Soaring above...well...in the fray. Source: Google Images
I don’t agree at all with the Economist’s leader this week, which suggests that Barack Obama’s presidency was headed for failure until his health care victory last week. The health care victory was the icing on the cake, coming fourteen months into Obama’s first term, after he rescued the planet from an economic meltdown in a cooperative effort with other G-20 leaders, pulled the Security Council behind him in a tougher stance toward Iran, negotiated nuclear arms reductions with the Russians, and improved America’s image in the world. Bravo, Mr. President!
Politically, this fella is no slouch. Obama may well avoid what happened to Bill Clinton in ’94, a massive mid-term reversal, with the likes of Newt Gingrich snickering in the hall, John Boehner today looking like a dim photocopy of the Newt. Sure, the president has been aided by the Republican victory in Massachusetts. Yes, that’s right — aided by the Republican victory, a wake-up call that came ten months before the mid-term elections, just in time to deflate the egos of many in the West Wing, to cobble together a realistic health care victory, and to lay the foundation for a multi-month comeback to a mid-term election victory, or at least a less-nasty defeat. Such a Democratic upset this November seems more likely now, given the current state of the know-nothing Republican Party, as hamstrung by their defunct ideology and mediocre leadership now as they were in October 2008 when they couldn’t understand that capitalism would be saved by government intervention.
Let’s not underestimate the dimensions of this political success. I, not knowing much about Barack Obama in 2008, underestimated the mettle of this (at the time) inexperienced, leftish, mediocre legislator with barely any time outside the Illinois legislature. He is one of those lucky bets that is paying off.
Obama, his advisers, and dare I say it, the Democratic leadership of Congress, played this thing like a symphony. Right on the heels of the Mass. election, which I wrote about in January, it would have been highly unpopular to ram health care reform through, utilizing the funky procedures they are employing right now. Steny Hoyer had to button his lip in January. Now, the country has barely noticed how the Democrats are passing this thing. The Dems realized that not passing health care reform would be worse than stealing it in the middle of the night. President Obama can claim that he has done something for the American people, something big, and yes, controversial. But this accomplishment will be remembered as such, and everyone will forget how it was done. Brilliant insight on the part of the Democratic leadership.
Even better, the president held that mock-bipartisan discussion with the Republicans right after the Mass. election, providing fodder for his future argument on the hustings, that “I reached out to them and they bit my hand.” Now, he can dispense with the facade of bipartisanship (something he has never really exhibited), just when you want to dispense with bipartisanship, that is, in the run-up to an election. The gloves are off, folks, and the Democrats are towering over a party in disarray, drifting to the right, and sipping tea.
Now, what do you do with this victory? This is the question the Economist asks. Undoubtedly, the Obama people will answer, “Get re-elected.” And for starters, this means doing as well as possible in the mid-terms, to allow for a legislative foundation to pass more of the Obama agenda, though no one is quite sure what that is. Then, run in 2012 as the early 21st century’s FDR, the remnant of the right quivering in their jack-boots.
To keep up the momentum, the President just jaunted off to Afghanistan, to underscore his key foreign policy priority and to make indelible his new-found image of toughness. Having sustained criticism for dithering and allowing others to lead him, whether Democrats in Congress or foreign leaders, Obama is in pursuit of a victory abroad to match the massive, bloody victory he just won on the homefront.
I opposed health care reform in this blog. Not that I oppose health care reform per se. In fact, I am for it. It is the fair and right thing to do in America, and one of those important actions, so intangible yet so necessary, that underpins social peace and the fabric of our society. However, I oppose health care reform, an expansion of government entitlements, at this time. I still feel that America’s gravest fiscal crisis in history — the one we are in, which is set to get worse — is no time to expand entitlements. Entitlements — unemployment insurance, medicare, medicaid, social security, health care, etc. — could undermine America’s finances, if a medium-term fiscal plan is not put forward that puts government debt (now approaching an unhealthy 90% of GDP) on a downward trajectory. On this, I concur with the Economist.
I was impressed that the CBO found a way to fully fund health care reform, albeit with uncertainty that the revenues will be there. Cost containment is another uncertainty. Hats off to the Democrats for seeking a way to expand entitlements without further busting the budget. I do feel that some credit for this is due to those of us who put pressure on the party in power to respect fiscal rectitude, including many in the party of “no”. Democracy works.
