Policy challenges facing the next president.

• Author: Weidenbaum, Murray
• Position: National Affairs - US economy, Iraqi war

WHOEVER TAKES the oath of office as president of the U.S. on Jan. 20, 2009, will face a staggering array of policy challenges. It is not surprising that few of these difficult issues are being taken up in the election campaign to date. Yet, it is not too soon for the American public to start thinking about them.

The most pressing item is responding to the adverse developments in the national economy. The normal concerns about dealing with the downturn phase of the business cycle are aggravated by unusual stresses and strains in the financial markets. My foggy crystal ball does not tell me whether getting the economy growing again will be a more urgent objective than dealing with rising inflation, but policymakers have to take both problems into account.

Restoring trust in financial markets should receive a very high priority. Too many investors were let down by the financial experts on whom they had been relying. Likewise, too many homeowners who qualified for conventional mortgages were pushed into more costly and complicated subprime deals. The most casual newspaper reader or television viewer has become aware of the shortcomings of the financial wizards who devise complex forms of securities embodying a bewildering array of underlying assets of often doubtful worth. The next Administration will have to undertake the difficult task of balancing the development of adequate protections for the public with the continuing desire to limit the arbitrary power of government over private decisionmaking.

The Federal Reserve System will continue to exercise major responsibility as a regulator of the macroeconomy as well as of financial institutions. In its day-to-day operations, the Fed traditionally acts with a substantial degree of independence. That is essential in maintaining the credibility of monetary policy at home and abroad.

Consistent with the Fed's autonomy, the role of the president will be to signal to the nation that the new Administration has developed an economic program that meets the needs of these challenging times. Surely, those of us who have engaged in the conduct of economic policy have learned that no Administration should try to give the Fed "marching orders." Rather, good communication is developed in a variety of informal ways.

Developing fiscal policy--in practice this means preparing the annual Federal budget-invariably is a vital initial task of any new president. On the tax side, a key issue will be deciding whether to renew the tax cuts that expire on Jan. 1, 2010. Of course, the president can recommend to Congress that they make some changes, such as modifying any extended tax reductions in order to provide revenues for important new priorities. The incoming Administration, Republican or Democratic, will be chastened by the practical point that letting the tax cuts expire would be the equivalent of a large and untimely tax increase.

By the way, we hear the same criticism about tax cuts today that we heard during the presidency of Ronald Reagan: they are unfair because they supposedly are a giveaway to "the rich." In responding to this loaded point, I always find it useful to look at the factual data supplied by the Internal Revenue Service-not the self-serving nonsense from some political...