An optimistic vision of Obamaâ€™s second term
President Barack Obamaâ€™s re-election is good news for the world economy and financial markets. Of course a victory by Mitt Romney, unlikely though it was, might have been even better news, which is perhaps why stock markets fell sharply after the election. If Romney had won, his promised tax cuts and willingness to ignore budget deficits would have delivered a big stimulus to the U.S. economy and triggered a potential boom. But even without this fiscal boost, recent U.S. economic indicators, especially on housing, employment and bank lending, have pointed clearly in the right direction â€“ and now there is every reason to expect these positive trends to accelerate.
While the election was a genuine obstacle to U.S. economic recovery, the problem lay not in the policies of either Obama and Romney but in the uncertainty about whose policies would be implemented and what each party might do to sabotage the otherâ€™s plans. This political doubt delayed investment decisions and hiring plans, and, in corporate bank accounts and bond markets, clogged the flood of new money created by the Federal Reserve. Now that the election is over, this dam will start to open. Political polarization, at least on economic issues, will start to ease. And the confrontation over taxes and public spending looming at the end of the year should be resolved with much less rancor than expected. All these optimistic conclusions follow from one crucial feature of the election result: The calculations of self-interest for politicians in Washington, for investors on Wall Street and for business people across America have now been transformed.
Let us begin with the business community. Much of it has been fiercely opposed to President Obama, particularly to his signature policies of universal healthcare and restoring Bill Clintonâ€™s top tax rates. Given that, surveys suggested that many companies, and especially small businesses, suspended normal decisions on hiring and investment for months before the election, while they waited for Obamacare to be abandoned and tax hikes to be ruled out.
That waiting game is now over. U.S. businesses can no longer hope for a new president who will restore the untrammeled free-market environment of George W. Bush. Instead of a theoretical choice between Obamaâ€™s new regulations and a free market utopia modeled on Ayn Rand, corporate executives must now choose between adapting to Obamaâ€™s policies, including healthcare, going out of business or finding another country with a friendlier business environment.
Once they confront this choice, a few may decide to move to Mexico, Canada or China, but most will surely acknowledge that the U.S. remains a relatively attractive place to do business and will simply build the costs of healthcare and taxes into their budgets. They will then switch their attention from politics to business as usual and get on with hiring or investment decisions that make financial sense in this new regulatory environment. If businesses refrain from investment or hiring from now on, this will be for financial reasons, not out of political unease.
A similar shift can be expected on Wall Street, as surprising numbers of investors and analysts believed that a Romney victory was likely and expected major changes in monetary policy. This possibility can now be ignored and investors can work on the certain knowledge that the Fedâ€™s ultra-expansionary policies will continue until unemployment falls below 7 percent.
Some investors like the Fedâ€™s policy, while others hate it, but all must now accept it as a fact of life, and then seek opportunities to profit in this environment. Once this ultra-expansionary monetary policy is taken for granted, such profit opportunities will surely be found in assets that benefit from stronger economic activity or higher inflation, such as equities, property and other productive assets, and not in those that benefit from deflation, like government bonds and cash. The consequent flow of money out of bonds into equities, homes and other growth-related assets is exactly what the Fed wants to encourage. As this flow accelerates, it will reinforce economic recovery and confidence. That should, in turn, help moderate political partisanship, at least on the economic front.
Which brings us to the new political calculus in Washington, for both the Republicans and Democrats. Until this week, the Republicansâ€™ â€śNo. 1 priority was to make Obama a one-term president,â€ť as Mitch McConnell, the Senate minority leader, famously declared. To make Obama unelectable, the Republican leaders were willing to threaten a default by the U.S. government or to push the country over a fiscal cliff. This destructive incentive is now gone. Since Obama can no longer be defeated or re-elected, the Republicans have nothing to gain from economic disruption, but potentially a lot to lose if obstructive tactics are seen as threatening jobs or damaging the business interests of their corporate supporters, who must live with Obama for four more years whether they like it or not.
Obamaâ€™s motivations are also transformed, however. Until this week, his main objective was re-election, and that demanded highly motivated Democratic activists. Starting today, the presidentâ€™s main goal is securing a legacy.
Obama could be remembered as one of the most successful and effective presidents in modern history â€“ the president who created universal healthcare, who crippled Al Qaeda, who pulled the U.S. economy out of its deepest post-war crisis and who laid the foundations for long-term fiscal solvency. But Obama knows he can only secure this legacy by breaking the gridlock in Washington and avoiding lame-duck status.
The changes in the Republican and Presidential political calculus almost guarantee a new willingness to compromise on both sides. With the job market improving, with the housing crisis largely over and the financial system returning to normal, Obama and the Republican congressional leaders will surely realize that compromise now serves their interests better than confrontation and sabotage. Only through some degree of cooperation can either side share in the credit for the strong economic recovery that could now lie ahead.
Anatole Kaletsky is a Reuters columnist.