AFTER feisty debates, campaign stops, billions spent on ads and countless candidate "robo-calls," America has re-elected Barack Obama as Commander in Chief.

Now the real work begins.

The economy is eking out a half-hearted recovery, and housing is slowly beginning to perk up. However, unemployment remains at a stubborn 7.9 percent, investors are skittish and businesses are still reluctant to spend.

What should Obama prioritize over the next four years?

"The first thing the President needs to do is solve the immediate short-term fiscal cliff problem," says Wharton finance professor Franklin Allen. "The second is to put us on the road to long-term fiscal sustainability," which will probably involve a reform of Medicare. Third, he suggests, is to decide how to reform the corporate and personal tax codes. And fourth: Figure out what to do about the mortgage market and government-supported enterprises such as Fannie Mae and Freddie Mac.

Allen's views reflect those of several Wharton professors, who point to the so-called "fiscal cliff" as the highest short-term priority, followed by comprehensive budget reform and a re-thinking of the tax code and some entitlement programs.

"Getting the economy up and running again at full steam is job No. 1." says Wharton professor of business economics and public policy Robert P. Inman, adding that another round of fiscal stimulus may be needed, preferably in the form of broad-based tax cuts.

To boost jobs, Inman favors federal programs that invest in human capital and skills development rather than infrastructure projects, which he sees as a role for the states.

Long term, bringing the federal deficit under control is a "more pressing" priority. But in the short term, he says, "the main thing here is to not go off the fiscal cliff."

Avoiding double-whammy

The "fiscal cliff" refers to the expiration of the Bush-era tax cuts with simultaneous cuts in government spending, a US$600 billion double-whammy of austerity that will kick-in on January 1 unless lawmakers find a way to avoid it.

Wharton business, economics and public policy professor Mark Duggan sees the fiscal cliff as a short-term crisis with a long-term opportunity to reform the tax code and bring government spending in line with revenues.

"It gives policy makers a real opportunity to make tax policy and spending a little smarter," he says. "How are we going to change the tax code? Are we going to try to raise tax revenue as a share of the economy, or are we going to do all the reduction on the spending side? Or are we just going to keep running trillion-dollar deficits?"

Taming entitlements

On the spending side, reforming social security and Medicare are two keys to long-term fiscal health, but the nation's aging population makes the task an unpopular one. In 2010, there were five non-elderly adults in the United States for every person over 65.

By 2030, the ratio will be 3 to 1 as the pool of elderly citizens expands in size. "The demographics are going to get worse every year," Duggan says.

The impact of Medicare and Medicaid is also expected to increase over time as a result of changes in the Affordable Care Act. These entitlement programs need to be tackled as part of overall budget reform, according to Duggan.

"On average, about US$8,000 of your taxes a year are going to Medicare and Medicaid," he says. "And that's going to grow more rapidly over time compared to incomes because of changing demographics. Whatever we do, those two programs are going to need to be reformed one way or another, so hopefully we can do it in a smart way. These programs are the biggest driver of our budget deficit."

According to the Congressional Budget Office, the US government debt came to 73 percent of gross domestic product in fiscal 2012. Spending is increasing at such a rapid rate that it is not possible to raise enough revenues to match it.

Investors are increasingly reluctant to invest in businesses in the United States because they see massive tax increases on the horizon. Yet the government has remained deadlocked and unable to find a way out.

"These are big, big problems, and they are going to require big solutions," says Kent Smetters, Wharton professor of business economics and public policy.

Smetters argues that the fiscal cliff is a minor issue compared to the long-term problem of deficit spending. "The fiscal cliff is a short-run problem. The big problem is the fact that we have massive amounts of debt, and we're going to have to figure out how to achieve balance."

Two 'daggers'

Without good solutions to the fiscal cliff and long-term fiscal imbalances, the fragile housing market recovery could falter, warns Wharton real estate professor Susan M. Wachter.

"We've got two daggers at the heart of the housing recovery," Wachter says. In the short run, there is the danger of the fiscal cliff pushing the economy back into recession. And in the long run, there is the danger that interest rates will spike if the country does not address its deficit spending. Both issues are important because the mortgage market depends on low, long-term interest rates.

Beyond the immediate problem of the fiscal cliff and long-term budget issues, Wachter also would like to see the President add the housing finance system to his list of things to fix. The housing market is beginning to recover, but the recovery is slow and weak, she adds.

No blaming China

And jobs are one of the biggest priorities in the short term.

High unemployment magnifies and exacerbates many other problems, Wharton faculty say.

One thing the President should avoid, according to Wharton business economics and public policy professor Howard Pack, is picking a fight with China over jobs.

"If ... unemployment remains high, there will be a very big temptation to say, 'Let's blame China'," says Pack.

But a trade war with China would be a mistake, he notes.

Trade sanctions might be politically popular and "will make people feel like they are doing something, but they won't solve the problem. And because China holds so much of our debt, it could do a lot to retaliate."

Like many of his colleagues, Pack would rather Obama focus on the ballooning debt problem.

The only way out is to both increase taxes and curb government spending, he says, "but nobody wants to do either one."

He hopes the government can break the stalemate, but is "not optimistic."

Meanwhile, if "debt keeps going up and interest payments keep going up ... it will be increasingly difficult to get the deficit under control. The costs of servicing the debt will become enormous."

So far, the United States has been lucky, because the interest on the country's debt is not very high.

But in the future, if interest rates go up to 5 percent, for example, "we will be paying enormous interest out each year, and a lot of that interest goes overseas," Pack points out.

At some point, the rest of the world may no longer be happy to buy American securities. "Then we'll have a huge problem," he says. "We can't go on like this much longer without a crisis."

Adapted from China Knowledge@Wharton, http://www.knowledgatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2696