Yesterday I wrote about what to expect if President Obama wins a second term in office. Today it's Mitt Romney's turn.
I'd like to look at Romneynomics - the policies that are likely headed down the pike if the underdog Mitt Romney wins in November.
As for the horserace, I think it is President Obama's to lose.
But last Friday's weak employment report indicates again that the economy could slow enough to push Romney ahead.
As with an Obama victory, I think the election will be a close one even if Romney emerges the winner. That means the Republicans will not have an overwhelming majority in Congress.
On the other hand, the Republicans might just get the four seats they need to win the Senate; if Romney wins I assume they will accomplish this. That would give them theoretical control of both the presidency and Congress, but with only small majorities.
As with an Obama win, the first order of business will be to sort out the "fiscal cliff" that comes along with expiration of the Bush tax cuts and the automatic expenditure cuts that will also occur at the end of the year.
With Romney set to inhabit the White House, I expect the solution to this to involve genuine spending cuts--perhaps along the lines of the budget presented by Rep. Paul Ryan (R.-WI).
This will be accompanied by an expiration of the Bush tax cuts on high incomes and elimination of some tax loopholes. Romney's first priority will be to eliminate the tax deduction for state and local taxes, which benefits rich Democrats in high-tax states and does nothing for rich Republicans in states like Texas, Nevada and New Hampshire with no state income tax. He will probably limit the home mortgage tax deductions and the charitable tax deduction, but not eliminate them.
In summary, a Romney tax and spending policy will be close to the Simpson-Bowles plan put forward in December 2010, or the compromise plan that appeared close last year.
It will not bear any resemblance to the "flat tax" and draconian spending-cut plans put forward by Republican candidates in the primaries. I would be very surprised also if Romney closed any major government departments -- even though the Environmental Protection Agency (EPA) is economically damaging, Education is largely redundant and energy entirely redundant.
On healthcare, Romney is boxed in by the cries of his base to abolish Obamacare entirely and his own passage of something pretty similar to Obamacare in Massachusetts.
The Congressional session of 2013 will almost certainly see an attempt to pass a replacement for Obamacare, which will keep most of the politically popular parts of that legislation, such as the prohibition against insurance companies rejecting patients because of prior conditions, but eliminate the individual "mandate" forcing people to buy health insurance.
Very likely, it will involve some form of voucher, as proposed by Ryan for Medicare, but extended to the entire working population.
This will need to be expensive in order not to be wildly unpopular, but if it is accompanied by removal of some of the most anti-market provisions in current healthcare legislation, such as the 1986 provision that hospitals have to provide emergency treatment without getting reimbursed, it may slow the growth rate of healthcare spending overall.
Energy is an area where a Romney presidency will make a difference. The Keystone pipeline will be completed, and federal barriers to fracking will be removed as far as possible. This will over time make the United States one of the lowest-energy-cost countries in the world, which in turn will make it highly competitive in energy-intensive manufacturing.
With Romney in the White House, it is however likely that "green energy" expenditure will continue in some form. In particular, the CAFE automobile fuel economy standards for 2025, which will impose huge costs on the economy and on our lifestyles if kept in place, may be modified but will not be eliminated.
On monetary policy, it's not clear where Romney will come out. He will not re-appoint Federal Reserve Chairman Ben Bernanke in January 2014; the man is too unpopular with the Republican base.
However, he is likely to appoint some compromise figure such as John Taylor (inventor of the Taylor Rule for setting interest rates) or former Fed governor Kevin Warsh. They will tighten monetary policy, but very slowly and cautiously, much as Alan Greenspan did in 2004-06.
That will bring modestly higher interest rates, but will not do much to quell the accelerating inflation that is already "baked into the cake."
However, even gradually rising interest rates will almost certainly cause turmoil on Wall Street, where many of the banks and the whole $300 billion agency mortgage REIT industry -- think Annaly Capital Management (NYSE: NLY) and American Capital Agency (Nasdaq: AGNC) -- will find the rising interest rates destroy their business models and will thus collapse.
For us as investors, a Romney presidency should probably make us look at oil companies exploring in and offshore the U.S., and at pharmaceutical companies. However, the financial sector and the stock market in general are likely to suffer as higher interest rates kick in.
Overall, in 2017 the government will still be bigger than it was in 2009, though not as big as it would be under four more years of President Obama. Taxes will also be higher than today.
In short, it won't be smooth sailing. In fact, the financial crash of 2014 or 2015 will be extremely painful, as will the subsequent recession.
On the other hand, the relaxation of regulation and the modest improvements in the healthcare industry may significantly improve long-term U.S. growth prospects.
As is the case in Europe, for voters here in the U.S. there just won't be any easy answers.
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