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The Credit StrategistThis essay is excerpted from a recent version of The Credit Strategist (formerly the HCM Market Letter). To obtain the complete issue, you must subscribe directly to this publication; Please go here. The Credit Strategist is on Twitter - @credstrategist

The election is mercifully over. The configuration of government has not been changed although the hand of the Democrats has been strengthened. Ironically, the primary thing that went up in smoke with Mitt Romney’s candidacy is the possibility of change from the last four years. Coming with the re-election of a man whose entire presidency has been based on the prospect for change, this brand of irony has to sting. While there may be compromise to avoid the self-inflicted crisis of the fiscal cliff, the course of fiscal policy is unlikely to alter significantly. There is a great deal of bold talk about tax reform, but the odds of our current leaders replacing our profoundly flawed tax regime with one that would breed economic growth and productivity are low. Congress will be lucky to avoid the fiscal cliff; asking it to alter the economy’s DNA is unrealistic.

Figure 1
Terminal Deficits

Terminal Deficits

The election revealed the cracks in the Republican program. Mitt Romney should have been able to win this election, yet he didn’t really come close. There are many reasons why he lost. Here is our catalogue of some of them.

  • Mr. Romney’s campaign was logistically inferior to Mr. Obama’s. The community organizer out-managed the private equity manager by a long shot.
  • Mr. Romney emerged from the Republican primaries badly tarnished by personal attacks made by other candidates who frankly never had a chance to win the nomination. The party needed its politicians to put the interests of the party ahead of their own selfish interests; instead it allowed its candidates to cannibalize each other. By the time Mr. Obama arrived at the scene, he was just picking at the bones.
  • The Republicans are on the wrong side of globalization. The United States is becoming more ethnically and religiously diverse; white are no longer the majority of the population. Instead of appealing to a populace that isn’t there any longer, the party needs to adapt its message to a multi-ethnic and aspirational constituency while walking the fine line between promoting equality of opportunity rather than equality of result.
  • The Republican Party needs to find a way to reduce the influence of its right wing. Republicans believe Americans want to be left alone by their government, yet they promote retrograde social policies that police private behavior and perpetuate inequalities that deprive individuals of freedom of choice. Without a more libertarian bent to their policies, the party will continue to alienate large groups of voters – young people, gays, minorities, etc. While Republicans would like to think that all Americans are equally situated, they need to acknowledge that many people’s personal choices are limited by their economic and social circumstances. This is why the party’s antediluvian immigration policies must change to reflect not only reality but humanity.
  • The Republicans were too dependent on their anti-tax orthodoxy particularly when the current tax system exacerbates economic inequality on a daily basis. It is very difficult for them to make the case for lower taxes leading to prosperity when the Clinton Presidency proved precisely the opposite. Republican anti-regulatory and tax policies are still perceived as the primary causes of the financial crisis. Nominating an individual who could be painted as benefitting from some of the most pernicious of these policies (i.e. carried interest tax break, offshore bank accounts, leveraged buyouts) was unwise, as I noted at the time. In order to get out front on the tax issue, the Republicans need to put forth a plan that not only contributes to economic growth but also to tax fairness. The key to any such plan would be the elimination of the differential tax treatment of capital and labor. Those with capital (the wealthy) should not enjoy huge tax advantages over those who only have their labor to trade.