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Jun 14 2012
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US Economics

OBAMA – ROMNEY BATTLE PART 2: ‘Winning Wisconsin’ Test Case. By Darren Lawlor

All too often, emotion and political expediency replaces rational economic sense and fiscally responsible actions.  The political gridlock pits Republicans (ruling the House of Representatives) against Democrats (ruling the Senate and, of course, the Presidency). However, it is at state level that the most revealing battles are being fought – in a tough 5 month slog between President Obama and challenger Mitt Romney – to hit 270 electoral votes and get handed the keys to the most powerful office in the world. These battles have intriguing localised economic roots.

In a small, Midwestern state with just over 5.5m inhabitants, Republicans got an early chance to test their deficit busting ‘small government’, pro-private sector economic arguments to a restless electorate who, although demographically pro-Obama could be drifting toward Romney thanks to his economic message.  The proxy battle waged recently in the $60m gubernatorial recall election in Wisconsin was an early warning shot at the Obama juggernaut – a recall initiated by over confident Democrats seeking to prematurely end the tenure of Governor Scott Walker (Republican), 18 months into his 4 year term.  Walker won the June 5 election by 7% (53-46%) a wider than expected margin.

The whole recall, like the state itself,  was a small but pivotal set piece in what is typically American economic theatre. Wisconsin is all about the power of unions or as the Americans say ‘Organised Labour’. In attempt to slash the states $3.8bn budget deficit, Walker and the state Republicans controlling the state legislature, voted in favour of Walkers first budget – restricting the collective bargaining rights of unions and sought to keep pay aligned with inflation among other things such as removing automatic union contributions from employee pay checks and making public workers pay for insurance.  Bargaining power of unions, in challenging economic times, is always reduced – so goes the theory – as unions can’t hope to seek pay increases etc for union members in a state with 6.7% unemployment (the term ‘blood from a stone’ springs to mind). Unions as a result, as in other states, are suffering from waning power which in turn undermines traditional support for Democrats – something which President Obama’s team clearly acknowledges by his deliberate absence from campaigning in the state. The reason is simple – this race turned national – and when it comes to ‘economic policy’ at national level,  Romney has the advantage.

In a rather open admission of weakness, challenger Tom Barrett (Democrat) continuously tried to make the recall about everything BUT the union issue. In essence, although a Republican activist group has declared “this battle is not about Wisconsin, its about America” – the same phrase could be used by Democrats. Walkers own message was succinct – effectively ‘states cannot continue to spend money they don’t have.’ This is the Republican ‘fiscal responsibility’ argument of 2012 consisting of promoting tax breaks and slashing spending to balance the books and spur private sector driven economic growth.

The Wisconsin result offers an insight into how economics is now impacting the US political math, rather than other way around as is usually the way. Walker’s win was a stunning Democratic own goal and has at least in some way undermined the Obama-Biden re-election campaign while vindicating Romney’s economic message at deep blue state level (in a state Obama won over McCain by 13%).  It now means that grassroots conservativism (driven by increasingly maturing and pragmatic tea party-ism)  can be energised, controlled and moderated such that the Republicans can clobber together a pluralist electoral coalition. Emboldened by this success, they will now undoubtedly ride a fundraising surge in blue states which will fund political infrastructure and start to hone state by state economic messages suited to each political climate. Walkers 22 offices in the state which were the launch pad for his success will now, with a slap of paint and some new signs, be quickly transformed into  Romney HQs, putting Wisconsin’s 10 electoral votes firmly in play with Democrats on the back-foot.

Of course, this might not last. It does however reveal that the economic messages of both parties are polarising electorates across the country and, despite conventional political wisdom, it means a rightward shift at state level might just be bubbling under the surface buoyed by an economic ‘deficit busting’ message rather than a purely political one (support Obama, etc).  Its also true to say that the divisive process of political ‘divide and conquer’ this time is a far cry from the hope and change of inspirational candidate Obama in 2008.  Advantage – Romney. Why –  A winning economic message.

