IS AMERICA FOLDING UP? THE MID-TERM ELECTION SEEN FROM EUROPE

Image:Republican candidates by state maps.png
It used to be that American elections were looked at as the perfect example of democracy in action. This time around the midterm election exercise has most people in Europe baffled. And I don't mean Europeans were surprised by the results: the Republican handwriting was on the wall, and, on both sides of the Atlantic, we saw it coming.
   Instead the questions that pop up in Europe are these: is America still a real democracy? Is America on its way out as a world leader?
   These questions are harsh, I know. Let me take them in turn.
   First, the lack of transparency regarding the funding of election campaigns can only have had adverse consequences. It is obvious to everyone that ultra rich Americans have poured tons of money to defend their own personal interests, particularly into the Tea Party (it got an early financial boost from the billionaire Koch brothers, followed by many others).
   Result? The political debate was highjacked and made to focuss on remarkably shallow arguments - essentially a call for smaller government and less spending -. Plus a lot of young, politically inexperienced and emotionally extremist people got elected. In California, two famous business women tycoons jumped into the melée, Meg Whitman of eBay fame, and Carly Fiorina, the former Hewlett Packard chief. If both ladies got a "shellacking" (to use Obama's word at his 3 November press conference - but of course he was referring to the Democrats), that's because California is something of an island within America, much more progressive and liberal than the rest of the country. The point is that over the next two years - until the Presidential election in 2012 -  the Tea Party is likely to play havoc with any attempts on the part of the Republican Party to negotiate with the Democrats - so expect gridlock on all major policies..
   Gridlock on fiscal policy was already expected by the Fed that wasted no time to launch a superlative quantitative easing measure: on November 3, it announced a bigger-than-expected $600 billion purchase of long-term Treasury securities by the end of June 2011. Sounds good but I'm not sure it'll work. When you're close to zero interest rates, monetary policy has essentially lost all its bite. Flooding the economy with cash is not likely to make much difference when the investment horizon is bleak and consumer markets are in retreat. Expect an even slower recovery from the Great Recession than what we've experienced so far...
   In just two years since Obama was elected on a vote of rejection of everything Republicans stood for, the tables were turned around yet again? Are American voters so fickle and so ignorant? So easily manipulated? It is hard to believe that Americans don't remember what happened in 2007 and why. If Wall Street collapsed and threatened to take with it the rest of the economy, it's precisely because Bush-era government was too small and didn't care to reign in the wild animal spirits of high finance. This was the era of no regulation and jungle capitalism, and it got us into the Great Recession. Moreover the bailout of Wall Street was Bush government doing, not Obama's. Yet Obama stood accused and Republicans are not mincing words when they say they want him out of the White House by 2012.
   That is what surprises Europeans: the spectacle of a country that got itself into trouble - the Great Recession - because of a particular set of policies and then is right back into it again, after just a short two-year interlude. On the face of it, this is not a very good or effective political system.
   The corollary of this state of affairs is that Obama will look like a weakened leader to America's partners in Europe and in the rest of the world. That cannot help America's image nor its role as a world leader.
   Could all this have been avoided? Yes, if Obama had played his hand better from the start. He tried too much to stay in the centre, bailing out the car industry and following through with the Bush-started TARP. His job-creation policies may have succeeded in creating 3 million new jobs or more in the private sector, but these figures were not bandied about by anyone. They were almost a well-kept secret.  On the foreign policy front, he wound down the war in Iraq but didn't pull out entirely (there are still 50,000 troops there). But his biggest mistake was to triple the presence of American troops in Afghanistan, with (so far) rather mediocre results. This continued engagement in war has meant Obama had no arguments to counter the Republican stand on deficit control and retreat of government from the economy.
   We're in for a prolonged walk in the desert, unless someone comes along with a good proposal to BOTH cut back on government expenditures AND increase spending so employment bounces back and new jobs are created.
   Impossible? Perhaps not. There could be a way out if only America would stop waging incredibly expensive wars abroad and start spending that saved money on job-creating programmes at home.
   What programmes? Stimulating consumption through fiscal measures hasn't shown itself particularly effective and the Republicans won't hear of it. But there are other ways to create jobs. Innovation is the key. Economists have long known (in particular since Schumpeter - in my view the greatest economists of the 20th century) that innovations are the movers in the business cycle. Innovations create new needs and new markets. This is particularly important in mature economies such as ours. Take a look at the car industry: it occasionally experiences surges in sales (like Chrysler last month) but these rarely last (Fiat, Chrysler's partner in Europe, experienced a hug drop in sales in the same month). Basically sales are driven by replacement needs as people sell off their old cars. To extend the car market beyond the well-off middle class, tools like consumer credit are used but in times of recession they don't work well: the poorer classes are the ones most directly hit by unemployment and the rest are worried about losing their job. The way out? A new type of product. In this particular case, electric cars could fit the bill but the problem is that they're still too expensive. If a cheap and technically convincing (but hybrids aren't) electric car existed, I'd buy it like a shot! So the way things are, I tend not to buy cars anymore (except for replacement) and I'm sure most people are like me. Who among your friends are the proud owners of a new, additional SUV?
   Spending on research and development to support innovation is probably the only way out of this recession. Other related investments (especially in education and adult training) should also be factored in so that a climate favourable to innovation is created.
   But how in the world is the US government going to find extra funds for this while at the same time trying to control its deficit and continue waging an exorbitantly expensive war in Afghanistan?
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