Economic Risk Assessment of the 2008 Presidential Race (Part 1)

by: Ed Kim

With the 2008 Presidential election about nine months away, I find myself entertaining the thought similar to an expectant parent: is it a boy or a girl? To help me understand the professional sentiment, I naturally turned to the odds makers. According to Linesmaker.com, the current favorite is Barack Obama at 4 to 7, meaning if Obama is elected President, a $7 bet on him will to win receive $4, or 57% return on a placed bet. John McCain is far behind at 3 to 2 (150% return):

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Source: linesmaker.com (as of March 1, 2008)

Naturally, everyone is interested in who will become the next President of the United States, since the fate of a $13.8 trillion economy hangs in the balance. As a risk manager, I am interested as well since the risks – Sovereign, Enterprise, and Business – facing the nation and the businesses, large and small will be vastly different, depending on the eventual winner.

The Risk Categories Used for The Analysis

This analysis will limit itself to looking at the following top 6 issues to reduce the complexity:

  1. Domestic Program Spending
  2. Economy
  3. Energy
  4. Foreign Policy
  5. Military Spending
  6. Taxes

Also, the analysis will look only at the three leading candidates – Hillary Clinton, John McCain, and Barack Obama – and their current positions on the selected issues. The candidates’ positions on the issues were obtained from their respective websites, NY Times, and Votegopher.com.

Risk Factors of the Top 6 Issues  [i]

What Do All These Colors And Numbers Mean?

To read the above chart, first look at the issue and then read down the issue column to understand the levels of the risk factors that I have assessed for that particular issue. For example, for Domestic Program Spending issue, the following risk factors are important to the issue and require careful considerations: Domestic Tranquility, Economic Development, Legal & Legislative, National Revenue, Ongoing Operation, Resource Management, Science & Technology, and Strategic Planning. Security risk is germane but has a moderate negative impact to the Domestic Program Spending issue. Reputational, Foreign Investment and Industrial Competitiveness risk factors have low relevance to the Domestic Program Spending issue.

Each “High” risk levels have been given 15% weighting, “Medium” risk levels is 5% weighting, and “Low” risk levels is 0%. The total of each issue column equals to 100% weighting. The purpose of this forced weighting is to focus attention on the risk components that are deemed to be the ones that will cause the largest damages, if the issues are not properly addressed.

Translation, Please!

Again, using Domestic Program Spending, we look at the 2008 estimated U.S. Budget from the Office of Management and Budget[ii] Table 5-1. For 2008, the U.S. Budget is estimated at $3,013 billion. From this, I have deducted National Defense ($693.2 billion), International Affairs ($39.4 billion), and Energy ($2.8 billion) to arrive at an estimated total Domestic Program Spending of $2,278 billion.

Applying the risk weighting, we arrive at the following breakdown of the $2,278 billion earmarked for Domestic Program Spending in 2008:

Now, we can look at each Presidential candidate’s position on Domestic Program spending and see if they had addressed it in any meaningful way to mitigate or manage the risk factors.

Stay tuned for Part II: Assessing the Risks of The Presidential Candidates