State Capitalism to Rule the U.S.: Roubini Report

Get ready for bigger government, no matter who you vote for this fall.

While voters may feel good this November about casting their ballots for Barack Obama or Mitt Romney, the reality is that the U.S. government will exercise ever greater control over the economy and markets regardless of which party occupies the White House, say economists at Roubini Global Economics in a report commissioned by Pershing LLC.

“State capitalism is coming to developed markets and will persist across emerging markets, where it has long held sway, especially in Asia,” the economists write in Elections and Economies: The Limits of Power in the Age of Deleveraging, a white paper available through Pershing Prime Services. “Rapidly growing government balance sheets and far greater financial regulation reflect widening doubt about the efficacy of unfettered markets to achieve economically optimal outcomes. Leviathan—the Hobbesian concept of a dominant state actor—has risen from the ashes of the financial crash to impose order on the free market.”

For investors, the rise of state capitalism will lead to more macro-driven markets and continued volatility, the Roubini economists predict.

The U.S. economy faces heavy fiscal drag in 2013, and either political gridlock or a withdrawal of stimulative policies could threaten growth, warn the Roubini economists. Nouriel Roubini, an economics professor at New York University’s Stern School of Business, is also chairman of Roubini Global Economics.

While the outcome in November may result in new policy decisions, “elections will not change the nature of the current balance-sheet recession and the consequent need for deleveraging; orderly, gradual rebalancing; and new growth models,” according to the economists.

Commissioned by Pershing, a BNY Mellon company, and written by senior economists at Roubini Global Economics, the independent study examines the impact that the U.S. and eurozone elections as well as China’s leadership change may have on markets and fiscal policy.

“Political officials elected in 2012 will face a difficult set of trade-offs,” Nouriel Roubini said in a statement. “Public policy engagement and central bank intervention have been necessary to avert a second Great Depression, but political gridlock has lowered the prospect of a faster recovery. While policymakers can influence the mix of spending cuts, stimulus and taxes, they should not assume that upward momentum will continue in the absence of accommodative monetary and fiscal policy.”