Daily Archives: June 14, 2011

Just a few weeks ago, Barack Obama’s re-election bid was beginning to look like an easy downhill jog. The daring raid that the US president ordered delivered Osama bin Laden to the bottom of the Indian Ocean. Economic prospects looked brighter. Perhaps most helpfully, the Republican party seemed to be indulging some kind of collective death-wish, putting Donald Trump first in the polls and Paul Ryan’s budget-cutting at the top of its legislative agenda. The GOP’s early presidential skirmishing took place in a land of conservative make-believe, where tax cuts grow on trees and the president can be described as any sort of alien – foreign-born, Muslim, collectivist – that one chooses.

Mr Obama’s spring peak came at the White House correspondents’ dinner in late April, when he jovially deflated Mr Trump, while the Navy Seals were en route to Abbottabad. But since then, the political weather has turned less favourable. Unemployment rose to a treacherous 9.1 per cent, while the Dow fell almost 1,000 points from its peak. The odds of a serious economic aftershock to the Great Recession have risen. Most alarmingly, the Republican party appears gradually to be going sane.

The GOP presidential field, while hardly dominated by political giants, appears far less outlandish than one might have predicted. At the first Republican debate in New Hampshire on Monday the seven candidates competed not for evangelical or libertarian favour, but for the status of someone plausible to compete with the president for swing voters.

Here are some of the things that did not happen in the debate. No one called Mr Obama a socialist. No one gave ambiguous encouragement to the “birther” faction. While all of the candidates oppose gay marriage, no one bashed homosexuals. With the exception of the marginal former Pennsylvania Senator Rick Santorum, no one directly endorsed the Ryan Plan. Two months ago, every Republican in the US House back this plan; now no one wants to talk about it.

There were cringe-making moments, such as the pizza executive Herman Cain’s assertion that Sharia Law is used in American courts, former House Speaker Newt Gingrich’s seeming call for Muslim-Americans to swear loyalty oaths, and former Minnesota governor Tim Pawlenty’s claim that America’s founding documents describe it as a nation “under God” (neither the Declaration of Independence nor the Constitution uses this phrase). But overall, there was little of the usual thunder on the Right. The sometimes fiery Mr Gingrich has returned from the Greek Cruise that prompted his staff to mutiny en masse perhaps excessively rested, wondering aloud about the absence of an American encampment on the moon. Even so, the Tea Party and former Alaskan governor Sarah Palin, touchstones for the populist right, seemed like phenomena from a past era.

It was former Massachusetts governor Mitt Romney who held centre stage, literally and metaphorically. As critics have alleged, Mr Romney is something of a political weathervane. More precisely, he is a businessman, with an instinct for what product will sell at a given moment. Having evaluated the marketplace, he recognises the demand for competence rather than ideology. Thus Mr Romney now accuses Mr Obama of failure, rather than leftism. He also does not repudiate his belief that human activity is causing climate change or his support the legislation that his overhyped rival Mr Pawlenty calls “Obamneycare.”

Instead, Mr Romney takes the coherent (if somewhat silly) federalist position that healthcare reform ought to take place at the state level. Mr Gingrich and Mr Pawlenty, no more principled than Mr Romney, but with poorer political instincts, have simply boarded a train going in the wrong direction.

In the dynamic glimpsed last night, Mr Romney is now running against Mr Obama, while the other Republicans are running against Mr Romney. The most credible challenge to the Republican frontrunner is likely to come not from someone more conservative, but his coreligionist Jon Huntsman, the even more liberal former Governor of Utah who is expected to announce his candidacy within the next week. Mr Huntsman, who has in the past supported not only civil unions but Mr Obama’s stimulus spending, has expressed his intention to show “civility” not just toward his Republican rivals, but to the Democratic President he recently served as Ambassador to China.

Primaries usually pull candidates to the margin, but the GOP is now experiencing a politically healthy course correction. Until recently the most evident forces were indeed pushing them away from the centre. We are now seeing an opposite shift, away from then margin, and toward the middle. For Mr Obama, this movement, and the outbreak of Republican sanity it signals, is a worrying development indeed.

The writer is chairman of the Slate Group.

