U.S. Elections Comments

Barack Obama has won a second term as President of The United States. How will he handle domestic issues and foreign policy over the next four years? INSEAD Professors Theo Vermaelen, Charles Galunic, Douglas Webber, Pushan Dutt, Amine Ouazad, and Gianpiero Petriglieri share their thoughts.

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Opinion

Obama damage

- By Theo Vermaelen, Professor of Finance -

America has decided to reappoint Barack Obama as President of the United States.  This is quite surprising, considering  a number of facts:  a $5 trillion increase in government debt to $16 trillion (a higher per capita number than any European country, including Greece); an unemployment rate of 7.9 % (higher than when Obama took office) ;  50 million people on food stamps and economic growth less than 2 %. Winning an election with such a poor track record is remarkable, considering that concern about the economy was the main issue for voters this year.

The stock market was surprised as well as it fell by 2.5 % the day after. Although the media and the Obama supporters tried to spin it as if the decline was caused by other reasons such as the Euro crisis, it is difficult to explain why then the biggest losers were energy stocks (in particular coal manufacturers) and the only winners were private hospitals (who will get more paying customers thanks to Obama care) and gun manufacturers.  As on Intrade, a highly respected betting website, the odds of an Obama victory were 70 %, the 2.5 % stock market decline represent only 30 % of the expected damage of an Obama victory. Hence, the total damage can be estimated as 2.5 %/0.3 = 8.33 %.  Another way to put it: if Romney had been elected the stock market would have risen by 8.33 % – 2.5 % = 5.83 %. With a stock market capitalization of $ 16 trillion the market’s estimate of the Obama- induced  wealth loss is $ 1.33 trillion. This loss does not simply hurts the “top 1 %” as more than 50 % of Americans is currently invested in the stock market.  They all will be hurt by Obama’s intention to let the Bush 2003 tax cuts on dividends and capital gains expire. 

Evidence of damage on the real side of the economy became clear as many companies have been warning of significant job losses if Obamacare becomes the law of the land.  Under Obamacare all companies with more than 50 employees have to provide health insurance for their full time employees, where full time is defined as more than 30 hours per week.  While this law may well be socially desirable, the fact is that there is no free lunch so that the cost of labor has gone up as a result, which will increase unemployment , especially in very competitive sectors where companies can’t pass on the full cost to consumers.  Especially small businesses may be reluctant to grow as the marginal cost of the 50th employee has now become very large.  Some companies are already forcing their full time employees to become part time employees, who are likely to become the biggest losers: not only will they have no health insurance, but they will also see their income fall.  Obamacare may well become a classic example of government intervention: good intentions with bad results, mainly because bureaucrats who design a law don’t anticipate how firms and individuals will respond.     

In some ways, America has confirmed it wants to become like a European country, with bigger government, more regulation, subsidized alternative energy, more social spending and higher taxes on the “rich”.   It seems that such a trend becomes irreversible once a large fraction of the voting population starts to become net beneficiaries of government handouts and subsidies. The Europeans are cheering, but they may get some second thoughts after realizing that the European social model is only sustainable if they can export their products to countries that don’t adopt their model, countries with high growth.  Moreover, the election also does nothing to help avoid the “fiscal cliff”, i.e. the combined expiration of tax cuts and spending cuts on January 1.  While the 2008 election led to change, this election has changed nothing in the balance of power: a president who won barely 50 % of the popular vote, and a Congress controlled by Republicans.  More than ever America is a divided country. 

 

Theo Vermaelen is Professor of Finance and The Schroders Chaired Professor of International Finance and Asset Management at INSEAD.

 

Blog

Lessons from Obama’s Campaign Victory

- By Charles Galunic, Professor of Organisational Behaviour -

Government and business organizations are different in important ways (for instance, one of them is not a democracy), but a political campaign has some useful lessons for leaders of any organization. While the balance of power in democratic governments can lead to deadlock and painfully slow consensus building (in their steady state), the “simplicity” of elections (competing bodies, a deadline, a vote, a decision) is, in a strange way, closer to the reality of business organizations (at least those in flux and who face choices which cannot be made through pure hierarchical fiat). Think of political campaigns as mobilization efforts, to build support within a population/organization, for some direction or change. Business leaders face this anytime they push for a new commercial strategy, novel technology, acquisition, or even some change in their organizational culture. This is presumably why topics like change management and leadership are so popular with executives—formal authority sometimes can’t cut it in getting things done.

So what can we learn from President Obama’s campaign victory?

