Good reasons for BC to worry about Obama's re-election

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Appeared in Business in Vancouver

Given the slow rate of economic growth and high levels of uncertainty in the United States, British Columbians should be concerned about the economic implications of President Barack Obama’s recent re-election.

Despite the fact that B.C. exports have diversified with exports to the Pacific Rim now equal those to the U.S., the U.S. remains a critically important market for B.C. A stronger American economy will no doubt lead to a robust recovery of B.C. exports to the U.S., which have declined more than 35% since 2005.

The trouble is that very few elements of Obama’s economic agenda are pro-economic growth.

For starters, Obama clearly wants to increase tax rates on those with incomes of more than $250,000. Tilting the tax distribution further towards high income earners in what is already the most progressive tax system in the industrialized world will negatively impact the incentives for hard work, investment and entrepreneurial risk taking.

In addition, Congress's Joint Tax Committee has estimated that raising taxes on income over $250,000 will raise only $82 billion a year and that’s assuming no incentive effects on people’s behaviour. So, if Obama does achieve his goal to raise taxes it will not put a dent in the annual deficit which current stands at $1.1 trillion.

Couple that with Obama’s unwillingness to enact spending reductions to balance the budget and it’s no wonder that the Congressional Budget Office (CBO) forecasts deficits for the next 40 years. Persistent deficits and significantly more government debt (which could reach more than 250% of GDP) will impose a significant drag on the U.S. economy.

And then there’s the so-called fiscal cliff, a combination of spending cuts and tax increases totalling $607 billion that take effect automatically on January 1st and which the CBO estimates will drive the U.S. back into a recession.

Obama will need to work with a Republican-controlled House of Representatives to get a deal done that averts the cliff. The coming “lame duck” session of the U.S. Congress (when one Congress meets after its successor is already elected) will likely kick the issue into 2013. In addition, the 2013 Congress will deal with another looming negotiation over the federal debt ceiling.

Unfortunately, the President and Republicans in the House are far apart on a potential solution and therefore, getting a deal done will be tough.

This all adds to the uncertainty that has crippled investment, business expansion, job creation and economic growth.

Further uncertainty emanates from regulations such as the Dodd-Frank Act which has, and will continue to impose significant new regulations (many of which have yet to be written) on financial services. Indeed, there are already signs that Dodd-Frank is discouraging financial activity in the U.S.

And then there’s energy policy, another area where Obama continues to prefer heavily subsidizing alternative energy investment while imposing regulations that make it more costly to extract conventional resources like coal, oil and natural gas.

There is little question that British Columbians need and want the U.S. economy to recover because our two economies are critically linked. However, when it comes to taxes, deficits, debt, regulation and energy policy, Obama has made it more difficult for the U.S. economy to rebound. If he continues to do so, there is little question that B.C.’s economy will be negatively affected.