The Post-Election Economic Blues
U.S. President Barack Obama won an extraordinary victory last week. Republicans have largely dominated the presidency over the last six decades. The Republicans have won most of the elections since World War II and they have won them by larger margins. In fact, only two Democrats have received a majority of the popular vote in this period: Lyndon Johnson in his landslide victory in 1964 and Barack Obama, twice.
While the Obama victory was certainly no landslide, he won a clear majority of the popular vote and a decisive victory in the electoral college, which determines the actual winner of the election. In principle this should make him well-situated to advance his agenda in his second term. However, it is unlikely that the second term will escape the sort of partisan gridlock that dominated the first term.
The most obvious reason for the continuation of gridlock is that the Republicans managed to retain their control of the House of Representatives, winning at least 234 seats in the 435-seat House. While they lost between two and seven seats (some races are still not decided), they will still have a clear majority in the chamber.
It is worth noting that although the Republicans will control the House it is not the result of getting a majority of the vote. While all the votes are not yet counted, Democratic candidates in total got at least 500,000 more votes for the House than Republican candidates. Republicans have been able to maintain their majority because district boundaries have been drawn in a way that hugely favor their candidates.
However this fact is not likely to make much difference in the political battles of Obama’s second term. The most immediate battle will be around the budget, and John Boehner, the Republican’s leader in the House, has indicated that he will push the same agenda he had prior to the election. This means first and foremost that he will oppose any increase in tax rates.
This opposition is likely to prevent any major deals on the budget. However, unlike in prior years, Obama may have some more room to maneuver. If there is no action from Congress, tax rates will rise to their Clinton-era levels, as the tax cuts passed by President George W. Bush will expire at the end of the year.
That raises the possibility that Obama will simply take advantage of this deadline and allow the higher tax rates to go into effect. In January, he can then propose a measure that will restore the lower tax rates for middle-income taxpayers while leaving higher tax rates in effect for the wealthiest 2 percent of households, which is exactly the position that he pushed during the election. It would be difficult for the Republicans to block a measure that would give a tax cut to 98 percent of the people.
While this is a plausible budget path around the partisan deadlock, there is little prospect for measures that will provide a substantial boost to economic growth. The basic story is simple, the only way to provide a substantial boost to growth would be with another round of stimulus from the government. That seems virtually impossible given the current political situation.
Republicans were not the only ones who railed against the large deficits that came in the wake of the economic collapse of 2008. Democrats, including Obama, have made reducing the budget deficit a top priority. They have distinguished themselves from Republicans on the ways in which they would look to reduce the deficit, favoring more cuts to the military and some tax increases, not on the need for reducing the deficit.
In this context, the government sector will almost certainly be a drag on the growth of the economy in the next four years. We will see less spending and higher taxes.
As a result, the economy will only slowly make up the ground loss due to the downturn. The number of jobs in the economy is roughly 9 million below the trend level. The recent pace of job growth has been approximately 170,000 a month. The economy needs to generate 100,000 jobs a month just to keep pace with the growth of the labor force.
This means that it would take almost 130 months, more than 10 years, for the economy to generate enough jobs to make up its 9 million shortfall at its recent growth rate. That is not a very good picture.
It is difficult to envision a scenario that looks much better. The housing market is recovering and that will provide a modest boost to growth, but it is not likely we will return to the construction rates of the boom years. Trade may be a small positive in the years ahead, but with the economies of most U.S. trading partners also weak, it is unlikely that trade will provide much of a boost in the near future.
In short, the U.S. economy is likely to remain weak and operating well below its potential for most or all of Obama’s second term. It is not an encouraging picture.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.
This article originally appeared on Caixon.