So, after $6 billion and 18 months of non-stop campaigning, the US finally has a new President?Barack Obama for a second term. The Democrats retained control of the Senate, while the House remained Republican. This is a huge win when seen against an unemployment rate near 8% and the much-hyped ?enthusiasm gap? among the President?s core supporters, namely the youth and minorities. Indeed, in contrast to the close pre-election polls, Obama?s victory margin was quite comfortable and the Democrats increased their Senate majority. As an aside, it was also a big night for gay rights and legalisation of marijuana.
However, turning to the more mundane world of economics, there will be not be much joy in global financial markets. This is not to suggest that the market is biased towards Republican policies. It is just that the market does not like uncertainty. In the last four years, the government?s political configuration?the administration and Senate being Democrat and the House strongly Republican?hasn?t managed to deliver.
It has failed on the biggest economic problems US faces, namely a medium-term fiscal consolidation path.
This election keeps the configuration exactly the same. So, the big question is, whether in the next four years a solution will be reached? This is what makes the market jittery.
Markets will not be patient for long and some resolution on this issue will need to be reached in the early months of next year. But even before that US policymakers will have to deal with two imminent related problems.
First, this year?s debt limit will be reached sometime this December. One expects lots of sound and fury, but eventually the limit will be raised without forcing the government to close down.
The second problem will be tackling the ?fiscal cliff? of 2013. This is really important. What is the fiscal cliff? As part of the fiscal support, President Bush cut income and payroll taxes temporarily that were extended by President Obama but are now slated to expire this year. Similarly, emergency unemployment benefits will also expire. In addition, as part of the Budget Control Act, because a fiscal consolidation path has not been implemented, most federal spending items will need to be cut across the board. Thus, unless there is agreement between the administration and the Congress, these changes will come into effect immediately from January, resulting in a withdrawal of nearly $570 billion fiscal stimulus. Assuming even modest multiplier effects this, can result in US GDP growth declining 3% in 2013. Needless to say, this would be a significant shock to global demand, exchange and interest rates.
No one really believes that the US will fall off the fiscal cliff. Many are hopeful that this will be resolved by the early months of 2013 and perhaps it can even be part of a grand bargain on medium-term fiscal consolidation. But what is a resolution? The market would like to see very little fiscal stimulus withdrawn in 2013 and a strong consolidation over the medium term. But politics in the US remain fiercely partisan. Neither the fiscal cliff nor a fiscal consolidation path is likely to be achieved without a compromise and that means trade-offs between tax increases and spending cuts. And until the details of the compromise are inked, markets will remain jittery.
Other than fiscal policy, on the economic front, energy independence will remain on top of the President?s second-term agenda. The House Republicans will try to push back on healthcare reforms, but, given the arithmetic, it will have little impact.
Beyond economics, immigration policy will be something that the administration will want to tackle early in the second term. This was a 2008 campaign promise where the President is widely believed to have fallen short. And this issue is politically important, given the large and rising Hispanic population in the US.
US foreign policy isn?t likely to change much, but the administration could be emboldened to push for more reforms in the United Nations and in multilateral organisations. Will this be helpful for India? Perhaps, but don?t hold your breath.
More broadly, how does this election affect India? Beyond the global effects of a resolution of US fiscal cliff and medium-term consolidation, not much. India will continue to become a bigger trading partner and so will China. The US fully understands that its interest lies in keeping both these economic giants equally close. India?s FDI policy and liberalisation of its financial sector will continue to be keenly watched by the US.
At the end of the day, this was an impressive victory for President Obama. Significantly more than the popular votes or the electoral college margins suggest. Much will be written in the coming months and years about this coalition of youth, ethnic minorities and women that re-elected President Obama. It showed that the coalition was not a flash in the pan. It has shown surprising longevity and clearly will impact social issues. The big question is, whether this new politics of identity will also turn into new politics of growth written by a coalition that hitherto was largely silent on economic policy?
The author is senior Asia economist, JP Morgan Chase. Views are personal