1. It’s not just the “Vision”

In 2008, candidate Barack Obama had a unifying vision and a big mandate (roughly, restore accountability among the “have’s” and ignite responsibility and a renewed sense of opportunity among the “have not’s”, captured well by the ubiquitous “Yes we can” slogan). In 2012, it wasn’t about the vision. It was about reality, trade-offs, and math. former President Clinton’s penchant for long speeches served the Obama campaign well, as he went into much needed detail about the reality of the past 10 years, the difficult choices ahead, and why Obama’s math was correct (and why the opposition’s was not). The lesson is that leaders need to show the details and talk about the trade-offs, they need to offer more than goals, values, and ambitions. Leaders often fail to do this when talking about company strategy. They mistake goals for plans, ambitions for mechanisms and logics.

2. Define the Alternative

Detailing the tradeoffs means defining the alternatives, that is defining the problems and threats of alternative choices and directions, or perhaps just why they are incompatible (not so much “wrong”) with preferred directions. To be fair, the Obama campaign had a lot of help, and long before the head-to-head campaign began. The Republican nomination process was grueling. Republican candidates did much to paint an unfavorable picture of Mitt Romney, questioning his ability to restore economic prosperity (for all) by tying him closely to the economic elites who were blamed for the 2008 financial collapse in the first place. The Obama campaign was relentless in continuing that process of defining the alternative (mostly by questioning the math). There is an important difference for how this can play out for business leaders. Business leaders can have problems “defining” the alternatives because, sometimes, they don’t want to let go of those alternatives (e.g., they want faster innovation and enterprising managers, but they may be extremely tight with resources, timelines, and costs). Defining your strategy may mean relinquishing incompatible alternatives, telling people what you will not do and what the organization (or shareholders) cannot really have (within a timeframe). Too often, leaders want their cake and eat it too and resist talking about the hard choices ahead. I suspect both political campaigns faced this dilemma, but I think it’s safe to say one was better at defining the trade-offs and alternatives than the other.

3. Adapt

President Obama’s first debate was universally panned (even by his staunchest followers). Mitt Romney came across as confident, tireless, and capable. Obama presumably tried to give the impression that he was above the fray and (supposed) social extremism of his opponent, cranking the volume on “Presidential tone,” but instead appeared aloof, tired, and lost. Romney tacked to the middle easily. But the Obama organization adapted. You didn’t have to wait for the second debate to expect a change in tact- you could gauge the new tone when Biden debated Ryan in the Vice-Presidential debate. Adapting is not easy. It is humbling at best, an admission of a leader’s failings. But it may be necessary, and only possible if a leader is genuinely gauging the audience and willing to absorb negative feedback. Leaders can leader from President Obama’s self-deprecation in the aftermath of the first debate, but they can learn more from the way he adapted.

4. Consistency Matters

Adapting requires carefully discerning what to change. Changing tact is one thing, changing core beliefs or propositions is another. Change too often and people will be reluctant to follow you. Mitt Romney was widely and frequently criticized for flip-flopping on issues (the “Etch a Sketch” candidate). Integrity (in the sense of consistency) matters. I suspect political candidates, under giant media microscopes, face a lot more questioning on consistency than business leaders. Business leaders are more likely to get away with offering grand visions but not following through with consistent structural actions. But leaders, of any sort, who can build consistency (over core ideals, mechanisms, and time) should be more compelling to followers.

5. A United Coalition

No political body is perfectly monolithic. Similar ideas populate individual minds—even those belonging to the same tribe—to different extents. But it was much easier to see the divides in the GOP, between the conservative mainstream and the Tea Party movement, than the divides amongst Democrats. The message isn’t that leaders must stomp out any and all divisions but that “schisms” are debilitating. Organizational leaders need to build coalitions that are (mostly) united and can authentically represent the central message all the way down the line.

 

This blog first appeared here.

Charles Galunic is Professor of Organisational Behaviour and The Aviva Chaired Professor of Leadership and Responsibility at INSEAD.

 

On Trans-Atlantic Relations

- By Douglas Webber, Professor of Politcal Science -

Most Europeans will be immensely relieved at Obama’s re-election. No matter how many of die-hard supporters on the east side of the Atlantic are disappointed that this has not so far been a transformative presidency, far more Europeans preferred Obama to Romney, whose conservative platform revealed a large divergence between the U.S. political culture and that in most European countries. For trans-Atlantic relations, the outcome points towards continuity or more of the same. As the balance of power in the world continues to shift away from the North Atlantic towards Asia, Europe will become progressively less important for U.S. foreign policy makers. Europe will be most affected by the economic policy choices made in the U.S. Here the fact that U.S. government remains divided, with the Democrats holding the presidency and the Senate and the Republicans the House of Representatives, does not augur well for braking before the “fiscal cliff”, which, if it is not avoided, will usher in a sharp turn towards a more deflationary policy orientation. There will be tense days in Washington DC and the rest of the world between now and the end of the year.

 

Why He Won

- By Amine Ouazad, Assistant Professor of Economics and Political Science -

Barack Obama won a clear majority of electoral votes. Does he owe this victory to the nascent economic recovery (“It’s the economy, stupid”) or to social issues? Mitt Romney carried the white male vote, and Obama won thanks to the overwhelming support of female, minority, and urban voters. That suggests that the Republican party needs to improve its image among those voters.