I was a country risk analyst for fifteen years. Country risk analysts are a breed that understands what is at stake with a deterioration in America’s public finances. Country risk analysts assess the likelihood that a sovereign government will pay back its debts in full and on time. Rating agencies, where I was a managing director for sovereign ratings for much of the past decade, assign letter ratings — AAA, BBB, BB, etc. — that rank countries by their sovereign credit risk. Alas, the US is now in danger of losing its cherished AAA rating — the highest rating, the lowest risk — if the deterioration is not reversed in public finances (not to mention the trade deficit, which is driven in part by government deficits). I wrote on these matters last fall — a piece on fiscal policy and one on trade — and earlier this year on the prospect of the US losing its AAA.
Americans are spoiled. Never having experienced a real sovereign debt crisis, similar to what was experienced in Mexico after 1994, in Thailand, Korea, Indonesia and Russia after 1997-98, and in Argentina after 2001, Americans don’t worry about their governments’ finances. Most argue today that the US, wealthy as it is, can afford health care reform. But they don’t want higher taxes to pay for it. There has never been a worry about the safety and soundness of US government bonds. There have not been lines in America outside of defunct banks of depositors seeking their money since the Great Depression. This is why the backlash against the bank bailout last year was so strident…and so ill-informed. Country risk analysts know better and understand that America has bought some time with its stimulus package and bank rescue, but had better balance its books in short order. My worry is that the president and his inner circle are not as on top of these risks as the average country risk analyst is. Hopefully, Geithner and Summers and others will bend the president’s ear regarding fiscal rectitude, if they are allowed to remain in power.
America’s economy remains strong and large. The US dollar remains the world’s reserve currency. American competitiveness in high-technology, education, services, agriculture, defense and other industries remains intact. It would take some serious further mismanagement for the US economy to lose its position of number one. In 1905, Argentina had one of the leading economies in the world. Through over a hundred years of mismanagement, Argentina became the number one sovereign financial pariah, with a massive sovereign bond default in 2001.
The US has a ways to go before becoming Argentina, or even Greece or Britain, the latter more likely to lose its AAA than the US. But, such intangibles as credibility of the US dollar and US assets could evaporate quickly. Right now, those with cash in the world do not have a lot of options better than US dollar investments — euro investments look dodgy at best, yen investments are not so attractive, and other currencies do not provide the depth and safety to handle multiple trillions of investment dollars that pour into US, European and Japanese markets. Not yet at least. Watch this box on the Rising Powers to learn more about the risks and opportunities in the major Emerging Markets.
The US economy and US power are in decline, for sure. Don’t gnash your teeth or get panicky. We’re talking about relative decline, which is inevitable. With $45,000 in per capita income, versus China’s $3,500, America will not grow as fast as China. The Chinese economy will overtake America’s in a matter of decades. US power too — that is, America’s ability to influence events in the world — will also decline in relative terms.
It is not time to move to Beijing. What is critical is the manner and speed of America’s decline. If America ensures that the Rising Powers remain cooperative members of the liberal interational world order — characterized by free trade, currency convertibility, market economies, democratization, the generally peaceful resolution of disputes, and cooperation among the world’s great powers — then America can decline with peace of mind. Moreover, if America’s declining economic position does not occur suddenly and rapidly, producing dislocation and popular anger at home, then America can maintain its still-powerful, yet diminished position in the world with grace, proud of having led the most prosperous, fairest, least-bloody world order since humans stopped swinging from trees.
The surest way to protect the world’s liberal institutions and to co-opt the Rising Powers is for America to stay strong. So, American policy makers must see every policy option through the lens of American power. Balance must be sought between achieving a more equitable American society and reinforcing the pillars of American power. That is why I opposed health care reform at this time, while I fully understand the political imperative of doing it now. Those Democratic majorities won’t last forever.
Flush with his health care success, President Obama’s first priority no doubt will be to win elections — first in 2010 and then in 2012. To that end, he will attempt to chalk up victories in his chosen priorities. He will seek tangible victories in Afghanistan, some movement in the Arab-Israeli conflict, and progress on jobs and financial re-regulation. Nothing wrong with these priorities. The only thing missing perhaps is this lens of American power. Will such-and-such a policy bolster American power over the longer-term or not? If not, do not expend political capital on it. Is there anyone in the White House looking through this lens? I hope so.
Restoring fiscal soundness, which means cutting spending and raising taxes, should be priority number one, Mr. President. The president, who has sought to recast his leftish record as a centrist, should embrace centrism — and its centerpiece, sound finances — wholeheartedly. But he won’t. No one believes that centrism wins elections. I suspect if he did embrace centrism, he might be surprised that it could win elections. As the first truly centrist American president, Barack Obama would be on his way to achieving another first, following his most recent first — health care reform.