Response by Reihan Salam

A debate that shows Republicans winning the battle of ideas

I agree with Jacob’s central point. But my sense is that this return
to seriousness has been going on for some time. While “birtherism” and Sarah Palin have drawn outsized attention, the deeper shift in conservatism has seen a renewed focus on the seemingly mundane but actually all-important question of how government works.

The recent battles in Wisconsin, for instance, in which Gov. Scott Walker proposed rolling back collective bargaining rights for public employees, was as heated and polarising a cable-news Kulturkampf as the battles over Terri Schiavo, or no-hope attempts to introduce a Federal Marriage Amendment. The difference is that the current outcome in Wisconsin actually matters for the fiscal future of state and local governments across the country.

Left-leaning Americans are inclined to see the same old fever-swamp irrationalism at work in the right’s attempts to subject bloated budgets to sustained scrutiny, but this is actually a debate that conservatives and libertarians are winning on the merits.

Rep. Paul Ryan’s Medicare reform proposal has been crucial to this revival of the right. Jacob notes that only former Senator Rick Santorum embraced the proposal in all of its particulars during the debate on Monday. That, I suspect, is exactly what Rep. Ryan would have anticipated.

For years, conservatives in Congress have railed against the size of government, yet they’ve studiously avoided talking about entitlements in any detail. President George W. Bush’s push to reform Social Security was plagued by a lack of specificity, which fueled the most paranoid interpretations of what dastardly right-wingers intended to do to a beloved programme.In truth, Rep. Ryan’s plan is not the most realistic on offer. That distinction belongs to the plan put forth by former Clinton budget director Alice Rivlin and former Republican Senator Pete Domenici, which would make for an excellent compromise between the visions of both parties.

But it is not and never was Rep. Ryan’s job to lay out a compromise proposal. Rather, it was to rally congressional Republicans behind a plan that they could bring to the negotiating table. For all the plan’s weaknesses, it represents a huge advance over what had been the do-nothing Republican status quo on entitlements.

If the next Republican presidential candidate takes Rep. Ryan’s lead and crafts a more politically palatable plan for entitlement reform, the GOP will establish itself as the grown-up party. And that will pay electoral dividends.

The writer is co-author of Grand New Party: How Republicans Can Win the Working Class and Save the American Dream

China’s announcement today that inflation in May hit a three-year high of 5.5 per cent and industrial expansion exceeded expectations will buttress those who see an inevitable economic crash coming. But even those who remain confident that a soft landing is possible seem to agree that China’s economic growth is unbalanced, with these imbalances widely blamed for trade surpluses with the west. This view, however, is much exaggerated.

Compared to other countries China’s consumption to gross domestic product ratio of 35 per cent is exceptionally low, suggesting consumption is not actually being repressed. China’s investment to GDP ratio of more than 45 per cent, meanwhile, is exceptionally high. This leads many to propose a standard solution to “rebalancing”: China must increase consumption and dampen investment.

The problem is this view is static. Growth, however, is inherently unbalanced. What matters are not indicators pointing to imbalances, but the direction of change. It is true that China’s private consumption to GDP ratio has declined by 15 percentage points over the past 15 years. But this is a pattern that mirrors many east Asian economies, and also that of the US during its industrialisation own in the 20th century. Despite all the admonitions, this ratio will not begin to increase until household savings rates decline or labour’s share of income increases.

Savings rates will also not fall anytime soon, because there is as yet no credible social welfare system. Households are currently saving more because they have doubts about the viability of pensions, while social security deductions are seen as a tax, encouraging more saving rather than less. Growing aspirations for home ownership also ratchet up savings. All of these factors contribute to a prolonged upturn in personal savings rates.

Increasing labour’s share of income is not a viable solution at this time either. Paradoxically, as more workers move out of agriculture and into industry – which is obviously a good thing – labour’s share of income will fall. Labour’s share of income in agriculture is almost 90 per cent, but in industry it’s only 50 per cent. Workers enjoy higher earnings and productivity increases, but the percentage of income that goes directly to workers actually drops.

Contrary to expectations, labour’s share of income within industry is also declining, because of the expanding role of the private sector relative to the state – but this is to be welcomed too. In the end, the declining share of labour – which shapes the consumption pattern – is a consequence of China moving to a more efficient growth path. It is not a problem.

Behind today’s figures and more talk of unbalanced growth, the truth is that China’s economy will change – in time. As the availability of rural labour falls and the relative shares of state and private enterprises stabilise, the ratio of consumption to GDP will begin to increase – just as we have seen in other higher income countries. But China is still several years away from this.

