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Kimberly Amadeo

How an Obama Win Affects the Economy

By November 6, 2012

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After all the debates and speeches, Barack Obama has won the Presidential race. Obama's win boosts the economy for three key reasons:

First, no matter who won, the removal of a large level of uncertainty allows businesses to move forward with any expansion and hiring plans.

Second, an Obama win means a continuation of existing priorities. This boosts the economy because it removes another layer of uncertainty. If Romney had won, he promised to replace Federal Reserve Chairman Ben Bernanke, repeal Obamacare and get rid of Dodd-Frank. He also promised to lower taxes, increase defense spending and change mandatory spending programs such as Medicare and Medicaid. It's uncertain that he would have been able to make all of these changes, as they required a vote by Congress. He would also have neede a Republic majority in the Senate to push all these repeals through. This ongoing uncertainty would have further complicated business planning, acting as a headwind to economic growth.

Third, the positive impacts of many of Obama's programs have yet to be realized, while most of the negative impacts have already been priced into business planning. The investment in green technologies and natural gas is slowly removing our dependence on foreign oil. The newly-created Consumer Protection Agency is helping to end credit card fraud. Obamacare will help lower bankruptcy rates, since health care costs are the major causes of bankruptcies in this country.

Most important, defense spending will fall, freeing up Federal spending for job creation or debt reduction. In his first term, Obama spent more than any other President in history on defense -- $850 billion in FY 2012 alone. Now that bin Laden has been eliminated, the War in Iraq has ended, and the War in Afghanistan is winding down, this massive spending will (hopefully!) no longer be needed.

However, Obama's biggest challenge remains. That is to reduce the U.S. deficit and $16 trillion debt. However, this should not occur until the lingering effects of the recession are safely behind us. That means growth in the 3% range, and a reduction in unemployment to at least the 6% level. At that point, contractionary fiscal policy will be needed to slow growth and prevent another bubble. That would be the perfect time to raise taxes, cut spending and restore fiscal responsibility.

Unfortunately, deficit and debt reduction are a higher priority, thanks to imminent decisions that need to be made to avoid another debt ceiling crisis in the next few months and the fiscal cliff in January.

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Comments

November 13, 2012 at 11:37 am
(1) Cyborg1939 says:

Interesting speculations. But with the stock market sell off I wonder how many readers would agree with them.
Can you comment further on this reaction?

November 13, 2012 at 12:23 pm
(2) useconomy says:

The stock market sell-off is in anticipation of possible tax hikes occurring in 2013. The Obamacare tax hikes could raise taxes on capital gains and dividends for those making more than $250,000 a year. If policymakers don’t resolve the fiscal cliff, the expiration of the Bush tax cuts will raise the tax rate on those investments from 15% to 20%. Investors are taking their profits now while taxes are lower.

Kimberly

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