Obama must lead charge for compromise to face challenges that lie ahead

From a certain angle, Britain's Coalition government is going to look rather good in the coming weeks. It will not be of much help to David Cameron, though, because the angle is only available in America. Whatever you think of the Coalition, it has reached compromises and held firm under testing conditions.

Across the Atlantic, compromise has been the political equivalent of a rare species over the last four years. Something you are told exists but that you very rarely get the chance to see. President Barack Obama did not need it in his first two years, when the Democrats controlled Congress. After the Republicans wrestled back control of the House of Representatives in late 2010, Washington could not achieve it except for last-ditch deals hatched in the shadow of potential calamities like national default.

On Wednesday, as Democrats were still celebrating and Republicans beginning the painful autopsy of their campaign, the Dow Jones Industrial Average had its worst fall in a year.

Were the wealthy on Wall Street voicing their dismay that Obama kept his job? That seems doubtful given both the Dow Jones Industrial Average and the S&P 500 climbed more than 50pc during his first four years in office. At the margin, Obama's victory also means the world is more likely to have a Federal Reserve chairman - whether Ben Bernanke or his successor - inclined to print money. The Republican challenger Mitt Romney had voiced concerns about the policy.

A simpler and more convincing explanation for Wednesday's drop is that investors were ringing the alarm bell over whether the political system in the US is up to the challenges that lie ahead of it. That may seem counter-intuitive given the world spent Tuesday watching the great wheels of American democracy turn. But it is not when you consider the bitterness of the fight, the closeness of the popular vote and Washington's recent track record of division.

"The reality is that we're going through a period that is historic in terms of its polarisation," says Norm Ornstein, the author of The Broken Branch: How Congress is Failing America and How to Get it Back on Track. "An ideological polarisation has become almost tribal."

Division in Washington is nothing new. Indeed, argument and a clash of opinion is an essential ingredient of democracy. Stark divisions are not particularly novel, either, according to Howard Rosenthal, a professor of politics at New York University. His analysis of Congressional voting records between 1897 and 2010 shows cross-party agreement on legislation began declining in the 1970s. The increasing refusal to compromise is exacerbated by America's punishing electoral cycle, which puts pressure on parties and presidents to spend more of their time in campaigning rather than governing mode.

It was easier for investors to ignore any discord in Washington when the economy was sailing along. Republicans and Democrats clashed bitterly as the financial and human cost of George W. Bush's decision to invade Iraq became clear, but it was at a time when financial markets were enjoying the US housing boom. That the political risk of investing in the US can no longer be shrugged off is coming into sharp focus because of what has been dubbed the 'fiscal cliff'. You have probably read about the cliff - the alarming nickname for the combination of government spending cuts and tax rises that Americans face in early January.

Just as troubling is why the US is staring at this double helping of austerity. The fiscal cliff is a trap set last autumn by a Congressional committee of Republicans and Democrats that was tasked with delivering a major agreement to reduce America's $16 trillion of debt. The cliff would be triggered if both sides failed to reach a deal. Compromise may be painful, so the theory went, but the cliff would be so much worse.

So much for that theory. Fast forward a year, and most economists believe that going over the proverbial cliff will be enough to choke America's recovery. You can see why investors, G20 leaders, the International Monetary Fund and almost everyone else are rightly anxious. Given the increasingly high stakes, investors should ask whether the acrimony hobbling policymaking in Washington simply reflects broader divisions in American society.

There is evidence that the gap in beliefs between Americans who identify themselves as Democrats and those who consider themselves Republicans has widened over the last 25 years. A survey published this year by the Pew Foundation found the gulf between such Americans is at its widest since 1987, with a far deeper divergence over the role of government than there once was.

That found an echo in an election in which Obama and Romney set out competing views on the role of government in the economy, deficits and taxation and almost split the popular vote between them. The exit polls also paint a vivid picture of the groups of voters Obama mobilised to return him to the White House. He won 71pc of the Hispanic vote, 55pc of women and 60pc of those aged between 18 and 24. However, in a country as diverse as the US, Hispanics are just as likely to have been swayed by Obama's support for immigration reform. Some women, in turn, will have been deterred by the Republican position on abortion.

So there are divisions among Americans. And, yes, some of them are animated by the competing views on the role of government in the economy that has been at the frontline of the war in Washington over the last two years. But not by any means all of them.

As the world looks on, it is also worth noting that both Republicans and Democrats have been allowed to keep digging their trenches because there has been no international pressure on America to make the painful decisions on which programmes to cut or who should pay more tax. Bond investors have not pushed up yields to a level where it has become painful, as they have done across southern Europe and threatened to do in Britain. That is partly because the US government bond market remains the safe-haven of choice of investors, and the dollar the world's reserve currency. They are advantages the US earned through more than a century of strong economic growth and political stability.

Prof Rosenthal fears that this week's election will only deepen divisions in Washington. That partly reflects the pessimism in the US towards Washington at the moment. Just 10pc of voters approve of the job Congress is doing, according to an August poll. Should Rosenthal be right, America's political system will be failing it just as its economy shows more encouraging signs of emerging from the four hard years since the financial crisis.

Having won a second election, Obama does not need to worry about winning a third. Painful as it may be for the winner, Obama should lead the charge for compromise on the tough decisions facing the US. It may help lift poll ratings for Congress and, importantly, shore up international faith in America's politicians.