The November 6, 2012 United States Elections
An Economic Tour of the Horizon for Investors, Business Owners and Entrepreneurs with U.S. and Foreign Economic Interests
With the re-election of President Obama, and virtually no change in the Democratic and Republican control of the U.S. Senate and House, there is continuity in the White House and Congress yet uncertainty regarding U.S. fiscal policies among business owners and investors in the United States and abroad. This uncertainty extends to the impact of U.S. governmental strategy on global business and competitiveness, on trade and commerce policies with China, and the view on collaboration to help resolve the EU debt crisis.
U.S. Fiscal Policies: The Fiscal Cliff
On November 7, the U.S. Dow Jones volatility index was down more than 300 points and equities lost 2.4% in value, while Asian stock markets also declined, depicting financial markets pessimism with the election results and possibly the future. This pessimism commenced in part in May 2012 with the U.S. Congressional Budget Office report that the U.S. economy would shrink by 1.3% in the first half of 2013. The pessimism is augmented in that U.S. GDP is predicted to be negatively impacted as a result of both individual income tax rate increases totaling $532 billion (over 3% of U.S. GDP) and more than $136 billion (nearly 1% of U.S. GDP) in automatic spending cuts occurring in the Pentagon and other U.S. government agency budgets. As a result, in 2013 U.S. consumers will have less disposable income to spend on U.S. and imported goods, while defense and domestic spending cuts will depress U.S. production and manufacturing resulting in job losses. These two economic conditions comprise what is referred to as the “Fiscal Cliff” and will combine to comprise a reduction of up to 4% of U.S. GDP according to the U.S. Congressional Budget Office. Further, there also remains lack of guidance regarding long-term congressional action on the U.S. budget and debt limits. A top priority for the President and Congress is to address the negative impact of the Fiscal Cliff, which presently is perceived as severe. On November 9, President Obama requested a meeting of House and Senate leaders for the week of November 12 to commence constructive discussions on pending fiscal matters, including U.S. deficit and budget matters and the Fiscal Cliff. On November 9 House Speaker John Boehner said Republicans would consider new sources of revenue as part of a bipartisan deficit-reduction deal to avoid the Fiscal Cliff, and a wave of automatic tax hikes and spending cuts due to hit January 1, 2013 but that hiking tax rates on the rich is "unacceptable" because it would prevent small-business owners from creating jobs. The Congressional Budget Office countered by reporting that going over the Fiscal Cliff would send the economy back into recession, but raising income tax rates for the wealthy would barely do any damage. The Fiscal Cliff will impact long-term business, consumer, and investment confidence and will certainly impact the global economy
The President and Congress could act in the lame duck session, before December 31, 2012, to remedy the negative impact of the Fiscal Cliff, yet a delay into 2013 will add to the current pessimism among U.S. and foreign businesses and investors as well as U.S. households.
Additionally, the President’s health care program, which Mr. Romney vowed to begin dismantling on the first day of his presidency, now seems certain to survive. While House Republicans continue to oppose it and may find ways to attack it legislatively, they may not have the ability to overturn it. And on November 9, House Speaker John Boehner said he's no longer determined to repeal President Obama's health-care law and stated "ObamaCare is the law of the land." To help fund the President’s health care program, effective January 1, 2013, an additional 3.8% Federal Contribution Medicare Surtax will be imposed on the unearned income of individuals, on top of increasing ordinary income tax rates. Also in 2013 there will be a new .9% Hospital Insurance Tax on earned income. Based on these tax rate increases, a top U.S. federal tax rate of 43.4% (39.6% and 3.8%) could apply to unearned income when considering the loss of certain itemized deductions. There are additional U.S. individual tax changes in 2013, including the reduction in the U.S. estate and gift tax exemption to $1 million per individual, and increasing income tax rates on dividends and capital gain income.
