Problem: carbon emissions. The speed with which climate change has become central to the Washington debate has startled even insiders—and it’s not all Al Gore. Industry lobbyists now accept that carbon-emissions legislation is imminent: the fight is over when, and who will be affected. During the 2004 campaign, John Kerry decided that an economy-wide cap on carbon emissions was too radical to propose. This time, one such cap is supported not just by the top Democrats but by some Republicans, too. A further signifier of how much has changed: the carbon tax Gore couldn't get during Clinton's first term is now preferred by the electric-power industry. "The Democratic programs," says Furman, the Brookings economist, "are more ambitious than anything anyone has ever proposed." It's enough of an issue that major institutional investors last year began pushing corporations to disclose greenhouse-gas emissions.
Likely Republican response: Mixed. McCain and Huckabee (like the Democrats) support a cap-and-trade system like the one featured in the 1990 Clean Air Act to cut the sulfur-dioxide emissions that cause acid rain. Romney advocates only voluntary cutbacks but might be forced by a Democratic Congress to go further.
Likely Democratic response: A cap-and-trade system or carbon tax, the economic effects of which could be nearly as widespread as those from universal healthcare.
Who it affects: Almost every sector of the economy. Carbon emissions are spread broadly (utilities account for 40 percent; transportation, 33 percent; manufacturing, 17 percent). Limiting emissions would impose new costs on the oil, gasoline, electricity, and natural-gas industries (making air travel and many other things more costly), while benefiting hydroelectric, nuclear, and wind power.
Problem: Caused a recession! The subprime mortgage mess placed the financial-services industry squarely in Washington's crosshairs. Legislation on predatory lending seems likely even before Bush leaves office. Strengthening or replacing the ratings agencies that signed off on the creditworthiness of so much bad debt seems possible this year, too.
But Washington insiders think that new regulations will be an "iterative" process, one that carries over to the next administration. A severe recession probably would lead to scapegoating and punishment on an industry-transforming scale—along the lines of the dreaded (on Wall Street, anyway) Sarbanes-Oxley Act, which stemmed from accounting scandals earlier this decade. Recession also would increase the likelihood that financial-services regulation will jump ahead of climate-change legislation on Washington's agenda because any significant attempt to control carbon emissions would further burden the U.S. economy.
Likely Republican response: Too soon to tell, though a reformer like McCain could be nearly as aggressive as a Democratic Congress.
Likely Democratic response: Severe, though still too soon to tell. Even before the recession, the private-equity industry was set to face greater scrutiny and a likely tax increase on profits. Depending on the severity of the downturn, a Democratic president could effectively transform the industry.
Who it affects: The sizable financial-services industry (21 percent of the S&P 500), and future mortgage buyers at all income levels.
During an election year, stocks trade partly as a function of the expected outcome and tend to move with the polls. Right now, Wall Street's focus is on near-term actions: yesterday's Fed cut, the stimulus package. But eventually the scale of what's likely to happen when a new administration takes power next year should begin to sink in; assuming that it does, the magnitude of the presidential election's effect on Wall Street should be greater than it has been in a very long time.