Economic consequences of the U.S. elections

Looking at prediction markets for who will be the next U.S. president could deceive anyone into believing that tomorrow’s elections will be an easy win for the incumbent Barack Obama.



In fact, it is anything but. If you look at the market for actual vote shares instead, you’ll see that Democrats and Republicans are deadlocked at 50 percent. There are valid reasons - such as low liquidity - not to take prediction markets too seriously, but a new survey by the New York Times and CBS News found that 48 percent of likely voters (in one of the mature democracies with the lowest voter turnout) now support Obama and 47 percent favor his opponent Mitt Romney.



It may therefore be useful to summarize the market and economic impact of a Republican win. But before going on, it is important to emphasize that neither party is likely to have effective control of the Congress, with Republicans strongly favored to capture the House of Representatives and Democrats likely to win the Senate. Therefore, the new president will be constrained, and not much will get done without some compromise.

But a Republican presidency would still bring significant changes to economic policymaking. For one thing, Romney has clearly said that he would like to replace Ben Bernanke when the Federal Reserve chairman’s term is up in January 2014. All the candidates mentioned in gossip circles would be more hawkish than Bernanke, which would increase the chances of an earlier exit from the Fed’s monetary easing.

The direction of regulatory policy would also be likely to change. I would expect a Romney administration to be significantly more industry- and less environment-friendly than the current government. Romney has also said he would like to repeal much of the Dodd–Frank financial overhaul law.

As for markets, certain sectors are very sensitive to the election results. For example, coal producers are likely to be subject to lighter regulation under Romney. Or hospitals could fare worse if Obamacare is scrapped, as Romney has hinted he would do. Nevertheless, I would not be surprised if U.S. equities, especially banks, rose on a Romney win.

On the other hand, the threat of a change in monetary policy is keeping gold bugs on edge. Remember the sharp selloffs in the precious metal earlier this year when expectations of quantitative easing were deferred. So I’d expect gold to plunge if Romney triumphs.



But the fate of markets and the U.S. economy after the first few post-election days will depend on how the “fiscal cliff,” the automatic tax hikes and spending cuts that are scheduled to come into effect at the end of the year and will push the economy into recession, will be handled.

I am not that worried. As a firm believer in the power of markets to intimidate, I expect that a Republican House and Democratic Senate would delay key elements of the cliff, but only after some bickering and the resulting turmoil in markets that would bring legislators down to earth.