Barring some kind of black swan, Mitt Romney is going to be the GOP nominee.Once it’s official, several people here at Business Insider who write about politics will declare who they’re voting for, just so we can get it all out in the open.
In the meantime, I’ll explain why I think Mitt Romney is the candidate most likely to save and rescue the American economy.
Let’s back up though…
There’s probably no issue bigger than the deficit.
You see, the massive deficit blowout over the last few years has actually been a wonderful thing.
It’s been the massive leveraging up by the government that’s allowed household debt to fall nicely as a percentage of GDP, while simultaneously allowing the economy to begin growing again. Hedge funder Ray Dalio has called the simultaneous contraction of household debt and the recovery in the economy a “beautiful deleveraging.”
Let’s break it all down into one chart that may at first look a little busy, but is actually really straightforward.
The red line is household debt as a percentage of GDP. As you can see, it approached 100% near the peak of the bubble. It’s come down non-stop since then. The blue line is government debt to GDP. It was below 70% before the crisis, but is now basically at 100%. And the green line is GDP itself.
What’s happened is, thanks to the surge in the blue line, government debt, we’ve been able to see a comeback in GDP, while seeing a shrinking of household leverage.
But as you can see, the work isn’t over yet. Households remain highly leveraged on a historical basis, and the ongoing decline in housing prices continues to weaken household balance sheets.
This problem still shows up in the economy in all kinds of ways, from 8.3% unemployment to Core CPI, which continues to be disinflationary, and indicative of economic slack.
So the trend that started under Obama — yawning deficits, and improving household balance sheets — is one that needs to continue.
Unfortunately, there’s a good chance that if Obama wins re-election this trend of large deficits, and household deleveraging won’t continue so smoothly.
There are two reasons for this:
- According to reports, Obama is not averse to seeing the middle-class tax cuts expire on everyone, as a step towards shrinking the deficit. In fact, there’s just no evidence that Obama believes in deficit spending. Sure he favours stimulus, but what he’s consistently wanted to see is paid-for stimulus, which pumps money into the economy, while sucking it out through taxes, which undermines the goal of household deleveraging. Even in the debt ceiling negotiations, he did want to go for a “grand bargain” that would see trillions lopped off the deficit over the next decade.
- At the same time, the political atmosphere between Republicans and Democrats in Washington remains poisonous. Next year, a fiscal time bomb in the form of expiring tax cuts, a debt ceiling fight, and automatic spending cuts is due to detonate. If the political split in Washington stays as it is (Obama in The White House, Republicans largely in control of Congress), then it’s hard, if not impossible, to imagine the time bomb being defused in time.
All of which suggests that for the economy, the path of least resistance is for Mitt Romney to get elected, an outcome that might easily let the bomb get defused.
First of all, we know that Romney would be opposed to any across-the-board tax hikes. Now granted, technically the Bush tax cuts would expire before he assumes office, but you could surmise that he’d quickly work to make sure taxes stayed low (or went lower) the second he got into office.
Furthermore, you can be sure that the Republicans in Congress would quickly forget all about austerity and spending cuts. This is because austerity is purely the domain of opposition parties. Remember, Republicans were pro-deficit, and pro-entitlement expansion under Bush and Reagan. Deficit cutting only became part of the party’s ideology under Obama. It’s safe to surmise they’d quickly revert to form once there were no longer any political capital to be accumulated via undermining the President.
And though Romney himself his talked about favouring cutting, capping, and balancing the US budget, you don’t have to ever take Mitt Romney’s stated policy goals too seriously since he’s, well, Mitt Romney.
There’s a zero per cent chance that a first-term President, with few obvious convictions other than wanting to be President, does anything that would slow GDP (and that includes cut government spending), when his first goal from the day he takes the Oath Of Office would be to get re-elected in 2016.
So the bottom line is this….
The US still needs big fiscal deficits to keep allowing the private sector to deleverage.
If Obama wins re-election, you’ll see a President who’s open to across-the-board tax hikes sit across from the table from a Republican Congress that’s more eager than ever to cut spending.
If Romney wins, you’ll see a new President that’s eager to stimulate using every last tool at his disposal, sitting across from a Republican Congress that has long forgotten about austerity or deficit reduction.
The answer seems obvious.
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