Daily Archives: May 29, 2012

Tuesday’s Wall Street Journal carried an article by Robert Rubin, former Treasury secretary, arguing that political and economic conditions after the election in November will be unusually favourable for a grand bargain that would get federal finances on a sustainable path.

Mr Rubin argues that the expiring of various tax cuts and implementation of automatic spending cuts, already enacted into law, will compel congressional and presidential action. He also argues that between now and congressional elections in 2014 is the ideal time to bite the bullet on unpopular tax and spending decisions.

With all due respect, I think Mr Rubin is engaging in wishful thinking. Rather than being a propitious time for cutting a deal on taxes and spending, it is almost a certainty the opposite will be the case. Here are some reasons.

First, nothing will happen before the election. Both sides believe the election will strengthen their hand and put them in a position to drive a better bargain. Both can’t be right, but until the election results are in neither side has any incentive to search for common ground.

Although theoretically some sort of backroom negotiating could begin, this is unlikely. Word inevitably would leak and there isn’t much to add to the work of last summer’s Joint Select Committee on Deficit Reduction, which ended in failure and set in motion next year’s sequester that will automatically cut $1.2tn in spending – $600bn each from defence and domestic accounts.

Second, there is no reason to think that the Republican position of opposing any tax increase will change after the election. Virtually every Republican now in Congress or likely to be elected has signed a pledge that they will not support higher taxes for any reason. Without some give on taxes, Democrats will not negotiate, believing a deal that only cuts spending is unfair and unworkable.

It is conceivable that should Mitt Romney defeat Barack Obama he might be willing to put taxes on the table. But he certainly would not do so until after he became president. Then he will need time to get his own people into the Treasury and other agencies before negotiating a budget deal with Democrats.

There is a higher chance of Mr Obama plunging into negotiations after the election. But at that point he will be a lame duck, which will limit his influence. And if Republicans hold the House of Representatives and pick up seats in the Senate, as most political forecasters expect, it will be in their interest to wait until the new Congress convenes in January before negotiating.

Third, lame duck sessions of Congress are notorious for their dysfunction since many members will have retired or been defeated. They are more interested in cleaning out their offices than doing serious legislative work. The most they will do is enact a temporary stay on the tax increases and spending cuts so that the next Congress and administration can deal with them.

Although it is tempting to believe conditions are ripe for a grand bargain on the budget, the unfortunate fact is that the elections for both Congress and the White House this year make it impossible to take advantage of the opportunity.

 

 

What is Russia’s place in today’s world? Has its government built new bridges to the West? Hardly. After the Soviet Union collapsed, US and European leaders extended a hand toward Moscow. The G7 group of industrialised democracies became the G7+1. Nato, the West’s military alliance, created a Nato-Russia joint council. Russia inherited the Soviet seat in the UN Security Council.

How has all that worked out? When many of Russia’s neighbours moved to build new ties to the West, senior Russian leaders called it an American plot to encircle their country. When US leaders announced plans for a missile defence system in eastern Europe to counter threats from Iran, Russian officials warned that they were really designed to paralyse Russia’s defences in advance of a Western invasion.

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    US officials have tried to “reset” relations with Russia – to begin again in a more co-operative spirit to strengthen US-Russian ties. In March, President Obama asked (then president, now prime minister) Dmitry Medvedev to allow time to address Moscow’s missile defence fears. In May, a senior Russian general threatened pre-emptive attacks on the sites.

    Nor is Russian membership in Western organisations yielding positive results. The G7+1 can’t really become a G8 until Russia begins to act like a mature free market democracy. It’s hard to work up much optimism on that score with Vladimir Putin claiming that recent protests in his country are choreographed by Western spies and that he couldn’t make it to the latest G8 summit at Camp David because he was busy putting together his new cabinet – always a complicated chore in an authoritarian country. Mr Putin’s absence made little difference as discussion turned to Afghanistan and the Eurozone, where Russia can’t help, and to Iran and Syria, where Russia is part of the problem.

    So if its government isn’t interested in Western clubs, can we classify Russia as a dynamic emerging market? Not a chance. In China, a communist party has engineered a complex, high-powered economic engine that has lifted the country from abject poverty to become the world’s second-largest economy. India has produced some of the world’s most innovative private-sector companies. Brazil is now an increasingly self-confident democracy with a well-diversified economy and a growing international profile.

    Russia, by contrast, has become an authoritarian state built on (president, then prime minister, now president again) Mr Putin’s reputation as a tough guy and the export of oil, gas, other natural resources and little else. Corruption is endemic. Graft is a particular problem in most developing countries and Transparency International’s global corruption index ranks Turkey at 61, Brazil at 73 and China at 75. Russia ranks 143rd. Russian courts and judges are among the world’s most politically compromised.

    In addition, much of Russia’s commercial elite still views the country as a wealth generator but not a sound long-term investment bet. Capital flight, a chronic problem, has reportedly accelerated since Mr Putin’s re-election in March and it could get much worse if the country faces any extended period of civil unrest. The country’s population is falling because healthcare is poor, socially driven diseases, such as alcoholism, is rampant and because well-educated Russians are leaving in search of better opportunities elsewhere. When the Soviet Union collapsed in 1991, Russia inherited some 148m citizens. Today, there are fewer than 142m. UN studies have warned that the population could fall by 30 per cent over the next four decades, with obvious implications for the country’s growth trajectory and even its long-term territorial integrity (with Siberia barely populated with Russians).

    Are things improving? During Russia’s most recent Potemkin election campaign, Mr Putin spent more time bragging about the stability he established during his last stint as president than any grand plans for the country’s future. Russia is also about to become less transparent as Mr Putin has formed a cabinet with reformers who may not have real power and brings administrative heavyweights on to his presidential staff. The risk is that policy will be made not in Russia’s ministries but behind closed doors inside the Kremlin.

    Republican presidential candidate Mitt Romney recently referred to Russia as America’s “No. 1 geopolitical foe”. That’s absurd, not because Russia isn’t increasingly antagonistic to US interests but because Russia is becoming increasingly less relevant – as a political power or as an attractive emerging market.

    There are those in Russia who argue they can become a modern European country rather than the “Eurasian nation” of Mr Putin’s dreams. These include some of the reformers around Mr Medvedev, much of the country’s urban middle class, internet and social media-savvy young people, a new generation of entrepreneurs fed up with Byzantine restrictions and regulations, intellectuals and much of the media. Members of all these groups want a democratic Russia with an innovative, modern economy driven by private-sector ingenuity and they have taken to the streets in recent months to make themselves heard.

    For the moment, the Kremlin has managed to ignore these voices. Washington should not make the same mistake. If US and European leaders genuinely want to build new ties with Moscow, these are the people they should be talking to.

    The writers are professor of economics at New York University’s Stern School of Business and president of Eurasia Group, a political risk consultancy

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