Whoever wins the US election between President Barack Obama and contender Mitt Romney will find themselves standing at the edge of a fiscal precipice.
The great recession has been hard on world leaders. Gordon Brown, Nicolas Sarkozy and Silvio Berlusconi are all history. Angela Merkel has her date with destiny next autumn, and Obama has his on Tuesday.
US political history would point to Obama joining the list of recent political casualties. He was billed as the heir to Franklin D Roosevelt when elected during the worst slump since the 1930s, but he has been no FDR. Recovery has been weak, unemployment slow to come down, inequality has got worse and vested interests left untouched. If the Republicans had been able to put up a candidate with even a hint of Ronald Reagan's charisma, Obama would be going the way of Jimmy Carter.
To be sure, Obama has not had it easy. He has been faced with venomous opposition from Republicans in Congress determined to obstruct the White House every inch of the way. What's more, the poor state of the economy over the past four years largely reflects stuff that happened before Obama became president.
It was George W Bush who took the budget surpluses Bill Clinton bequeathed to him and turned them into whopping deficits; Bush who was in the White House when the biggest property bubble in US history was allowed to inflate; and Bush who was president when Lehman Brothers went bust, sending the global economy into a tailspin. By the time of Obama's inauguration in early 2009, the profile for global industrial production and trade was similar to that in the early stages of the Great Depression.
The recession arrived at a time when the US was structurally weak. Stephen King, the chief economist at HSBC, has noted that in the past decade growth in the world's biggest economy has consistently failed to live up to expectations, while inflation has been higher.
Growth in the 2000s was lower than in the 1990s, which in turn saw slower expansion than the 1980s. The great boost to growth that was supposed to come from the IT revolution did not materialise, mainly because the spoils of growth were so unevenly divided.
Real median incomes have been virtually flat for decades, with top-ups from tax credits less generous than in Europe. That left Americans reliant on the drug of debt to finance their consumption habit.
Recoveries from recessions that are rooted in financial crises always take time, and this one has been made still more sluggish by high oil prices, which have taken spending power away from consumers and raised business costs. Central banks respond to downturns by cutting interest rates in the hope that cheaper borrowing will encourage spending and investment, but when the banks are licking their wounds and reluctant to lend, credit flows dry up even when interest rates drop close to zero. Hence the willingness of the federal reserve to try unconventional measures such as quantitative easing – creating electronic money – in the hope that it can get spending going again. Ben Bernanke, the chairperson of the federal reserve, says quantitative easing has prevented an even deeper downturn, but one side-effect may have been speculation in commodity markets that has driven up the cost of food and fuel.
The case for Obama is that he has done as good a job as could be expected in the circumstances. There has been no return to the 1930s. The US economy is bigger than it was before the recession started, something that cannot be said of the UK. Unemployment is lower – just about – than it was when he arrived in the White House and there has been a pick-up in jobs growth in recent months. The car industry has been rescued, which it would not have been had Mitt Romney been president. Fewer people are being thrown out of their homes now that the real estate market has started to recover.
Seen from the eurozone, where things are going from bad to worse, this looks like a reasonable record. It is not, though, the stuff of a new Roosevelt.
There are two main criticisms of Obama – one from the right and one from the left. Romney's case is that the president has hampered recovery by tying the economy up in knots and by allowing national debt to explode to 100% of national output. Businesses have been reluctant to hire and invest in new plant as a result of the uncertainty caused, hence the sluggish growth. The Republican challenger for the White House would cut taxes, cut spending, eliminate tax loopholes and take the axe to bureaucracy. US enterprise would be unleashed and job creation would accelerate.
The Keynesian left, however, says Obama erred by being too cautious. He was too optimistic about the economy's ability to bounce back from deep recession. He used up all his political capital getting his healthcare bill through and paid too little attention to getting the economy back on its feet. He delivered a stimulus package just shy of $800bn (£500bn) but it was not big enough to counter the lingering effects on growth of the financial crisis. Paying far too much heed to Bill Clinton's economic advisers such as Larry Summers, he backed away from root and branch reform of Wall Street. Timidity has resulted in an underperforming economy leaving those who voted for Obama with gusto in 2008 feeling sorely let down. The fact that the president doesn't seem to have much of a clue about what he would do in a second term has compounded the problem.
If Obama wins, it will be because he saved General Motors – the one moment he did come close to being a second Roosevelt – and because of the fear that Romney would be even worse, with tax cuts favouring the rich and spending cuts that would hurt the poor. It is hard to know what Romney would do because his economic plan is full of holes. He might be a hardline fiscal conservative who would plunge the US into a double-dip recession by imposing austerity too soon. On the other hand, he might prove to be a closet Keynesian, following Reagan's approach with unfunded tax cuts that stimulate growth at the expense of a ballooning deficit.
Whoever wins will have to confront the looming fiscal cliff, the package of tax increases and spending cuts due to be enacted in January 2013. As things stand, it will be Obama who has to come to terms with Congress following an unenthusiastic endorsement on Tuesday. After that, he might like to get down to the unfinished business of his first term: jobs, tackling poverty and inequality; repairing America's decaying infrastructure; and getting serious about the issue that in the past week has saved his bacon: climate change. – © Guardian News and Media 2012