The perception that China has invested too much is also misleading. Actually, China’s capital stock relative to GDP is lower than other comparable east Asian countries. Moreover, much of the surge in investment over the past decade is due to housing construction, where the country is still making up for the shortfalls from the Mao era.

In all this we must also remember that directing resources away from investment to consumption may be neither feasible nor desirable. China’s investment-led growth model, by generating faster growth than otherwise would have been possible, has in fact arguably led to sustainably higher – not lower – consumption levels. The country’s yearly 8-9 per cent growth in consumption, and 10 per cent in real wages, puts China at the top of its peers.

The bottom line is that China’s growth is not unbalanced. Even so its trade surplus continues to be a major irritant with the west. In principle the problem is not hard to solve, but the solution runs counter to conventional wisdom. China’s trade surplus is now running around 2-3 per cent of GDP, so if consumption, investment and government expenditures all rose less than one percentage point of GDP each, the problem would evaporate.

But in which order should this happen? The best near-term solution rests not with higher consumption but with public expenditures, paid for by increasing dividend payments from state enterprises to the government. Since pre-tax profits of state enterprises have surged to more than 7 per cent of GDP, channelling just a fraction of these surpluses into public social services would make a big difference.

If China acted in this way, its already high investment rates may not need to decline in the short term, but with the right financing vehicles there needs to be more spending on social housing and less high-end speculative construction. Together with continued support for social infrastructure, these actions would be enough to eliminate China’s trade surplus sooner rather than later. This would also buy the necessary time to improve welfare and consumer credit programmes so that households are eventually inclined to save less and spend more.

Such actions would prevent trade surpluses from re-emerging when the pace of investment is likely to fall by the second half of this decade. They can be achieved without compromising China’s growth or restraining global demand, allowing the west’s recovery so it can continue coming out of the global economic slowdown. And perhaps most importantly, they would allow China to dispel the myth of its unbalanced economy once and for all.

Yukon Huang is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China.

Response by Kerry Brown

Ominous signs grow for China’s future growth

For some commentators China’s economy has been about to implode for most of the last two decades. But threats have come and gone, from the 1998 Asian economic crisis, to the challenges of exposing china’s domestic companies to international competition on entry to the World Trade Organisation, to the 2008 collapse of exports after the international economic crisis, and still the Chinese economy has motored along.

The bottom line is that for all the imbalances, there is plenty of room for growth. If the Chinese government delivers on its aim of getting the country to middle income status (with a per capita gross domestic product of $8,000) by 2010, then the gross size of the Chinese economy will be well on its way to overtaking the US.

During this process, wealth creation will in turn be able to deal with issues like constructing an adequate social welfare system, dealing with some of the vast pension deficits, and letting the burgeoning middle class relax a bit so that they can become better consumers.

The problem is that journey to 2020 is beset by all sorts of challenges, some of which are starting to look ominous – perhaps more ominous than Yukon Huang’s article above acknowledges. On a tour round central china this week, I’ve seen some of the 60m or more empty flats and houses that currently can’t find a buyer. Another report warned that China’s central government may have committed up to $400bn in bailing out the bad debts of local governments. Meanwhile, domestic reports put inflation way higher than the official 5 per cent figure released today, with unemployment reaching as much as 15 per cent.

The important issues, however, are not so much economic as structural and political. The structural issue is the continuing problem of fiscal reform, so the current highly centralised tax raising system begins to allow individual provinces to make more of their own decisions. At present the problem remains bureaucrats in Beijing calling the shots about relatively minor problems, many thousands of miles away.

The political problem remains that the state-owned sector, after several years in the shade, is now coming back with a vengeance. This sector is seen by political leaders in the communist party as their bulwark against the global financial crisis, and a vindication that maintaining strong state control over key parts of the economy was the right thing to do.

Because of this the state sector operates in an even more benign environment than ever – it is now almost above questioning. Today, as I sit in Shanghai, with prices for almost everything (except taxis) higher than in the UK, the best one can say is that china’s economic transformation continues to get more complex and more uncertain by the day. But for a regime that have placed almost everything on economic growth, there isn”t a clear plan B.

The writer is Head of the Asia Programme at Chatham House, and author of Ballot Box China.

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