United States Economic Trade with China
While Mr. Romney spoke tough language regarding China before the election, a view is shared internationally that President Obama has taken protectionist actions regarding trade with China although the benefits of this policy to correct the trade imbalance have been hard to discern. According to the U.S. Census Bureau, in August 2012 U.S. exports to China were $8.6 billion while U.S. imports from China were $37.3 billion. According to the International Monetary Fund, by 2016 the U.S. will no longer be the world’s largest economy with China’s total economic output eclipsing that of the United States. Presently the U.S. retains a substantial lead in overall gross domestic product. In 2011 U.S. GDP, at over $15 trillion, was more than double China’s $7 trillion output. When measured by purchasing power parity (PPP), which unlike calculating nominal GDP does not involve converting yuan to dollars, the figures are closer; but the U.S. economy still leads China by $15 trillion to $11 trillion. The IMF projection is based on purchasing power.
The EU Economic Crisis
Considering the present EU economic climate, while there is a view in the EU that the continent no longer carries the necessary geopolitical clout to influence Washington’s foreign and economic policy in the region and beyond, the reality is that the U.S. and EU together comprise 54% of global GDP. Further, the U.S. and EU remain transatlantic partners and share common challenges that can significantly impact and hopefully improve their position in the global economy. In September 2012 for example, U.S. imports from the EU totaled nearly $30 billion USD while U.S. exports to the EU totaled slightly over $21 billion USD; as a result the U.S. remains a vital trading partner to the EU.
Over the past four years the Obama administration has cited the EU’s inability to solve its economic travails as threatening to America’s economic prospects. Despite this, as Ronald H. Linden (a political scientist at the University of Pittsburgh’s European Union Center of Excellence) notes, the European Union is a most significant economic partner for the U.S., as is the U.S. for the EU. Supporting the restoration of economic growth in the EU economies plays an important part in the U.S. recovery. Accordingly, it is likely that the Obama administration will continue to closely monitor EU economic developments, while being cautious in providing advice or promulgating programs that could be viewed by the EU as protectionist.
The EU, International Monetary Fund and European Central Bank will continue to work together, as guarded optimism remains that the U.S. will support collaborative fiscal policies in the EU. Each member country is striving to design and implement economic plans to address and remedy significant debt and deficit levels as well as stubbornly high and destabilizing unemployment.
As a point of reference, earlier in 2012 real GDP in the EU was projected to contract in the first half of 2012 but then start recovering, except in Spain, Italy, Greece, and Portugal where recovery will only begin in 2013. Many advanced economies outside the Euro area avoided large pre-crisis imbalances, which helped cushion the spillovers from the Euro area. Growth in the emerging European economies was projected to slow sharply to 1.9% this year, reflecting that area’s strong economic and financial linkages with the Euro area. Europe is expected to see projected growth of 1.4% next year.
In Greece this week, where the unemployment rate exceeds 25%, there were strikes among public transport workers, hospital staff and air traffic controllers, among others, as unions try to pressure lawmakers who are voting on another round of austerity cuts, including a fifth cut in state pensions. If the measures aren’t approved, as required for the country to receive the next tranche of 31 billion euros ($40 billion) in funding, Greece could leave the Euro zone as Prime Minister Antonis Samaras faces a rebellion among his coalition partners, and his own lawmakers.
In France, the Francois Hollande government announced plans this week to cut company payroll taxes with the intent to stimulate the use of companies’ tax savings for corporate funding with the aim of increasing hiring and employment. Offsetting the government’s payroll tax revenue loss would be increased VAT rates (to 20% starting in 2014) and sales tax rates. Coincidentally, the result would decrease labor tax costs for companies and increase taxes on consumers which was a policy endorsed by former President Sarkozy.
Observers of the U.S. and foreign economies will be particularly watchful as the Obama administration and Congress wrestle with old 2012 feuds and new 2013 electoral realities. Their progress toward fiscal compromise, or lack of it, will go a long way toward determining concomitant actions or reactions among our trading partners worldwide. As circumstances dictate we’ll continue to provide analysis and, as always, welcome your thoughts as well.
Sources for this article include the Brookings Institute, Foreign Policy Magazine, U.S. Department of Commerce, U.S. Bureau of Labor Statistics, and The Financial Times, ABC News and CNN News.