Daily Archives: March 6, 2012

During the past decade the US sat on the sidelines while many nations around the world competed aggressively to win larger shares of manufacturing output and employment. The next decade is likely to be different. In several recent speeches and policy proposals, President Barack Obama has laid out a compelling case for why manufacturing matters for the health of the American economy and has signalled that the US will be a more active player in the intense global competition for manufacturing.

His 2012 budget proposal calls for $1tn in discretionary spending cuts over the next decade, reducing the share of discretionary spending to five per cent of gross domestic product by 2022. Despite its overall austerity, the proposal contains measures to boost manufacturing. Many of these – including policies to increase high-school graduation rates; workforce training programs at community colleges; more funding for basic research, infrastructure investment, and scientific, engineering and technical education; and immigration reform – would benefit other sectors as well. Continue reading »

Mr Obama is facing an extremely difficult task: remaining tough on Iran without sabotaging the US economic recovery. While the strategy of squeezing Iran financially is logical, it comes with serious economic risks that are not often recognised. We’ve entered a new era in which the distinction between the financial and security spheres no longer holds: geopolitics drive markets even as markets drive geopolitics.

Enforcing oil sanctions against Iran could threaten the global economy. In the context of improving global growth, removing too much Iranian oil from the world’s energy supply could cause an oil price spike that that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time sanctions have the potential to be “too successful”, hurting the sanctioners as much as the sanctioned.

One solution would be for Mr Obama to maintain his tough public rhetoric on sanctions, no matter how harsh it appears, while privately signaling China and India – and only China and India – that it is fine for them to purchase Iranian crude, but at a significant discount from market price. Forcing Tehran to sell discounted barrels would provide the desired result: a substantial reduction in Iranian revenue with less impact on global energy prices and less harm to the US and world economies.

It’s a tricky diplomatic line to walk, to be sure. It will likely not assuage the administration’s critics either domestically or in Israel. But it may be the only way out of the dilemma. Continue reading »