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Economic consequences of US elections

Dollar prices can fall if minimum wages will increase resulting in a rise in production costs, reports DH Pai Panandiker.

india Updated: Nov 17, 2006 19:11 IST

The election campaign in the United States was marked by high pitched economic rhetoric, apart from the mess in Iraq. Now that the Democrats have a majority both in the House of Representatives as also the Senate it is quite likely that the agenda of the Democratic Party will have a chance of being implemented.

Although the Democratic Party is yet to spell out its full agenda, there are a number of issues on which prominent members have expressed strong views arising mainly from the feeling that America has been losing jobs to other countries and that its fiscal policies are biased in favour of the rich.

If the party succeeds in pushing through its agenda there will be a change in their business environment which will not fail to affect the rest of the world as well.

The Democrats have been seeking an increase in the minimum wage and a curb on executive pay. Ms Nancy Pelosi has vowed that the minimum wage will be increased from $5.15 ( Rs 230) to $7.25 an hour. President Bush, in a conciliatory mood, has said that on this issue it is possible to find common ground.

That makes the increase in the minimum wage almost certain. The result would be a rise in the cost of production which is likely to affect competitiveness of US businesses to the extent that the prevailing wage is below the target. This will have a bearish effect on the stock and the currency markets. The dollar will fall.

There is an equally strong resistance to the tax breaks, given by President Bush to companies, more particularly to oil companies, and shareholders. The Democratic Party may seek to end the tax shelters though this may not come before 2010.

But the uncertainty of tax breaks will have a depressing effect on companies and will affect new investment. The worse hit may be American overseas investment.

Some of the Democrats had been against business process outsourcing (BPOs), particularly Senator John Kerry, the Presidential candidate who lost to President Bush in the last elections.

In the present campaign, the Democrats did not make much of this issue though it has been asserted that there will be resistance to policies that move American jobs overseas, or to trade policies that put American companies at a disadvantage.

The ire has been mainly against China which has grabbed a good part of the American market and has been responsible for America’s huge trade deficit. The trade policy is likely to be more protectionist and there will be greater vigilance about the implementation of intellectual property rights by other countries.

The stance of American policy will change from one of laissez faire to protection, from growth to equity, while addressing global issues like climate change. As a result, the growth of US imports may slow down, outsourcing by companies may be discouraged, IPR protection will be strengthened and American investment overseas may taper down. This can leave a shadow on India’s trade and investment.

First Published: Nov 17, 2006 19:11 IST