What the exit polls say

Evidence from exit polls suggests that even those demographic groups might have held Obama accountable for the weak state of the economy. Firstly, support for Republicans increased in the manufacturing states of the Rust Belt. Secondly, states that suffered the most during the housing bust (California and Florida) saw marginal shifts in favour of Mitt Romney. The U.S. is now more Republican than in 2008. But this was not sufficient to give Mitt Romney a victory. It is still very early to draw strong conclusions, but such evidence from the exit polls suggests the state of the economy played a smaller role than social issues.

 

U.S. & Asia: Strategic Pivot

- By Pushan Dutt, Associate Professor and Chair of Economics and Political Science -

Given that the political landscape remains unaltered (Republicans in control of the House; Democrats in control of the presidency and the Senate) President Obama’s strategic pivot towards Asia should and will continue. The presidential debate and the election in general focused primarily on the Middle East, with occasional sojourns into China-bashing.
Contrary to reports in the media, the Obama pivot in Asia is not just about balancing or confronting China. The U.S. hopes to play a central role in Asia for decades to come – through enhanced trade and investment links, creating multilateral organisations such as the Trans-Pacific Partnership (TPP), and enhanced security ties and presence in the region. Of course, the ability of the U.S. to play a bigger role in the region depends whether the U.S. can get its fiscal house back in order and continues to recover strongly.

The Fiscal Role 

When the debt negotiations in the U.S. failed, it damaged the U.S.’s standing in Asian countries. It brought sharply into question the U.S. model of capitalism and democracy and whether the U.S. would have the political will and the resources to take a bigger role in the region. The current political climate remains unchanged and may turn more vicious. How will the U.S. negotiate the fiscal cliff? This not only has the potential to throw the U.S. and eventually Asia into recession but also raise serious doubts about the efficacy of the U.S. presence in and commitment to the region. For President Obama this remains the biggest short-term challenge.

Pushan Dutt is Associate Professor and Chair of Economics and Political Science and teaches the following Executive Education programmes at INSEAD: Asian International Executive ProgrammeAdvanced Management ProgrammeTransition to General ManagementManagement Acceleration Programme.

 

Opinion

Obama’s Victory: A Lesson In Resilient Hope 

- By Gianpiero Petriglieri, Associate Professor of Organisational Behaviour -

Leaders gain the right to represent their people by articulating and embodying a story of possibility—pointing towards a future that others want to be part of. This is why we follow and trust them—or oppose and mistrust them if their story does not spell promise and feel our own. An election, in that respect, is a contest of stories. A choice of who embodies best what we hold dearest and which possible future we want to see realised. This is how candidates earn permission to lead.

Once gained, however, permission to lead doesn’t last forever or only rests on a leader’s symbolic appeal. It lasts as long as the leader proves able to help realise that story—to deliver that vision into our daily life.

When that does not happen—because we had put unrealistic expectations on a leader in the first place, because of intervening factors, because of systematic, relentless opposition—then we often conclude that he or she wasn’t a good leader or even much of one. This was the backdrop for the Obama re-election campaign this year.

The dynamics that lifted Barak Obama to the office of U.S. president in 2008 as a steward of change had all the marks of idealisation. Our timeless propensity, in times of distress, to seek leaders larger than life who ignite unbridled hope with promises of salvation or renewal. That is the audacious kind of hope that Obama stirred in 2008 and, while getting him elected, contributed to making his first term an uphill struggle.

Steward of Hope

Back in 2008, Obama embodied the vision of a society that may transcend its most painful divisions, where opportunity was alive and well for those with talent, courage and the willingness to work hard. Obama was a living reminder of the best that America had to offer at a time when the world had become accustomed to seeing America’s worst. To vote for him meant putting one’s hand on the arc of history to help bend it towards justice.

Since then, he helped avoid another Great Depression, rescued the domestic automotive industry, reformed healthcare and rid the world of Bin Laden. The U.S.’ standing in the world has improved and its economy appears on the road to recovery, albeit a slow one. Those achievements pale, however, in comparison to the transcendence that never materialised in American politics and society at large.

Far from embracing his calls to bipartisanship, the opposition spared no effort to obstruct his work. In the aftermath of the financial crisis it became easy, not just for his opponents, to portray the inspiring senator who had stood against the Iraq war as the disappointing president who turned a blind eye to Wall Street while inequality continued to soar.

Hope Still

We may never be able to tell to what extent, in winning re-election, Obama benefited from the positions of his opponent and by his administration’s management of the hurricane Sandy emergency. At a crucial moment, the latter undoubtedly helped him be cast less as a disconnected leader, and more as a quietly competent manager who takes care of business. Grateful for all the help he can get. Asking for patience and hard work. Rejoicing if the numbers look better each month.

