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Obama cleaned up a mess, but economy still needs work

By: David J. Lynch and Mike Dorning

Posted: 11/8/2012 1:00 AM | Comments: 0

WASHINGTON -- Unemployment is falling. The housing market is rebounding. Consumers are paying off their debts. And the big banks are healthy.

The U.S. economy that earned U.S. President Barack Obama a second term looks nothing like the mess he inherited four years ago. Instead of shrinking and shedding jobs, the country is growing at an annual rate of two per cent and businesses are handing out new paycheques at a monthly average of 157,000 so far this year.

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That doesn't mean the world's largest economy is thriving. The United States has been growing below its historical trend since March, according to the three-month moving average of the Chicago Federal Reserve Bank's National Activity Index, a blend of 85 indicators measuring employment, production, housing and consumption.

Danger looms in the form of $607-billion automatic spending cuts and tax increases known as the fiscal cliff, scheduled to take effect at the beginning of 2013. A simmering sovereign debt crisis that has sapped Europe's commercial strength poses another risk. Few economists, in any event, expect a return to the robust growth of the late 1990s, when median household income rose for six consecutive years.

"The economy is OK right now, but there are worries about potential headwinds next year," said economist Chris Rupkey of the Bank of Tokyo-Mitsubishi in New York.

Obama's election victory Tuesday night erases a question mark that has shadowed the economy all year while he and Republican Mitt Romney, two candidates with sharply divergent views of government's appropriate role in the economy, duelled for the presidency.

While the specifics of tax, spending and regulatory policies remain to be written, investors now at least know what direction will be taken by the White House. Obama's victory means renewed political pressure to raise taxes on high-income individuals and on investment income.

Though Republicans in Congress have pledged to oppose tax increases, the president will claim a fresh mandate to eliminate the George W. Bush administration's tax cuts for the wealthy and raise taxes on capital gains income. Obama also is likely to fulfil campaign promises to protect spending on infrastructure, education and clean-energy manufacturing.

Even with Obama's vision being endorsed by voters, the country's deep partisan divide will be an obstacle to politically painful compromises such as tax increases or reductions in entitlement benefits.

Obama and the Republican speaker of the House, John Boehner of Ohio, came close to a deal on debt and deficit reduction during talks a year ago, providing a potential framework for an agreement that would provide more certainty on long-term U.S. finances. The president's re-election also leaves backers of the new health-care and financial services laws in charge of finalizing key regulations.

A commitment Obama has made to corporate tax reform opens the possibility of a lower tax rate for businesses at the cost of losing lucrative tax deductions. Most economists argue that trade-off would improve long-term economic growth.

There are many details that remain to be hammered out in negotiations between the White House and congressional leaders. "There are trillions of dollars of adjustment in taxes and spending that are coming, and it's not clear who's going to bear them," said economist Jason Thomas, director of research for the Carlyle Group, a private equity firm in Washington.

As policy-makers begin grappling with the nation's fiscal challenges, there are reasons for both optimism and concern about the economy. New oil and gas supplies are being tapped in states such as North Dakota and Pennsylvania, making the U.S. more attractive for a variety of new industrial investments.

Yet, more than three years after the recession's end, the economy's total productive capacity remains below its April 2009 peak and no greater than in April 2007, according to the Federal Reserve.

-- Bloomberg News

Republished from the Winnipeg Free Press print edition November 8, 2012 A4

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