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POLITICAL AND ECONOMIC CHALLENGES ACROSS THE ATLANTIC

Posted on 16.12.2011 by Greg Mastel

In 2011, both the United States and the European Union struggled to recover from a severe recession and avoid clipping into a dreaded “double dip” recession.  On both sides of the Atlantic, this economic stress also created political crises that continue to test governing institutions. 

Europe’s struggle to deal with the needs of ailing southern European economies and hold the Euro together continue and seem likely to redefine the economics of the European Union and the role of Germany in it.

In the United States, economic growth continues at a feeble pace, but unemployment and the federal budget deficit remain high.   The economy often has a defining role in election results, but it can be said that the same recession led to major political shifts – in opposite directions – in 2008 and 2010.  In 2008, President Obama won a landslide election with strong Democratic majorities in the House and Senate which he used to push forward major healthcare reform legislation, financial reform legislation, and a major economic stimulus package.  In 2010, the economic recovery was still weak and anxiety over government spending levels led to the Republicans re-taking the House and narrowing the Democratic margin in the Senate.

The Republican controlled House nearly forced a showdown over the summer on the debt limit – the legislative authority to borrow funds to pay for government operations – that threatened to shut down the government and did impact the credit rating of the US government.  The primary solution to that showdown was an agreement to establish a Supercommittee composed of senior Members of Congress to work out a package of measures to reduce the federal deficit by at least $1.2 trillion over the next decade.  Unfortunately, that effort deadlocked on partisan lines in late November, which creates the possibility of across-the-board spending cuts in 2013 that could sharply impact many areas of government operations.

The Supercommittee deadlock came down to a deep political division on two issues.  The most obvious was that of new taxes.  With considerable success, Republicans have made holding the line against tax increases a central tenet of their political message since the 80s.  President Obama and Democrats in Congress argued that new taxes were needed if serious cuts in social programs, like Medicare, were to be contemplated.  Some efforts were made to bridge the gap, but they failed.

Another closely related dispute comes down to whether economic stimulus through government spending and tax cuts is still needed to boost the economy or whether fiscal discipline should be the top priority.  Obama and some Democrats seemed to accept the goal of fiscal discipline, but wanted to continue or even expand programs to stimulate new employment much of which would be paid for through new taxes.  Republicans – though individually interested in particular stimulus programs – as a group felt that fiscal discipline was more important and that efforts to stimulate the economy were either misspent or perhaps simply unwise given the federal deficit.

Rather than resolving those issues, the collapse of the Supercommittee effort seems likely to make those same disputes central to the 2012 campaign -- which will start in earnest in January.  Even the remainder of 2011 has been characterized by brinksmanship and near shutdown of many government agencies.  In the end – perhaps moved by the holiday spirit – the Congress and the President were able to patch together a rough compromise and at least kick many issues over into 2012.  Unfortunately, the overall deep deadlock remains very much in place and real bipartisan leadership has not been demonstrated by any party in Washington.

The outcome of the election will doubtlessly impact the players in the upcoming debate and the strengths of their positions, but a complete electoral victory by either side is unlikely.  To have the power to dictate agenda, one political party would need to win the White House, control the House of Representatives, and control 60 seats in the Senate in order to overcome filibusters which could otherwise kill any initiative.  For a brief time in 2008 and 2009, Democrats held this level of control, but even then they were unable to accomplish all legislative goals and they lost that control decisively in 2010. 

It is impossible to predict the precise results of an election so far from election day.   But -- beyond saying that this may be the third straight US election where the recession of 2008 and its aftermath are a defining issue -- it seems very unlikely that either party would be able to gain complete control.  It is particularly difficult to see either side gaining a 60 vote majority in the Senate.

This means that a high level of gridlock is likely to continue in 2013 and rancorous disputes are certain to continue.  The election results can certainly tilt the results on specific issues and may change the political context of future debates on the debt limit, taxes, and budget issues, but a radical swing – even one as large as 2008 -- is unlikely.  

This political situation combined with ongoing economic problems means that clients will be facing a US government that is likely less willing and perhaps able to launch major new government initiatives, particularly if they involve new spending.  It also means that there is a very real possibility of continuing deadlock and crises on budgetary and taxation issues, which could lead to uncertainty in equity and bond markets.   Left to its own devices, there is reason to hope that the economy can continue its modest recovery, but political gridlock is likely to continue to impact US economic prospects in many areas.  Client expectations for US government action should be modest and uncertainty will continue to hang over future US tax and budget policy decisions.