Daily Archives: November 1, 2012

Ohio. Ohio. Ohio. As the 2012 presidential election races to a nail-biting conclusion, all eyes are on the Buckeye State. Without it, Mitt Romney almost certainly will not win the White House.

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The state’s battleground status should not be a surprise: it has backed the winner in every presidential vote since 1960. What is unusual this time around is the suggestion of opinion polls that President Barack Obama may win a larger slice of the vote in Ohio than he does nationally; in all but one election since 1976, the Democratic presidential candidate’s performance in the state has lagged behind his national showing.

Should the reverse indeed happen this year it could only be attributed to one factor: the president’s decision to rescue the US car industry. That act has led Ohio from a double-digit unemployment rate as recently as October 2010 to a jobless rate of 7 per cent today, below the national rate of 7.8 per cent.

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Michigan may be home to General Motors, Ford and Chrysler, but with a concentration of parts suppliers, Ohio’s 150,000 car industry jobs rank it as a not too distant second. More than 20 per cent of new jobs created in Ohio since mid-2009 have been within the sector. Add in the spillover effects for businesses from office suppliers to local bars and by some counts one in eight Ohioans depend on the auto industry for their livelihoods.

As daunting as a rescue of the industry appeared to be in 2009, the next president faces an even greater challenge: reversing the course of US salaries, which are on a downward trajectory. Solutions to this problem may be even more elusive than fixes to the auto industry. Once again they may also start in Ohio.

Often depicted as quintessentially Middle American, Ohio is more diverse than its image suggests. It encompasses industrial metropolises such as Cleveland, smaller cities preserved in 19th-century amber, and farms that seem straight out of a Grant Wood painting.

All told, Ohio is not all that different socio-economically from America as a whole, except for its lack of a significant immigrant or Hispanic population.

But manufacturing remains at the core of Ohio’s economy. Even excluding carmakers and suppliers, companies that make things account for 40 per cent of new employment in Ohio over the past three years.

That strong manufacturing presence means Ohio reflects many of the challenges facing the rest of America, particularly the continuing threat to manufacturing from globalisation.

As strongly as manufacturing is rebounding, it follows a dizzying fall; in 1990 Ohio had 1.1m manufacturing jobs; today, even after the recent recovery, it has 657,000.

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US elections 2012

staff fixes the presidential seal before US President Barack Obama gives a press conference

Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

Changes in incomes in the state are even more dismaying. A decade ago, a typical Ohio family earned about $53,000, identical to the national median income. Since then the national median household income has fallen to $50,000 (after adjustment for inflation). But in Ohio it has plummeted to $44,650. For Ohio’s sharper fall blame international competition, which has put huge downward pressure on pay.

Nowhere is this more evident than in the car industry. A long-serving worker at one of the big three Detroit carmakers takes home about $28 per hour in cash pay (plus almost the same amount in benefits).

However, in order for the big three to remain globally competitive, new workers – toiling side by side with their longer-standing colleagues – receive about half as much. New hires take home about $30,000 per year, well below the national median income, and hardly the definition of a good middle-class income.

No president will be able to turn back the clock and eliminate global competition. Instead, the focus should be on preparing American workers for higher-skilled jobs that face less intense competition from developing countries. That will mean investing in education and training.

It will be a long process that will involve considerable pain along the way. But realist political leaders will recognise that there is no quick or easy fix to the wage problem and embrace more protracted but efficacious solutions.

In the coming days the old saying, “as goes Ohio, so goes the nation”, will be used often. It is a phrase that could be applied not only to our elections but also to the economic challenges facing America.

The writer is former head of President Obama’s auto taskforce

Labour MPs trooped through the House of Commons lobby yesterday alongside Tory rebels to reprimand David Cameron for his negotiating stance on the European Union budget. Mr Cameron’s government will ask for a real terms freeze in the EU budget, but for MPs that was not ambitious enough and they called on the prime minister to seek a real terms cut.

That was the right decision for the wrong reasons. And in this case it is the wrong reasons that matter.

