Obama 2.0 and the world: Andy Xie
Commentary: U.S. president’s vaunted Asia pivot will be mostly talk
By Andy Xie
BEIJING (
Caixin Online
) — Obama won reelection despite a high unemployment rate, declining
average incomes and skyrocketing government debt because voters blamed
his predecessor for the economic problems and didn’t trust his opponent,
Mitt Romney.
Even though the economy has improved somewhat in the past three years,
the United States’ situation remains dire: the poverty rate is at a
historic high of 15%; middle class income is back to the 1995 level and
wealth to 1983; the unemployed who find jobs end up with significantly
lower pay than at their prior employment; and the combined local and
federal government deficit at 9.5% of gross domestic product and debt
stock at 120% of GDP.
The Republican Party put up a strange candidate to run against Obama.
Romney is a former private equity person. So soon after a financial
crisis caused by people like him, it seemed an odd choice, even though
he was not one of the crooks responsible.
His background just didn’t pass the smell test. The contest was so close
towards the end because Obama screwed up in the first debate.
About Caixin
Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs.
• Get the Caixin e-newsletter
Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs.
• Get the Caixin e-newsletter
The role of the government was the issue during the contest. The
Republicans campaigned on shrinking the government, the Democrats on a
caring government. The election result, however, didn’t give a clear
verdict on the issue.
On the surface, the election kept the status quo: the Democrats kept the
White House and Senate, the Republicans the House. The undercurrents
suggest a country much more divided than before.
Romney won the traditional Republican states that are poorer than the
national average and are net beneficiaries of Federal tax dollars.
Voting for a smaller government is hardly in their best interest. Also,
he won among the older population who are more dependent on Medicare and
Social Security. Voting for a smaller government is hardly in their
interest, either.
This election was more about race than anything else. Romney won 70% of
the white vote. Obama won over 90% of the black vote and over 70% of the
Hispanic and Asian vote.
The United States is amidst a profound transition towards a multi-ethnic and multi-religious society. In its first two centuries, the country absorbed mostly Europeans. Hispanics and Asians are now the fastest growing groups in the country. The Roman Empire first gave citizenship to other Italians and eventually to the people within the empire. What’s going on in the United States is similar to the second stage of Roman integration. The future of the United States depends on whether the existing majority accepts this change and whether the newcomers are additive to the system, not subtractive. The answer to both remains uncertain.
The tilt of the Asian vote toward Obama demonstrates the importance of
race in this election. In 1992, Bill Clinton won only 31% of the Asian
vote. Asian-Americans have relatively high incomes and are least
dependent on government help. They should be a natural constituency of
small government Republicans. That they are not shows that the raison
d’être of Republican Party is not economics anymore.
The party is a coalition of business interests who want low taxes and
fewer regulations and evangelical Christian voters. The latter block
delivered all states Romney won. It shows what’s important in the
Republican Party.
As demography tilts further toward the Obama coalition, the Republican
Party can compete by becoming more like the Democrats or shift to
extremist tactics. I’m afraid the latter is more likely.
A conservative democracy
The American democratic system is designed to slow, but not prevent change.
In the 2012, general election, the Democrats actually won more votes
than the Republicans in the elections for the House. But the Republicans
retain a comfortable majority there. The reason is that the seats are
contested one at a time within a district. The majority party at the
state level can redraw the district to make the election more favorable
to it.
President Obama pardons turkeys for Thanksgiving
President Obama pardoned a turkey on Wednesday, and for the first time, the public voted on which turkey should get the presidential pardon.
In theory, 26% of the voters could elect a majority in the congress or a
president. Of course, it is statistically difficult. But, the system
gives incumbents an advantage to overcome a majority. It prevents a
temporary and irrational flare up in popular sentiment to change the
political system and damage the country. If the popular sentiment is
lasting, the system eventually conforms to the will of the people.
In addition to the checks and balances among the different branches of
the elected government, an independent and appointed judiciary makes
radical changes even more difficult.
A government that adopts change hastily could be struck down by a single
judge. Even though the judiciary can sometimes spearhead change, like
in abortion rights, it is by and large the most conservative branch of
the government. Checks and balances and slowing but not resisting change
are the secrets for the longevity of the United States’ democratic
system.
