Ideas@TheCentre
Four more years of Obamanomics
Long before Mitt Romney formally conceded defeat, it was clear he was not going to be the next president of the United States. Even Fox News had conceded the election to Barack Obama by 4 pm AEST.
Obama’s victory is all the more remarkable because the US economy is in the worst shape at an election since 1936. Unemployment is high, growth is low, the budget deficit is enormous, and the public debt is crippling.
Although some of these indicators are improving, they are nowhere near what was promised when Obama introduced his US$800+ billion stimulus package in 2009 (approximately 60% of Australia’s GDP).
This unashamedly Keynesian response to the global financial crisis is indicative of Obama’s economic policy, which focuses on strong government intervention. Indeed, he believes government is an integral part of economic growth.
Regardless of the causes of the crisis, the length of the recession and failure of demand stimulus measures point to underlying structural weaknesses in the US economy, particularly government debt.
Research shows that a public debt to GDP ratio of over 70% may seriously impede economic growth (this effect is stronger at debt ratios exceeding 90%). Total US government debt exceeded 100% of GDP in 2011 and net debt (US government debt held by the public) is at 72% of GDP.
Budget deficits need to disappear for debt to lower, and Republicans and Democrats share responsibility for this problem. Both parties have run up serious deficits and neither party is willing to compromise on a long-term solution. The deficit this year is more than $1 trillion and will remain high notwithstanding the so-called ‘fiscal cliff', which I have discussed before.
Despite research, such as Alberto Alesina’s, showing that spending cuts may promote growth more than raising taxes for big government spending, Obama is likely to continue his big government approach, backed by new taxes (assuming he can get anything past a bitterly divided Congress).
For example, Obama regards his bailout of the US auto industry (US$30 billion) and his protectionist stance towards manufacturing as a policy success. Romney’s objection to this massive taxpayer funded bailout cost him in key states such as Ohio.
Unfortunately a clear lesson from this election is that regardless of the economic pitfalls, bailouts seem to be a political success story.
Simon Cowan is a Research Fellow at The Centre for Independent Studies.