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May 03 2012
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US Economics

Obama-Romney Battle Part 1 – American Tax Fairness. By Darren Lawlor

Forget about those ‘political’ wars in Iraq, Afghanistan or (potentially!)  Syria or  Iran – the important wars in the 2010s are economic. As such, they will be fought in banking boardrooms, finance ministries/treasuries, parliaments and central banks across the western world. Ground zero is that unrepentant capitalist champion, the United States.

First, to politics. The US Presidential election on November 6th 2012 is arguably the most significant in over 30 years – specifically in an economic dimension. Usually, choosing the Chief Executive of America Inc. is a game of dramatic razzmatazz where two broad ideologies are sold to a changing electorate with different results from time to time. Not since the first landslide victory of the cowboy conservative Republican Ronald Reagan in 1980 has such a polarised and stark choice been on offer to an increasingly disenfranchised electorate. Then, as now, a Democrat had been elected 4 years previously on a wave of populism and a promise to end the status quo corruption in Washington. Then, as now, he was quickly reduced to a bystander to ‘events’, battling against strong prevailing negative eco-headwinds while his administration fought its political life by steering through turbulent economic waters – their fate dependent on the next positive monthly jobs report and effective spinning of unemployment numbers.

America remains in deep economic trouble with the opponent Republicans relishing rehashing the number as evidence of Obama’s failure: 5.5m fewer jobs than toward the end of Bush’s term in 2008. 8.4% unemployment and 18.3% underemployed (around 8m Americans ‘stuck’ in part time jobs). Expected growth of 2%, the majority stemming from low wage job sectors. With Mitt Romney as the virtually certain Republican nominee, a Massachusetts moderate will take on the Illinois insurgent in what is likely to be an almighty battle between economic ideologies. Let us preview the key two economic wars in question one dealing with income methods, one dealing with spending.

This first article will deal with  income and the tax battle – a significant skirmish in the great raging economic war. This one is all about that a basic (and popular) ideal of ‘fairness.’ In principle, all tax systems are ’equitable’– the cost levied on citizens should be based on their own, unique ability to pay – and accordingly they pay their share. It follows then logically that proposing raising taxes on the ‘have more’ upper crust is smart political populism with economic advantage. Take the recent debate over the ‘Buffet Rule,’  a proposal – promoted by legendary investor Warren Buffet – based on raising taxes on the very wealthy (to 30% for an income over $1m) to help pay down the multi-trillion dollar US deficit.  Mitt Romney and Republicans generally reject this, acknowledging that while it’s popular (70%+ favour it, as a principle) – it complicates an already overly complicated tax code and would yield a paltry $5bn per year over the next decade. Romney’s view, continuing the GOP onslaught against ‘Big Government,’ is that this would  pay for not more than 11 hours of ‘government’ per year – a statistic supported by the left leaning Washington Post and their Pinocchio themed ‘Fact Checker’.

The Buffet Rule has already hit the buffers in the Democrat controlled Senate but, according to some commentators, this sets up a convenient wedge economic issue to lever apart the Democrats and Republicans across the political map on the very issue of ‘fairness’  and equity. The Republicans in turn accuse the President of promoting class warfare, pitting social groups against each other. Democrats counter by saying that rich Americans earning $1m+  are paying a declining share of tax on their income – from 70% in 1920, to less than 30% now.  (Romney himself pays less than 15% on an income of over $20m) – wryly assessing the Republican strategy as ‘social Darwinism’ – where the strong (i.e. wealthy) are given the means to help themselves at the expense of spreading general wealth downward. Left leaning Former Clinton Labour Secretary Robert Reich  sums this up  well in saying “Fairness isn’t incompatible with economic growth. It’s essential to it.”

