Nov 16th 2010

The Economic Consequences of America’s Elections

by Michael Boskin

Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisors, 1989-1993.

STANFORD - November's mid-term elections were a sharp rebuke to the vast expansion of government spending, deficits, and debt in the United States. Elected in the midst of the financial crisis in the fall of 2008, President Barack Obama and the Democratic leadership of Congress seemed surprised when the public rejected their stimulus, health-care reform, and energy policies by large margins.

Of course, some of the huge increase in expenditure and debt has been the result of the recession, and of the defense and other spending legacies of President George W. Bush. But, instead of finding security and salvation from recession in a new era of dependence on government, most voters were repelled by such policies' apparent failure to do much to improve the economy.

Thus, the election results should not be viewed primarily as an endorsement of the Republicans, but as a rebuke to the Democrats' agenda, which voters believed was out of touch with their concerns, interests, and values.

The Republicans took control of the House of Representatives, netting more than 60 seats - the most in over 70 years - and six Senate seats. They gained in every part of the country, but especially in the industrial heartland from Pennsylvania to Wisconsin. They also won many governorships and took over many state legislatures; both will play a vital role in redrawing Congressional and legislative districts in the reapportionment next year following the 2010 census.

With divided government, many expect partisan gridlock on major legislation. But there is reason to be hopeful: the American economy, labor market, and stock market have historically fared a bit better in years of divided government.

Moreover, the changed Congressional landscape will be better for trade-related legislation. The Republicans' protectionist wing is smaller than the Democrats', which may eventually help free-trade agreements between the US and countries such as South Korea and Colombia, as well as a revival of the moribund Doha round of global trade-liberalization talks.

Likewise, economic (but not other) tensions between China and the US should be a little easier to manage. "Global rebalancing" requires surplus countries such as China to boost consumption, while deficit countries such as the US save more (which requires sharply lower budget deficits and increased private saving). It will get a more sympathetic hearing from the new Congress than from President Obama, who was soundly rebuked at the Second G-20 Summit for demanding more deficit-financed spending.

The new Congress will not support Obama's additional stimulus plans, such as a national infrastructure bank. Republicans will want to reform federal infrastructure spending - which is already substantial - rather than add to it. They are committed to rolling back spending to 2008 levels. In short, they want to ensure that the spending explosion is indeed temporary, not entrenched in a new baseline for the federal budget.

But Obama's veto power is a big obstacle to reversing his policies. While Republicans will be able to make some inroads on reducing spending and preventing tax hikes, making good on their vow to "repeal and replace" Obama's signature health-care reform would require a Republican to be elected as president in 2012.

A showdown also looms over tax policy. Obama's temporary first-year expensing proposal for capital purchases (a good idea as part of a permanent corporate-tax overhaul) could get folded into broader tax legislation. But the center of attention will be the expiring Bush tax cuts of 2001 and 2003, which reduced marginal tax rates on income, dividends, and capital gains.

Obama wants to let the cuts expire at the end of this year, but only for those with incomes over $250,000. Republicans will mount substantial pressure to extend the tax cuts for all, as well as to prevent expansion of the so-called alternative minimum tax (which applies if it is larger than the regular tax) from hitting millions more taxpayers. Indeed, the lower marginal rate ought to be made permanent, but accompanied by spending control, with broader tax reform to come later.

Another important feature of the new Congress will be heightened polarization. The center of gravity of the remaining Democrats has moved to the left, because the vast majority of defeated Democrats were moderates from swing districts. Likewise, the Republicans elected several conservative senators and a sizeable number of more conservative House members.

This will make compromise even more difficult, as will partisan positioning in the run-up to the 2012 presidential election. Meanwhile, most political analysts do not expect Obama to make as large a move to the political center as President Bill Clinton did when the Republicans took control of Congress after the 1994 mid-term elections. Clinton then worked with Republicans to balance the budget and reform welfare, easily winning re-election in 1996. But Obama starts much further left than Clinton, making a move to the middle a longer trek if he decides to embark on it.

That means that a period of legislative stalemate looms over many of the big issues. We are likely to see some spending consolidation, but less than in Great Britain and other European countries. Temporary extension of most or all of the Bush-era tax cuts is also likely. And trade liberalization may be an area where Obama and Congress can agree.

Inaction in other areas will be bad news for many. But America's lurch toward a European-style social-welfare state in Obama's first two years appears to have been halted, if not permanently ended or reversed. And that is good news for the US - and for the global economy.

