Monday, 10 September 2012

Election Stick Or Twist

As the general election draws ever closer in the US, It is evident that economics will dominate. The stance of both candidates on this issue will be vital in deciding who will be become the President for the 57th term in its history. But what is the actual state of the world’s largest economy? Growth had been on an upward trend in 2011, peaking at 3% in the fourth quarter. However with the worsening of the Eurozone debt crisis, coupled with the slowdown of the emerging economies across the world, growth slowed to 1.5% in the second quarter of 2012 with now signs of improvement in the short term. Vast amounts of deleveraging by both firms and consumers have also contributed greatly to lacklustre growth. While Keynesian theory would promote the government stepping in to replace the spending that is not forthcoming from the private sector, gridlock in congress and the upcoming elections have made further fiscal stimulus close to impossible.

Unemployment had been falling at a more than expected rate throughout 2011, a sign some believed signalled a quick recovery for the economy. Yet 2012 has brought about increased difficulty for a large proportion of economically active Americans. With the joblessness rate hovering above the 8% mark, the latest figure being 8.3% in July, and increased problems the creation of new jobs throughout the country, the sign of a quick recovery has all but evaporated.

Despite countless forecasts of high and dangerous inflation from some commentators, who Paul Krugman refers to as ‘Very Serious People’, as a result of large amounts of bond buying from the Fed. The rise in the general price level in the US has slowed greatly over the past year, falling below the target of 2% set in early 2012. This has led to increased calls for the Fed to do more in order to revive growth given it has larger scope in which to do this.

Several economists though have advocated for a long time that US economy is in a position (i.e. a ‘liquidity trap’) in which monetary policy is, to a large extent, an ineffective tool to boost growth Despite an all-time low interest rate of 0.25% for over a year and several rounds of Quantitative Easing (QE) implemented by the Federal Reserve, substantial and sustainable growth has not materialised. With the Fed also seeming to rule out any new action to kick start the economy until after election and Congress not blinking, the short term health and future direction of the US economy increasingly hinges on the outcome on November the 6th.

Running for a second consecutive term in office is President Barack Obama. He will be campaigning partly on the basis that while in office his economic policies prevented a repeat of the type of financial conditions seen in The Great Depression and now under his guidance the US is on a path to recovery, all be it a very slow one . Many would claim that the incumbent has not gone far enough with his economic policies to restore the US to the growth it saw before the financial crisis hit.

An example being his largest economic policy to date, the $787 billion 2009 ‘American Recovery and Reinvestmentstimulus package. While the total size of the package might sound like a lot, when comparing it to the size of the US economy at the time, it is minuscule. The package only accounted for around 2.6% of total GDP over the period of 2009/2010. Furthermore the central problem of a total loss of spending in the economy (estimated at around $2.9 trillion) was not properly addressed as the stimulus plan consisted of only about $600 billion of actual spending. This was clearly not enough to deal with the dramatic slump of consumption as it didn’t even cover over a third of the total spending lost.

The overall failure to restore substantial growth was clear to see. Despite the package pumping $241.9 billion into the economy, stirring growth to a robust 3.9% by early 2010. Growth, consumption and investment fell thereafter, resulting in the unemployment rate rising to 9%, as it became obvious that the package had not been large enough. Moreover the ineffectiveness of the package gave ammunition to the Republicans, who were reluctant in ratifying the plan in the first place, to prevent any additional spending by the government to help support the economy.

In the aftermath of the crisis Obama has attempted, the degree to which can be debated, to try and prevent another repeat of the implosion of the financial system. The most significant being the Dodd-Frank Wall Street Reform Act, which is the most comprehensive financial reform since the Glass-Steagall Act of 1933, with the intention to improve the overall regulation of the banking sector. But the way in which his administration approached reform in the financial sector drew anger from sections who claimed that it didn’t go far enough in reining in and punishing those responsible for the crisis in the first place.

Another major policy implementation by the President has been the Patient Protection and Affordable Care Act (PPACA) of 2010, referred to generally as Obamacare. The act, which has provoked much controversy in the county and had substantial opposition from the GOP, is aimed at decreasing the number of uninsured Americans and reducing the overall costs of the healthcare system (the US has the most expensive but inefficient system in the western world). The impact of this act is still to be seen due to the constant Republican opposition which has led it to be referred to the Supreme Court in 2012 (the court upheld the constitutionality of most of PPACA). Further improvement of the US healthcare system is one of the main pledges given by Obama should he be re-elected.

