Nine Possibilities Heading Into 2009

By INVESTOR'S BUSINESS DAILY

Time again to make a few guesses — 9 for '09 this time — on what the New Year may bring.

Last year's "8 for '08" were fairly accurate on six counts: the world would continue to dither as Iran's nuclear program advanced, the "consensus" on global warming would start to crumble, Cuba would sail into rough waters, Hugo Chavez would wear thinner, the Cold War would return and the economy would replace Iraq as the top news story.

We were too sanguine, however, about the economy's ability to avoid recession and a little early in predicting a reassessment of the Bush presidency. We were also disappointed a Nobel Prize didn't go to Japanese and American researchers who found a way to turn regular human skin cells into the equivalent of embryonic stem cells.

Now, this year's outlook:

1. A Less Safe Homeland?

One of the Bush Administration's key reasons for letting the National Security Agency listen to communications between the U.S. and al-Qaida contacts was that the special courts set up by the Foreign Intelligence Surveillance Act often work too slowly to prevent terrorist operations. As current CIA director and former NSA director Gen. Michael Hayden put it, "it's a quicker trigger . . . it allows us to be as agile as operationally required to cover these targets."

Given this success, will Barack Obama as president follow the wishes of many of his fellow Democrats in Congress and dilute this indispensable tool that has helped keep us safe since the 9/11 attacks?

Will he end the CIA's so-called "black prisons" program, in which tough interrogations were used on key terrorist detainees in foreign locations, to extract information about future attack plans?

Will he take the heat from the left of his own party and boldly use his constitutional authority as president to go the extra mile in protecting the country, as George W. Bush has?

Will he view victory as imperative in both Iraq and Afghanistan, recognizing them as fronts in the war on terror?

We'll see. Promising to get Osama bin Laden sounds great in a campaign; governing requires more than catchphrases.

2. Stimulus Pushes Deficit To $1 Tril

Late in 2008, talk centered around a deal involving up to $800 billion in new spending, focused mainly on infrastructure and so-called Green Jobs. Tax cuts of $150 billion or more will focus on the middle class. Under Obama, those who no longer pay any taxes will surge from 44 million currently to more than 50 million, as those in the top 5% of incomes shoulder a greater share of the tax burden.

Obama' s stimulus, along with the nearly $2 trillion in outlays for 2008's financial and auto bailout, will push the deficit to more than $1 trillion — 7% of GDP, the biggest deficit since 1946.

The gush of red ink will alarm fiscal conservatives of both parties, who will have to grapple with soaring entitlement costs and a huge price tag for Obama's stimulus and infrastructure programs. The GOP will try to make it a wedge issue in congressional elections of 2010.

With Democrats firmly in control of both houses of Congress and the presidency, businesses may start feeling left out. A cut in corporate income taxes, at 35% now among the highest in the developed world, may make it through Congress, but only as part of a bigger deal that would raise taxes on those with incomes over $250,000.

And Democrats will fight Republican efforts to cut capital gains taxes, calling it a giveaway to the rich, even though such cuts have in the past led to strong economic and job growth.

3. China Falls Into Recession

After decades of stunning 10% GDP growth, China's economy stumbled late in 2008. It will continue to slow in 2009 — and possibly beyond. The main trigger for their slump: Soaring energy prices during early 2008, and a steep decline in U.S. demand for China's goods.

In 2007, China posted a $262 billion trade surplus, most of it rung up with the U.S., which ran a $709 billion trade deficit the same year. China has a pile of nearly $1.8 trillion in reserves, thanks mainly to its persistent trade surpluses. But that might shrink as its economy moves into a slowdown and China invests money overseas.

This will have a major impact. Already 20 million people a year leave farms and rural areas of China to find work and a better life in the big cities. If China grows by 5% or less over the next year or so, it won't create enough jobs and will face serious social pressures that could break into open violence. In 2007, China experienced at least 85,000 acts of rebellion, usually put down quickly and brutally.

Despite its rapid growth, China still only ranks No. 81 on the U.N.'s human development index, a gauge that combines health, education and income. Things are far worse for the more than half of China's 1.3 billion people who live in rural areas. If they tire of communist rule and endemic corruption, things could get very ugly.

Given China's dilemma, its best hope might lie with Wal-Mart.

4. Recovery In The U.S.?

Contrary to predictions of gloom and doom lasting into 2010, the U.S. economy will pull out of its recession as a massive home inventory overhang is worked off, oil prices stay low, trillions of dollars in stimulus and bailout funds are put to work and Fed interest-rate cuts kick in. Banks and finance companies will start lending again, and rising demand will push companies to hire. By the end of 2009, some people will be voicing concern about a new threat — inflation.

Cheaper energy helps. The weekly average cost of a gallon of gasoline plunged from $4.05 at its peak in mid-July to $1.59 in the last week of 2008. According to Nariman Behravish, chief economist of Global Insight, each 10-cent drop in gas prices is equal to a $12 billion tax cut. So the U.S. will get a "silent" tax cut of about $295 billion.

This means the bear market in stocks — which are one of the economy's best leading indicators — should be drawing to a close. This bear is now in its 15th month, and most don't last more than 15 or 16. Nine to 10 is more like it.

Most economists look for a 1% drop in GDP in 2009 as unemployment heads for 8%. But a strong second-half rebound means the U.S. economy might grow in 2009 — and once again pull the rest of the world out of recession with it.