The EU budget is a runaway monster. Indeed the Commission’s initial proposal, including near €60bn of big ticket spending mischievously hidden outside the formal budget, would constitute an increase of 11 per cent on 2007-2013 spending and take the budget to 1.11 per cent of Europe’s gross national income. You do not have to be anti-Europe to grumble at eurocrats’ apparent detachment from national spending pressures. European institutions need to eventually exercise the same austerity they are forcing on everyone else. Brussels gives the impression of arrogantly floating above this – its Common Agricultural Policy largely unreformed and untouched; its regional funds representing politicians’ patronage rather than pressed areas. Its salaries and benefits still suggesting an unaccountable munificence. As a former UN official I was similarly amazed at our disregard for our donors’ local economic difficulties. We were too quick to think we were a world apart.

So a real terms cut to the EU budget is not to be shrugged off simply as Albion bloody-mindedness. Nor are the Labour frontbench the cynical opportunists they are being dismissed as. Yes Labour presided over a nominal rise in the EU budget from €100 billion in 2004 to €129 billion in 2011. But it is one thing to have spent more in good times, when the domestic economy was growing, and the EU itself was expanding, it is quite another to spend more when the domestic budget is being squeezed. It is not hypocrisy to say spend less in bad times. Circumstances change.

Nevertheless this was a very bad vote for Britain. Formally, it does not tie the prime minister’s hands but in practice it has undermined the prospect of a budget deal. Until now viewed from Brussels it was just about possible to believe that British resistance was limited to a combination of raucous Tory backbenchers and a prime minister not willing to see them off (thanks to Mr Cameron’s evident emotional detachment from, and distaste for, Brussels’ elaborate summitry and all-night negotiations.) In this view Britain was only an election away from recovering its sanity.

Indeed Labour leaders’ claim that their willingness to invest in the give and take of Brussels negotiations made them better advocates of British interests in Europe had validity – until yesterday.

Guy Verhofstadt, the leader of the Liberals group in the European Parliament and a former prime minister of Belgium, gave what will be a typical response: ‘It is a scandal that the Labour party has sided with the most anti-European wing of the Conservative party’.

In the eyes of European politicians yesterday’s Commons vote will be seen as confirmation of a wider British national madness. Now it will seem both major political parties are willing to head for the EU exit. German-born Labour MP Gisela Stuart’s expressed support for ‘Brexit’ over the weekend is remarkable. A natural European, she has expressed something that in 2005, at the last budget negotiations, would have seemed heresy in Labour ranks.

Ever since Britain entered the EU, oppositions have tended to make hay at the expense of British governments that have been forced by the responsibilities of office reluctantly to defend Brussels. But this politicking to observers watching Britain from the continent will seem like collective panic: a sign that few are willing to put their heads above the parapets and confront ancient but growing public hostility to Europe. Many will consider the British retreat from Europe to have begun.

With hindsight this may turn out to be like the instant reaction to last December’s veto by David Cameron of new treaty rules overseeing taxation and spending – hyperbolic morning-after judgement. A few days later we may find the world, even Europe, is still turning. After all the sluggish ways of Europe are not given to sudden breaks and overnight change.

But at the very least the Commons vote seems to confirm a course. And that perception alone may be enough to undermine Mr Cameron’s hand at the EU Summit on 22 November. If the Westminster political class has given up on Brussels why bother to placate them will go the thinking of other leaders. There may seem little point in giving anything to the prime minster of a country that appears to be walking away from Europe anyway.

Britain has been aloof from Europe’s big debate about the eurozone, other than lobbing in the occasional irritating piece of unsolicited advice from the outside. In Brussels. yesterday’s vote will be seen as a further side-show to that continuing main event, but one that demonstrates how wide the Channel is once again becoming.

The writer is a former government minister, UN deputy secretary-general and vice-chairman of the World Economic Forum.

As America slouches towards the final days of a dismal presidential campaign where too many issues have been fudged or avoided, the one question on which the candidates have provided a clear choice is whether the rich should pay more tax.

That choice will determine whether the US falls over a “fiscal cliff” in January, when $400bn of tax increases and spending cuts are scheduled to kick in. It will also dictate the terms on which Congress and the President (whoever he is next year) must reach a “grand bargain” for taming the nation’s growing budget deficit.

All sides are agreed that something must be done to rein in the country’s budget deficit, but with President Barack Obama and former Governor Mitt Romney neck-and-neck in the polls, it is possible America may elect someone who believes the rich should play no part in this. How is this possible?

