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 75.

    Imagine if Romney won..."Thank you ladies and gentlemen for flying with Air Romney. Due to the different time zone in the United States, passengers are reminded to put their watches back 50 years."

    Obama has been deeply disappointing. Let's hope he can be more radical in his final term and seriously look at where money comes from in his country and change its creation as debt through loans.

  • rate this

    Comment number 74.

    A good article on who won...
    Another good point is Romneys invective vs China and Russia.
    With a choice between these two the US voter could only lose. Anyway be interesting to see who Wall st sends over to be sec treas.

  • rate this

    Comment number 73.

    lies and deceit

  • rate this

    Comment number 72.

    Gerard Jackson, BrookesNews.Com, Monday 5 July 2004
    "To cut to the chase: artificially lowering interest rates and creating phoney bank deposits distorts production (money is not neutral) and generates a boom-bust cycle. So welcome to another monetary roller-coaster, courtesy of Mr Alan Greenspan."
    Got 2 elections out of it though...

  • rate this

    Comment number 71.

    Projections are of a repeat in the stalemate in sorting out the problems of the fiscal cliff and the looming debt limit.
    Important point is how the credit rating follows that .It should be downgraded, but with the SEC watching this may not happen, then the ratings agencies credibility is shot.
    Obama is rated as the worst president,Romney could have been worse still, only Wall st wins.

  • rate this

    Comment number 70.

    The cliff is just the beginning; the debt/deficit is so high (and growing) that once you manage to struggle past the cliff, you will find a mountain, and then another cliff. Inevitably, you will become exhausted, and fall.

  • rate this

    Comment number 69.

    Four more years of misery and mind boggling deficit and wastfull spending on health care and gay marriages

  • rate this

    Comment number 68.

    Another article on economics that makes no mention of the changes to employment that policies may make. Obama should tough it out and enable the rationale wing of the Republican congress persons to prevent their party being seen as wanting to give the rich a windfall. It is their chance to learn the obvious from the election.

  • rate this

    Comment number 67.

    More of the same old, same old. As the effects of last nights party wear off and the BBC remove the champagne bottles from broadcasting house. America is waking up to realise that re-electing Barry hasn't created one more job or paid off one more cent of the deficit - and it will not.

  • rate this

    Comment number 66.


    Quite right - commodities is the area where it is all now happening. And the spivs are minting it - just check out reports of commodities trader splashing £40k on drinks at Raffles Club recently. Some have it, we all pay for it....

  • rate this

    Comment number 65.

    People need jobs, that's the core issue. They will weaken the currency further and further in the hope that the jobs come back from the east problem is 300 jobs lost in the west only made 100 jobs in the east come back and it'll be 10. Next election, same fight with result decided on the flip of a coin or if you said something unpleasant about women or Hispanics. Find jobs, rule the world.

  • rate this

    Comment number 64.

    The Health service did not make the UK bankrupt. Irresponsible lending and greed by the financial institutions did. For a nation to be civilized it has to look after the weakest. ‘Trickle down’ does not pay for heart bypasses or university. Meritocracies (which the US claims to be) need affordable health and education, as the best are often poor.

  • rate this

    Comment number 63.

    UK comments on this column have little to do with American reality. Certain issues are hot button issues to Americans that probably haven't been debated in the UK since the beginning of the 20th Century. But the amount of smoke from them shouldn't disguise that America's economic course has now been irrevocably set for the next four years.

  • rate this

    Comment number 62.

    nobody should ever be put in the position were you have to sell your home to cover health care costs or a childs education. Private Insurance companies have made huge profits out of bad circumstances and he sees the benefits of state funded services for millions of ordinary people. The top 5% of USA do not want ordinary Americans to have this and thats what lost the election for them.

  • rate this

    Comment number 61.

    There you are, 3.25 off on Wall Street, over 1.5 off here.

    Worrying about markets Stephanie, is like worrying about a killer disease which good social practice would eliminate. In this case the public ownership of the finance industries everywhere across the world.
    Our job, Steph, is to bring it about here.

  • rate this

    Comment number 60.

    Par for the course's_term_end

    The US medicare issue will run on and on. Does the state have the right to insist people take care of their health?

    He fought his pledge and won. Respect

    Nothing l have seen of the man, puts him within light years of socialism, he is about personal responsibility not yahoo get rich. He is not uncaring. That's OK.

  • rate this

    Comment number 59.

    Odd that the USA can't afford medicare/aid for all but, miraculously, can still be the worlds policeman. Been at war for so long I can't even remember when they weren't fighting someone. Costs a lot of lives, even more bucks, $1.2 trillion per annum I read somewhere. Global capitalism works fine with cheap energy and labour, we have neither now. Time to adapt to the new situation?

  • rate this

    Comment number 58.

    The writer forgets Obama still has to curb the deficit,plus his plan B for medicare/aid for all ? The costing will be prohibitive, and not everybody will be covered. Like the UK's NHS, the Country will go broke funding a burgeoning bureacracy which is not answerable to the taxpayer.It grows like the Gorgon dragon. Then there is the Pentagon Budget ?

  • rate this

    Comment number 57.

    Obama will transform the US into a welfare society like the UK

    Just were does democracy go when politicians offer the majority of electors more benefits than the country can afford to get elected?

    It's all about short term gain but in the long term the debt will make US citizens slaves of China.

  • rate this

    Comment number 56.

    For America it depends on whether Republican talk of cooperation and government for the people is anything other than talk. Republican intransigence over the prior four years certainly hasn't helped the American people, or the economy they are subjected to.

    It isn't beyond the realms of the possible that four more years of blind opposition becomes a reality.


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