Obama victory may signal a resurgent US economy.

This is a version of a column published in the Irish Examiner .

The election of Barak Obama for a second term as US president is, like a curates egg, a mixed blessing. From a political perspective it is good – it shows that the US electorate is not willing to give credence to a party that has become more and more illiberal, more and more unwilling to engage in real world politics, more and more entrenched in ideological purity and less and less connected to the real challenges facing the United States. A reinvigorated republican party, purged of its lunatic fringe, open to real reform on immigration and the economy cannot be but a good thing for US politics, by extension the US Economy and thus the world economy.

Economically the situation is less clear. Obama faces major challenges, and in dealing with them he can put the US economy back as the engine of world growth, or stall further. One crucial issue is whether or not the US House of Representatives, still republican dominated, will accept that bipartisanship is required. If they continue to block, stall, filibuster and obfustcate then there is no hope of a strong USA. And with a racist, nasty , lunatic fringe which yet refuses to accept that most people are on average average in their policies there is little hope yet.

The most immediate problem facing Obama on the economy is the so-called “Fiscal Cliff”. This refers to a combination of tax increases and government spending deductions which are due to come from early 2013. A large part, possibly up to $2tr, of the US record deficit can be attributed to the massive tax cuts of the Bush era.  This, startling as it may seem, is as much as the cost of the wars of the Bush era.  A difficulty however is that while rowing back these tax cuts may make economic and social sense, increasing taxes at a time when the economy is only beginning to recover is a risky proposition. A particular problem is that some of the tax cuts being repealed will impact not just on the wealthy – an increase in capital gains from 15% to 20% – but on lower paid – the payroll tax decuction. However, the US is also running a massive deficit and its debt now stands at $16t, or 100% GDP. As a consequence increased tax takes are needed. But the us also faces cuts to defence and non defence spending, taking over $100b out of the economy each year through 2020. The combination can deal a significant blow to US and world growth.  A deal is going to be required to be struck whereby some tax increases are made and some additional infrastructure spending undertaken, as urged by the IMF.  That however will require the House to overcome its republican repugnance to government spending and tax increases. If the US drives over the fiscal cliff it will be the republicans who have done so.

Beyond that, history suggests that we should welcome a democrat in the white house. There is strong evidence that under democratic presidents the US Stock market significantly outperforms compared to republican presidents. This outperformance is significant – up to 16% for small cap stocks. To some degree it can be explained by increased risk during democratic presidnecies but it remains. Therefore if history is any guide we should see the US market booming as it has done since 2009, but perhaps more in the latter half than the first.

More generally, republican presidents, especially in the last half century, tend to get low marks for economic management. For all the republican rhetoric on sound fiscal policies their record is fairly dismal when it comes to debt. Ronald Regan and Bush Sr presided over a doubling of the US debt/GDP from 30% to 60%. Clinton stopped the rot only to have the wars and tax cuts of Bush jr take the debt from below 60% to 90%. Faced with a tea party infused congress Obama has made no headway on this to date. In terms of unemployment the US unemployment rate under republican presidents is marginally higher than under democrats, and inflation is little different.  Taken all together therefore the last half century suggests that democratic presidents tend to preside over economic good times compared to their republican rivals.  A growing, strong US, as one of our larger economic partners, is a good prospect for Ireland. But it is not all good news.

Ireland needs to be careful. The increased focus on offshore tax havens and homes will inevitably bring Ireland back in to focus. We have already seen how ruthless the US treasury can be (Mr Geithner, Bondholder on line 1…) when it comes to protecting what it sees as US interests. We should not assume that our tax status will continue to be as it has been. Any change in this status would throw up very interesting quandaries for US firms headquartered in Ireland.  Add to that the desire by Obama to make offshoring of tax by US corporates less palatable and we face a potential fiscal cliff of our own.

Taken together the Obama victory is good news. But like all good news it needs to be managed. And we need all the help we can get in an economy which is flatlining.


One thought on “Obama victory may signal a resurgent US economy.

  1. Tom

    Good post, good blog. The House Republicans have sounded a little more conciliatory since the election, so maybe the gridlock can be eased a bit and Obama can do what needs to be done.


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