Assessing political risks ahead of US elections

The campaign economic advisors of Barack Obama and John McCain are virtually unknowns in global markets.

McCain seems to be going for supply side economics, which will be exceedingly difficult to apply during a recession. Gerry Parsky of private equity firm Aurora and a former Treasury official is senior campaign advisor. Kevin Hassett is a resident scholar and the director of economic policy studies at the American Enterprise Institute. Hassett is a former senior economist to the Board of Governors at the Federal Reserve Board, economics and finance professor at the Graduate School of Business at Columbia University.

"John McCain has a clear record of supporting tax cuts, cutting spending and promoting trade," Hassett asserts.

John Taylor is professor of economics at Stanford University and senior fellow at the Hoover Institution. Taylor is also a former Under Secretary for International Affairs for the Treasury in the George W. Bush Administration.

Obama, similarly to McCain, seems to have limited knowledge of economics. His protectionist views come at a time when the US economy desperately needs exports to boost the economy. To be sure export growth is currently playing a major part in keeping the economy going.   His main economic advisor is Professor Austan Goolsbee of Chicago University. Goolsbee, has written several papers on tax reform and the Internet economy. Others are Jeffrey Liebman, a pension and poverty expert at Harvard University and David Cutler, a Harvard health economist.

Brendan Brown, a Chicago University PHD and London based head of research at Mitsubishi UFJ Securities International, comments:

In December, 2006, the University of Chicago Graduate Business School held its annual business forecast luncheon. One of the faculty speakers shocked his audience by making the following predictions. First, the US budget deficit would explode. Second, prepare for a hedge fund shakeout, scandal and regulation. Third, the next 24 months would mark the start of China's banking crisis.

Professor Austan Goolsbee's predictions remain very much alive.

The professor, who is now economic adviser to Barack Obama, has criticised the supply-siders. They argue that increasing taxes on the “very well-off” would lead to a fall in their income growth and a reduction in the overall tax revenues of the Federal Government. Goolsbee argues that income has been rising disproportionately at the top of the scale , regardless the level of tax rates.

Regarding the energy crisis, Goolsbee has written that weaning the US off foreign oil through energy conservation is muddled thinking. Less energy use in the US would mean a lower global price for oil, but this would be to the detriment of high-cost production at home ( e.g. shale deposits in Utah and Wyoming, deep-water offshore pools in the Gulf of Mexico).

“If we are seriously to contemplate reducing our dependence on foreign oil, we must find a way to reduce the cost of producing alternative energy sources," contends Goolsbee.

The actual agenda will be very different to campaign promises

The key risks in economic policy related to Goolsbee are: How long would he remain the principal adviser to Obama and would he play a powerful role for any length of time in an Obama administration? Second, how might his views shift when he is confronted with new facts on the ground? There are plenty of sceptics outside the Obama campaign who would see Professor Goolsbee as an entertaining, respectable, and eloquent accompaniment for the gifted oratory of Obama, but so what? The real agenda could be quite different.

In any case, the shape of the post-election US economy and how it performs during the lifetime of the next Administration, will have very little to do with the competing blueprints written by the economic advisers for the two campaign teams.

The campaign blueprints could be an influence on the relative prices of different groups of investments (drug companies vs. the market as a whole, private equity vs. public equity, hedge funds vs. mutual funds etc etc). But that is likely to be where the market-relevance comes to a stop. On broader questions such as the future value of the equity market, US bonds, or the dollar, much bigger issues than the economic blueprints, will be decisive.

Future economic policy fuzzy

There is little clarity as to how the two alternative administrations would take decisions in the real post January 2009 world. For a start, there is much darkness surrounding what the policies would be in international relations. Doubtless they will be formed more by unfolding events and responses to these, than any draft now circulating.

Furthermore, in the critical areaof monetary and credit policy, the choice, in late 2009, of the next Federal Reserve chairperson and other members of the Fed Monetary Committee will be more important. Is the Federal Reserve to continue along the lines of the Greenspan/Fed’s ten principles (unofficial inflation targeting, ignoring asset and credit bubbles, highly discretionary rate-decisions and no rules) or is there to be a revamp? None of this will emerge in the campaign.

Historically, US election news during the campaign, has not been a big factor in market swings, although there were some exceptions notably the Hoover-Roosevelt battle during 1932. If a candidate develops a huge lead very soon, then the market will focus on potential future policies rather than the polls. Note, however, that McCain could win, but he could be stymied by a Democrat controlled Congress.

Perhaps the biggest market factor in the campaign will be how the US under the next president would engage in various potential crises, notably Iran, Iraq, and the Israel Palestinian conflict.

Copyright © Brendan Brown & All Rights Reserved.


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