Republicans question the wisdom of a policy – which currently holds firm in Europe – advocating higher taxes on the wealthy who are, by virtue of their status and success, wealth creators and drivers of consumerism and so economic growth and jobs. Philosophically, American ‘liberty’ (onus on private property), state sovereignty and federal taxes are three elements of Americana which do not mix well together. The American dream is one of wealth  procurement and opportunity – not at the expense of ones neighbour but from ones own genius. That ability to better yourself, to improve ones circumstances and protect this at all costs is quintessentially American.  Middle America assumes that one day (with luck or hard work) they too can be wealthy and they don’t want this path hindered by an obsessive federal tax regime aiming at stripping entrepeneurship away, leaving those aspirants with no rungs on the ladder upon which to climb up.  To quote CNN’s Fareed Zakaria “Americans are generally aspirational, not envious.” Hence, the tax wars are a blatant political attempt at divide and conquer by the Obama campaign – to pit class against class, rich against poor (hence white against black/hispanic or professionals against the students etc) and city against countryside.  The danger for Obama is that aspirational Americans still exist and are more virulent then ever to escape the recessionary squeeze.

Saturday Night Live comedian Jon Lovitz, a self confessed Democrat, summed up the dichotomy well recently ( in somewhat colourful language).  “First they say … ‘You can do anything you want. Go for it.’ So then you go for it, and then you make it, and everyone’s like, ‘F- you,’” Lovitz said. “[Obama] is the perfect example. He’s amazing. He had nothing … and the guy ends up being at Harvard. He’s the Ppresident of the United States. And now he’s like,  ‘F- me and everybody who made it like me.’”

This election is, as all elections involving an incumbent seeking releection, about ‘more of the same’ and ‘a choice’. Like 1980, this ‘choice’ might just prove to have long lasting consequences on the underlying structure and direction of the world’s greatest economy.

Apr 15 2012
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US Economics

One thing you should never predict is the future. By Inaki Villanueva

Sala-i-Martin a Columbia University professor wrote not long ago that if you want to know how the economy is going to perform in the next years you should not ask an economist but a fortune-teller.

The truth is that usually economists are mistaken for fortune-tellers. Economists’ main duty should not be long-term forecasts but to analyse policies effectiveness. Like weathermen, some economists do short-term forecasts, but those are basically based on the ‘what goes ahead must be similar to what’s left behind’ principle. That is, they use statistical models that predict the future based on the past. That is like driving a car looking at the rear-view mirror. In short, economists are ignorant of future events as anyone.

Yet there are exceptions to any rule. In particular, I found two exceptions worth mentioning.  One is 1996 Paul Krugman masterly article in the New York Times and the other is Alan Blinder 2005 academic paper. Both forecasted the same future events, but to do so they didn’t use a crystal ball but basic economic principles. Here I just want to focus on their prediction about the end of higher-education. This prediction, they suggest, is going to happen as a result of two economic events or factors.

First event is about the information age and its importance. Krugman disagreed with all those prophets that argued information to be a key sector: “In general, when the economy becomes extremely good at doing something, that activity becomes less, rather than more, important. […] When something becomes abundant, it also becomes cheap. A world awash in information is one in which information has very little market value.” Today’s world is supremely efficient at growing food; that is why it has hardly any farmers. The future world, and to some extent the present one, is supremely efficient at processing routine information; that is why traditional white-collar workers are going to virtually disappear. Many of the jobs that once required a college degree or postgraduate degree will be eliminated. College provides knowledge and information to its students but as it’s been said information is going to lose its value, computers which are proficient analysing and processing information will replace white-collar professionals.

The second event is about the possibility that human analysts play a –small- part in the information sector. If such future happens, white-collar workers of Europe orAmericawon’t have an opportunity either. In this future, information will be transmitted easily to poor countries and analyzed there for a fraction of the cost in Boston or London. This is what has been called, downsizing and outsourcing. Downsizing and Outsourcing are already affecting for the first time the college, white-collar graduates and will affect them even more in the future.  Alan Blinder give us a clue why this is happening “…because technology is constantly improving, and because transportation seems to grow easier and cheaper over time, the boundary between what is tradable and what is not tradable is constantly shifting– Over time, more and more items will become tradable. Many services are now tradable and many more will surely become so”.

