With the defeat of John McCain by Barack Obama, many people are wondering what effect, if any, an Obama presidency would have on the American and world economies. I will offer a few of my thoughts on that issue in this article.

Well, as you may have seen today the optimism surrounding Obama was short lived on Wall Street, and the Dow plunged 400 points on pessimism about protectionism and the currently bleak global outlook. If Obama is as much of a protectionist as he clamed to be on the trail (I.E. wanting to renegotiate NAFTA), such fears could be realized. Many of Obama's big wins were upper Midwestern states, where organized labor is strong, and he will want to please this group somehow so he can retain their support in 2012. Protectionism makes workers happy and countries poor, and protectionism during a moderate recession would be a disaster. Likely the first step out of this recession will be a rise in exports, and this rise will not happen if there is a sharp increase in protectionism.

Also, there is the matter of Obama's tax plan. Here's why high tax plans hurt economies: The government spends every dime it gets, but people save some of their income and spend some of their income. Taxes, of course, take money from people and give it to the government to spend. So if the government raises taxes, the net effect is a reduction in savings and an increase in current expenditures. This makes the economy look good in the present by boosting current expenditures, but it hurts future growth by reducing the amount of money invested in the economy. Money that a household would have spend on stocks, or that a business would have spent building new plants, will be taken and spent by the government. With less people buying stock businesses cannot raise money to expand, and with less factories there will not be as many jobs available.

The potential silver lining is that Obama seems to engender confidence in people, and consumer confidence is just what we need now. It is hard to estimate how large this effect could be.

I suppose right now we cannot say anything for sure. There is a very real chance that Obama will soften his position somewhat and move more to the center on taxation and protectionism. And, a bit of current expenditure from the government could be beneficial in this economy. I just hope that the Democrats can keep a cool head for the next two years while they basically control the government and not do anything too extreme.