A Grand Old Problem for the GOP

Can the White House boost the economy by Election Day?

The axiom is as well-known as it is harsh: When the economy sinks, voters oust the incumbent party.

That reality poses a tough challenge for Republican policymakers and campaign strategists alike. Even as economists on Wall Street and elsewhere are clamoring for more aggressive policies to reverse the slide in the housing and credit markets, the Bush Administration has largely rejected those calls. Yet if the White House fails to bolster the economy and alleviate the worst of the foreclosure crisis, the electoral prospects for Arizona Senator John McCain and other Republican candidates could grow dimmer by the day. "This is a giant dilemma for the Administration," says Republican consultant David Carney.

Officials in the White House and the Treasury Dept. argue that the recently enacted stimulus program, along with the Federal Reserve's moves to cut rates and boost liquidity, need time to work. They believe many of the proposals promoted by Congress or the Democratic Presidential candidates—like allowing bankruptcy judges to renegotiate mortgage terms—will only make things worse. Fears about the moral hazard of helping out troubled lenders, investors, or homeowners also holds big sway over GOP policy. "We are focused on making sure that we don't do more harm than good," says Robert Steele, Treasury's Under Secretary for domestic finance. "A lot of proposals now out there are the equivalent of bailouts for Wall Street banks and investors."

Then there are the dynamics of the Presidential race. Many Republicans aren't convinced that spending tax revenues to bail out homeowners will be a winner politically. A December poll by Harris Interactive (HPOL) asked a sample of 2,082 voters whether the government should provide financial help for those who can no longer afford their mortgages. The largest share—42%—said it should not, while only 25% backed such aid. "There are a lot of people who did the right thing, saved for years for a downpayment, and now they'll have to pay for the mistakes of people who bought bigger houses than they could afford," says Carney. "Many voters don't have a lot of sympathy for that."

For now, McCain's position on bolstering housing and the economy mirrors the Administration's. "The question is when does it become imperative for the broader health of economy to do something [more]? That's clearly something we're monitoring," says the McCain campaign's chief economic adviser, Douglas Holtz-Eakin. But he dismisses the idea that economic woes will dent McCain's prospects.

Kim N. Wallace, chief political analyst for Lehman Brothers (LEH), believes the Administration will continue to resist the political pressure to do more to right the economy. By the third quarter it should be clear whether fiscal stimulus and Fed policy have done enough. If not, says Wallace, the Republicans will still have a window in September when they can step up the action before Americans vote. The question is whether that will be too late to keep the White House in GOP hands.

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