Copyright: Project Syndicate, 2010.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jun 19th 2021
EXTRACT: "Xi Jinping’s call for friendship gives us an opportunity to examine Chinese politics on both the domestic and international stage. On the face of it, it suggests the possibility of rapprochement between the rich liberal democracies represented by the G7 and the authoritarian Chinese state. However, despite appearances of a call for a closer relationship, there is more than one way of being friends – and Xi’s idea might be somewhat different to what many in countries attending the G7 might expect."
Jun 12th 2021
EXTRACT: "China’s recently published census, showing that its population has almost stopped growing, brought warnings of severe problems for the country. “Such numbers make grim reading for the party,” reported The Economist. This “could have a disastrous impact on the country,” wrote Huang Wenzheng, a fellow at the Center for China and Globalization in Beijing, in the Financial Times. But a comment posted on China’s Weibo was more insightful. “The declining fertility rate actually reflects the progress in the thinking of Chinese people – women are no longer a fertility tool.” "
Jun 12th 2021
EXTRACT: " I remember recounting fellow leaders of the story of a Rwanda schoolboy caught up in the genocide of the 1990s and now immortalized in the Kigali Genocide Memorial museum, where, in a section devoted to children, one can find his photograph and a plaque that reads: ----- David, age 11 ...... Ambition: to be a doctor ...... Favorite sport: football ...... Favorite hobby: making people laugh ...... Death: by mutilation ...... Last words: the UN are coming to save us ----- In his idealism and innocence, David believed the international community would save him and his mother. We didn’t. "
Jun 8th 2021
EXTRACT: " While many conservative Republicans opposed Trump and saw that he posed a danger to their party and democracy itself, they were hesitant to buck the mass movement they had created, fearing that it would turn against them. Some of these same conservatives assumed that with Trump's defeat, the horror of January 6th, and the former president's banishment from social media, the time had come to restore sanity to their party. But the GOP leadership’s continued cowering in the face of what they now call "Trump's base" has caused them to circle the wagons and purge their ranks of those who call for sanity. "
May 26th 2021
Editor's Note: This article is about the Federal Reserve, inflation in the 1970's, and possible similarities to today.
May 25th 2021
EXTRACT: "Netanyahu claims to be acting in the name of the Jewish people. He certainly is not. Many Jews around the world, including me, despise Netanyahu’s racist politics. As an American, I am also deeply troubled by the US government’s knee-jerk support of Israel. Fortunately, I am not alone in this view. A growing number of Democratic Congressmen, Jews and non-Jews alike, have called on the United States to stop supporting Israel’s lawlessness. The truth is that the US government’s uncritical support for Israel has come to depend more on evangelical Christians, such as former US Secretary of State Michael Pompeo, than on American Jews, who are deeply divided by Netanyahu’s actions. And the evangelicals’ real interest in Zionism is not Jews’ security, but Armageddon, the end of the world, which they believe will come only when all Jews are in Israel."
May 18th 2021
EXTRACT: "This period in US history could go down as the moment when America’s democratic system for electing a president – the most consequential duty of US citizens – was broken, perhaps for good."
May 16th 2021
EXTRACT: "While reading Human Rights Watch’s (HRW) monumental report “A Threshold Crossed,” I felt a range of emotions. It also left me with one big question. I was deeply impressed by the report’s rigorous scholarship. At the same time, it brought to the surface feelings of anger and profound sadness. It’s an extraordinarily complete study detailing not only the many ways Israel has violated a broad range of Palestinian human rights, but the ideology of racial superiority and entitlement that Israel has used to justify its repression." ..... "My advice to both Israel’s defenders and weak-kneed liberals is​, “Read the damn report.” "
May 16th 2021
EXTRACTS: .... "He transformed a transitioning market economy into a stable statist project that rests on an alliance of his inner circle," ..... "He transformed Russia from a respected member of the international community into a rogue state" .... ". He energized NATO by providing it with the adversary it lacked after the end of the cold war," ..... "He befriended hopelessly corrupt, dysfunctional, and unstable dictatorships..." ..... "He forged a quasi-alliance with China, thereby enhancing Russia’s dependence on the one country that might have reason to appropriate those Russian territories inhabited by Chinese."
May 15th 2021
