Thursday, October 30, 2008

The Relationship Between Politics and Economics

With less than a week to go till the election, we see the economy going through a roller coaster ride of sorts. Seems like one day it's up by 900 and the next it's down by the same. With these sudden changes in the economy so close to the election, one might wonder does politics play a role in the economy?

An article from Politico1 talks about this relationship. The article states that in the past the stock market has not been driven by election day events. It seems like this year may yield different results, especially when you factor in the recent bailout packages that have occurred. The next president will have to manage the aftermath of all of this on top of the economic plans each has promised in their election campaigns.

Speaking of those economic plans, many believe that they will also be a driving force behind the economy mainly because of the vast differences between both candidates' plans. There are three big issues that both candidates wildly differ on when it comes to the economy: taxation, trade, and union membership.

Both candidates state that they are advocating tax cuts, but in different ways. McCain is for giving tax cuts directly to the people while Obama wants to give a tax credit to the people on their income tax form. For more details on Obama's plan see our post on Tax Cut or Income Redistribution.

In the past, Obama has been a critic of NAFTA and other free trade agreements according to an article from The Nation2. Putting requirements on free trade will hurt American goods being imported into other countries consequently hurting the businesses that make the goods. This could be devastating to companies such as IBM and Caterpillar that rely heavily on overseas business. McCain, however, has always been a proponent of free trade and will either keep the status quo or reduce the requirements on free trade.

Labor unions have had their place in our economy for generations. In the past, they have instituted such changes as child labor laws and the eight-hour day. However, in today's global economy, they tend to make corporations less competitive. In an article from The Heritage Foundation3, the writer states that labor unions now add to costs and discourage productivity. Obama wants to make union membership easier by doing away with secret ballots, according to a Fox News article4. This will drive union membership to an all time high causing a massive increase in salaries for already struggling companies. McCain is an anti-union guy and would probably do away with them all together if he could.

As you can see both of these candidates differ greatly on their economic ideals. Could this be causing a lot of the uncertainty we have seen in the markets? I think so. While there might be no direct connection between politics and economics, there is certainly a long term effect that comes from the policies that our politicians make today.

1. Will the election drive the Dow? The Politico. October 22, 2008.
2. Obama Goes Soft on Free Trade. The Nation. June 18, 2008.
3. Do Americans today still need labor unions? The Heritage Foundation. April 1, 2008.
4. Secret Ballots May End in Union Elections If Obama Becomes President. Fox News. May 19, 2008

1 comment:

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