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As 'fiscal cliff' looms, stock markets shudder at economic 'uncertainty'

Tuesday's election has stirred stock markets' concerns about the economy, with the Dow Jones falling 2 percent Wednesday. The reason: Washington appears poised for gridlock – again.

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Back in the US, investors are also weighing what Obama’s win will mean for other economic issues, ranging from energy policy to restructuring the corporate tax code. Obama has called for tax reform, but has sketched a different vision from that of House Republicans.

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And in the run-up to Tuesday’s vote, Obama voiced support for expanded development of domestic energy sources, but it’s not clear if energy policies will change substantially in a second term.

Where the election does provide some new certainty is on health care and banking regulation. Obama’s Affordable Care Act and Dodd-Frank financial rules now appear set to be implemented, whereas Romney had pledged to seek repeal of those measures.

On monetary policy, too, Obama’s victory may also be a win for “status quo.” Romney had pledged to replace Federal Reserve Chairman Ben Bernanke. Although it’s not clear whether Obama will reappoint the chairman in 2014, investors now aren’t expecting a significant shift in Fed policy.

Markets were spared one major form of uncertainty: doubts about the election outcome itself. Despite a close-fought race and some concerns about voting-machine irregularities, the overall outcome Tuesday was clear. No season of recounts or court review awaits.

The fiscal cliff, coupled with the need for Congress to revisit its “debt limit” on Treasury borrowing, would have made the coming weeks a period of high uncertainty no matter who won.

Longer term, some economists say that the most important task for Washington policymakers may be to improve the very institutions – from elections to public schools – that undergird economic growth.

That’s the view of Daron Acemoglu, a Massachusetts Institute of Technology professor who has studied how countries prosper or decay. In a book this year written with James Robinson of Harvard University, he argues that nations prosper by nurturing inclusive institutions, which in turn spread economic opportunity and lay the foundation for innovation.

In a recent e-mail interview, Mr. Acemoglu cited several trends that raise worries about the future vibrancy of the US economy. Those include rising income inequality, lagging school performance, and a rising role of money and lobbyists in politics.

The good news, he says, is that “US institutions have shown great flexibility … in the face of similar challenges in the past.” But he argues that, with these issues posing a challenge for Republicans and Democrats alike, there is little room for complacency.

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