That President Obama was able to withstand the disappointment that follows idealisation, however, is hardly the product of chance. Nor does it mean he is no longer a symbol. He may have rather become a symbol of a more humane kind of leadership, whose success is not just the product of extraordinary brilliance but of a competent and loyal team. Leadership that promises no salvation, that acknowledges difficulties and asks for involvement to craft a path ahead.

Such leadership may be more broadly appealing and better suited to our day and age. It may inspire less ecstatic hope—but more resilient, and harder to displace.  I am curious to see what will happen once Obama reorients his administration’s efforts from the goal of earning four more years to that of building its legacy.

He once claimed that he would rather be a “really good” one-term president than a “mediocre” two-terms one. He can’t be the former any longer. With much support and a little luck he may well go down in history as an excellent two-terms one. There still is, as that iconic poster put it, hope.

 

Gianpiero Petriglieri,  MD (@gpetriglieri) is Associate Professor of Organizational Behavior at INSEAD, the Business School with campuses in France, Singapore and Abu Dhabi. He is an expert on the psychology underpinning the exercise and development of leadership, and the director of the Management Acceleration Programme,  INSEAD’s flagship executive program for emerging leaders.

 

Comments
RANDOLPH LINEHAN, INSEAD '74,

NOW FOR A MORE REALISTIC COMMENT FROM THE SOUTHWEST OF THE US: THE REASON OBAMA WON WITH A VERY THIN MARGIN OF POPULAR VOTE WAS VERY SIMPLE: HE LOST THE HISPANIC VOTE (DOWN FROM 40% FOR BUSH IN 2004 TO LESS THAN 10% IN 2012) AND THE UNDER 55 FEMALE VOTE BECAUSE OF HIS STANCE ON THE ABORTION ISSUE.

BY GAMBLING ON RYAN AS RUNNING MATE AND EXTREME ABORTION PLANK (REPEALING ROE VS. WADE) AND MAKING STATEMENTS AGAINST THE "DREAM ACT" AND IMMIGRTION REFORM, INCLUDING "SELF DEPORTATION," HE CLEARLY LOST THOSE TWO SECTORS OF THE POPULATION. THERE WAS NO GENERAL "ENTHUSIASM" FOR OBAMA: IT WAS THE ECONOMY STUPID, BUT THESE TWO IMPORTANT SECTORS OF THE US POPULATION VOTED AGAINST ROMNEY'S STANCES.

IT DOESN'T TAKE A "HARVARD BUSINESS SCHOOL CASE" TO UNDERSTAND THAT THE REPUBLICANS WILL HAVE TO REFORM THEIR POSITIONS ON ABORTION AND IMMIGRATION TO SURVIVE AND WIN AGAIN. OTHERWISE, LIKE SO MANY OTHER POLITICAL PARTIES IN US HISTORY, THEY WILL BE HISTORY.

THE COUNTRY IS AS DIVIDED AS IT WAS PRIOR TO THE ELECTION AND MR. OBAMA SHOULD BE ASKING HIMSELF WHY HE ONLY ACHIEVED A 50% + POPULAR VOTE AT A TIME WHEN HE WAS THE INCUMBENT, HAD ALL OF THE US GOVERNMENT RESOURCES IN HIS FAVOR AND A CLEAR AND EASY TICKET FROM BOTH THE HISPANICS AND WOMEN UNDER 55 TO WIN. I WOULD NOT CALL THAT MUCH OF A WIN!

- RANDOLPH LINEHAN, INSEAD '74

A,

Surely when using Intrade numbers to assess the damage inflicted by Obama’s win, one should mention the inherent assumptions? The prices are Arrow-Debreu prices, and are translated into odds by assuming risk neutrality. As long as people dislike the risks of any ‘damage’ inflicted by a particular election outcome, the 70/30 split used is incorrect.

In any case, respected or not, Intrade and Betfair markets were leaving arbitrage opportunities on the table for days before the election, so perhaps it was not the home of truly rational ‘investors’. Certainly more accurate information was publicly available (see canonization of Nate Silver), so I would hesitate to use Intrade’s numbers as an accurate representation of probabilities.
I don’t doubt there are companies, perhaps many companies, who would have preferred a Romney win. While these effects are easier to measure for companies listed on stock exchanges, it is less obvious that this is an unbiased sample. In particular when thinking of future growth, some of which may be in companies that are not yet founded, much less listed.

Indeed, perhaps reducing the ability of coal companies to pollute the world at will provides the opportunity for new firms to compete against these giants of the last century, who are finally forced to internalize costs of externalities. Those gains, however, would not be visible in stock prices. Yet. Whether they will materialize remains to be seen, but unless we have reason to believe they will not, they should not be ignored.

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