A larger India role is partly aimed at bringing China into a more rules-based trade and security framework
President Barack Obama’s second term is likely to put the US on a somewhat different ideological path, relative to the 20th century American capitalism one is so familiar with. If Obama’s mandate is any guide, America is about to move to a softer, more socialised capitalist framework in which the people’s welfare will be at the centre of policymaking. In a sense, America may be heading the European way in terms of pursuing social market policy, like Germany has done over the past many decades.
One could intuitively sense this new element in Obama’s vision from the nature of the political debate, which was highly polarised this time round. Mitt Romney had asserted he would roll back Obamacare if he came to power. And this mandatory universal healthcare programme was at the very centre of the new social market policy promised by Obama.
Obama’s victory, which turned out to be bigger than most people had anticipated, will further encourage Obama to reorient American capitalism and make it more socially oriented.
The first test for this subtle policy shift will be how Obama manages the looming fiscal cliff, which would require great political acumen. Some of the tax cuts carried forward from the Bush era and higher social sector expenditure will, by law, have to end in a couple of months from now. Analysts say this will, at once, result in a withdrawal of fiscal stimulus of about $570 billion, which is roughly 4% of US GDP. Theoretically, a fiscal contraction of this magnitude could send the US and global economy into a tailspin. The US GDP could shrink by over 3%, ushering in a full blown recession.
Obama will of course not let this happen. He would negotiate with the Republicans who control the US House of Representatives to softland the withdrawal of the fiscal stimulus. The Republicans will again insist that Obama must focus more on expenditure reductions rather than withdraw tax cuts. Obama would prefer to do away with some part of the ongoing $570 billion stimulus by taxing the relatively rich as he has promised in his election manifesto. Obama’s preference will be to increase taxes on the rich rather than reduce ongoing social security programmes for the poor.
It will be interesting to see how he deals with the hardcore elements