Monday, January 12, 2009

Only Game in the Town

Tom Friedman talks about American and Chinese national pregnancies giving birth to stimulus packages whereas NYT’s journalists warn about one term Obama presidency if this new baby, the stimulus package, does not pan out. So it is clearly the only game in town for the moment – Obama’s stimulus package.

Chinese are going to have hard time to deal with their policy – ‘let us bring the prosperity by exporting our way out’. The necessary cultural, administrative, economic and political reforms to increase the domestic Chinese demand look very unlikely to realize. Meaning China - despite their half trillion dollar stimulus and willingness to spend more as needed (since their debt to GDP ratio is smallest, around 18% of economies which matter and they have around 2 Trillion dollars of reserves) may miss the bus in terms of containing the on going global recession as well as a chance to exert global economic leadership.

Indians are reeling under Satyam fiasco, uncertainty of Indo-Pak relations and looming biggest political carnival in the world – Indian General Election for Parliament in New Delhi. All this means, clearly economic growth will be on side and back burner in India.

With Europeans, the only crisis that matters is Gaza crisis. Hundred Thousand Spaniards will come on road to demand cessation of Israeli aggression but may not come high on their government for better economic policy. Europe as a whole is too much pre-occupied with Gaza than their own economic problems.

Russians started their new year as usual – by leaving Ukraine cold in stopping gas supply. This is every New Year’s regular drama. With collapsing oil and gas prices, no amount of arm twisting of Ukraine and Europe is going to solve Russia’s problem (which does not mean that Ukraine and Europe should not pay the market prices for these supplies). That goes same with Saudi and all the ‘sovereign funds’ financed by Oil.

Stubbornly high domestic debt and hence high servicing charges leaves Brazil and Latin American Economies not in a healthy position to either recover or lead from the current economic doom. Brazil and Latin American countries used commodity driven prosperity to spend on welfare rather than reducing their debt in any meaningful way.

Of all of these regions which are not scripting any sensible solution to come out from the current economic gloom, the Japanese are a class apart. Already with debt to GDP ration at 170+%; the Japanese Prime Minister Aso wants to borrow more money to distribute cash to his citizens - $1200 per person! Rightly so Japanese are indignant at this policy – actually it is LDP’s bribe to voters for the coming election. No wonder there is no chance whatsoever of any sustainable Japanese recovery nor any possibility of leading the charge for rest of the world. Over the years and decades, Japan has given nothing but disappointment when it comes to economic leadership. There does not seem to be any change in this. Losses at Toyota and layoffs at Sony are the sad but telling signs of this Japanese demise. May be the time is ripe for opposition leader Ozawa to take charge and he very well may defeat LDP. That will be the best possible development for Japan and for the global economy.

This all means literally too much is riding on Obama’s stimulus plan. It is not just America, but the hope is along with American recovery rest of the world picks up pieces too. Sure that is the burial of ‘de-coupling’ theory if any was required.

So it is no exaggeration that if Obama’s stimulus plan fails to ignite a meaningful and sustainable recovery, America would have increased her debt in process with only realistic chance being squandered. With lack of growth in GDP, American debt to GDP ratio will remain high or even increase to in decades to come.

The question of consequences is whether Obama Administration is being smart is devising the proposed stimulus plan. Looks like it is ‘half smart’ only in this respect. First, Obama (having failed to find any other bipartisan bill for which GOP will be on the board at the start of his regime) is intend on ‘bribing’ GOP for their bipartisan support by giving ‘tax cuts’ in the stimulus plan. NYT editorial was right to point that America does not have any money to waste on Tax cuts which all have been proven to be marginal at best in stimulating the growth. Obama needs to think very seriously that just because GOP backed this stimulus package; he and Dems will not share any responsibility when economy fails to recover. For example look at the Iraq war – even though Dems backed it, is regarded as Bush’s War and Bush’s fiasco. It will be no different when Obama would have wasted money on Tax cuts which hardly make any difference. That would also eat resources for more progressive tax cuts Obama pledged on the campaign trail.

While bribing GOP by Tax Cuts on one hand, Obama is falling for Dem’s pet policies like financing State deficits by way of giving money to Medicaid and other welfare project run by States. Food stamps and extended unemployment benefits are expected to bring more value, but everything else looks like a waste. Federal Government should not try to run these States and their unwieldy deficits. Politicians in states like California are singularly responsible for the mess in which these States find themselves – refusal to reign in their expenses. If at all any money of Fed is to be used to address problems at State level, then that should not come at the cost of efforts needed to ‘right course’ state finances ship.

Money poured in Medicaid does not solve the underlying problem of America’s health service issue where serious attempts need to be undertaken to involve end consumer in the payment chain. As Robert Samuelson pointed out in his Newsweek article, Obama needs to make tough choices in order to address health service issues of America. Pouring money in paying operating costs of State Health Programs is waste in absence of reforms. As like any other politician, Obama is reluctant to bring the end consumer at the center of the payment chain to reduce the health care cost. In 2007, of the total USA budget of $2.7 Trillions, 0.7 Trillions were used for Health Services including Medicare. Unless, Fed freezes around 25% of the budget for health services at the most; America’s long term budgetary stability is at the risk. Any time health cost increases; Taxes need to be raised to maintain this 25% share. Such tax increases will surely make Americans find ways to contain the cost and Congress will be then forced to change the health care system accordingly. In absence of any of these, shelling out 100 to 200 Billion dollars as payment to State health bills is like throwing money to burn. Regardless of how much pressure the all powerful House Speaker Nancy Pelosi brings for such State giveaways, Obama needs to avoid such wastage. As some Congressional Dems have pointed, the stimulus should be all about – jobs, alternative energy and growth. Everything else is waste.

Never in recent times, the task is cut out so well for an incoming president. This also means any failure in elevating America’s economic pain will be clear failure of Obama and he will be no different than Carter – one term President. By wasting money on Tax Cuts and doing money to States to cover their operating expenses; Obama for sure is making his task harder and increasing the risk of failure.

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