For an election that was largely about the economy, the result
this week leaves a lot of economic doubts in its wake.
President Obama scored a clear win, but now has unanswered policy
questions piled on the White House doorstep.
First among those is what to do about the fiscal cliff of
scheduled tax increases and federal spending cuts. Unless the
president and a politically divided Congress take action, the
economy drives over that cliff on Jan. 1.
That may explain, in large measure, why US stock indexes fell
sharply on the morning after the vote. The Dow Jones Industrial
Average slumped more than 2 percent in early trading Wednesday.
The re-election of President Obama removes one uncertainty for
investors, economists Paul Ashworth and Paul Dales of Capital
Economics wrote in a Wednesday analysis. But they are none the wiser
about if, how and when Congress will deal with the colossal
tightening in fiscal policy scheduled to occur early next year.
The tax hikes and spending cuts would dampen consumer spending
(by households and by the government), threatening a new recession.
Forecasters widely expect some bargain designed to change the cliff
into more of a gradual slope.
But how such a deal will shape up, in the current partisan
climate, remains unclear. Will Mr. Obama seek to hold firm on his
view that an extension of Bush-era tax rates should exclude the
rich? Will resistance to tax hikes within the Republican-controlled
House stymie efforts to strike a grand bargain that mitigates the
cliff in the near term while also reducing long-term deficits?
The analysts at Capital Economics in Toronto predict that Obama
will struggle to garner bipartisan support for a more comprehensive
agreement [on] how to put the nations finances back on a sustainable
Obama used his victory speech, delivered in the wee hours of
Wednesday morning, to focus above the partisan fray on things that
unite Americans rather than divide them.
With the cliff just weeks away, however, bargaining on the issue
is moving immediately into high gear.
Senate majority leader Harry Reid (D) said Wednesday that any
solution should include higher taxes on "the richest of the rich,"
but also that hes not for kicking the can down the road" into next
Delaying the issue until next year could be hazardous to an
economy thats already fragile, growing at an annualized pace of 2
percent or perhaps a bit less. Current forecasts, which assume some
resolution of the "cliff" problem, call for similar tepid growth in
Wednesdays stock market weakness was also fueled by reminders
that the economic clouds arent limited to the US. Traders were also
listening as European Central Bank President Mario Draghi spoke of
economic weakness in the wider euro zone. …