point to differences between President Bush's years and the early Democratic tenure. "Certainly we'll have mitigated at least what the Bush people have done for the last eight years. They've put us in a real hole here and we have a long way to go to get us out of that hole."

Some see indications that recent action by the Bush administration and Congress is already taking effect. "I do believe that we are on track toward stanching the bleeding in the financial sector," Galston said. "The U.S. government and other major governments have already devoted huge resources to the effort and I think they've made it clear that they understand that the stakes are so potentially catastrophic that they are willing to do what it takes."

The economy remains in poor shape thanks to weak fundamentals. In order to turn the corner, economists and political scientists said, those fundamentals are going to have to change. "Home prices have to stop dropping [and] jobs are going to get worse before they get better," said CNBC's Erin Burnett. "Both of those things are going to take years." The unemployment rate sits at 6.1%, according to the latest government statistics, and Burnett said that number could continue "well north" of 8%.

In fact, while Democrats may face dangerous terrain in 2010, the economy could once again be the party's saving grace. While economic growth is expected to slow, and even decline, through much of 2009, by the time voters tune in the following year the economy could begin to grow again. Housing prices won't rebound until at least 2010, Burnett said, but that could come just in time. "For political purposes, the crucial question is not what happens in 2009, it's what happens in 2010, because voters tend to be quite myopic in economic considerations," Galston said. "If that period is a period of recovery, it will blot out the memory of what precedes it."

For now, the economic meltdown is proving a huge political boon to Democrats across the country. In states like Kentucky and Georgia, once-safe Republican senators are finding themselves in serious political danger, while GOP House members from California and Arizona to Pennsylvania and New York are under increased pressure. "It's the old adage of meet the voters where they are," explains Democratic consultant Eric Adelstein. "Fortunately politically, unfortunately for the country, the economy goes bad and the Democrats have a default advantage. People just think that [Democrats] are better in difficult economic times."

In the coming two years, explains CNBC's Burnett, the connection between government economists in Washington and the health of the economy as a whole will become clear. "We've realized the extent to which the two are tied together, inextricably," she says. "When Washington wanted to increase home ownership, Wall Street fueled and financed it."

The immediate future, most agreed, holds the prospect of additional government spending in order to stabilize the economy. "The odds are that the combination of very costly government actions will create a better context for economic stability," Galston predicted. "The political stars are in alignment for action that is likely to be on a large enough scope and scale" to repair a badly-shaken economy.

If by 2010 Democrats are able to take credit for stabilizing the economy they might save the ship; if not, it could be the issue that takes the new majority down.