Posts Tagged ‘decline’
“One man with courage is a majority.” Thomas Jefferson
My last post was about the disarray in Europe. What about America?
Let’s start with some interesting statistics. The famous American “fruit” company, Apple, according to the latest financial report, now has more cash to spend than the American government. While in itself not a critical factor, this still poses a sort of dilemma – is business so much ahead of the government in America?
In the backdrop of the on-going debt debate, Barack Obama looks like a man who picked a fight he is unable to finish. But wait. Obama just announced that Republican and Democratic leaders reached an agreement on raising the US debt limit and avoiding default. The deficit reduction is meant to happen over the period of 10 years. And both sides went to a seemingly lose-lose compromise just to get the deal. Will it hold or even pay off?
The debt-related stand-off in Washington is political in nature, having been initially thrust upon incredulous investors. Increasing America’s overdraft (which, according to Government Accountability Office, GAO, has been increased 74 times over the past 50 years) beyond $14.3 trillion (or facing the very 1st default in its history) should have been relatively simple. But Republican congressmen, furious about big government, have recklessly used it as a political tool to embarrass Obama.
America’s fiscal problem is not now — it should be spending to boost recovery — but in the medium term. Its absurdly convoluted tax system (allegedly changed 579 times only during last year) is very inefficient, and there is speculation that ageing of its baby-boomers will push its big number of entitlement programmes into bankruptcy. Obama set up a commission to examine this issue and until recently completely ignored its sensible conclusions. For long time, Obama also held the illusion that the panacea to the deficit is to tax the rich (top 5% who already pay 60% of taxes).
The problem, in America like in Europe, lies not just in the weak/inconsistent leadership and inability to commit to radical economic measures necessary to cure the ailing economy, but also in the political structures. Just like in Japan, its dysfunctional politics were stemming from its one-party system, in American Congress, the (moderate) centre — conservative Democrats and liberal Republicans — has collapsed, in part because partisan redistricting has handed over power to the extremes, ushering it into a radical quasi-one-sided system, not unlike the Japanese.
But American politics is less broken than many think or allege. Since 2009, Congress has passed a huge stimulus bill, ARRA (although there are 1.3 million fewer private-sector workers today than when the ARRA was passed), aimed at economic recovery, evidence that the legislature is still able to get things done.
American economy is becoming increasingly vulnerable. New data continue to reveal just how weak growth was in the 2nd quarter of 2011. The economy has expanded at a 1.3% annual pace. Markets are declining, and businesses are building up cash reserves as insurance against the worst. After two years of pitifully slow recovery, while tens of millions of workers are unemployed (currently at about 14 million) and wages are flat, the government is doing little to get back to economic growth.
Some possible solutions to the ailing American economy include:
- Government size to be reduced (public sector, expenditures) in order to put a dent in this debt.
- Congress to accept cuts on entitlements.
- Government to create a favorable environment for job creation; the private sector does the rest (recently, McKinsey conducted a research asking, “What is the single most important step the U.S. should take to create more jobs” and published the responses here).
- Continue pursuing/following-up with taxes for the top 5% (to be invested, for example, in increasing financial aid for college students).
- Move some (according to certain criteria) of 46% of American population, who pay no Federal income tax, into the ranks of the remaining 54%.
- Impose a national sales/VAT tax. Tax consumption (not investment) and reward savings.
- Let the capitalism (supply and demand) solve the housing problem instead of introducing artificial measures.
- Let the zombie (aka bailed out) banks/firms go, which might result (for some of them at least) in chapter 11/bankruptcy and making them (in majority of cases) downsize and restructure rather than liquidate.
- Wind down American military engagements abroad (two wars, Iraq and Afghanistan, would save up to $150 billion/year in addition to withdrawing, at least partially, 53,000 military personnel from Germany, 36,000 from Japan and thousands more in another 133 countries).
I started by quoting Jefferson and so I shall finish, hoping that Obama and Congress will act before it is too late.
“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” Thomas Jefferson
Europe is in disarray.
Appearance-wise and disregarding petty differences, the EU-27 are marching on the spot on foreign policy, defence, Schengen and the single market with the exception, notable but again not yet really convincing, of progress on financial regulation and supervision.
A layer deeper though, one encounters seemingly impassable hurdles of sovereign debt, vulnerable and domino-like arrangement of banks, and a poorly-designed Eurozone, the combined effect of which risk to disintegrate the Euro (for which the crisis was originally brought on by investors with genuine worries about the solvency of several euro-zone countries), on whose foundations the united European economic system was built. It is clear that economic integration has exhausted its potential, which is more limited than anyone had imagined at the beginning, for ensuring structural convergence of industry between Member States and ameliorating weak growth performances.
Presently, Europe appears to be heading towards a decade of stagnation with the triple threat of nationalism, populism and protectionism which is being dragged behind unemployment (9.9% and among young workers, more than twice that much). Industrial activity is already shrinking in Greece, Ireland, Italy, Portugal, and Spain. The time is coming when a new path towards integration, political this time, will reveal itself as indispensable. But no consensus exists for a new treaty. Ad-hoc formulas will therefore have to emerge as short term Band-Aids, exploiting the existing potentialities of the Lisbon treaty to be followed by long-term formulas, based on a complete revisit and revamp of European economic, social and political values and vision driven by a need for sustainability and prosperity.
Europe also finds itself faced with the colossal challenge of having to mobilize public opinion. But because of the lack of a real consciousness of European citizenship, public opinion is at best passive and at worst euro-sceptic. To mobilize it will demand the unveiling of a “European plan” and the rallying of a majority buoyed by the perception of a commonality of destiny on the economy and defence, two inseparable pillars.
European politicians, led by Angela Merkel, have gone to absurd lengths to avoid admitting two truths: that Greece is bust; and that north Europeans (Germans in particular) will end up footing a good part of the bill. The current rescue package reduces Greece’s debt, but not by enough to give it a genuine chance of recovery. As a result, Greece, and maybe other European countries, will need another bail-out rather sooner than later. To face this (upcoming) problem in a united manner, Europe might get “tighter together” by spawning a fiscal union, hitherto unprecedented, while trying to run away/re-distribute immediate problems.
There is also a part of blame to be laid on dysfunctional politics. In Europe national politicians, answerable to their own electorates are struggling to confront continent-wide problems – thus a crucial misalignment between expectations (by national electorates) and commitments (towards European policies) yielding, on average, ”value-less” results.
European leaders do however know what they need to do. They have been slow in doing for two reasons:
- magnitude of the commitment necessary to save the union is uncertain, and they don’t want to pay a penny more than is necessary, and;
- distribution of commitment costs is uncertain and not guaranteed, and no individual entity wants to pay a penny more than is necessary.
So what are those possible solutions to the ailing EU economy that EU leaders so far fail to carry out? Some might be:
- Peripheral debts to be addressed through austerity.
- Like in case of Ireland, to drop all unsustainable debts, not to continuously slowly the economic recovery.
- The Euro to compete with the national currencies, putting pressure on the ECB, which will ensure that the Euro is a low-inflation currency.
- A form of Eurozone bond, which would largely replace the national eurobonds issued by the individual countries.
- To bolster European emergency funding, which fight failing European banking contagion.
- Financial/fiscal integration to take place, including fiscal transfers to support peripheral economies while they get their budgets in order.
- European Central Bank to stop raising interest rates and being illusioned about inflation.
Just as in Japan two decades ago, politicians have failed to make the structural labor- and product-market reforms essential to spurring growth. Lack of strong leaders was the underlying problem of Japanese economy, which has not recovered yet. The turn has now come for European leadership to show what it is capable of, but there seems to be no leadership.