Thursday, May 15, 2008

Risk Assessment of the 2008 Presidential Race – Part 2 (Assessing the Risks of The Presidential Candidates)

It seems we now have a Presidential race between John McCain, and Barack Obama. The only question that is of interest to the voters is who will be the Democratic vice presidential candidate. It seems that has been answered by John Edwards’ endorsement of Obama Wednesday in Michigan.

It is no secret that Barack Obama and Hillary Clinton have engaged in a very bitter nomination campaign. Given the race and Obama’s stance on issues, it would be to his disadvantage to turn to Hillary Clinton as his running mate. The fallout from her and her staff’s many gaffs would invite more criticisms than benefits. Moreover, the general election requires connecting with the Southern ‘red belt’ voters - the very voters that do not have the warm and fuzzy for Clinton. John Edwards, being a southerner is better suited to bring in the southern votes. Moreover, he has connected very well with the working class (if you can forget his $200 haircut gaff)

So it appears to be Obama-Edwards for the Democratic ticket, a very strong ticket against McCain and a very short list of non-contenders. I think that the best Republican ticket would be McCain-Huckabee. Mike Huckabee provides a nice conservative counterbalance to McCain, whom the conservatives distrust. Moreover, Huckabee is well spoken and carries a youthful image, which should provide some comfort to those who feel that McCain is ‘too old.”

Since McCain is older than Ronald Regan, the issue of age will haunt the Republicans unless they bring in a vibrant youthful vice presidential candidate to the ticket. This would be Huckabee

So given the scenario of Obama-Edwards versus McCain-Huckabee tickets for the presidential race, it is going to be a very interesting race.

The Risks Of Each Presidential Candidates
Domestic Spending: There is very little difference between the two candidates on domestic spending. The difference comes on Universal healthcare (Obama for federal funds for universal healthcare; McCain for universal healthcare through the private sector), Abortion (Obama for Woman’s right to decide; McCain for making abortion illegal), and taxes (Obama to roll back Bush tax breaks and provide tax breaks for the middle class; McCain to keep the Bush tax breaks but eliminate ATM).

On the domestic front, there is no glaring difference, just shades that are moot (debatable). If one desires to debate the subtle difference between ATM and rolling back Bush tax breaks, click here for a Brooking Institution write up). The moot point is whether the middle class will actually benefit from either candidate. Ultimately, the middle class will not benefit from either candidates as Obama’s platform does very little to relieve the tax burden while McCain’s platform obfuscates the tax process by suggesting two tax systems to be used at once: “…an alternative tax system, while keeping the current one in place for those who want to use it, with “two tax rates and a generous standard deduction.”

Foreign Affairs: Again, the two candidates are very similar on foreign policy: they both have nothing else aside from a myopic focus on Middle East, particularly Israel-Palestine, Iran, and Iraq. It appears that their world consists of the U.S. and the rest. This is a very dangerous perspective. However, McCain’s view seems to have higher risk potential as he explicitly notes “Fighting Against Violent Islamic Extremists...” as one of his key foreign affairs points. Someone should remind both candidates that Islam does not own the rights to religious extremism. All religion has their ‘extremists’ and ‘liberals’. This label is moot as it only reflects the view of the speaker, not the religion.

One advantage that Obama has is that he does mention Africa as part of his foreign affairs policy view. Perhaps, it is because his dad was African. However, the world does need to look at Africa and try to understand how colonialism is still leaving its marks in Africa. Until Africa reverts back to tribal lines, which will never happen, there will be continual strife and warfare. It is unfortunate but innate to humans to develop hate based on nothing more than a subtle difference.

Obama’s risk factor is leaving Iraq too quickly and having it devolve into a full blown civil war. If this occurs, the U.S. would be left fighting for the governmental faction against Sunnis, Kurds, Shiites, and off-shoots radicals of each group. It will also open up Turkey to invade northern Iraq in pursuit of Kurdish rebels, Saudi Arabia covertly funding the Sunnis in Iraq, Iran funding and openly assisting the Shiites, and Israel using this opportunity to push the Palestine out of contested territories. In a word, a ‘mess.’

