The American presidential election is rapidly drawing near. The race is becoming more intense and the field of candidates has narrowed to such that a detailed look at each of their platforms makes sense. The focus of this article is on Barack Obama, one of the leading contenders for the Democratic Party’s nomination. Of primary interest for traders in the forex markets is his economic policy, though there is significant overlap between his positions on taxes, trade, and the economy. In addition, his proposed health plan and energy plan, for example, both carry important economic implications, and hence should be considered within the context of how his presidency would bear on the US economy.

Since his platform is broad, complex, and often nuanced, we have distilled it into ten more manageable subdivisions, which are laid out below.

Increased Tax Equity: Mr. Obama’s tax policy typifies the liberal stance of his party, favoring a system that is equitable and progressive, above all else. The core component of is tax policy would bring tax relief to the middle-class. Whether he would pay for this "relief" through a tax increase on the upper class or through budget cuts is uncertain. It will not be financed through a bond issue (increase in government debt), as he has pledged to balance the budget. [More on this below]. In addition, Mr. Obama has pledged to eliminate so-called "tax havens" for the wealthy and loopholes in the tax code exploited by special interest groups. It is expected that this increase in tax revenues will partially offset the middle class tax cut. How Mr. Obama’s tax policy would impact economic growth defies prediction. Subscribers to the infamous "Laffer Curve" would argue that a fall in middle-class tax rates would theoretically increase unemployment and hence, increase government tax revenues. However, since America’s wealthy contribute a disproportionately large share to the coffers of the Federal government, a tax increase on the rich could theoretically lead to a decline in government tax receipts. This idea remains controversial, and most politicians conveniently err on the side of the argument that is consistent with their politics. This lack of clarity means it’s inappropriate to comment definitively in this article.

Fair Trade: Barack Obama’s trade policy eschews both protectionism and unbridled globalization in favor of the more fashionable "fair trade." Insofar as trade is conducted fairly, he is an advocate. On the other hand, when governments are belived to use unfair tactics, such as subsidies, dumping, and exchange rate manipulation, he favors countervailing efforts to block such trade. For example, he has vocally argued that the perceived undervaluation of the Chinese Yuan represents an indirect subsidy for Chinese exporters, and he favors legislation that would "equalize" the playing field. In addition, Mr. Obama supports an increase in America’s domestic manufacturing sector and a consequent increase in employment. As with some of his other policies, he has been vague on how this would be achieved, whether through subsidies or tariffs, or a less conventional method. Finally, Mr. Obama supports energy independence, which basically translates into less reliance on foreign oil and gas producers.

In its entirety, this loosely sketched trade policy represents a significant break with the unapologetic free-trade stance of the current Bush administration. While it is doubtful that many of these measures could be implemented, the trade imbalance could be singlehandedly reversed by a decrease in energy imports, which represents an estimated 35% of the total deficit. Classical economic theory dictates that in order to correct a trade imbalance, a nation’s currency must depreciate proportionately. If this theory is applied to the US, a shrunken trade deficit achieved by an Obama presidency should stem the multi-year decline in the Dollar.

Employment Versus Growth: Mr. Obama’s criticisms of the Bush Administration’s economic policy have centered around the "jobless recovery," whereby America’s economy enjoyed strong growth while the unemployment rate hardly budged. Accordingly, Mr Obama would prioritize employment over economic growth. Since free-trade is theorized to maximize growth, Mr. Obama’s "fair trade" policies could come at the expense of efficiency, and hence GDP growth.

On the other hand, he supports rural investment, increased access to capital among minorities and the poor, and improvements in the nation’s transportation infrastructure. All of these measures are consistent with both employment and growth. In addition, his support for renewable energy, innovation (via an R&D tax credit), and a greater emphasis on math and science education, aim to cement America’s status as the world’s leader in technology and innovation. The current flow of capital and labor (albeit not always ideas) favors developing countries, so Mr. Obama’s proposals are somewhat against the grain. The payout for the US economy could be large but it could also be costly.

Support for the environment: One of the recurring themes of Mr. Obama’s campaign is support for the environment. While environmentalists have delighted in promises of marine and forestry preservation, the direct economic implications are less cut-and-dried. It has long been argued that economic growth and concern for the environment are diametrically opposed. This notion is certainly belied by the boom in alternative energy, which is supported by Obama. In addition, Obama’s proposed cap on carbon emissions could force businesses to become more efficient. However, it could also come at the expense of output, as corporations curtail production to be meet more stringent environmental standards. Finally, Mr. Obama is a staunch proponent of ethanol, part and parcel to his pursuit of energy independence. While this directly benefits the US economy, it has also been shown to increase food prices as land is diverted from food production to energy production. Thus, while GDP would increase and the US would likely receive more foreign capital, the purchasing power of US consumers as well as the value of the Dollar would be eroded.

Expansion of Home Ownership: Barack Obama has promised to make home ownership both easier and more affordable, especially for poor families. Unfortunately, one of the byproducts of the current expansion of such housing has been the subprime lending crisis, one of the primary causes of the economic downturn. Of course, Mr. Obama has also pledged to crack down on so-called “predatory lending,” in which complex mortgage products with artificially low interest rates are used to lure unsuspecting borrowers.