President Obama is emphatically in favour of raising taxes on the rich. He proposes increasing tax on earnings in excess of $250,000 in a single year from 35 to 39 per cent (the highest rate during the Clinton years). He would do so while preserving George W. Bush’s tax cuts for people earning less than $250,000 a year. Mr Obama also wants a minimum tax rate of at least 30 per cent on annual incomes over $1 million (the so-called “Buffett Rule”, named after the billionaire investor who has championed it).

Mitt Romney is just as emphatically against taxing the rich more. He wants to cut everyone’s taxes by 20 per cent, which, in absolute terms, would amount to a larger tax cut for the rich than for anyone else. Mr Romney also wants to keep the Bush tax rate for the wealthy of 35 per cent, and reduce or eliminate taxes on dividends and capital gains.

Mr Romney says he will close loopholes and eliminate deductions used by the rich so that their share of total taxes remains the same as it is now, although he refuses to specify which loopholes or deductions. Even if we take him at his word, under no circumstances would he increase the amount of taxes paid by the rich.

Mr Obama has the stronger argument.

It begins with America’s large budget deficit. Just about everyone who has looked at how to reduce it — including the non-partisan Congressional Budget Office, the bipartisan Simpson-Bowles Commission, and almost all independent economists and analysts — has come up with some combination of spending cuts and tax increases that raise revenue.

Just last Thursday, executives of more than eighty large American corporations called for tax reform that “raises revenues and reduces the deficit.”

The practical question is who pays for those additional revenues. If Romney’s view prevails and the rich do not pay more, the burden shifts to everyone else.

That outcome would accelerate a divergence in American incomes that is already alarming: since 1980 the richest 1 per cent has doubled its share of America’s total income — from 10 per cent to 20 per cent; the share going to the top one tenth of 1 per cent has tripled; and the share garnered by the top one hundredth of 1 percent — 16,000 families — has quadrupled. The richest 400 Americans now have more wealth than the bottom 150 million Americans put together.

Data from the French economists Emmanel Saez and Thomas Piketty, meanwhile, show the top 1 per cent garnering 93 percent of all the gains from the recovery so far, while US median family income is 8 percent lower than it was in 2000, adjusted for inflation.

Meanwhile, the tax rates paid byAmerica’s wealthy have been dropping precipitously. Before 1981 the top marginal tax rate was never lower than 70 per cent. Under President Dwight Eisenhower, a Republican, it was 93 per cent. Even after taking all the deductions and tax credits available to them, the rich of that era paid around 54 per cent.

The top tax rate in Americais now 35 per cent and the tax on capital gains (increases in the value of investments) is only 15 per cent. Since so much of what they earn is from capital gains, many of the super-rich, like Mitt Romney himself, pay an effective rate of 14 percent or less. That’s a lower tax rate than many middle class Americans pay.

Add up all the taxes Americans pay — not just on income and capital gains, but also Social Security payroll taxes (which do not apply to income above $110,100) and numerous state and local taxes on the sale of goods — and many middle-class Americans now contribute a higher percentage of their income than do those at the top.

So how can anyone argue against raising taxes on America’s rich? Easily: Romney and his Republican allies say it would slow the economy because the rich are “job creators.” And they have backed their claim with a pile of money for advertisements, hammering it home over and over again. That may explains the closeness of the polls, and yet, in the immortal words of Joe Biden, it’s malarky.

The US economy did just fine during the three decades after World War II, when the top tax rate never fell below 70 per cent. Average yearly economic growth in theUnited States was higher in those years than it has been since, when taxes on the rich have been far lower.

In fact, there seems to be no correlation between tax rates on the highest earners and economic growth. Bill Clinton raised taxes and the economy did wonderfully well. George W Bush cut them and the economy slowed.

The real job creators are to be found in America’s vast middle class, whose spending encourages businesses to expand and hire — and whose lack of spending has the opposite effect.

That is a big reason why the US recovery has been painfully slow. So much income and wealth have gone to the wealthiest Americans that the vast majority do not have the purchasing power to get the economy moving again. The rich save most of what they earn, and their savings go to wherever in the world they can get the highest return.

It would seem nonsensical to compound the damage by raising taxes on the middle class and not on the rich.

Logic, fairness, and common sense should dictate that America’s rich pay more in taxes. But it’s far from clear that logic, fairness, and common sense will prevail when Americans go into voting booths on November 6.

The writer is the chancellor’s professor of public policy at the University of California at Berkeley, and former US secretary of labour under President Bill Clinton.

 

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