The Athenian democracy in the fifth century B.C. destroyed itself by
allowing public anger to decimate its best and brightest. The Roman
republic fell to first mob rule and then military dictatorship because
the system concentrated too much power among vested interests that
refused to address popular grievances.
The Weimar Republic gave way to Adolph Hitler’s dictatorship because the
system allowed total power handover to a party that won the most votes —
not even the majority — and that power was not checked against by other
branches of the government.
In two centuries, the United States abolished slavery and gave blacks,
and eventually women, the right to vote. Now it is beginning the process
of giving gays and lesbians the right to marry. Big problems in U.S.
history have all taken a long time to resolve, but they do get resolved.
The delay prolongs the pain for the affected, but avoids hasty and
destructive change.
The United States is amidst a profound transition towards a multiethnic
and multi-religious society. In its first two centuries, the country
absorbed mostly Europeans. Hispanics and Asians are now the fastest
growing groups in the country. The Roman Empire first gave citizenship
to other Italians and eventually to the people within the empire.
What’s going on in the United States is similar to the second stage of
Roman integration. The future of the United States depends on whether
the existing majority accepts this change and whether the newcomers are
additive to the system, not subtractive. The answer to both remains
uncertain.
The fiscal cliff
When raising the debt limit for the Federal government a few months ago,
the two parties couldn’t agree on how to address the deficit issue and
just adopted conditions for another round of negotiations at the end of
2012. The conditions are that, if the two sides fail to agree, the Bush
tax cuts, Obama’s payroll tax cuts and other assistance programs, and
some across-the-board spending cuts would automatically go into effect
in 2013.
Page 1
Page 2
By Andy Xie
Continued from page 1
Page 1
Page 2
The total amount involved is 3.5% of GDP. The government and market
analysts believe that this contraction of the Federal budget would cause
another recession and increase unemployment above 9% by the end of
2013.
Obama ‘s line in the sand is that the households with income above
$250,000 and individuals making above $200,000 would see their top tax
rate climb back to the Clinton-era 39.5% from the 35% they received
under George W. Bush. Obama emphasized his position during the
presidential campaigns and earned the right to hold this line.
The Republicans, especially the “tea party” members, have sworn against
any increase in the marginal tax rate. The election result has weakened
the Republicans’ hand. Its leadership sounds conciliatory in
negotiations. But it is not clear that the “tea party” members in the
Congress will compromise this time.
The market has become optimistic about the conciliatory rhetoric from
both sides and recovered some of its losses since the election. The
optimism may prove premature.
The Republicans, especially the “tea party” members, have sworn against any increase in the marginal tax rate. The election result has weakened the Republicans’ hand. Its leadership sounds conciliatory in negotiations. But it is not clear that the “tea party” members in the Congress will compromise this time. The market has become optimistic about the conciliatory rhetoric from both sides and recovered some of its losses since the election. The optimism may prove premature.
The Republican Party won’t surrender on the tax issue. Even though the
Obama administration has stated that it is prepared to go over the
cliff, it really doesn’t want this. The party that occupies the White
House is always blamed for a recession. Hence, it is likely to seek a
compromise.
The solution that the market expects and wants is a grand bargain
between the two parties to sort out expenditure and revenue for the next
decade. This is unlikely. I think that the two parties would agree to a
temporary measure to get through 2013, involving some temporary tax
increase on the rich and spending cuts.
Going over the cliff is good for the United States in the long run. Even
though it would cause a recession in the short term, it would roughly
halve the Federal deficit. It is at least a major step towards fiscal
sustainability. But, as the baby boomers retire, government expenditures
on health care and social security will escalate. Going over the cliff
merely postpones the debt crisis.
U.S. fiscal sustainability requires both controlling expenditure and
raising revenue. On the expenditure side, some increase in the
retirement age may be inevitable. Also, means testing for social
security, i.e., reducing benefits for well-to-do seniors, is also
needed. Most important, there must be control over the escalation of
health care costs.
A McKinsey study shows that higher doctor and hospital charges explain
half of the U.S.’ health care costs, which are twice as high as in other
developed economies. Unless the government does something about it, the
escalating health care costs will bankrupt the U.S. government.
