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Mid-term madness
By Linda Westerlund, intern at Danish-American Business Forum
In 2008 Obama said “yes we can”, and did. But recent developments suggest that the political balance of power may tip on Tuesday, November 2nd. There has been much speculation about what might happen if the Republicans take majority in one, or both, houses of Congress. Either way, both sides of the political spectrum are eagerly anticipating the outcome, and the world is watching expectantly to find out how the US mid-term elections will affect the global economic future. |
Status Quo:
The US Federal Government is made up of three separate branches: The Legislative Branch consisting of the House of Representatives and the Senate, the Executive Branch consisting of the President and finally the Judicial Branch which is composed of the Supreme Court and Federal Courts (See Figure 1).
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The mid-term elections are all about the Legislative Branch, where Senators serve six year terms and Congressmen serve two year terms. Up for grabs are all 435 seats in the House (of which Democrats currently hold 255 seats and Republicans hold 178). Republicans need to gain 39 seats in order to take control of the House.
The Senate is currently composed of 57 Democrats, 41 Republicans, and two independents that caucus with the Democrats. 18 of the 41 Republican seats are up for election this year as well as 19 of 59 Democratic seats. This means that the Republicans must win 10 out of 19 Democratic seats without losing any of their own in order to win control of the Senate.
These contests could shift the balance of power between the Executive Branch and the Legislative Branch considerably. But why should Danes care about a political election going on 4000 miles away? And how does it affect Denmark? There are a few interesting areas in which a political shift might have an indirect effect on the Danish businesses climate.
Reason 1: Trade policy
In the midst of high unemployment, slow U.S. growth and a rising U.S. trade deficit, trade policy has emerged as an important campaign issue. Republicans have criticized the trade policy of the Obama administration for failing to stimulate U.S. job growth and business expansion. They argue that Obama has failed to advance major trade deals since his election, and emphasize that trade deals create U.S. jobs by benefitting U.S. multinational corporations. Republicans support tax advantages for U.S. multinationals, which in their opinion encourages trade and produces job growth.
At the other end of the political spectrum Democrats and many labour unions oppose these pending deals. In Obama’s trade policy agenda he pledges to build on existing trade agreements to strengthen the global trading systems and uphold American values and commitments around the world. He’s set a goal of doubling U.S. exports in the next five years to support another two million American jobs.
Both parties are hoping to rally their base and independent voters around these issues to help gain congressional seats on November 2.
Reason 2: Economic policy
Another heavily debated issue this year has been the static US economy. Despite Obama’s stimulus efforts, his administration has been heavily criticised for the persistently slow growth. Both political parties have agreed that the way to a healthier US economy is through job creation. The major distinction is in their strategy. The Democrats strategy includes a deepening of tax cuts for small businesses, incentives to hire new workers and a fresh round of infrastructure spending. Also included was extended unemployment insurance, emergency aid to cash-starved states and cities, aid to senior citizens, and health-care assistance for the jobless.
According to simple Keynesian theory, the rationale for increased government spending during a recession is straightforward. If governments employ unexploited sources of labour and capital when they spend more, it provides an immediate boost to employment and output. Spending done by these newly employed people in turn multiplies the effects of the government spending further, and so does spending by the recipients of this second round of spending. The total impact is the sum of all these separate boosts, and its share to the initial level of government spending is called ‘the spending multiplier’.
Republicans also seek to boost the economy, but through an entirely different strategy. In September, Republicans in the House of Representatives released “Pledge to America”, a 21 page document proposing strategies on how to create jobs, cut taxes and shrink government spending hoping it will resonate with American’s distress about near double-digit unemployment figures and ballooning budget deficits.
Unlike the Democrats, Republicans seek to create more- and protect existing jobs, through a tax deduction for small business equal to 20 percent of their income. In addition they promise a spending cut including retraction and replacement of the current health care reform and a roll back of non-discretionary spending to 2008 levels before The Troubled Assts Relief Programme (TARP). Lastly the plan includes the establishment of strict budget caps to limit federal spending going forward and a cancelation of all future TARP payments as well as a reformation of Fannie Mae and Freddie Mac.
The strategy that wins a majority on November 2nd will have a big influence on future US economic policy.
Reason 3: The stock market
Perhaps the most important reason for Danish companies to pay close attention to the result of the mid-term elections is the stock market.
According to TIME.COM there is a longstanding belief on Wall Street that political gridlock is good for stocks. The rising possibility that Republicans could win back majoritiesin the House of Representatives and possibly the Senate this November has whipped a number of market strategists into frenzy. So what do stocks do just before and just after mid-term elections and in the third year of the presidential cycle? They usually go up, and by quite a lot. According to Deutsche Bank strategists, the stock market has on average risen 13% in the six months after mid-term elections, and 17% in the next twelve months. Conclusively, the results of mid-terms on stocks are extraordinary. With that in mind, many investors are gleefully awaiting this year's mid-term elections.
If there is a shift in the balance of power between the executive branch and the legislative branch, it may very well create political gridlock. And gridlock, market experts say, is why mid-term elections are good for stocks. Theory holds that the less power a president has, the less likely he is to push an activist agenda, unshackling businesses from the burden of regulatory uncertainty. Put in a simpler way: markets love gridlock.
Conclusion:
Even though this year’s mid-term elections will not influence Denmark directly, there is still reason to keep a finger on the political pulse of the United States.
Job creation, trade and economic policy are on both parties’ agendas, but each approach it with entirely different methods. Whichever party lands on top after November 2nd, the rest of the world will inevitably be affected. Danish-American Business Forum considers up to date info on consequences of the elections of crucial importance to our members. Therefore we have arranged a breakfast meeting on November 5th where experts will review the political results and analyze the consequences they will have on the global economy. Do not miss this opportunity to gain insight into the 2011 international economy.
For more information click here.
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