Skepticism of Business Establishment: While not stated explicitly in his platform, Mr. Obama is generally opposed to “big business.” He has pledged to rein in predatory lending through increased regulation of mortgage companies. He uses hostile language to describe healthcare insurance companies and managed care organizations, which he views as part and parcel of the never-ending rise in healthcare costs. In addition, he will fight special interest lobbies generally, and the mortgage lobby specifically by making it easier for individuals to declare bankruptcy. Currently, there is a loophole which exempts certain obligations (namely mortgage payments) from re-negotiation during bankruptcy, and presumably this would be modified. Then there is his concern about M&A between large companies, which he perceives as anti-competitive and limiting of consumer choice. The icing on the cake will take the form of an investigation of conflicts of interest on Wall Street, where consolidation has created situations where pre-existing client relationships can compromise objectivity.

In short, the the business establishment is dreading an Obama presidency, with its strict regulatory climate and consumer protections. Some analysts believe that the stock market performs better under Republican presidents because of the perceived friendliness with Wall Street, but ultimately economic factors will predominate, and good investors don’t put too much stock in the President’s ability to sway the markets.

Support for small businesses: It may come as a shock to those who have grown accustomed to the handful of large corporations dominating the business landscape that the brunt of the US economy is powered by small businesses. In fact, one of the few positions Mr. Obama shares with President Bush is his support for small businesses. Accordingly, he will use a combination of tax relief and healthcare subsidies to facilitate growth in this vital sector of the economy. The healthcare subsidies will take the form of direct reimbursement for healthcare benefits paid by small businesses, many of whom are struggling to provide health insurance for their employees. This could prove difficult to implement because of the tremendous costs involved, and would need to be offset by cuts in other areas of the budget.

Labor Equity: Unions remain a bastion of the Democratic Party, and a large source of conflict with the Republican Party. To his credit, Mr. Obama’s position is somewhat more nuanced than that of his Party. He supports a broad spectrum of labor rights, including enhanced protections for the right to unionize and promoting a work-life balance, perhaps by expanding the Family & Medical Leave Act which was signed into law during the Clinton administration. His final goal of a higher Federal minimum wage has been largely preempted by individual states, which have taken much initiative in this regard.

Labor rights are similar to environmental protections in that both are seen as antithetical to economic growth. Free-market economists are typically opposed to unions and wage floors because they necessitate wages higher than what the market would otherwise pay. Accordingly, Mr. Obama’s position represents a sop to the fear of cheap foreign labor (whether immigrants or workers abroad) percolating in the working class. This jives with his fair-trade policy, which would prioritize domestic employment over efficiency.

Foreign Policy: Mr. Obama’s foreign policy would be decidedly less aggressive than that of the Bush administration. He favors soft power, in the form of diplomacy and foreign aid, over the hard power of a strong military. Controversially, he has volunteered to meet with all foreign heads of state without any prerequisites. At the same time, he has also pledged to continue expanding the military, both in terms of manpower and technology.

The economic implications of foreign policy cannot be overstated. Due in part to the ongoing wars in Iraq and Afghanistan, it now costs the US government an estimated $1 Trillion per year to conduct its foreign policy. In addition, it has been estimated that the total costs of the war in Iraq could exceed $3 Trillion by the time the US has successfully extricated itself. The majority of this outlay will be financed by debt. Thus, a Barack Obama presidency can be expected to increase the budget of the defense department but decrease discretionary military spending. In addition, the US maintains embargoes and/or limits trade with certain nations for political reasons, which could also change if Mr. Obama was elected. Finally, the price of oil is connected with geopolitical events. This is exacerbated by the fact that a significant portion of the world’s oil is controlled by regimes that are viewed as hostile by the US. This is reflected in the significant risk premium (estimated by some analysts at $20 per barrel) currently built into the price of oil. Improved relations with these governments (Venezuela, Iran, Nigeria) could lead to a reduction in the price of oil.

Fiscal Discipline: From an economic standpoint, fiscal policy represents a natural segue way from foreign policy, because it is among the largest components of the Federal budget. Mr. Obama has pledged to restore fiscal discipline by curtailing earmarks and re-introducing a system of PAYGO into the budgeting process, whereby spending increases must be simultaneously offset before they can be approved. Social security will be shored-up, and further reinforced through incentives to save for retirement. Lower medicare costs will be obtained through negotiations with healthcare insurance and pharmaceutical companies. Overall, the goal is modest one: a balanced budget.

An impressive agenda, to be sure, but Mr. Obama’s senatorial record on fiscal policy is mixed. On the one hand, he spearheaded ethics reform legislation to cut Congressional waste and only designates earmarks for public projects. On the other hand, he voted against using the Program Assessment Rating Tool (PART) to pay down the Federal deficit by automatically reducing spending on programs deemed ineffective. He has also voted against cuts in entitlement spending and agriculture subsidies. Thus, if Mr. Obama has any real intention of reducing the national debt, or at least of balancing the budget, he may have to break with his Party.