Some are born great (like Harry Potter). Others have greatness thrust upon them. It seems that President Obama is falling into the latter category. He probably knew something of this sort was coming when he ran for the Presidency. He might not have accounted for how much he would need to rise to meet the challenge. The title of the blog suggests a question which I am in no position to answer. So I’d rather illustrate why the question seems important.
I’ve seen politics in the UK and India but nowhere has it been as polarized as in the US; at least when it comes to serious things. That the tea party, with vocal supporters of default can actually exert considerable influence in the decision making is alarming. While its most likely that default will be averted in the eleventh hour, the very fact that it took that much of give and take to reach a consensus pushes me to ask the question I did. Democracies are strong because they involve people. Any policy made is the result of a consensus and hybridizes ideas of different parties. Yet when faced with obstinate parties and unwavering ideologies: the core of any consensus, “compromise” is lost. That is a divided house. It’s a place where people start caring more about their beliefs and ideologies. Not about the house and the nation.
On the other hand there is the President. He is the elected representative, indirectly chosen by the people to lead them. To prevent concentration of power he is subject to the legislators on Capitol Hill. At times, he has the luxury of exemplary support in both houses. Else he executes the policies of the Federal government by engaging with the hill. His personality, charisma and power are crucial to the enabling of consensus. Several American presidents’ present precedents on this matter, including Dwight Eisenhower (often poor relations with Congress) and Ronald Reagan (exhausted the Soviets). In this case however, President Obama clearly is not able to break deadlock. He might be able to cajole his own party to accept cuts in social policies. He cannot get the G.O.P house speaker, John Boehner to accept closure of tax loopholes, let alone rises. Boehner in turn is under pressure from the conservative right to concede not an inch of ground. The democrats too refuse to concede deep cuts in a bloated and inefficient social service. Clearly if every party is to have their way a default is inevitable. A default will be terrible. It will spark partial government shutdown, quickly depreciate the dollar, increase cost of borrowing, and bump up actual cost of living. It will jeopardize the American and Global economy. Eventually as the American people get affected Congress will undoubtedly act. It would then be too little too late.
What the president must remember is that while Congress will be to blame, it is a body of 535 people. Eventually, they are responsible to their constituent which consists of a couple of million; at most. The president on the other hand is an individual directly responsible to the nation; vested with enormous authority to act in its interest. Congress might be paralyzed by the powerful weakness of democracies: indecision. That is why the executive exists. It is time for the president to do something truly presidential, if he can.
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Thursday, July 28, 2011
Monday, July 18, 2011
Dont stop at the Debt limit
Defenitions:
Rich-top 20%
Middle-40-60%
Poor- bottom 20%
This post closely follows my last post, both in chronology and essence. Right now D.C is fighting a sharply divisive battle to extend the Federal debt limit. Failure to do so will mean partial U.S default, a drop in confidence in the US dollar and bonds. Bad news for America! The crux of the issue is the means to decrease government deficit to prevent further escalation of the debt limit. De-escalation of the wars and reduced spending on the US military is a partial given. I mean you could squabble on whether to keep one extra aircraft carrier or not but that’s just about it. The military spending of the United States as a percent of GDP is the same as that of a China. So ideally unless China is secretly going bankrupt, this spending seen disjointed from the whole problem should not be of major concern.
Social services are a different ball game. The entire healthcare system accounts for 38%-45% of the entire government spending and 16% of GDP. Private audits as well as most senators would agree that the system lacks in efficiency. During the general economic growth of the US, it would seem money was merely pumped into the system without any concerted effort to increase efficiency. So your doctor gets paid so much more than doctors elsewhere. On the flip side despite being the wealthiest country in the world, the United States suffers from one of the most inequitable distribution of wealth. The GINI coefficient which is a measure of income inequality paints a sad picture. Inequality in the states is worse than most of Asia, Africa and far worse than most of Europe. So when you cap the tax for the richer sections of the society you get far less revenue from taxation than you would in a country with a better wealth distribution. The logical argument has been that giving this financial freedom to the wealthy allows them to reinvest in the economy. This ensures prudent investment, better management of wealth and smaller/efficient government. Something’s going wrong though. This is a theory.
A Forbes survey (1) actually does a pretty good job of highlighting how Americans make and spend their money. Crucially you’ll observe that rich Americans do not spend the highest as a percent of their income on most things. Where they do the difference is only marginal. True, even a small percentage will have high value but so will the difference of the saving they have, compared to the poor and middle class. The question is what happens with these savings. Unsurprisingly a lot is in investment but where? In nations like India and China, banks offer a far higher rate of interest and then use the public money to do the investing. This has an advantage of ensuring the money is invested in the domestic market. Banks have an incentive to stimulate local markets to ensure their own growth. America however seems to be suffering from a flight of capital. High net value individuals seem to be investing more and more in better appreciating economies. Often even if the investment is directed to American companies, the investment is eventually pumped overseas. The fact is that as economic polarization continues (and that is irrefutable) a vast amount of the investment being made is offshore restricting US job growth, further polarizing wealth. A vicious cycle.