Consequently, wages trends are clear, educated jobs will diminish. In relative terms, personal, face-to face jobs, (that is, jobs that cannot be delivered electronically) will see an increase of their wages. Face-to-face jobs like paranursing, waiters, firemen, policemen, carpentry, household maintenance and so on, “[will] pay nearly as much as if not more than a job that requires a master’s degree, and pay more than one requiring a Ph.D.”

This should be rather obvious already; Steve Jobs and Bill Gates were college dropouts, Krugman argued. He finished saying that white-collar, college-educated workers will be fired in large numbers, even while skilled machinists and other blue-collar workers will be in demand. This will signal that the days of ever-rising wage premiums for people with higher education are over. Without investment returns for students, higher-education will lose their clients and without clients universities will disappear or in the best-case scenario become what they were back in the 19th century, a club for the children of the rich, a social institution “to refine their social graces and befriend others of their class.”

So, in conclusion “education, full stop, cannot be the answer anymore.” Blinder says. Don’t get too scared, Dr. Blinder also offers a solution “Want to get ahead today? Forget what your parents told you. Instead, do something foreigners can’t do cheaper. Something computers can’t do faster.” For example, playing live a piece of beautiful music can not be done faster or abroad.

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Apr 13 2012
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UK Economics, US Economics

Britain’s Loveless European Marriage. By Darren Lawlor

First, to state a fact. Britain’s relationship with modern Europe has always been quantified in terms of pure pragmatic economic value rather than aspiration or philosophy. Through this prism, between the tenures of Disraeli and Cameron, there lies the real roots of modern day British antipathy toward European integration which is itself steeped in British self interest prevailing over any common purpose. To use a metaphor, Britain’s relationship with Europe is like your typical shotgun union past its prime. Both parties are apathetic about each other but – out of pure habit – they reluctantly plod along in an increasingly predictable pattern. Their disagreements have long become consistent, uniform and repetitive.  They both know there was never a foundation of any real love, just self interest and occasional mutual respect mixed with latent animosity. But , in fairness, Britain is not an easy spouse to get along with.

Prime Minister Cameron’s recent hardline stance on the European Fiscal Treaty (among other things) reignited a nostalgic spark in British hearts of bygone memories where British assertiveness over Europe rather than New Labours conciliatory approach was the norm. Margaret Thatcher’s famous moments of handbag Euro-diplomacy – including the infamous 1979 Dublin Summit where she steamrolled over protocol to demand the British billion pound EEC budget rebate – were reviewed by revisionists as a pivotal turning point where quintessentially British expressions of steadfastness and confidence of purpose were re-established and ‘Euro-elites’ were forced to back down. Perhaps. One thing is certainly true – Britain likes to hark back, which is a stubborn preoccupation putting its own future development in serious doubt.

Britain, as a nation, has a particular insular conception of itself. In the 1860s/70s, under Prime Minister Benjamin Disraeli, the term ‘Splendid Isolation’ came into being, describing Britain’s unwillingness to become ‘entangled’ in European conflicts. Then, Victorian Britain’s dominance was at its height during a time where it was truly accurate for a Briton to proudly boast of being a citizen of a world flung empire where the sun never set. As such, Britain could pick or choose what concerned her. A century later and those little theatrical Tory gestures of Thatcher and Cameron personify an overwhelming popular desire to reassert British prowess on the world stage – a once again confident nation willing to stand with Europe when its suited but not force fed paltry scraps from the Brussels’ champagne buffet. The commonality of approach is particularly interesting insofar as, in the interim, the Tories managed to tear themselves apart in the 1990s and 2000s over the very issue of Europe. Most recently it appears that a sharp nationalist tone helped inch Cameron’s Tories past Labour in the opinion polls (albeit temporarily). In other words, the average Briton seems to like British defiance on Europe (or, as this usually becomes known, Churchillian defiance)

Historically, British political showmanship on Europe should surprise no one. Britons (quite rightly)  tend to like putting Britain first. The precarious position of the post-war British economy was first in the minds of policymakers at a time when ‘Europe’ was just emerging from the rubble of war. Thus the British marriage with the modern day EU was understandably conceived and developed along lines of pure British self interest – its own economic survival. Lets examine the history.