McCain’s risk factor is leaving a weak dysfunctional government in Iraq perpetually supported by the U.S. military, thereby continually being a drain the resources of the U.S.

While both options are distasteful, from a risk / reward view, McCain’s position is more palatable for the U.S. and the rest of the world as it hopes to prevent the Iraqi civil war turning into a regional proxy war between Turkey, Saudi Arabia, and Iran.

Economy:Hand’s down the McCain’s platform is pro business. The very idea of being able to write off the full amount of equipment and technology investments in the first year is great for corporate America as it has not upgraded its technology in any substantial amount since 2000-2001. However, as with all great ideas, there are going to be loop holes. And I already see a loop hole in the definition of “equipment and technology.” Depending on how one parses the definition of these two words, it is possible for smart tax accountants and bankers to come up with ways to have perpetual write offs of goodwill purchases of “equipment and technology.” Heck, I already have thought up about three different ways to write off millions using a creative definition of “equipment and technology.”

With loop holes around the “equipment and technology,” there will be very impact of McCain’s proposed rollback of corporate taxes from 35% to 25%.

Obama does not have much of an economic policy except for suggesting vague patches to existing issues. However, he is not proposing anything radical as McCain. Obama’s position suggests minute changes that will not upset the apple cart

The risks are high for McCain but the rewards could be there if he does it right. However, history has shown that plans are not always implemented correctly and that compromises made with Congress will lead to a Frankenstein-like creation that will potentially do more harm than good.

Energy:Obama is more specific on energy than McCain. McCain only has carbon cap trading and a vague statement on protecting the environment and lessening our reliance on foreign oil by going more on nuclear power. Click here for his other public statements on energy, which are still vague.

Obama on the other hand has specific plans on energy. However, a lot of what he proposes is a dust off of previous presidential candidate’s proposal for energy independence (biofuel – Bush; increase fuel standard – Bush & Clinton). Moreover, Obama’s biofuel proposal is only going to exacerbate the growing food problem and grain shortage.

This would be a great time for someone to step up and propose that since we, as a nation, use too much natural resource and therefore need to slow down, use less, conserve more, or pay higher taxes like they do in Europe. However, this is unlikely as all energy promises made by a president since Nixon has been broken.

The risk here that we will not change our ways at all, leaving us dependent on imports of oil and natural gas. The only thing that seems to change our ways, is a combination of severe shortage and high prices.

Given that presidential candidate’s promises are often broken, the risks of promises on domestic spending, energy, and taxes are deemed to be moderate severity. This means that if they occur, the impact will be material but limited to financial consequences, which will result in either inflation or deflation. Since this is a normal cycle of economic norm, there is nothing that could be considered to be a ‘tail’ event (risk term for an extreme risk factor).

However, foreign policy is often fraught with severe risk factors that include the risks of loss of lives, violence, disruption of society, and famine. In this regard, Obama’s position on Iraq is a potentially high risk factor. Whichever candidate wins the election, I do hope that they quickly realize that Iraq issue is something that we had created, a legacy of Bush that we can not simply walk away from. Iraq is a quagmire that is a major drain on the U.S. and its military. However, if we walk away from Iraq by drawing down our forces too quickly, it will result in a power vacuum that can incite major strife and regional war.

From a strictly risk factor perspective, Obama’s foreign policy views poses more risk to the world economy than McCain’s. From a commonsense perspective, excluding foreign policy, Obama’s views are more pragmatic than McCain’s.

Regardless of who becomes the next President of United States, I hope that:

  1. the individual would build a cabinet filled with competent, experienced, and pragmatic people,
  2. that the President would take their advises, and
  3. learn to use their compromises with Congress in a way that benefits the nation.
In Obama’s case, I hope he will pull out of Iraq slowly and with a clear exit strategy and work to develop more alternative energy and conservation other than biofuel.

In McCain’s case, I hope he will disavow Bush’s legacy, modify the first year tax write off to be targeted to true investments that aids in economic growth, and develop a bipartisan plan for alternative fuel development.

Ed Kim
Practical Risk Manager

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