Thanks to aneconomy that is a bit healthier than it was a few
years ago, voters handed President Barack Obama the keys to the
White House for four more years.
As a re-elected incumbent who campaigned on a platform of "stay
the course," we have a pretty clear sense of what kind of policies
and programs to expect from the administration. Or at least that's
what many believe.
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The actual path plotted by the Obama administration likely will
be quite different: Simply put, the country's current challenges
are quite different than what we saw four years ago. In early 2009,
radical action was needed to forestall an economic collapse. In
that respect: Mission accomplished.
Though the economy is not yet truly healthy, it could continue
its path of modest 2%GDP growth -- assuming the so-called "fiscal
cliff" doesn't come to pass. Such an economic backdrop will force
the Obama administration to keep one eye on the still-weak
employment picture while also figuring out ways to tackle the
outsized budgetdeficit that still plagues Washington.
To tackle the employment challenges, Obama will again seek to
provide some sort of stimulus, perhaps in the maintenance and
rebuilding of our national infrastructure. But a recalcitrant
Congress -- still in the hands of the opposition party -- may again
thwart those plans.
It's the latter issue, the nation's massive budgetary problems,
that you should expect to come into focus, and coming moves will
have a clear impact on your pocketbook.
Taxes: Going up by how much?
Simply letting the Bush-era tax cuts expire, which appears
increasingly likely, will raise taxes for many households. Although
the top earners -- those making more than $250,000 a year -- will
feel the deepest impact from a resumption of Clinton-era tax rates,
even those in the middle class will feel the pain. For example, the
2% payroll tax cut that was enacted in 2009 during a time of crisis
is likely to expire at year's end.
Yet if you make less than $250,000 a year, there is reason for
hope. The scuttlebutt in Washington suggests Obama will seek to let
all tax cuts expire so he can renegotiate the entire tax structure,
primarily shielding sub-$250,000taxpayers in the process.
An area of bipartisan agreement: Both parties would like to dole
out perks to small-business owners, especially with job-creating
incentives. So if you are a small-business owner, look for newly
proposed plans to hire veterans or replace outsourced jobs with
local hires.
More broadly, both parties agree that the current tax code is
too complex, with too many loopholes and too much room for tax
abuse. Will Obama seek a bold initiative to lower tax rates while
closing loopholes (taking a page from Gov. Mitt Romney's playbook)?
History says maybe. Both Ronald Reagan and Bill Clinton pivoted to
the center in their second terms and they scored many more
legislative victories as a result.
Spending: Going down by how much?
Of course, Obama can seek to boost government revenues only to a
moderate extent. He knows that the economy is simply too weak to
withstand massive across-the-board tax hikes. Yet the budget crisis
will still require bold fixes, and both Obama and leaders of the
Democratic party have signaled a willingness to sharply cut
government spending.
Why haven't they agreed to spending cuts already? Two reasons.
First, the economy has been so weak in this recovery that many in
the Democratic party have been pushing for deals that boost the
economy in the near-term while pursuing deficit-shrinking moves a
few years down the road. Obama has been caught between that
position and the GOP push to tackle the budget gap immediately.
Second, both parties concluded at some point in early 2012 that
a long-term budget deal might hand the other side a victory during
the fall elections, so inaction took the place of action.
Now, with elections again a few years off, both parties are more
likely to try to make a renewed push to come to a budget agreement.
Will the Democrats succeed in their attempts to provide the economy
with more juice now and deficit-shrinking moves later? Probably
not. You can debate the merits of near-term economic boosts, but
much of the U.S. public is so wary of the budget deficit that it's
hard to conceive of any expansion in government spending at this
point.
As a result, look for further reductions in government spending
in 2013 and beyond, though not likely as draconian as is envisioned
by the "fiscal cliff."
So what does a smaller governmentmean for your wallet?
- If you have family in the armed forces, be prepared for even
tougher times ahead. The Department of Defense will almost surely
go on a diet, even as it invests in new ships and other hardware.
That means fewer soldiers and smaller benefit packages for those
who remain in the military.
- If you are a school teacher, count on pay freezes and further
job cuts. In the first part of his first administration, Obama
sought to support states with funds that protect teachers' jobs.
At the time, the move was seen as a stopgap in hopes that a
firmer economy would restore state-level financesback up to
historical levels. Now, lower state tax receipts appear to be the
norm, and Washington is a lot less inclined to help out states at
this point. A similar trend may play out among our nation's
firefighters and police officers -- unless crime statistics spike
higher.
- A smaller government is also likely to impact anyone living
within commuting distance of Washington, D.C. The economy in that
region has held up better than most, thanks in part to the still
robust food chain of lobbyists and their spending. Fewer
government employees, and fewer lobbyist dollars, are bound to
create a drag on D.C.'s economy.
- Also, look for more user fees on the goods and services you
buy. The government won't formallycall these tax hikes, but a
reduction in federal contributions to state and local programs
means the money will have to come from somewhere -- namely you.
From highway tolls to DMV registrations to arts programs, get set
for local and state governments to boost their slice of the
taxing pie.
This scenario envisions an orderly reduction in the budget gap,
with the efforts increasing over the span of Obama's next four
years. Yet few things ever happen as orderly as is hoped.
And here's a greater concern that few are talking about right
now: A key component of our government spending is interest on our
national debt. Annual interest expense currently stands at $360
billion. But what happens if interest rates start to rise?
Well, government borrowing costs would quickly rise, consuming
an ever-greater portion of our government spending, squeezing out
funds for programs that have already been squeezed. (Roughly
speaking, every 1 percentage point rise in interest rates would
increase interest expenses by $100 billion). That's a doomsday
scenario that few are even comfortable thinking about right
now.
Action to Take -->
Obama's first term was characterized by an initial economic crisis
followed by an underwhelming economic recovery. Still, it could
have been worse, at least compared to how global events were set to
play out in late 2008.
But the next four years present their own challenges. For
example, we still may see a big shoe drop in Europe, where Greece,
Spain and others see their economies spiral out of control. That
would undoubtedly impact our economy in myriad ways. And what if we
get dragged into another military conflict? Where will the money
come from to pay for that?
Frankly, our economy needs to stay afloat and continue to expand
if these tough budgetary moves are to help lower the deficit. A
slip back intorecession would make all these moves akin to treading
water against a tide, and we'd still be in this same budgetary mess
four years from now.
This article originally appeared on InvestingAnswers.com:
What Obama's Win
Means For Your Wallet
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.