The United States no longer straddles the international economy like a giant. It does not play the role of world growth engine—that task is left to China and the other BRICs. But as the sole military superpower, home to one-fifth of global output, the undisputed reserve currency, and the world’s leading universities, the United States retains a unique capacity to export both its problems and its beliefs. With Europe mired in its deepest-ever crisis and China absorbed by development challenges, U.S. leadership in the economic sphere—whether exercised or not—remains essential. With the U.S. elections approaching, the question is what kind of impact the next U.S. president—either incumbent Barack Obama or his Republican challenger Mitt Romney—and new Congress will have on the global economy.
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In his first public event since returning from Kabul, Ambassador Ryan Crocker delivers an address at Carnegie on the challenges and opportunities ahead in Afghanistan. With Ashley Tellis. September 17, 2012 Washington, D.C. Few things are certain, especially given the threat to the U.S. economy posed by the crisis in Europe. But some pundits have already begun forecasting that Obama will beat Romney by a fair number of electoral votes despite a dead heat in the popular vote. The FiveThirtyEight blog in the New York Times, one of the few outlets venturing a forecast for toss-up states, projects 294 electoral votes for Obama versus 244 for Romney and a one-percentage-point win for Obama in the popular vote. The Washington Post’s The Fix blog offers a more cautious assessment, one that nonetheless shows Obama winning and closer to the decisive 270 mark. However, Republicans are expected to easily retain control of the House of Representatives and may also regain control of the Senate by a small margin.
Two crucial points emerge. First, even if Obama wins and Democrats retain the Senate, the president will have to seek a compromise with a Republican House. Second, in no scenario, including a Romney win, would either party gain a filibuster-proof 60 seats in the Senate. This means that the victorious candidate, whoever he is, would have to try to compromise with senators of the opposite party, not to mention members of his own party whose views may differ on a particular issue, in order to pass meaningful legislation.
It follows that the implications of the U.S. elections for the global economy depend less on precise electoral platforms than on the shape of the compromise reached on the big issues, and, against a background of fraying consensus, whether compromise can be reached at all. Thus, the U.S. electoral outcome is likely far less predictive of policy than, say, the Socialists’ sweep in France in May or even last year’s Conservative/Liberal Democrat victory in the UK.
The Candidates and the Issues
Here is a look at how the two candidates stack up on the main issues affecting the global economy and a best guess as to the likely outcome.
Fiscal Cliff
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Ambassador Ryan Crocker
The candidates, like their respective parties, are most sharply at odds over how to reduce the fiscal deficit, which reached 9.5 percent of GDP last year. Democrats advocate higher tax rates for upper-income taxpayers as the key to reducing the deficit. The Republicans advocate cutting entitlements and lowering individual and corporate tax rates while broadening the tax base to make up for the lost revenue. 1
The immediate source of disagreement, however, is how to go about avoiding the “fiscal cliff”—a precipice consisting of automatic federal spending cuts and tax hikes, including the expiration of the Bush-era tax cuts and the payroll tax cut, scheduled to go into effect at the beginning of 2013. Falling off the cliff could potentially imply a Greek-sized deflationary fiscal adjustment worth 3.9 percent of GDP.
While Romney proposes making the Bush-era tax cuts permanent, Obama argues they should end for upper-income households earning more than $250,000 per year. However, neither has proposed preventing the $120 billion yearly payroll tax hike. No compromise is likely before the election. Instead, the lame-duck Congress that will convene in November could just agree to suspend the cutbacks and tax increases for a few months. This means that the shape of a final deal on the deficit will remain unknown until late 2012 at the earliest, more likely early 2013.
Under either candidate, a compromise is bound to include some mixture of tax increases and reductions in entitlement and discretionary spending, as well as further deferrals of tough decisions to a point down the road. Of course, there is no guarantee that such a deal will materialize. In the meantime, especially if the U.S. recovery remains hesitant, it is difficult to believe that policymakers will push the U.S. economy over the edge.
Euro Crisis
Both candidates insist that Europe has the resources to address its fiscal and financial problems and, so far, have kept the option of U.S. support off the table, including through the International Monetary Fund (IMF). However, while the Obama administration has pressed mainly for Germany and the troika (the European Commission, the IMF, and the European Central Bank) to step up help for troubled economies, presumably in the form of fiscal transfers and larger liquidity injections, Republicans have argued mainly for austerity as a way to restore public confidence.
Unless a cataclysm occurs, the United States will likely continue to take a backseat in the euro crisis under either candidate by, for example, providing liquidity swap lines via the Federal Reserve.