In 1945, Britain was a war weary nation standing (barely) technically victorious (in that Germany didn’t win). The economy was is a desperate state of disrepair with depressed resources and a fatigued society brought to the brink by rationing and horrific terror campaigns over the skies of major cities.  With hostilities finally over , the British public, traumatised but united after a collective effort to battle Nazi aggression stirred up quiet social revolution at the ballot box by unceremoniously sweeping the war hero Winston Churchill from office. Labour, under Clement Atlee, was elected in an overwhelming landslide – the first majority single party Labour government in history. This was a realigning election. Winning on a unashamed socialist agenda , this Labour victory marked a sharp shift leftward in public opinion which hauled the centre of political gravity into a hard left consensus – known as the ‘Social Consensus’ – where political forces of the left and right accepted core concrete ‘demand side’ economic realities including the construction of the apparatus  welfare state (including, of course, the National Health Services NHS), Keynesianism and the trade union role in crafting industrial policy. Undeniably, the social consensus was an economic by-product of WW2.

A second parallel consensus was intended to pre-empt further challenges (war included) by aiding Britain’s economic ills through a long held tool which was starting to show signs of diminishing returns (only just). This was the British Commonwealth – or more precisely, a somewhat obsessive and myopic desire by successive British governments to ignore warning scenes of violent disintegration and rebellion in Ireland, India and beyond and protect those preferential trade networks from the old days of Empire. The reasoning was plainly economic – the Commonwealth represented a strong (and profitable) market for British goods and excellent sources for British imports. As such, Britain happily imported food, exported manufactured products and managed the international financial trading system. Although the Commonwealth consensus predated the war, it was – like Britain’s reputation, relevance and economic strength- severely dented by events. Like a phoenix from the ashes of Dresden, it was the United States which was to soar after the war, not Britain. The factors underpinning Britain’s economic leadership of the western economy – the Commonwealth trading network being one, the pound sterling being another – rapidly unwound due to the perilous and vulnerable state of the post-war British economy which was, in itself not helped by the massive expense of constructing the welfare state. Hence, each consensus had one common effect – huge economic cost.

British policy makers inevitably fell into this trap, realising that achieving a growth orientated economic policy with these two constraints was impossible. One ‘tandem’ alternative was to grow the domestic economy through maintaining a focus on the (temporarily) strong Commonwealth states but equally reasserting British pride as a worthy world power by cosying up to Washington D.C. Britain was attempting the perilous feat of trying to ride two horses and attach its increasingly rickety wagon to the American express train juggernaut – to little effect. Britain just wasn’t valuable enough, in her current state,  to the Americans.

In sum, Britain was distracted by its domestic economic ills and, as such, paid little attention to the early European project. The entire structure of British pride and economic power was based on a foundation which was weakened by domestic events (the double consensus) and external events – a strong empirical trade network falling victim to nationalistic rebellions and the resulting chaos,  a strong pound falling victim to a resurgent dollar and a strong military and domestic economy falling victim to the ravages of war. With attention elsewhere, British  uncertainty over the workability of the entire European project allowed the European Coal and Steel Community to be formed in 1951 through American and French efforts, not British. Having viewed the geopolitical situation through an domestic economic lens, Britain missed the boat entirely and has grumbled and undermined the project ever since. Having failed to put her stamp on Europe in its formative years, and denied entry to the European project by a reassertive France for years later, Britain continued trying operate within the confines of the double consensus at home, with very little effect (until Thatcherism waged war with the social consensus).

Since then, Britain has continued to pursue a ‘piggyback’ economic strategy driven by domestic policy considerations attaching Britain to Europe to serve British interests. Where this isn’t explicitly obvious, or is likely to retrench those interests – as with Mr. Cameron and the Fiscal Treaty – Britain simply says no and is apathetic about the aftermath.  Based on history, that shouldn’t be surprising. More bizarrely, a much more compact 21st century Britain still harks back to the Disraeli era when it comes to European ‘entanglements’. Plus ca change…

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