November 22, 2010
A few days before President Obama’s departure for Lisbon, two prominent Democrats exhorted him in the columns of Washington Post to announce publicly that he would not run for a second term in office. Having been seen as the best hope for the Democrats’ election chances in decades, President Obama is regarded these days as the party’s main electoral liability, and for good reason.
The 814 billion dollar stimulus package has failed to put the US economy on a strong path to recovery. Growth is sluggish and unemployment is still 9.7 percent. The US’s European allies in NATO are disgruntled by the strategic failures of the alliance in Afghanistan and especially in Iraq. The Chinese, which were initially courted assiduously by President Obama, have become the target of American policymakers who are calling for trade sanctions against Chinese imports. The president himself has embarked on a new course in foreign policy in Asia, which closely resembles George Bush Jr.’s hawkish “containment of China” doctrine. Thus little, if anything, remains of Obama’s progressive agenda that was responsible for his landslide victory in 2008. As a consequence most of his party colleagues are advocating, albeit wrongly, for a return to Clinton’s bipartisan deals, which saw the American left become the New Left – a by now thoroughly discredited political force in both Britain and the US. The choice this time is simpler. As The Economist argues, there is no neoliberal agenda left to steal from the Republicans that would in any way improve America’s economic performance or international standing.
If compared to the much more successful Chinese stimulus package, of almost equal size, the American one failed to deliver on growth because the money was used to prop up a few Wall Street mega-banks at the hard core of America’s casino capitalism system. The state-sponsored Chinese investment package was spent on upgrading the country’s infrastructure, which sent China’s growth rate soaring again.
The second quantitative easing adopted recently by the Federal Reserve, on the other hand, is going to be as successful in reigniting growth as was Franklin D. Roosevelt’s bout of dollar printing in 1933. To be sure, despite presidential efforts to promote exports in Asia, the US has never been an exporting powerhouse, like China or Germany, and is not likely to become one now. The only alternative to reduce drastic unemployment and get America moving again is not a second QE, but a second stimulus package, since the first one ended up in the wrong people’s coffers. As Robert Shiller, professor of economics at Yale, argues, this is the right time for the US government to borrow massively and spend big on infrastructure, as interest rates are close to zero:
“Low long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them. This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education.
Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth. Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone).”
To avoid raising income taxes, the introduction of some form of VAT should go hand-in-hand with pump priming measures that the American administration has failed to undertake two years ago. Unfortunately, in “the lawyers’ republic”, it is easier to reach a compromise with one’s political opponents than to convince them to agree on an economic recovery program which would benefit all citizens, not only those who were able to make large electoral contributions. (sources: The Economist, Project Syndicate, Le Monde diplomatique)Florian Pantazi