US election: Four more years... of what?

Barack Obama Investors expect Fed policy to be looser under Barack Obama

Americans voted for four more years of President Obama - but what else did they vote for?

How Republicans and Democrats in Washington choose to answer that question will have a major impact on the next four months for the US economy, let alone four years. That's because it will determine how - and how far - they take the country over the so-called "fiscal cliff".

The first piece of good news is that the cliff is not quite as large as it looks. The other is that it is not, really, a cliff. Unlike Wile E Coyote, a divided Congress could step over the cliff, look down, and step back onto solid ground again.

That is more or less what the "smart money" now expects them to do. But that's not to say there won't be some moments of vertigo on the way.

More on that in a moment. But the big economic conclusion that investors have already drawn from the election result is about US monetary policy, not fiscal. Put simply: they think that the US central bank's policy is now going to be looser - for longer - than if Mitt Romney had won.

The argument is that Mr Obama is more likely to replace departing "doves" on the Federal Reserve Board of Governors with other doves - ie, people who are more likely to support the current policy of pumping money into the economy for as it takes to bring down US unemployment.

Investors also think that there will now be a relatively dovish successor to Ben Bernanke, if the current Fed chairman decides to stand down when his term expires in 2014.

These assumptions are probably right - though the definition of "dove" and "hawk" is always a bit simplistic. There are plenty of examples where presidents have appointed Fed governors (or judges) to do one thing, only to see them turn into something very different. Today's monetary dove might, in different circumstances, be tomorrow's hawk.

Other things equal, "four more years" of Obama-style monetary policy probably suggests the dollar will be weaker than it might have been under President Romney.

That, and the prospect of more years of quantitative easing, may not be welcome news to many emerging market economies, who worry that Ben Bernanke's Fed is sending a wave of cheap liquidity into their already challenged financial systems.

Whether it's good or bad news for the eurozone is harder to judge.

To have a chance of surviving in its current state, most economists say the eurozone needs growth and the only way it will get that - across the region - is through a weaker currency. Some would say the same about the UK. A weak dollar could make that more difficult.

But most important of all to anyone in Europe - Britain included - is that America achieves decent growth. Will that be stronger under President Obama?

A majority of voters in the key "swing states" seems to have decided that it will - or at least, they have decided that the risks in Mr Romney's approach to fixing the country's problems outweighed the potential benefits.

Crucial to that, however, will be what happens to that "fiscal cliff": the $600-690bn - or 4-4.5% of GDP (depending on how you measure it) in spending cuts, tax rises and other measures that could come in January, if there is no deal between Congressional Democrats and Republicans to stop them.

I said the cliff is not as large as you might think. That's because at least $230bn of that $690bn involves regular quirks of the crazy US tax system - like the raising of the threshold for the Alternate Minimum Tax - which always get fixed and almost certainly will be this time.

So we're talking about a somewhat smaller cliff of maybe $460bn, or 2.6% of GDP. (Thanks to Kevin Logan at HSBC for pulling some of these figures together).

About $125bn of that - the expiry of both President Obama's temporary payroll tax cut and extension of unemployment benefits - will almost certainly go ahead. The administration did not even bother to incorporate them in the President's budget plan.

That degree of tightening - about three quarters of 1% of GDP - is unlikely to send the US back into recession. In fact, you might think it the bare minimum, for a country that is still running a federal deficit of more than $1 trillion.

The real argument is over the remaining $110bn in spending cuts - including defence cuts which the Republicans hate - and the $200bn or so in tax rises that will happen if the Bush tax cuts are allowed to expire - which Republicans also hate.

Democrats are determined to see these tax rises go ahead for households earning more than $250,000 a year, which would raise about $50bn. Republicans are equally determined to stop them - or at least, they have been.

Has the result done anything to break the stalemate? Medium term, perhaps. Many in Washington I speak to think the Republican party that emerges out of this very bad outcome will be resigned to higher taxes on the richest households. They may well also be thinking of an election strategy that reaches further beyond their core vote.

But there are some basic realities that the "hands across the aisle" scenario has to deal with. One is that almost every Republican member of the House if Representatives has signed a pledge not to raise taxes on anyone. The other is that the president has said he will not delay those automatic spending cuts without a "balanced" 10-year plan to lower the deficit - i.e. one that involves higher taxes on the rich.

It's possible that the election has changed the dynamic for this "lame duck" Congress. More likely, though, might be the scenario that many Washington insiders now expect - which is that the $460bn in spending cuts and tax rises are allowed to happen, but then partially reversed, in a deal early in 2013.

Why would it be easier to do this in January than December? Because then, Republicans can say they are voting to cut taxes for the majority of Americans, rather than raise them for the rich.

That might sound to you like a distinction without a difference. But I suspect you are not a House Republican who has sworn not to raise taxes.

Remember, the Republican party retained control of the House. Future Republican contenders for President may draw major lessons from Obama's re-election. It's not obvious that Congressional Republicans will.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 35.


    EU has bent over back-wards to enable Chinese to flood EU with their cheap, subsidised, slave laboured exports?
    That is why US has no platform to deal with US job losees to China as the US is under-mined by the EU?
    This situation will get worse, no better now that Obama has another 4 years - best US can do is stagnate - most major economies have too much population growth?