Even with maximum possible expenditure cuts, the United States’ local
and Federal governments can’t cut expenditures significantly below the
current 35% of GDP. For an aging society, it is hard to see how this
could be done. Hence, the Republican intransigence against raising taxes
is not realistic. Unless it compromises, a debt crisis is a matter of
time.
AIG plans to invest $500 million in PICC
People's Insurance Co. (Group) of China, seeking to raise up to $3.6 billion in a Hong Kong IPO, is attracting investors like AIG.
The grand bargain is not coming anytime soon. The U.S. government will
likely have more temporary measures to keep the budget going. The
uncertainty will linger until next crisis.
The rise of protectionism
The second Obama term will be significantly more protectionist than the
first. Without the auto industry bailout in 2009, the Midwest swing
states may not have voted for him and there would be no second term. In a
divided electorate, micro-targeting is highly effective in determining
an election outcome. Learning from this lesson, the Obama administration
is unlikely to do anything harmful to the manufacturing interests in
the Midwest.
As part of its pivot to Asia, the United States is trying to expand the
Trans-Pacific Strategic Economic Partnership Agreement (TPP). The
existing members are the United States, Chile, Singapore and New
Zealand. Australia, Peru, Vietnam, Malaysia, Mexico and Canada are
negotiating to join.
Global Dow
• U.S.: Market Snapshot | After Hours
Tools
• Latin American and Canadian indexes
• European indexes | Asian indexes
More on the Markets
• Global Economic Calendar
• Bond Report | Oil News | Earnings Watch
• Currencies | U.S. Economic Calendar
The TPP has been touted as a block to offset China’s weight in Asian
trade. I suspect that the United States’ internal constraints will
prevent it from taking off in a significant way. For example, having
Vietnam as a member has much bigger implications than having Singapore
or Chile.
Indeed, the United States will use most anti-dumping measures to
restrict imports that compete against America’s domestic industries.
Anything related to the auto industry is off the limits. That’s why the
United States is complaining to the WTO about Chinese auto parts. It is
also imposing protectionist measures against Chinese solar power
equipment.
The protectionist bent of the second Obama term will have a significant
effect on export-oriented East Asia. Even though most measures will be
against Chinese exports, other countries, like Japan and South Korea,
provide equipment and components for such products.
All countries will be affected. As the United States backs down from
free trade, others may follow. The era of trade-led global economy is
over. In the past two decades, global trade has risen twice as fast as
GDP. A one-to-one relationship is more likely in the future.
The pivot to Asia
After being bogged down in Iraq and Afghanistan for a decade, the Obama
administration has been talking about pivoting to Asia in foreign
policy. The actual content so far includes the deployment of a few
dozens of marines to Australia, some extra warplanes to Okinawa and a
few navy ships parked at Guam. The U.S. government talks about much more
to come.
I seriously doubt that the Asian pivot will have enough substance behind it.
The United States’ fiscal situation makes significant cuts to the
defense budget inevitable. Its defense budget accounts for 45% of the
global total, while its economy is about 23% of the world’s total. The
United States cannot spend twice as much on defense with such a large
fiscal deficit. The inevitable cutting will make the Asian pivot
difficult.
Regardless of what the U.S. government says, its foreign policy is
inevitably pulled into the Middle East. It’s been so for the past half
century. The current decade is unlikely to be different. Something
always happens in the Middle East to suck the United States in. The
Asian pivot will remain mostly talk.
The talk has been quite effective so far. It has sown tension between
China and its neighbors. The American effort mostly involves Secretary
of State Hillary Rodham Clinton visiting the region repeatedly. She is
literally one woman army.
As long as China keeps its cool in dealing with its neighbors, the
tension won’t turn hot. And I doubt that Clinton’s successor will be as
effective.
U.S. president tends to focus on foreign policy when it is difficult to
achieve anything domestically. Obama is in such a situation.
When a weak successor to Clinton is found, it will give him the
opportunity to get involved more. Asia will be his preferred
destination. Unfortunately, regardless of his intention, he will be
sucked into the Middle East.
The odds are that, like his predecessors, he will try to broker a peace
deal between the Israelis and Palestinians at some point and without
success.
No comments:
Post a Comment