Another significant investment the rich in America make is in the luxury market. This can cover anything from Gulfstream jets to Mansions. The market value of these products may be high, but the positive economic impact is far less; depth wise. Simply, if the money was split and invested in other development ventures more people would've been helped. The problem maybe, that America is getting too successful. At least a section is. They chose to fund the lives and the activity of the many others. Doing so they have created a complacent workforce on a global back foot. Now as the rich choose to shrug of this responsibility and the political guns go off like loose cannons, careful planning is again ignored. Question I want to ask is how do you make sure Americans invest in their country again? How do you improve the competitiveness of existing industry and spawn new ventures to attract new investment. For now, the grand bargain is essential. No single avenue can generate enough saving to create a definite impact on debt. So increase taxes for now and look for investment patterns amongst the rich before relaxing them again. As for Medicare/aid well really you cant do much because of the insurance companies.
Thing is you can solve this problem multiple ways with strong leadership. The best way may be to incentivize the rich to invest locally. Use a part of that to modify healthcare and spawn new industry via research. Play forces of corporate insurance payers against insurance companies. Play inventors and entrepreneurs against overseas investment. Importantly try to hasten the global flattening. Promote a more equitable economy by selective reduction of social services. Divert the savings to tertiary education and saving. Promote STEM, making graduates valuable to industry as well as research. Essentially: force skill into the workforce by denying benefits to the uncompetitive but providing support to ensure upward mobility. I accept the fact that eventually India and China will become as rich as the United States, maybe even per capita wise; someday. What I cannot agree with is that the American economy must fall for them to rise.
(1) http://www.forbes.com/2006/07/19/cx_de_americanspending_11.html?thisSpeed=35000
Rich-top 20%
Middle-40-60%
Poor- bottom 20%
This post closely follows my last post, both in chronology and essence. Right now D.C is fighting a sharply divisive battle to extend the Federal debt limit. Failure to do so will mean partial U.S default, a drop in confidence in the US dollar and bonds. Bad news for America! The crux of the issue is the means to decrease government deficit to prevent further escalation of the debt limit. De-escalation of the wars and reduced spending on the US military is a partial given. I mean you could squabble on whether to keep one extra aircraft carrier or not but that’s just about it. The military spending of the United States as a percent of GDP is the same as that of a China. So ideally unless China is secretly going bankrupt, this spending seen disjointed from the whole problem should not be of major concern.
Social services are a different ball game. The entire healthcare system accounts for 38%-45% of the entire government spending and 16% of GDP. Private audits as well as most senators would agree that the system lacks in efficiency. During the general economic growth of the US, it would seem money was merely pumped into the system without any concerted effort to increase efficiency. So your doctor gets paid so much more than doctors elsewhere. On the flip side despite being the wealthiest country in the world, the United States suffers from one of the most inequitable distribution of wealth. The GINI coefficient which is a measure of income inequality paints a sad picture. Inequality in the states is worse than most of Asia, Africa and far worse than most of Europe. So when you cap the tax for the richer sections of the society you get far less revenue from taxation than you would in a country with a better wealth distribution. The logical argument has been that giving this financial freedom to the wealthy allows them to reinvest in the economy. This ensures prudent investment, better management of wealth and smaller/efficient government. Something’s going wrong though. This is a theory.
A Forbes survey (1) actually does a pretty good job of highlighting how Americans make and spend their money. Crucially you’ll observe that rich Americans do not spend the highest as a percent of their income on most things. Where they do the difference is only marginal. True, even a small percentage will have high value but so will the difference of the saving they have, compared to the poor and middle class. The question is what happens with these savings. Unsurprisingly a lot is in investment but where? In nations like India and China, banks offer a far higher rate of interest and then use the public money to do the investing. This has an advantage of ensuring the money is invested in the domestic market. Banks have an incentive to stimulate local markets to ensure their own growth. America however seems to be suffering from a flight of capital. High net value individuals seem to be investing more and more in better appreciating economies. Often even if the investment is directed to American companies, the investment is eventually pumped overseas. The fact is that as economic polarization continues (and that is irrefutable) a vast amount of the investment being made is offshore restricting US job growth, further polarizing wealth. A vicious cycle.
Another significant investment the rich in America make is in the luxury market. This can cover anything from Gulfstream jets to Mansions. The market value of these products may be high, but the positive economic impact is far less; depth wise. Simply, if the money was split and invested in other development ventures more people would've been helped. The problem maybe, that America is getting too successful. At least a section is. They chose to fund the lives and the activity of the many others. Doing so they have created a complacent workforce on a global back foot. Now as the rich choose to shrug of this responsibility and the political guns go off like loose cannons, careful planning is again ignored. Question I want to ask is how do you make sure Americans invest in their country again? How do you improve the competitiveness of existing industry and spawn new ventures to attract new investment. For now, the grand bargain is essential. No single avenue can generate enough saving to create a definite impact on debt. So increase taxes for now and look for investment patterns amongst the rich before relaxing them again. As for Medicare/aid well really you cant do much because of the insurance companies.
Thing is you can solve this problem multiple ways with strong leadership. The best way may be to incentivize the rich to invest locally. Use a part of that to modify healthcare and spawn new industry via research. Play forces of corporate insurance payers against insurance companies. Play inventors and entrepreneurs against overseas investment. Importantly try to hasten the global flattening. Promote a more equitable economy by selective reduction of social services. Divert the savings to tertiary education and saving. Promote STEM, making graduates valuable to industry as well as research. Essentially: force skill into the workforce by denying benefits to the uncompetitive but providing support to ensure upward mobility. I accept the fact that eventually India and China will become as rich as the United States, maybe even per capita wise; someday. What I cannot agree with is that the American economy must fall for them to rise.
(1) http://www.forbes.com/2006/07/19/cx_de_americanspending_11.html?thisSpeed=35000
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