Obama Wins Second Term: The Only Thing That is Certain Now is More Uncertainty

With Ohio going for President Obama, his second term at 1600 Pennsylvania Avenue is secure.  However, in the run-up to this moment, for which we have all been waiting these past many months, a more thorough discussion of what happens next has been sorely lacking. With the Democrats holding the Senate and the Republicans retaining the House, it looks like we're in store for more status quo, and the status quo is gridlock. With a huge amount of fiscal drag looming on January 1, 2013 ... the expiration of the 2001/2003/2009 tax cuts, the across-the-board spending cuts due to sequestration, the expiration of the payroll tax cut and extended unemployment insurance, the ~27% cut to Medicare physicians all set to hit at the same time ... this has the potential to be a serious headwind for the economy next year, and it's unlikely to be resolved in the near term.

While commentators and politicians alike have promised that this "fiscal cliff" will be addressed prior to yearend, the past performance of this Congress should provide ample reason for even the most optimistic of observers to rethink their assumptions. Indeed, given the sheer volume of significant issues that must be addressed in the few short weeks that will remain between Congress's return from recess and January 1, one would be impressed if they were able to tackle all of them in a full two-year session, to say nothing of a truncated six-week lame duck session.

Such a perspective is further complicated by the dynamics of the race results themselves. With such tight margins in select battleground states proving the determining factor, it will be difficult for either side to claim a mandate. As a consequence, neither is likely to shift from their fundamentally entrenched positions on taxes, which has always been the sticking point. President Obama has made his position a key campaign issue, promising time and again that he will veto any legislative proposal that does not increase taxes on upper income earners. Republicans, meanwhile, with Speaker of the House John Boehner (R-Ohio) saying as much just tonight, have similarly promised that they "will not entertain" any plan that increases taxes on any Americans. This spells gridlock, and it becomes more likely that a retroactive fix will become likely sometime soon after the new year and the 113th Congress is sworn in.

Following this, of course, will be a discussion over the debt limit, which the Department of the Treasury now expects we will reach in early 2013. Although the Department possesses cash management tools that it can use to stave off a potential default, we can look forward to a fight that may closely resemble the uncertainty and discord that we saw in 2011, and with that comes the potential for an additional credit downgrade by rating agencies like S&P and Moody's. Prolonging this uncertainty, again, are the established positions outlined by the two parties, which are likely to remain fundamentally unchanged by tonight's elections. Republicans will continue to insist that every $1 increase in the debt limit be offset by a $1 reduction in spending, whereas the president will look to additional revenues that are sure to be inadequate for the task at hand. Given that all of the low (and even medium) hanging discretionary spending fruit was plucked the last time we held this debate and developed the Budget Control Act that we are now seeking to avoid, we can all look forward to another combative fight over just how we plan to get our fiscal house in order.

The election is over. However, the only thing that is certain is that uncertainty is here to stay for some time.