  • rate this

    Comment number 34.

    What I'm mostly glad about is dodging hawkish like foreign policies for 4 more years"
    I'm completely bummed out about the election, but I agree with you regarding the war mongering.However as displayed in Libya, we don't seem to have anyone in charge competent to defend us if need be.
    Right now the market's in a tail spin.

  • rate this

    Comment number 33.

    Fitch Ratings: early warning that U.S. probably would lose its AAA credit rating if the President and Conress don't address looming tax increases, spending cuts & the fast-approaching debt ceiling.
    Fitch: Economic policy facing the president is to put in place a credible deficit-reduction plan necessary to underpin economic recovery & confidence in credit of US.

  • rate this

    Comment number 32.

    Someone must be very worried about something: as Democrats & Republicans try to extricate US Govt from automatically imposing tax hikes & steep spending cuts at year-end.
    Wall Street is slipping. Investors worried this so-called fiscal cliff scenario will send US back into recession?

  • rate this

    Comment number 31.

    #21 so we build mor ein the UK , I'm all for that , so that will take trade away from somewhere self

    #27 it about time USA/EU started to call CHINA for what it is.

    1) currency manipulator
    2) Failed state run by a self serving Dictatorship

    EU/USA should join together for a trade war with china
    untill then nothing will happen

  • rate this

    Comment number 30.

    It will come back to growth as will Europe just like they always do. No recession this deep was fixed in 4 years. What I'm mostly glad about is dodging hawkish like foreign policies for 4 more years

  • rate this

    Comment number 29.

    Hopefully 4 more years of laying the ground work for a competitive economy.

    You cant fix a 20 year debt bubble in just 2-3 years (amazing how many think there was a lever he could have pulled on inaugeration day Jan 2009). Many are ignoring that unemployment fallen from 9.9% to 7.9% over a peiord of continuing recession around the globe.

    Hopefully enough to keep the nutty GOP out in 2016

  • rate this

    Comment number 28.

    @24.nautonier ,
    This morning's stock market's not looking well.
    We don't have problems so much with immigrant population in America, only with folk looking for a free ride. Most immigrants-legal & non,work hard & contribute much to our society.Without immigration we'd be shrinking like Japan & parts of Europe.

  • rate this

    Comment number 27.

    'Four more years... of what?'
    High taxes & govt spending and/or

    More US 'QE'
    US $ devalues
    Serious inflation setting into the US economy
    Unless - Democrats roll back most of Obama's reforms
    Difficult to see how the US can do well under these conditions as Obama isn't able & willing to take on the Chinese in a trade war.

    America might regret not electing 'Mr Marmite' before too long

  • rate this

    Comment number 26.

    4 more years of destruction of the middle class in America.

  • rate this

    Comment number 25.

    5th paragraph, last line, missing words 'long as'

  • rate this

    Comment number 24.

    4 more years of Obama back-tracking the main reforms he has put in place as are too expensive in a real GDP per capita slow-down as the US struggles with population (immigration) growth. Obama cleverly kept election away from the real issues - but Obama will be forced, (like Clinton in 1996 with welfare reform) to agree a harsh austere budget making eg 'Big Medicare' too expensive even for the USA

  • rate this

    Comment number 23.

    Four more years of...

    1) More hopey changey stuff
    2) Becoming Greece
    3) Er, that's it

  • rate this

    Comment number 22.

    With the almost even split between democrat and Republican, i can't help but wonder if the next four years will lead to another 'American Civil War'.........not in the sense of armed combat (or maybe it will) but the creation of a dual identity nation.
    The emotion, hatred and anger demonstrated by those that lost has to go somewhere........................question is.......where ?

  • rate this

    Comment number 21.

    Let's forget what might happen in the US, EU, EZ to make things better (or worse) for us. It's time UKGov and public start making things better for themselves. Build UK industries, make UK products better, buy them & sell them.

    The total lack of self-belief we suffer has held us back for 50 years.

  • rate this

    Comment number 20.

    I think for at least the next 15 years, unless we wake up and smell the coffee

  • rate this

    Comment number 19.

    Fiscal Cliff (G Bush tax cuts) expire really soon.

    So will Obama:
    1. Let taxes to revert to the norm (& take 4% off of GDP)
    2. Continue the cuts and let the deficit balloon (& take 4% off of GDP)
    3. Cut spending (& take 4% off of GDP)

    2 - I guess - the worst option!

    They really MUST fix the banks and money or they will without any uncertainty collapse the global economy yet again!

  • rate this

    Comment number 18.

    4 more years of the same!
    Growing realisation by those who voted for Obama that Ben-Obama policies simply leave you stuck with high unemployment, a stock market asset bubble, ever increasing deficits and debt; until the fantasy crashes down around them. Sadly, the US wants to have its cake and eat it too. If it were not the global reserve currency, the mess would be more obvious; as in Europe.

  • rate this

    Comment number 17.

    Error in paragraph 6?

  • rate this

    Comment number 16.

    The only conclusions that can be reached about all this money printing and financial manipulation by 'independant ' central banks are that interest rates will continue very low and inflation will eventually rise, so paper money should not be held by any sane person. Gold mining shares seem far safer in this scenario. Perhaps the share cerificates of mines should eventualy be circulated as cash


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