Can Obama Save the US Economy?

29/11/2012 09:36 GMT | Updated 26/01/2013 10:12 GMT

Barack Obama. The first black president of the United States, re-elected. The victory saw the re-emergence of an envigorated Obama, inspired once by the more support of (most of) his people and the prospect of guiding the US through a challenging and ever-changing period. He faces an unenviable challenge: a fiscal cliff and a big one, to say the least.

The problem with addressing such issues was the gridlock at Congress with Republicans and Democracts failing to agree on a deal on deficit reduction after a stand-off over the US debt ceiling in mid 2011. At this moment in time, there is optimism between Obama and congress leaders; Republicans, who were previously strongly opposed to new tax rises, would be willing to compromise as long as the tax code was reformed and accompanied by changes to benefit changes according to Mr Boehner, the Republican speaker of the House of Representatives. The question is: will the two parties continue to co-operate or will congress once again descend into effectively a state of gridlock?

Some Senate Democracts have begun to contemplate the idea that going over the cliff would not be such a bad idea because the tax increases would kick in and then could be cut for the middle class. Republicans, on the other hand, don't want this to happen as the more perilous the prospect of the cliff-face, the more leverage for them. On the outset, this appears to be a another highly frustrating case where politics impedes the progress of vital economic measures. One hopes that such interests are put to bay, at a time of such economic volatility and in increasing cases, desperation.

How does this affect you and me?

The state of the US economy, the leader of the free market world, will have a great impact on many economies around the world, especially when it comes to confidence which is proving to be an increasingly sought-after and scare resource in the global economy. The US economy simply doesn't have enough momentum to absorb the shock of going over the fiscal cliff without going into recession. Moreover, the impact of the proposed cuts is expected to be lethal; JP Morgan economist Michael Feroli has estimated that more than $550bn could be sucked out of the economy. The overarching concern here is that the UK's recovery could be put in danger by the weakening of the US economy. We're not exactly having a party (in economic terms) over here in the UK with the economy just having recovered from a double-dip recession and expected growth over the coming months and years expected to be stunted, to say the least. If the US economy falls into a recession then it's likely that the UK economy will follow suit. It could also have a detrimental impact on the eurozone recovery. The Fitch rating's agency recently said that "The dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economy into recession. At the very least it would be likely to halve the rate of global growth in 2013."

I'm certainly not arguing that the US is entirely responsible for the fate of the global economy; Eurozone economies also have a prominent role to play. Decisive fiscal consolidation must occur in conjunction with growth measures to prevent the weakening of the economy and also to prevent aspects such as social unrest which have unfortunately come to characterise austerity measures. Moreover, the slowing growth of economies such as China and India mark an end to an unsustainable run of growth. These changes combined with the political uprisings and conflict in the middle east, ultimately signal the beginning of a new chapter in the global economy. The area of considerable debate currently, is whether politicians and economic measures can adapt to such changes and respond swiftly enough to prevent long-term damage to the productive potential of economies.

There you have it. A teetering world economy. An economic crises for which solutions remain unknown. The leader of the free market world potentially having a gridlocked political system. I think there's only one thing that can be said here: good luck Mr. Obama.