America’s Constrained Choice

NEWPORT BEACH – The conventional wisdom about the November presidential election in the United States is only partly correct. Yes, economic issues will play a large role in determining the outcome. But the next step in the argument – that the winner of an increasingly ugly contest will have the luxury of pursuing significantly different policies from his opponent – is much more uncertain.

By the time the next presidential term starts in January 2013, and contrary to the current narratives advanced by the Obama and Romney campaigns, the incumbent will find himself with limited room for maneuver on economic policy. Indeed, the potential differences for America are elsewhere, and have yet to be adequately understood by voters. They center on the social policies that would accompany a broadly similar set of economic measures; and, here, the differences between the candidates are consequential.

Whoever wins will face an economy growing at a sluggish 2% or less next year, with a nagging risk of stalling completely. Unemployment will still be far too high, and almost half of it will be hard-to-solve, long-term joblessness – and even more if we count (as we should) the millions of Americans who have dropped out of the labor force.

The financial side of the economy will also be a source of concern. The fiscal deficit will continue to flirt with the 10%-of-GDP level, adding to worries about the country’s medium-term debt dynamics. The banking sector will still be “de-risking,” limiting the flow of credit to small and medium-size companies and undermining hiring and investment in plant and equipment. And the household sector will be only partly through its painful de-leveraging phase.