November 7, 2012
Post-Election Q&A with David Joy and Russell Price
Following Tuesday night’s election, Ameriprise Financial Chief Market Strategist, David Joy and Senior Economist, Russell Price responded to questions about what the re-election of President Obama and a split Congress mean for markets and the economy.
Q. Do you think the results of this election will have an impact (short-term or long-term) on the markets and economy? Please explain.
David Joy: I suspect a status quo outcome will be viewed as a disappointment, and markets may sell off somewhat in the short run. It will be viewed as an outcome which offers the prospect for continued partisan bickering on a budget deal, and which increases the likelihood of brinksmanship on the fiscal cliff. If so, the economy will be on hold until the fiscal cliff is addressed. Longer term, the economy will limp along until whatever budget deficit deal we're going to get, if any, is done. If no deal is made, the economy will struggle.
Russell Price: The most important near-term question is still the fiscal cliff. The lame-duck session of Congress must agree to a temporary extension for most fiscal cliff related issues; but with all the rhetoric of the campaign now over I think we’ll see a deal come into focus rather quickly.
Hopefully both sides have learned from this election that there is nothing to be gained from uncompromising positions. We need a long-term, comprehensive solution to our budget problems that is balanced and rational. The only way we’re going to get a plan like that is through compromise.
Q. Will a deal be reached by lawmakers in time to avoid the fiscal cliff? Will going over the cliff push the U.S. economy into a recession?
David Joy: The fiscal cliff will likely be avoided. It is hard to believe that even a government as polarized as this one would let the economy slide into recession if it was at all possible to avoid it. What will be interesting to watch will be what horse trading takes place to get a deal done. And the further into the lame-duck session these deliberations go, the more harmful it will be to markets and the economy.
Russell Price: I don’t think the election results really change the odds of a temporary extension for most fiscal cliff-related issues. With the elections now over, I think we’ll see a deal made rather quickly. It’s just too important and the consequences too great.
Going over the fiscal cliff would almost assuredly put the U.S. economy back into recession. It would also damage Europe’s ability to pull out of recession, jeopardize China’s likelihood of achieving a soft landing, and it would more than likely be worse than many people expect. Fortunately, it is also completely avoidable.
Q. Much has been made of the negative effects of political uncertainty. What sort of lift, if any, will having the election behind us give to investors and the economy?
David Joy: By itself, the election will not ensure that a deal on the deficit that includes entitlement and tax code reform will get done. Investors and companies need to know the rules of the game, whether those rules are to their liking or not. A deal is more important than the fact that the election is over.
Russell Price: Any relief is likely to be short-lived. The elections were just the first step. Now the real work begins. Businesses have cut back drastically on their investment spending over the last few months. Have they done this due to uncertainty related to the elections? No. It is almost entirely due to uncertainty around how Washington will deal with the fiscal cliff. A compromise deal on the fiscal cliff could be a strong economic stimulus and I do believe we’ll get one next year.
Q. How will the U.S. election results impact other economies throughout the world?
David Joy: The biggest issue for foreign economies is the fiscal cliff. We saw this concern articulated at the recent G20 meeting. Even though the U.S. is barely growing at a 2 percent pace, it is doing better than Europe or Japan. If we slide into recession in the first half of next year, the global economy will suffer a major blow.
Russell Price: How our elected officials deal with the fiscal cliff will have significant ramifications for the global economy. If we go back into recession, we will likely pull the global economy with us. And let’s face it: Washington has not exactly been a bastion of rationality and cooperation over the last few years.
I don’t think world leaders will breathe a sigh of relief until the fiscal cliff issue is resolved. The election results may have produced a lot of familiar faces, but from an outsider’s perspective, it’s also the same group of people that gave us the debt ceiling fiasco last year.
Q. Are there policies that the president and Congress can come together on to promote stability and economic growth?
David Joy: Absolutely. The U.S. must immediately enact reforms that assure it will not end up like peripheral Europe. First, postpone the fiscal cliff for one year. Second, use that time to agree to a deal that reforms entitlements without the demagoguery, closes the budget deficit with spending cuts and tax increases at a ratio of 3 to 1, and simplifies the tax code in the process and keeps taxation of dividends and capital gains at current levels to encourage investment. The trajectory of public debt must be reversed. This will require real leadership by the White House, to reach across party lines. The politics of divisiveness and class warfare are counterproductive. The climate in Washington needs to change.
Russell Price: In the sense of traditional fiscal stimulus policy, there is nothing more the federal government can do for the economy. There’s just no room in the budget.
However, a comprehensive, well-balanced plan that gets the federal budget on a sustainable long-term path could be a very strong economic stimulus in and of itself. The longer a deal takes, the longer the economy suffers. It’s just that simple.
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