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US gives President Obama another four years

07-11-2012 19:51

It’s now official that President Barack Obama has been re-elected. Moreover, the Democrats again appear to have a majority in the Senate, whilst Republicans continue to lead the House of Representatives. Thus the status quo prevails - USD 6 billion later. Despite this expensive campaign and no major change in the powers that be, this election result is to be preferred for the US and for the global economy.

What prompted the Americans to re-elect Obama? The economic recovery is sluggish, but has started to strengthen. Unemployment is still high, but has begun to decline. In the key swing states, support to the automotive industry during the crisis also played a role. Foreign policy - and most recently the handling of Sandy - has been to the president's advantage. Obama's policies are well known and are addressed to the whole country whereas Mitt Romney frequently fluctuated regarding what policy he would like to carry out. In addition, the Republican Party proved divided and this affected their campaign.

How important is the election outcome for the global economy and the Swedish economy as well? In the short term, maybe not very; but in the longer term, the differences would be significant. The Republicans’ fiscal policy could have created major imbalances and also adversely affected global stability. To try to reduce the budget deficit and the federal debt by making large tax cuts would have entailed monumental spending cuts. The economic and political conditions would probably not have existed for such budget cuts, thus increasing the budget deficit and the debt burden rather than doing the opposite. The question is how much of this can the Republicans push through with their majority in the House of Representatives.

Ultimately, it's about how the large debt burden should be reduced i.e. by making it even more difficult for those furthest from the labour market and increasing exclusion, or by those who are best-off actively contributing. Divisions in American society have been growing for a long time, and the problem has worsened during the crisis years. Ultimately, this is also about the federal government's role and size. Structural problems in the labour market are not remedied by tax cuts, and in addition a tighter monetary policy - which very well could have been the case with Republican policies – what is needed are more active fiscal and structural policies with education and labour market measures. The Democrats do not have such a powerful policy either, but do have a greater understanding of the need for special measures.

Many business leaders in the US, especially on Wall Street, maybe would have preferred Mitt Romney, who has created better relationships with businesses and the financial sector than Barack Obama. Among other things, there were proposals to abolish the regulations set up recently, and also to change the health reform that many are critical to.

The Democrats' economic policy has evolved into a crisis policy in recent years. Now, a new way of thinking is required as to what growth model the US should choose. The president has failed to obtain compromises with the opposition - this has been hampered by the Tea Party movement's influence on the Republican Party. The most important thing now is to avoid deadlock. The first thing required of the President and Congress is to overcome the fiscal cliff. If not, a new recession awaits not just in the US but also for the global economy. The second requirement is to agree on a new debt ceiling and negotiate a medium-term budget plan that is sustainable and inspires confidence. Continued uncertainty would otherwise hold back growth. Who dares to consume, invest and recruit when it is unclear what the tax rises and budget cuts will be in the future?

The outside world needs to see the world's largest economy – with by far the most important financial market - manage its public finances in a more disciplined way and gradually create a balance. The US must also take responsibility for having good relations with the outside world, particularly with China, and ensure that global trade and capital can flow freely. Republican proposals for a tougher tone with China and the establishment of the gold standard would hardly have benefited the global economy in the current situation - another reason to prefer this election result where the Democrats and President Obama retain their position of power.

Economists

Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden

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