Political pundits have been highlighting the horse-race for the Presidency for a couple years now, and that competitive chatter has only increased as we close in on the election. Never mind the fact that the statistical models indicate strong chances for an Obama victory in the electoral college; for the purposes of this article, let's assume Romney wins the election.
It is November 7 and Romney has won, so what changes? First, it is worth pointing out that Obama is still in office for another two-plus months; in that time, he must resolve the fiscal cliff situation. As he indicated in the debates, the sequester "won't happen." That is a pretty safe bet. Congress did a good job making the sequester so painful for both sides that neither one will let it occur. However, that doesn't mean that the problem will be solved. If anything, a Romney election will make the Republican controlled House less likely to acquiesce to major compromises; they will be hoping for a better deal under a Republican President. So, a compromise will be reached to kick the can down the road a few more months, thereby forcing Romney to deal with it as soon as he enters office.
Once Romney gets into office the economy will magically turn around, right? Wrong. Regardless of his policies, the first year of any Presidential term is largely out of his control. Aside from the fact that it takes about 18 months for a President to find his governing style (recall that the first two years of the Clinton administration were a disaster), the President is also operating the government based on his predecessor's budget for the first year. So, don't expect many of those "day 1" changes to occur.
Sure Romney will work to reform the tax code and promote some "business friendly" policies, but no matter how generous the electorate is to Republicans this week, they will not get a super majority in the Senate. So, like Obama, Romney will have to choose between compromise and inaction.
Given Romney's pragmatic, business-like approach to governing, compromise is the likely road. The trouble is that this compromise will anger the conservative wing of his own party, particularly in the House. This leads Romney to a choice between acquiescing to the Tea Party in the House and facing a series of Democratic filibusters in the Senate, or parting ways with the Tea Party and building a moderate coalition in order to move policy forward.
It will likely take a year for this whole situation to play out, and if Romney does select the moderate, pragmatic approach (as he has done in the past, but disavowed in the Republican primaries), this will greatly weaken the Tea Party and fundamentally alter the political landscape in 2014.
Changes in 2014?
Before we get to November 2014, we get to January 2014 and the end to Ben Bernanke's term. Since Glen Hubbard has already disclosed that he would prefer a post at Treasury to the Fed, that leaves John Taylor and Greg Mankiw as the two most likely candidates. As I have noted before, I think it would be a challenge for Taylor to survive confirmation, especially if Democrats retain control of the Senate. So, the likely choice is Mankiw.
Will Mankiw differ from Bernanke? Not as much as you might think. Like Bernanke, Mankiw received his PhD in economics from MIT and later went on to serve as George W. Bush's Chairman of the Council of Economic Advisers. If anything, Mankiw's early career and his support for New Keynesian economics contrasts with Bernanke's fascination with Milton Friedman and suggests that Mankiw might even be more dovish than Chairman Bernanke. In reality, this is unlikely, but Professor Mankiw would almost definitely continue any remaining stimulative policies rather than aggressively tighten policy (as John Taylor has suggested doing).
In the first year or two of a Romney presidency not much is likely to change. The President would be pressured into a tenuous game of coalition building, forcing either a moderate agenda or a stalemate with Congress. And the Fed will change hands, but likely change very little. So, what will the economic effect of all of this be?
More of the same!
Social Security, Medicare, tax rates and even a repeal of any portion of the Affordable Care Act will require compromise. Plus, unresolved Eurozone issues in Greece and Spain will remain a drag on the global economy. Meanwhile, as the recovery slogs on, the unemployment rate will likely remain around current levels as confidence grows and discouraged workers reenter the workforce. So, for all the talk about Romney's pro-business agenda aiding the recovery, the reality is that President Romney would face all of the same institutional constraints President Obama has faced, the same constraints that make fast reform nearly impossible.
All of this means that if Romney wins on Tuesday, after the market's initial elation, reality will set in. Without real policy change, any bull market run will be a house of cards that crashes down when investors realize that the state of the world remains basically the same. So, should he win, investors should be wary of a Romney bump in the market - but given the way the polls are looking, investors might be better off remembering that just as Romney wouldn't change much, neither will a second term for Obama. So, if the market dives from an Obama victory, investors needn't panic.