Trade
Differences on trade policy are marginal. Both candidates intend to implement the three U.S. free trade agreements with South Korea, Panama, and Colombia and seem to generally agree on a Trans-Pacific Partnership as well as on reducing the red tape that accompanies trade with Europe.
While Romney is a strong supporter of the North Atlantic Free Trade Agreement (NAFTA), Obama continues to propose amending it by including tougher labor and environmental standards. Romney’s election rhetoric is tougher on China than is the incumbent’s. But, with China’s current account surplus declining sharply, designating Beijing as a currency manipulator, never mind imposing punitive tariffs, is unlikely—notwithstanding Romney’s campaign pledge to do so on his first day in office.
In fact, trade agreements with China may get more attention, whether in an Obama second term—especially if Republicans regain the Senate—or in a Republican administration.
Energy
On energy issues, the Obama administration and the Romney campaign both support an “all-of-the above” approach that calls for the development of all sources of energy but differ significantly over how quickly to exploit fossil fuel-based energy sources at home and over what safeguards should be imposed.
Obama’s approach includes developing domestic fossil fuel reserves as well as a range of alternative energy sources, including solar, wind, and biomass. For Romney, fossil fuels are crucial. He would, for instance, allow the rapid development of shale gas and oil—and favors less regulation across the board—but also advocates greater investment in nuclear power. Additionally, Republicans are calling for a higher number of new oil and gas leases for offshore drilling.
Though Republicans would likely move to allow more aggressive domestic exploration and speed up the approval of the Keystone XL pipeline, fundamental shifts in U.S. energy policy are unlikely under either candidate. The climate issue, moreover, stands out as one that both candidates will seek to avoid—for Romney, it is simply not a priority, while Obama is chastened by a failed first-term effort to pursue carbon emission mitigation policies.
Other Issues
Regardless of the election outcome, Republicans will likely continue to chip away at the healthcare reform law passed in 2010, which was a significant step toward universal healthcare coverage. But it would be difficult to repeal the law entirely, even in the event of a clean sweep of the White House and Congress by Republicans. The Supreme Court in June upheld its constitutionality, and the Congressional Budget Office recently projected that repealing the law would increase federal deficits by $109 billion over the next decade.
Obama’s and Romney’s positions on legal immigration are similar, especially on granting permanent residency to and lifting country-based caps and other quotas on visas for highly skilled immigrants. But the two candidates deeply diverge on granting permanent-resident status to the 11 million illegal immigrants who are currently in the United States, which Obama favors but will likely have no luck pushing through a Republican Congress.
Implications for the Global Economy
The U.S. fiscal outcome will remain unknown until at least late 2012, adding to the global economy’s jitters. But the U.S. election—under plausible outcomes—will most likely bring some investor reassurance in the short run but also bad news in the long run.
The short run relief, under either candidate, is likely to come from the avoidance of a U.S. fiscal nosedive in 2013, more attention to trade agreements, avoidance of a big trade dispute with China, and the continued development of new energy sources. For better or worse (likely for worse), Europe will be left to its own devices.
The bad news is that the post-election United States is unlikely to make significant headway on its thorniest economic problems: the long-term fiscal imbalances associated with aging, healthcare spending, and inadequate tax revenues that disproportionately favor corporations and the wealthier segments of the population; the effect of increased fossil fuel use on the climate 2; and the legalization of its large undocumented migrant population. Moreover, the country’s lagging primary and secondary education system, which affects its international competitiveness and helps account for soaring income inequality, barely makes the cut for election debates.
Conclusion
Compared to badly aging Japan and the euro-challenged eurozone, the United States looks like the shining city on a hill, a picture it is inclined to admire. Unfortunately, the hill lies on a deep fault line—a vanishing political consensus.
Despite the U.S. economy’s size and vitality, its inability to implement a number of crucial structural and fiscal reforms is reflected in its failure to provide clear leadership on those issues and others to a global economy that is being transformed at unprecedented speed. A patchwork solution to the fiscal cliff is likely to provide some temporary reassurance. But the pattern of putting off a long-term solution to America’s fiscal woes significantly adds to the risk that, sooner or later, events like the 2008–2009 global financial crisis will recur, though in a different shape and with perhaps even more disastrous consequences.
Uri Dadush is director of Carnegie’s International Economics Program. Shimelse Ali is an economist in the International Economics Program. Zaahira Wyne is the managing editor of Carnegie’s International Economic Bulletin.
[1]. The administration considers “upper income” taxpayers to be those earning $250,000 or more per year. For Democrats more broadly, “upper income” is defined variously as $250,000 to $1 million per year.
[2]. To be sure, per capita carbon dioxide emissions in the United States have steadily fallen over the past three decades.