September 13, 2012
In a separate blog post ("What A Romney Presidency Would Mean For the US Tech Market Outlook"), I analyze what I think would be the likely impact on the US tech market if Mitt Romney is elected President in November. In this post, I provide a similar analysis of the US tech market should Barack Obama be re-elected. As with my analysis of a Romney election, I start with the premise that elections only slightly move the needle on the general course and direction of tech market growth, at most shifting growth rates up or down one- to two-percentage points.
In that blog post, I pointed out that there are only minor differences between the Republican and Democratic platforms in terms of policies directly impacting the tech industry, and almost no differences in policy areas not addressed in the platforms, such as tech investment tax incentives. That means that the biggest impact of an Obama election on the tech sector will come from what that would mean in terms of tech demand – that is, how the economy would grow under an Obama Administration, and how government spending on tech might change.
Like the Republican platform, the Democratic platform is vague or ambiguous on many critical details of economic policy, especially in explaining how it would address federal budget deficits and entitlements spending. As the incumbent, Obama does have a track record, which we can use to make some predictions about his administration’s likely policies if he is re-elected. Here are the key tenets:
· Support for additional fiscal and monetary stimulus to boost economic growth.
· Continuation of the Bush-era tax cuts for those earning up to $200,000 per year, but higher taxes for those with higher incomes.
· Continued or expanded federal investment in infrastructure, research and development, education.
· Continuation and full implementation of the Affordable Care Act of 2010, with increased emphasis on programs to reduce healthcare costs overall through research on effective treatment protocols, increased preventive care, and reductions in Medicare and Medicaid fees to healthcare providers.
· Continuation of and some increases in environmental, labor, and other regulations, although with more scrutiny of new regulations and retirement of old regulations.
· Avoidance of dramatic changes to Social Security and Medicare, although with a willingness to compromise with Republicans on changes such as higher retirement ages, slower cost of living adjustments, and reduced payment rates to providers.
If he is re-elected but Republicans retain the House and capture a majority of seats in the Senate, Obama will probably have to compromise with Republicans on a full continuation of all the Bush-era tax cuts and at least some of the cuts in both social and defense spending that were part of last year’s deal to raise the federal debt ceiling. If Obama is re-elected and the Democrats retain their Senate majority, the compromise may entail at least some tax increases and lesser social spending cuts. In either case, there will be a compromise that avoids the dreaded “fiscal cliff” of an end to all the Bush-era tax cuts and steep cuts in both defense and non-defense spending. A similar compromise will lead to a new increase in the federal debt ceiling when one is needed in the spring of 2013. The economic effects will cancel each other out, with lift from continued low taxes for most (if not all people) offsetting the negatives from moderately less federal spending. That, along with continued Federal Reserve monetary easing and a slowly improving housing sector, will be enough to keep the US economy growing at a modest pace of 2% to 3% — not enough to significantly reduce unemployment, but better than the likely growth path if an austerity program is put into effect in 2013.
It’s also worth noting that the Obama administration has been generally supportive of the tech sector from a spending perspective. The administration’s stimulus program steered billions of dollars into areas like utilities’ smart meter/smart grids tech investments and the healthcare industry’s investment in electronic records. And federal government tech purchases under the Obama administration have been generally strong; although recent budget proposals have shown federal IT spending with little or no growth.
Given our expectations for economic growth in 2013 with a re-elected Obama and stable if not increased federal IT spending, I think US tech market growth would be in the 5% to 6% range — a bit better than growth in the 3% to 4% range in 2012 or the similar rates of growth that I predict would occur in 2013 if Romney is elected.
Beyond 2013, though, the prospect of continued high federal budget deficits will start to weigh on US economic growth. The challenge for President Obama would be whether he can provide the leadership to push for adoption of a mixture of moderate tax increases (ideally, through simplification of the tax code and reduction in distortive tax deductions and credits) and entitlement benefit cuts — along the lines of the Simpson-Bowles panel’s proposals – that would set the foundation for federal deficit reduction. A balanced deficit reduction approach of this kind would increase confidence in the long-term prospects for the US economy and lead to better economic growth than a deficit reduction plan that combines low taxes for the wealthy (which tend to go into savings, investments in real estate, or foreign imports) with big cuts in current operational spending and in programs like unemployment insurance, food stamps, Medicaid, and others that provide a safety net for the poor and support current consumption. If this happens, the tech market’s growth will shift to a higher gear of 8% to 9% along with stronger US economic growth.
However, Obama has yet to provide the kind of leadership needed to achieve a balanced deficit reduction plan. Moreover, by not making such a balanced tax-and-spending deficit reduction plan a central part of his re-election campaign, he will lack a popular mandate to overcome Republican opposition to any tax increases. A continued deadlock between a lame duck Obama and a Republican Congress unwilling to compromise would leave the US with the kind of weak economic growth mixed with periodic US federal debt ceiling crises that we have seen in 2011 and 2012. Should this occur, US tech market growth in 2014 to 2016 would be stuck in the 3% to 4% range that we are now experiencing in 2012.
Bottom line? Under a second Obama Administration, I think US tech market growth in 2013 would grow by 5% and 6%. Beyond 2013, the outlook depends on whether or not Obama can secure a longer-run deficit reduction deal that mixes tax increases with entitlement cuts to bring US deficits down to sustainable levels by 2016. If he can do so, a much stronger tech market lies in prospect, similar to the kind of tech market growth that the US enjoyed after President Clinton and his tax increases brought US deficits to close to zero in 2000. Alternatively, a continued deadlock on federal budget deficits would mean tech market growth in 2014 to 2016 would not be much better than 3% to 4%.