EXTRACT: "On the face of it, the latest escalation of violence is following the template of all inter-ethnic wars. Muslims observing Ramadan shouted nationalist slogans and clashed with Israeli right-wing groups chanting “Death to the Arabs.” The Israelis haughtily marched with their national flag on Jerusalem Day, marking Israel’s capture in 1967 of East Jerusalem and the Temple Mount, the site of the biblical Second Temple, and of Al-Aqsa, completed in the year 705. Battles in and around the Al-Aqsa compound erupted, with worshipers inside throwing stones at the Israeli police, who responded by firing rubber-tipped bullets and other projectiles, wounding hundreds."
May 13th 2021
"Regardless of how the current and future violent conflicts between Israel and the Palestinians in Jerusalem will end, there will be no Israeli-Palestinian peace unless East Jerusalem becomes the capital of a Palestinian state while the city remains united."
May 7th 2021
EXTRACT: " Would the United States be prepared to risk a catastrophic war with the People’s Republic of China to protect the Republic of China, better known as Taiwan? "
May 5th 2021
EXTRACT: "Human history, ancient and contemporary, is replete with instances of genocide – that is, the effort to eradicate a people, erase their history, denigrate their culture, and destroy their physical presence. Many of these atrocities have been recognized by the victims and other nations who support them. But, with the notable exception of the German acknowledgment of the Holocaust, rarely have the perpetrators of these crimes accepted responsibility and offer recompense "
May 2nd 2021
EXTRACT: "The best way to defend liberal democracy is to practice it at home and abroad with the “courage and self-confidence” that Kennan touted at the dawn of the Cold War. This is also the best way to ensure the survival of our own conception of human freedom. And survive it will."
May 1st 2021
EXTRACT: "Ann Arbor (Informed Comment) – Sammy Roth at the LA Times/ Boiling Point Newsletter reports that California’s main power grid was powered for several hours last Saturday by 90% renewables. For just four seconds that day, the grid, which covers 4/5s of the state, reached 94.5% generation by green energy. California is the world’s fifth largest economy. The main grid does not cover Los Angeles County. On the other hand, these figures do not include the electricity generated by the Diablo Canyon nuclear plant, which is not counted as renewable but which is also very low-carbon."
Apr 23rd 2021
EXTRACT: "It is no accident that there has been an economic divergence in Central and Eastern Europe. Those countries that have joined the European Union have improved their economic governance, and GDP has begun to converge with Western Europe. Between 2014 and 2019, Hungary, Poland, and Romania grew at an annual average rate of 3.9%, 4.1%, and 4.7%, respectively. Meanwhile, Belarus and Ukraine experienced minimal growth during this period, and Russia’s economy expanded at an average annual rate of just 0.7%. Though Russia had a higher per capita GDP (in terms of purchasing power parity) than Croatia, Poland, Romania, and Turkey as recently as 2009, all of these countries have since overtaken it. Russians today are shocked to learn that they are worse off than Romanians and Turks. Among EU member states, only Bulgaria is still poorer than Russia. With its close proximity to the EU single market, Russia could have had higher growth if it had pursued sound economic policies. Instead,..... "
Apr 22nd 2021
EXTRACT: "As far as anyone can tell, the US military is not on the verge of an internal breakdown, let alone primed to stage a coup d’état. But few predicted anything like the US Capitol riot before protesters equipped with body armor, stun guns, and zip-ties breached the building. Before the US is blindsided again, its leaders must act resolutely to root out extremism in the military."
Apr 17th 2021
EXTRACT: "The new report on 2020 by the International Renewable Energy Agency reveals that the world’s renewable energy generation capacity increased by an astonishing 10.3% in 2020 despite the global economic slowdown during the coronavirus pandemic." .... "In 2020, the global net increase in renewables was 261 gigawatts (GW). That is the nameplate capacity of some 300 nuclear power plants! There are actually only 440 nuclear power plants in the whole world, with a generation capacity of 390 gigwatts. So let’s just underline this point. The world put in 2/3s as much renewable energy in one year as is produced by all the existing nuclear plants!"
Apr 16th 2021
EXTRACT: "When we examined the development of nations worldwide since 1820, we found that among rich Western countries like the United States, the Netherlands and France, improvements in income, education, safety and health tracked or even outpaced rising gross domestic product for over a century. But in the 1950s, even as economic growth accelerated after World War II, well-being in these countries lagged.
Apr 11th 2021
EXTRACT: "Some presidents indulge in the “Mount Rushmore syndrome” making an obvious effort to achieve greatness. Normally soft-spoken and apparently modest Biden is making his own bid for immortality."