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It's Time for Washington to Think Strategically

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GOP and Dems are in it together

The great British founding father of geopolitics Halford Mackinder famously said: "Democracy refuses to think strategically unless and until compelled to do so for purposes of defense." Mackinder stated that a politician often thinks in principles, ideals, and morality, instead of reckoning, as he should, with the realities of geography, economics, space and time.

Let's hope Democrats and Republicans will deal responsibly with political-economic reality and the dangers of the coming fiscal cliff and start thinking strategically. If MacKinder was right, they will, because American prosperity and power can only be retained if the US gets its fiscal and economic house in order. Trillion dollar deficits for years on end, a dangerously high debt to GDP ratio, a crumbling infrastructure etc... Washington needs to get down to business immediately, because the realities of economics, markets, and time demand it.

Have the elections increased the likelihood of a deal between the GOP and Democrats to drive down deficits and debt without hurting the economic recovery? Will the new balance of power enable breaking the gridlock on the Hill?

Nothing changed?

The new balance of power is remarkably similar to that of a week ago. Obama has another four years, the House will remain comfortably in Republican hands and the Democrats keep a hold on the Senate without having a supermajority to overcome a GOP filibuster. And the leaders of both the Senate and the House will stay on their posts.

From this perspective, you could say that partisanship will continue and that gridlock is virtually guaranteed. But a couple of things are important to notice. First of all, Obama doesn't have to worry about re-election any more. He can go bold and try to make America better instead of trying to get re-elected. That could make him more prepared to reach across the aisle.
Another factor increasing chances of bipartisanship is the disappointing result for the Tea Party wing of the GOP. For example Tea Party candidates had to endure losses in Nevada, Indiana, Delaware, and Missouri.

Working with or against each other?

Unfortunately there are also a couple of factors that frustrate reaching compromises. The Senate Democratics will now have an emboldened liberal wing and they have lost moderates in their caucus through retirements.

Moreover, the loss for the GOP in the Senate is a big disappointment for Senate minority leader Mitch McConnell. He will have to campaign for a tough re-election in 2014, as will a number of prominent more or less pragmatic GOP Senators. If those politicians feel the need to cater to the wishes of the right wing of the GOP, finding agreement with the Democrats will be very difficult.

The above mentioned arguments in favor of more bipartisanship will probably outweigh the counterarguments. Obama will want to go into the history books as the president that got America out of the biggest recession since the Great Depression and therefore he is more likely to compromise. Plus the Tea Party has been weakened.

And to add to that, if Romney was elected, he would have lost a lot of time having to push nominations through Congress. Obama mostly has that out of the way and can get down to business right away.

Are investors wrong about Obama?

With the re-election of Obama the US, the world, and the financial markets have gotten more certainty than with a Romney victory. Financial Times columnist Gideon Rachman already warned about the potential dangers of the Republican party base pulling Romney back to the right wing after a victory. With a Romney presidency, there would have been much more uncertainty about healthcare and about numbers that don't add up (his promises to raise defense spending, cut taxes, and balance the budget weren't doable). Furthermore, Romney as president could have emboldened Israel and resulted in an attack on Iran. Especially when he would have surrounded himself by neocons like John Bolton. And going back to the domestic side of things, Romney would have probably put the brakes on expansionary fiscal and monetary policy. I am not sure if the US economy would already have been strong enough to withstand a tightening policy.

Investors were clearly thinking along traditional lines last week and wanted Romney, but the Obama victory doesn't have to be such a bad result for them. Chances of reaching a deal to avoid the fiscal cliff have increased a little bit with the outcome of these elections. And the outlook for getting to a more comprehensive agreement on getting back on a healthy fiscal track have improved somewhat with a second-term president and less power for the Tea Party.