Obama has to stimulate the economy with government spending. Europe is a cautionary example, which could convince Republicans who, up to now, have blocked everything.
Nevertheless, the worst has been averted. Republicans had really clear goals for U.S. economic policy: They wanted to weaken bank regulation and reduce taxes on the wealthy even further. Instead, Republicans now have to live with the fact that they lost not only the presidential election, but were also defeated in a decisive senatorial race: Elizabeth Warren will now represent Massachusetts in Congress.
Warren is perhaps the best known critic of the U.S. banking system. She epitomizes the sometimes realizable American Dream: She was born the fourth child of a working class family in Oklahoma City— and is now a law professor at Harvard University. Her victory in Massachusetts can be regarded as a sign that Republicans have lost influence on economic policy.
This is progress, but will not solve U.S. economic policy problems, because Republicans still comprise a majority in the House of Representatives. In the past two years, this has led to a permanent deadlock, preventing U.S. President Barack Obama from pursuing almost any economic policy, although the number of unemployed remained alarmingly high for a long time.
If, in spite of this, the U.S. economy recovered slightly, it was exclusively due to the U.S. Federal Reserve. It pumped roughly $1.5 billion into the economy to push down interest rates. This strategy of quantitative easing has definitely worked, but was only a temporary fix. To put it technically: The monetary policy of a central bank cannot replace the fiscal policy of a government.
The Interest Paradox
This means that even low interest rates will not automatically lead to companies borrowing to invest in their production. They must also be able to sell their goods. In an economic downturn, customers are lacking. So the seemingly paradoxical situation may occur that companies do not borrow even if interest rates are at zero.
The U.S. has found itself in exactly this trap for months. Actually, Barack Obama would have had to pursue a fiscal policy in his first term and to have issued an economic stimulus package to generate demand. Yet Republicans torpedoed that option and forced a policy of cutbacks instead. Now the U.S. is headed for a “fiscal cliff.” If Republicans and Democrats do not arrive at a compromise, automatic tax increases and spending cuts equivalent to roughly 5.1 percent of the U.S. economic output could go into effect. This would lead directly into a renewed recession.
The Eurozone as a Cautionary Tale
Correspondingly alarmed are Democrats, who had apparently set their hopes primarily on using American national pride and the cautionary tale of the eurozone as a deterrent. Former Labor Secretary Robert Reich illustrated how to combine the two, on Wednesday in an interview with CNN. He warned against repeating the “austerity trap Europe finds itself in,” which would plunge the whole continent into “another recession.” Maybe this argument will actually catch on with Republicans. Because for many of them, the Europeans are “communists” whose policies can only be wrong anyway.
Yet there is a great probability that American national pride will play out on another topic: the energy supply. For Republicans, the necessity of freeing the U.S. of oil imports from “hostile nations” was a constant theme of election campaign. In his victory speech, Obama explicitly addressed this topic, promising that the U.S. would be “freeing ourselves from foreign oil.” This could be a chance to implement renewable energy nationwide. But it is feared that instead, drilling in national parks will increase. This is because oil is necessary so that every American can drive cheaply. Solar panels and wind farms will not help there.
Even if the nationalistic undertones on the topic of oil are surprising, the topic will remain and will determine the future of the U.S. However, oil is a finite resource. In spite of this, the U.S. economy and infrastructure are oriented towards this one energy source. As for a more realistic source of energy, Democrats are at a loss.