Obama the Republican

In 1992, Bill Clinton won the presidency by focusing on “the economy, stupid.” Some analysts think that all presidential elections turn on economic conditions. It seems certain that this year’s campaign will be fought on that terrain, with Mitt Romney arguing that Barack Obama’s policies have failed and Obama countering that the economy is recovering, or it isn’t his fault, or both.

For the past three years, politicians and pundits have been watching a “recovery” that feels like a recession. Economic output has grown since the middle of 2009, but only fitfully, weighed down by a depressed housing market, buffeted by last summer’s debt ceiling standoff, and haunted by the European debt crisis. Unemployment remains above 8 per cent, a level not seen since the early 1980s. In this environment, both Obama and Romney are campaigning on the promise that they can get the economy going and create jobs. Only they can’t. The link between presidential policy and jobs is hazy. President Clinton, for example, oversaw the most robust economic expansion in decades, but it’s not clear if the credit should go to his 1993 deficit reduction plan, the information technology revolution, globalisation, or simply an upturn in the business cycle.

President Obama or President Romney will have little room for manoeuvre. Either party might sweep the White House and Congress, but neither will get the 60 Senate seats necessary to pass legislation unilaterally. (Reconciliation, a once-obscure parliamentary tactic, can be used to pass certain types of bill with a bare majority of the Senate, but it faces procedural limits.) A Democratic victory will not lead to a second stimulus program to fuel the recovery. A Republican victory might produce a major tax cut sometime in the next two years; but since its benefits will flow largely to the rich, its short-term impact is likely to be small.

The presidential election will determine what happens to the George W Bush tax cuts, that expire at the end of December. President Romney wants to extend all of them, President Obama only those for the “middle class” (very generously defined). The difference between the two would have little effect on the recovery.

However, this year’s election could have a profound impact on the American economy for decades to come. The hesitant recovery will take hold sooner or later, and unemployment will fall, though perhaps not to the levels of the late 1990s. But within the next four years, it will be time to tackle America’s next macroeconomic challenge: a large and growing national debt. Today, the sluggish economy and global investors’ jittery nerves are keeping interest rates low in the United States. Within the decade, however, the Congressional Budget Office expects debt levels to push up interest rates and weaken the economy. Investors could lose their appetite for treasury bonds, tipping the US into a true budgetary crisis.

There are two basic ways to deal with the national debt. One, outlined by House Republicans led by Representative Paul Ryan, is to radically reform entitlement programs such as Medicare, slash the rest of the federal government to 19th-century levels, and cut taxes at the same time. The other is to make modest cuts in entitlements and fill the rest of the budget gap with tax increases, primarily on the rich.

Mitt Romney is often thought of as a closet moderate—he favoured abortion rights (anathema for US conservatives) when running for the Senate and later required Massachusetts residents to buy health insurance (ditto) as governor. But the brutal, drawn-out Republican primary has dragged him so far to the right that he is locked into conservative spending policies: he has promised a 20 per cent cut in income tax rates and endorsed the Ryan budget. Obama is demonised as a socialist, but on fiscal issues he appears much closer to what used to be called a moderate Republican. Last summer he pushed for a deficit reduction package that included, by some estimates, $5 in spending cuts for every $1 in tax increases.

This means that this November’s election will have major implications for how—and whether—the US deals with its debt. President Obama would be more likely to pursue a bipartisan solution such as those proposed by the Simpson-Bowles fiscal commission or the Domenici-Rivlin panel. President Romney could only reduce the deficit on unconditional conservative terms—rolling back the New Deal to pay for more tax cuts—or else be pilloried by a Republican base that still does not trust him. But since Medicare and Social Security are vastly popular among voters in both parties, it is more likely that Romney would simply cut taxes and leave spending programs untouched, only increasing deficits and the national debt.

Ever since Newt Gingrich kneecapped President George HW Bush in 1990, by refusing to support a deficit reduction bill that included tax increases, conservative Republicans have railed against deficits while cutting taxes at every opportunity. President George W Bush even increased spending by starting two wars and making Medicare more generous. There is no guarantee that Obama would be able to get anything more through Congress in a second term. But we can tell what a Republican presidency would bring: tax cuts, larger deficits, and more debt. America’s economy would pay the price, in higher interest rates and slower growth, for years to come.