September 13, 2012
With the US presidential election race entering the two-month sprint to election day, I think it is useful to speculate on what a Romney administration would mean for the US tech market (in another blog post, I analyze how a second Obama Administration would affect the tech market — see "What An Obama Reelection Would Mean For the US Tech Market Outlook.")
To start, we should remember that US elections don’t have much of an effect on tech spending and purchases. Businesses and governments make tech buying decisions based on their own needs and funding resources, which elections affect only around the margins. I don’t expect this election to diverge from this historic pattern. Still, marginal tech decisions can mean the difference between a tech market that grows by 3% to 4% or one that grows at rates of 5% to 6%.
In terms of policies directly impacting the tech industry, there will likely be very small differences. CIO Magazine recently compared the Democratic and Republican platforms (see Kenneth Corbin, “Tech Policy 2012: Comparing the Democrat's and Republican's Platforms,” CIO Magazine, September 11, 2012. It found both platforms highlighted cybersecurity (with Democrats emphasizing a strengthened Federal role and Republicans stressing more private sector data sharing); both platforms called for Internet freedom (with Republicans emphasizing freedom from too much government regulation in the US and Democrats emphasizing freedom internationally from authoritarian governments); and both supported the current Internet governance structure and opposed efforts to give governance to a single entity like UN. The biggest divergence was Republicans’ criticism of the FCC’s net neutrality role, while Democrats discussed Internet privacy rights.
In other policy areas not discussed in the platforms, there have been more similarities than differences. Both parties have favored tax policies like accelerated depreciation to encourage tech investment; both parties have ambivalent attitudes toward H-1B visas to allow foreign tech workers to work in the US; and both emphasize the importance of the tech sector to America’s economic future. The fact that most tech CEOs are supporting Romney probably has more to do with the attractiveness to them of Republican tax policies compared with Democratic plans to increase taxes on the wealthy and to perceptions that Obama does not like business (as shown, for example in his attacks on Bain Capital’s role in outsourcing) than with any substantive policy differences between the parties regarding the tech sector.
That means that the biggest impact of a Romney election on the tech sector will come from what that event would mean in terms of tech demand – that is, how the economy would grow under a Romney Presidency, and how government spending on tech might change.
While details of the economic plans of a Romney administration are still unclear, and its prospects would depend on Republicans also gaining control of the Senate as well as the House, the broad outlines are clear:
· An end to the Affordable Care Act of 2010 and cutbacks in federal environmental, financial, labor, and other regulations.
· Renewal of the full Bush-era income tax cuts and potential additional tax rate cuts, offset in part by unspecified elimination of tax deductions and exemptions.
· Cuts in federal social spending, conversion of Medicaid to fixed block grants to states, and potential changes to Medicare, such as its replacement for those under 65 with vouchers that would be used to purchase private insurance.
· Increases in federal defense spending.
· Aversion to Federal Reserve monetary stimulus.
One positive would be that these policies would eliminate the uncertainty about the future of the Bush tax cuts, scheduled to expire at the end of 2012, which is currently holding back US economic growth. Similarly, the prospect of reduced regulation and a more pro-business attitude in the White House may encourage businesses to step up investment in plants and equipment, a potential boon for economic growth generally and for tech equipment and software specifically.
However, the likely cutbacks in Federal non-defense spending would put the brakes on economic growth, as would a Federal Reserve that shifted from monetary easing to monetary tightening in response to administration pressure. The degree of the slowdown would be would depend on the scale and timing of federal budget tightening. But with a vocal Tea Party Republican contingent likely to push for big cuts in the near term if they are to approve the raising of the federal debt ceiling in early 2013, there is a high risk that the cutbacks in federal non-defense spending would be large and front-loaded.
The question is whether the boost to business confidence and investment would be enough to offset the contractionary pressures of large reductions in federal non-defense spending and an end to monetary easing. Here, the evidence from both history and Europe is not encouraging. Government austerity programs weaken consumer spending; weaker demand in turn causes businesses to lay off workers and delay investment to bring their costs in line with reduced revenues; and resulting unemployment increases reduce consumer spending even further. This has been the case in Greece, Italy, Spain, the UK, and Ireland, as well as in past periods in the US, such as the 1937 recession. Moreover, business investment has already been strong through 2010 and 2011 when the Bush-era tax cuts were in place, even with Obama administration regulatory policies in theory being a deterrent. It is hard to see this part of the economy — which represents only about 10% of total GDP — increasing enough to offset the direct and indirect effects in federal spending cutbacks.
In short, I think a Romney administration is likely to preside over at least a few quarters of very weak economic growth or even renewed recession in 2013. That would certainly not be good for US tech spending in 2013, which suffers whenever the US economy declines.
In the longer run, a Romney administration’s policies could lead to a reduction in federal spending and federal deficits, setting the stage for a stronger economic recovery led entirely by the private sector. That assumes that they could make their sums work, that is, achieve a large enough reduction in non-defense spending (including Social Security and Medicare) and large enough gains in eliminating tax expenditures to offset the additional tax rate cuts and defense spending that their platform calls for. In such a scenario, a temporary slowdown in economic growth in 2013 would be a price worth paying. But the economic history from the 1950s to the 2000s shows that federal government spending has been an important contributor to US economic growth, from its investment in infrastructure in the form of US highways, airports, and ports; to support for research and development that has led to transformative new technologies; to its contributions to higher education and medical research; to its safety net programs that protect the poor and elderly from destitution; and to its counter-cyclical expansion of federal spending when private sector spending declines. Nor have higher tax rates than the US currently has been an inhibitor to strong growth. So, there is no guarantee that an economy with a significantly smaller federal government sector in terms of both taxes and spending would lead to better economic growth and stronger tech market expansion than what the US experienced in the 1990s with the large federal sector of the Clinton era.
Of course, it is unlikely that the full Republican agenda would be implemented, any more than the Obama administration was able to implement its full agenda from 2009 to 2012. Democratic opposition in Congress — especially in the Senate, where a determined minority can stall action — would restrain Republican plans, just as Republican opposition limited the Obama administration’s plans. The Federal Reserve may well persist with monetary easing, with the tacit support of a Romney administration, despite lip-service to the contrary. Romney in office may revert to the moderate Republican that he was in Massachusetts as governor, and Republicans may accept pragmatic government programs and policies proposed by a such a Republican president instead of rejecting those same policies when proposed by a Democrat (remember, that the healthcare principles of the Affordable Care Act were originally created by Republicans as an alternative to publicly provided health care).
The bottom line? I think the election of a Romney Administration would lead to a weaker economy in 2013 and softer tech buying with 2% to 3% growth, although not to a recession or a drop in tech purchases. Beyond 2013, I think the higher incentives for tech investment by business from lower federal taxes would be offset by the drag from slower economic growth and reduced government tech buying, causing the US tech market to grow by just 3% to 4%.