22/09/2011 1 Comment
The United States is often marketed as the Greatest Democracy on Earth. I’m not sure I agree.
A couple of months ago there was a lot of worry in the global markets that the US was about to default on its debt. As I wrote about here, this was a very different situation to that of Greece who is very much in danger of default at the moment.
So, why is it different? After all, both of them need money. Let’s take a look.
Investors are banging on the door to lend the US more money.
Finding someone who wants to lend to Greece at the moment is harder than finding a dodo who can simultaneously breakdance, juggle six elephants and recite its seven times table in Welsh.
While both countries need money, investors believe that the US will be able to pay it back and Greece won’t. It is probably not a bad judgment.
So if the US isn’t a risk to lend to, if people are queuing up to lend it money – why was there ever talk of a default?
To understand this we need to look at US politicians. In the US (to all intents and purposes) there are just two parties, the Democrats and the Republicans and things are always very close between the two. With nothing to back this up, I am going to lazily say that 45% of the US public always vote Republican and 45% always vote Democrat. The remaining 10% decide who is in government and even they are often fairly evenly split.
Because of this the US always has a fairly evenly split Senate, which in turn leads to both parties needing to agree in order to pass changes to US policy. There’s nothing wrong with this in theory; in some ways it is quite good but it does require that to get anything done the two parties need to work together in a reasonably constructive manner.
That’s where the problem lies – they can’t. Or at least they don’t.
The President of the United States, is often referred to as the most powerful person in the world. Evidence clearly shows this is far from true. Take that “almost default” example. Without the Senate agreeing, Obama couldn’t even make the decision to take the money that the US needed and not default on their debt repayments.
Instead the decision went to the Senate.
Defaulting on your debt when people want to lend you money very cheaply would be more than a bit daft. In fact it would be so daft that even the Republicans knew it would be much worse for the US than just borrowing the money that people wanted to lend it.
The Republicans also know though, that their votes are needed for the decision to pass so instead of just saying “Fine borrow the money, let’s move on to something important.” They instead said, “You can borrow the money only if you do something totally unrelated that we want.”
(For more on that read my charming, metaphorical story about Obama flying an aeroplane. Or should that be an “airplane”?)
Had the bill not passed, the people who would have lost out would firstly have been the US citizens as their economy went down the pan. Then everyone else in the world would have been in trouble (as the health of the US economy affects us all).
Although there was a lot of posturing and political bravdo thrown around by both sides, that situation can be neatly summarised like this:
The Republican Party held the US government to ransom with the American people as the hostages.
I’m not being theatrical, this is simply what happened. The Republicans wanted some spending cuts and held the country ransome to get them and it was truly shameful. A far better way of doing things (without causing global economic chaos) would have been to say:
“We all agree that we need to borrow some more and while we would like to discuss other fiscal measures we will do so once this is sorted out. After all whatever we agree on those items, paying our bills is essential.”
Unfortunately this isn’t a one off. Obama has recently announced a new bill aimed at boosting the US economy through closing tax loopholes for the wealthy and increasing government spending. It is actually a very sensible bill but it doesn’t matter – it will be shot down by the Republicans and it won’t pass.
Is that stupid? No, it is ludicrous. Republicans, hate taxes on rich people and hate government spending. Their political campaigns are funded by the rich and that is of more interest to them than doing something sensible to actually help sort out the problem.
The US government needs to act decisively but can’t because of their politicians and sadly, their economy will experience far lower growth than it should do and we’ll all be worse off because of it.
Have you ever wondered why the US can’t bring in public health care or cut greenhouse gas emissions? Same reason – any sensible policy can be easily blocked by a few right-wing half-wits with their own agenda.
In light of this, is the US the greatest democracy on Earth or a bit of a fucking mess?
It’s not just the US though. Europe is in a big mess too. Do you see any sign of some decisive action from European politicians to put forward a clear plan to sort their mess out? If you’ve spotted one then let me know, it must have passed me by.
Politicians just don’t seem to realise that part of the remit we gave them when we elected them was to be able to sort this stuff out. In the US, Obama is trying but he’s ultimately powerless in achieving anything. In Europe they’re doing nothing and hoping it blows over. (It won’t.)
So what of the UK? The UK government has favoured spending cuts and austerity over any attempt to boost the economy. With interest rates at the zero lower bound and unable to be cut further to offset the cuts, this is at best a dangerous game. Basic economics shows that spending cuts in such a situation will harm growth but the government crossed their fingers and hoped that the economy would somehow sort itself out on its own. In the long run it probably will but that’s hardly a reason to dismiss opportunities to sort things out now.
The IMF has said that if the UK is not going to meet the government’s 2011 economic growth targets (it doesn’t have a chance by the way) that it should reconsider its policy of spending cuts and look instead at a policy of stimulating the economy.
After the election in 2010 it would have been very difficult for any political party to forsee the future and build the perfect fiscal policy to cope with such unknowns. In such circumstances, the elected government should:
– Have used macroeconomic theory as the foundation for their policies. (They didn’t)
– Absolutely be prepared to adapt their policies to match the continually changing and unpredictable economic climate. (They aren’t.)
The government based their policy of spending cuts on the hope that economic growth would happen anyway. It hasn’t and now is the time for them to understand that blindly pursuing this will only cause further harm to the economy.
When looked at objectively, the ability to assess and adapt seems like common sense but asking a politician to consider changing policy is not so simple. A lot of that is our own fault. When a government changes its policy we all say, “It’s a U-turn! You got it wrong! You’re rubbish!”
That really is missing the point. An effective government will not be made up of fortune tellers. Therefore an effective govrnment needs to be able to continually adapt their policies to fit with a volatile and unpredictable world. If, next week, George Osborne says that he is going to scrap some cuts and instead focus on some policies to stimulate the economy, we should not all be criticising him as a weak policitian for changing his mind. If he does this we should be commending him as a strong politician – someone who is able to adapt their policies to fit the situation in which they find themselves.
Of course this is all wishful thinking. In reality what will happen next week is that:
- Obama will bang his head against a wall because the Republicans will block his sensible policies
- Angela Merkel will keep her head in the sand and hope it all goes away
- George Osborne will fly in the face of logic and stick with spending cuts
The really sad thing is that now, more than any time in the last three years, it is easier to know what a good fiscal policy is.
It just seems harder than ever for a politican to spot one.