Expect little and you may yet be disappointed

Until yesterday’s defeat of Roger Federer in the final of the US Open at Flushing Meadows, the most disappointing development this year was the performance of president Barack Obama and his administration – and my expectations were modest to begin with.

A major let-down on the ‘values’ front has been the disregard for basic human rights and civil liberties displayed by the administration in their treatment of the Gitmo detainees.  I would add to that Obama’s reluctance to pursue possible criminal offences committed by members of the previous administration who may have been involved in aiding and abetting torture and other forms of inhuman treatment of detainees.  Obama’s preference for ‘healing and reconciliation’ – aka the soft option, because without accountability and justice there can be no healing and reconciliation – puts him on moral thin ice.

In foreign policy, the only success has been the gradual but steady US disengagement from Iraq.  That bit of good news is increasingly overshadowed by the open-ended nature of the US (or Nato) engagement in Afpak, where the US administration is in bed with two spectacularly corrupt regimes, without any clear, operational statement of its objectives and its exit strategy.

But it is on the economic front that the damage is really piling up.  President Obama’s speech yesterday (the first anniversary of the collapse of Lehman Brothers) on the lessons from Lehman’s demise demonstrated once again that we are stuck with a president who knows little about economics and cares less.  There was some perfunctory populist bank and banker bashing, but nothing concrete.   Like most other political leaders in the financially benighted north-Atlantic region, president Obama will use the absence of international cooperation and the undesirability of unilateral action by any one country as an excuse to avoid radical reform of the cross-border banking and financial system.  No doubt the French president, Mr. Sarkozy, will again threaten his by now traditional walk-out over some trivial issue, but the chances of international agreement on measures that could reduce the frequency and severity of future systemic crises are slim.

The US officials supposed to lead the systemic reforms of the domestic and international financial system are the same people who failed to recognise the emerging disfunctionalities that produced the crisis, who indeed were responsible for creating some of these disfunctionalities, who failed to prevent the crisis, who re-fought the battle of the 1930s (and insist on taking great credit for doing so) and left us with the moral hazard nightmare legacy of the end of the first decade of the twenty first century.

On the fiscal side, Barack Obama is presiding over the biggest peace-time government deficits and public debt build-up ever.  According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose.  The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America’s crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large.

But it is on the international trade front that Obama has been most disappointing.  The latest decision to slap a 35 percent tariff on Chinese tire imports could, with a bit a bad luck, be the beginning of a nasty little international trade tiff, and possibly of something more serious.  The US International Trade Commission (“An independent federal agency determining import injury to U.S. industries in antidumping, countervailing duty, and global and China safeguard investigations; directing actions against unfair trade practices involving patent, trademark, and copyright infringement;”) – the dark heart of official US protectionism – had, in response to a complaint from the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, recommended a 55 percent punitive tariff on imports of certain Chinese tires (this is on top of the existing 4 percent tariff).   The president in the end signed an order for a 35 percent punitive tariff – possibly in an attempt to be just a little bit pregnant.

Whether or not these punitive duties are in violation of WTO rules time will tell.  We know right now that it is a protectionist measure which is bound to enrage the Chinese, who announced retaliatory restrictions on imports from the US of poultry and vehicles (including poultry-drawn vehicles).  Making the Chinese mad for no obvious domestic benefit (other than pandering to a relatively small sectional interest – the Steel et. al. Workers Union) is not smart.  It comes right on the heels of a US slap in the face for its Canadian neighbours, who, under the Buy American provisions of the Obama stimulus act, cannot bid for US construction contracts, in direct violation of NAFTA.

A trade war in a global economy trying to escape from the worst downturn since the 1930s is the single event most likely to trigger a renewed collapse of global economic activity.  The usual protectionist suspects in Europe (including, you guessed it, president Sarkozy  of France) are already chomping at the bit to impose carbon tariffs on imports from China and India – an act that would be as close as you can get to open economic warfare short of blockading the ports of Mumbai and Shanghai.

Clearly, the qualities one needs to get elected to high office in western democracies are not qualities that are likely to be helpful once you have achieved high office and are expected to govern and lead. To survive the selection process to become president you have to be able to stitch together a coalition of special interests that can provide sufficient financial and sweat equity resources to win this grueling race to the top.  Once you get there, you should shed the unfortunate baggage you accumulated on your way up and govern in the interest of all the people.  Few can do that.  Apparently Obama is not one of them.

 

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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