5. Energy Fever, Climate Change Cool Off

The cooling trend that began in 1998 will continue as solar activity remains dormant. Last year was the coolest year in a decade.

As the evidence grows, more scientists will join the list of climate "deniers," as protests arise in Europe and the U.S. over expensive alternate-energy schemes that slow global economic recovery.

But as long as crude remains below $70 a barrel — the make-or-break level for many energy projects and alternative energy — Congress will continue to drag its feet on drilling for more oil and gas in the U.S. Obama might try to introduce a cap-and-trade system passed by Congress. If he can't, he'll let the Environmental Protection Agency limit companies' output of carbon-based emissions.

Meanwhile, congressional Republicans, many of whom are skeptical of extreme claims made by global warming advocates, may cut a deal with Democrats that would raise taxes on all forms of carbon-based energy in exchange for deep cuts in income and payroll taxes.

World demand for oil will fall, as it did in 2008. Global economic growth of 4.6% a year from 2003 to 2007 was the fastest in decades, pushing up energy use. But the boom's over. Petrobullies like Russia's Putin, Venezuela's Chavez and Iran's Ahmadinejad will find their ambitions curbed as oil earnings plunge.

6. Big Labor Fights For Relevance

Organized labor made a big deal about its $400 million in campaign spending to win the election for Democrats in 2008. Elated by its success, it vowed to put its agenda front and center.

But as 2009 rolls in, all that cash is starting to look less like power projection and more like a last-gasp bid to go for broke.

The big problem is that in a weak economy, the union agenda is incompatible with economic growth. Businesses can't grow and create jobs in an atmosphere where workers are forced into unions and free trade is restricted. Given the choice of a recovering economy or a satisfied union base, Obama is likely to tilt toward saving the economy, if only for the sake of his own political viability.

That said, after spending that much money, unions want to show they still matter after watching their share of the U.S. work force shrink from 31.4% in 1960 to less than 12% today.

Two possibilities stand out in 2009: One is to fight head-on for legislation like "card-check," a change to the National Labor Relations Act that would eliminate secret ballots to make organizing new unions easier. But businesses will strongly fight "card check."

On trade, unions will oppose pending free-trade pacts with Colombia, South Korea and Panama and make new demands for protection against China. If Obama agrees to this, exports, a key spur to U.S. growth, will suffer.

7. Obama Seeks Health Care Reform

Even health care experts sympathetic to Obama's goals argue the president-elect understates his plan's costs. Obama's plan of near universal coverage means "a $100 billion infusion of new health care spending" that "would actually increase the rate of health care inflation and ultimately create an imperative for more draconian government intervention in the health care markets," says Health Policy and Strategy Associates President Robert Laszewski.

Featuring Medicaid and SCHIP expansions and huge new burdens for businesses, ObamaCare's massive new spending will be a tough political sell, especially with taxpayers already footing the bill for bailouts of banks and the auto sector, and millions of Americans losing their jobs — which is where Tom Daschle comes in. The HHS secretary-designate was Democratic leader in the U.S. Senate.

Daschle knows plenty of senators on both sides of the aisle personally and appears regularly around the country on a health care "listening tour," hoping to gather a mandate for an entirely new system.

If, as expected, President Obama insists that a big government health care reform is imperative for economic recovery, this shrewd legislative warrior will be his general, in charge of imposing the kind of socialized medicine found in France, Britain and Canada, where waiting lists and substandard quality are the norm.

8. India Gets Assertive

India's citizens have gained a lot from their opening to the world in 1991 and they aren't about to give it up. But threats remain from the global economic downturn and terror attacks out of Pakistan.

Elections by May could bring the return of the BJP Hindu nationalists to government. The ruling Congress Party's cautious response to November's terror attack in Mumbai and the sharp economic downturn have left voters unhappy. India's 9%-plus GDP growth rate is expected to slip to 6.5% in 2009. Still, India's 1 billion-plus people have tasted prosperity and want to keep it going.

It all points to a need for assertiveness, no matter who wins. Fiscal stimulus is on the plate, and possibly more defense spending. The government may tighten its alliance with the U.S. to modernize its military. Though Pakistan is the big problem, India is unlikely to risk nuclear warfare. But it may assert itself in forums like the U.N.

As a large market, India will forge closer trade ties with markets like the U.S., Japan, and EU. India will help fight pirates in the Indian Ocean because it's vulnerable to them blocking key sea lanes.

India has one thing going for it: optimism. Its public still believes in markets and the country's future.

9. Israel Gets Rid Of Iran's Nuclear Threat

Will Israel use its altercation with the Iranian-backed Hamas as a stepping stone toward a strike on Iran's nuclear facilities? The signs are that an Obama Administration, committed to "tough diplomacy," will be less likely to let Israel take matters into its own hands and strike Tehran as it did Iraq's Osirak nuclear reactor in 1981.

Lack of U.S. support would make such airstrikes more difficult, and leave Israel even more vulnerable politically on the world stage. With the Jewish state just this week sending warplanes to annihilate Hamas terrorists, defying heavy international pressure for a cease-fire, it seems clear Israel won't hesitate to defend itself.

Should Bibi Netanyahu and the Likud Party return to power in coming elections, Hamas — and its patron, Iran — might be in bigger trouble. Israel might be tempted to go for broke, taking out Iran's burgeoning nuclear threat rather than letting Tel Aviv go up in a mushroom cloud.