The temporary change of parties in power in the United States Congress might help to temporarily cut taxes and put some brakes on an ever-expanding government, but do not expect any huge shift in American domestic policy
Plus ça change, plus c'est la même chose. This is a French proverb that means: the more things change, the more they stay the same. Often this expression is used in reference to elections. Certainly in regard to the recent American election, it is in some ways quite accurate. In other ways, quite wrong.
The American elections on 2nd November did result in a rather dramatic shift to what at least Americans would consider a more conservative government. According to the polls many of the election results were driven by a populist movement known in the United States as the "Tea Party" movement. The term "tea party" is a reference to an incident in the early history of the United States. Both the modern tea party movement and the historical one are not really what they seem.
The original so called Boston Tea Party occurred in 1773 in the city of Boston in the then Colony of Massachusetts. The event consisted of the destruction of a cargo of tea owned by the British East India Company. It has gone down in history as a protest against the right of the British Parliament to tax colonies without any representation. The reality was that the mob that destroyed the tea was most likely instigated by John Hancock whose smuggled Dutch tea would not have been able to compete against the British tea even with the onerous tax. So it was really about the defence of a privilege.
The present 'tea party' movement in the US has developed its own mythology. It is supposed to be about cutting taxes, lowering the US deficit and shrinking the size of government. But it is really none of those things.
For the US government to cut taxes, reduce spending and the size of its deficit, it have to limit outlays on so-called entitlements, including healthcare for the elderly, and defence spending, because they make up the largest parts of the American budget. But no member of the tea party movement has advocated any of these things. Quite the contrary, tea party members, usually older white people without university educations, have strongly advocated that privileges for entitlements and defence spending should not be touched.
So both the tea party movement and the real Boston tea party are about the defence of privileges in a given regulatory system. Like the striking workers in France, the tea party members are unhappy that their privileges, their cut of the national wealth, are being eroded by the forces of immigration and globalisation. It is change and they don't like it. But although the change might be hard for the people who once ran things, it is good for the market. It is good for the market because it ultimately changes the rules to limit power.
In his book, the Wealth of Nations, the father of economics, Adam Smith, warned that it was in the interest of certain businesses "to widen the market and to narrow competition." These privileges and market distortions could be created by law. Smith believed that such laws should be "listened to with great precaution and ought never to be adopted till after having been long and carefully examined not only with the most scrupulous, but the most suspicious attention." He felt that such privileges might only benefit the few and result in an "absurd tax" on anyone else.
The great economist Mancur Olson wrote that power groups would, if given the chance, use law to subvert more of the economic pie to their own benefit rather than trying to increase it. So if law is used as a limit to the privileges of power or if law is used to limit the power of government itself, then the entire system gains in efficiency.
The temporary change of parties in power in the United States Congress will act as such a limit. It will not necessarily shrink the budget deficit. It might temporarily cut taxes and it will put some brakes on an ever-expanding government. But do not expect any huge shift in American domestic policy. The demography of the United States itself will limit the impact of the tea party.
Immigration mostly from Hispanic countries and the population growth of the Hispanics in the US will ultimately make the whites in the US another large minority. Although this inevitability is frightening to most of the tea party movement, it will serve to rejuvenate the US domestic market by helping to institutionalise change.
The markets and political systems that may have issues in the future are those that cannot change. The United States economy is undergoing a structural change as consumers are required to deleverage. This will slow growth not only in the US, but also in exporting countries, specifically China. The real problem is that China's system does not allow change. So although the impact of the US election will not be great, the impact of no elections in China will be.