Some of the other economic policies that have been instigated by Obama include: The raising of the federal minimum wage from $5.15 an hour to $7.25, favouring an increase in capital gains tax above the present 15% rate to 20% for families whose income is above $250,000 and attempts to implement the so called ‘Buffet Rule’ which would apply a minimum tax rate of 30% on individuals making more than a million dollars a year. No doubt the biggest challenge facing Obama in his campaign will  be re-elected is to regain the trust and confidence of the American people that he is the man that can once again restore growth in the US to the level it once was, despite failing to do so first time around. It remains to be seen whether the electorate are willing to give the man, who campaigned firmly behind the slogan ‘Yes We Can!’ in 2008, another chance to revive the country’s economic fortunes or whether the US people have finally decided that ‘No He Can’t!’.

Opposing him will be Republican Mitt Romney, who recently compounded the shift to the right in US politics by appointing uber conservative Paul Ryan as his running mate. Much of the media has focused on Ryan’s and not Romney plan for the economy, perhaps a sign of the lack of direction the formers campaign is at risk of being characterised by. Romney endorses the so called Ryan Budget, the now well-known and controversial deficit reduction plan. The main victims of the cuts will be the poorest Americans, 62% of cuts are aimed at programs targeted at aiding those on low or moderately low incomes. Medicaid, a program that provides health care to those on low incomes or with disabilities, will be hit with $1.4 trillion cuts thus withdrawing health care from 11 million people. A voucher system is planned to be introduced alongside Medicaid, in the name of increasing consumer choice and competition. These buzz words translate to giving more power to insurance companies, who have it in their interests to try and reduce care and shift the focus away from pre-emptive care.

Even with these harsh cuts to social programs the budget will (if the numbers add up, and many believe they do not) take 18 years to balance. This is because of the plans to further increase military spending, which under Obama has increased to its highest level since World War II. This illustrates the hypocrisy that lies within the Republican Party’s ideology. While championing freer markets with minimal government intervention, they virulently defend an increased military budget which is ironically the least competitive US industry. 

The main reason for the focus on the Ryan Budget is that there is no clear path being proposed by Romney himself. He has released his own 59 point plan for the economy, described by some as “50 shades of Grey without the sex”, light on detail and avoiding difficult or interesting questions. This non-committal stance may be tactical, it is easy to see his opponent struggling with a weak economy while not offering an alternative that may itself be criticised, but with so much focus this election on the economy it will be risky to give it the silent treatment for too long.

A key component of the plan is Romney’s commitment to lowering taxes. With this he seeks to be seen as the candidate for the middle class. His tax cuts would represent roughly a $1000 saving for the moderately well-off family, while those earning over $1m will benefit by $250,000. The tax cuts will be paid for by making the system simpler, first by the notoriously hard task of removing  loop-holes and secondly by reducing tax breaks. These breaks include mortgage reductions, local tax deductions and pension and tax benefits, measures that all aid the middle class. Give with one hand, take away with the other.

While tax remains a divisive issue, the economic impact of Romney’s foreign policy is often forgot about amidst his pandering to Israel and approaching on racist rhetoric towards Arabs. Perhaps the most important relationship America now has is with China. Relations between the world’s two biggest economies have long been strained by the latter’s trade practises and Romney has already ruffled feathers in the Far East by labelling the Chinese “currency manipulators” and describing their currency policy as “cheating”, as well as criticising Obama’s supposed weak stance with the Chinese. What these statements will lead to if he becomes President is unclear but any trade war and rush to protectionism will be disastrous for the recovering US economy.
So while Mr Romney describes the levels of poverty in America as “tragic” it is undoubted that his policies will further increase inequality in the most unequal advanced economy. Even ignoring the social context of this shift, it has a wider toxic impact for the economy as a whole. With the population desperate for the economy to accelerate forward all growth is being made at the very top of the pyramid (in 2009-2010 the top 1% captured 93% of the income growth). While the majority of income growth for those at lower incomes is immediately spent, going back into economy, those at the top have a much lower propensity to spend. More importantly the richest, who have sought to buy political influence, do not require as many public services as the 99% and make a habit of avoiding taxes, so use this influence to block any attempt by Government to tax them and invest in infrastructure, education and technology. This means that many potential innovators and entrepreneurs coming from lower incomes may never have the opportunities afforded to their wealthy peers.

What must be remembered is that this is not only a divisive election for the US economy but globally. The time in which it takes for the World’s richest nation to find its feet again, will significantly impact on the prosperity of the rest of us. For the electorate it is a choice between the man that has prevented a repeat of the harsh conditions of 1930’s but has failed on his promise to return America to the path of sound and sustainable growth. While on the other side is a Republican who seeks to return the nation to its Conservative roots both fiscally and socially. Though many believe his ideal America is based on fantasy and that his policies will drive it further away from a return to prosperity.

Authors: Thomas Viegas and Andrew Whitehead

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