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Rivals in America and their worldview

Publication Date : 05-09-2012

 

America's Democratic President, Barack Obama, will be facing a challenge from the Republican, Mitt Romney, in the elections due in November. The worldview of the two contenders is quite different.

Obama is strongly opposed to outsourcing. Romney, on the other hand, supports it. In his reckoning, American companies should be allowed to outsource in order to remain competitive in the global economy. As the Governor of Massachusetts, he had vetoed a bill passed by the legislature banning government contractors from outsourcing work.

Obama is right that jobs especially those dependent on the US government’s support should not be outsourced. But he overlooks the point that US companies will have to use more expensive labour. They will be priced out of the global market and the jobs will evaporate as it were. Romney, on the other hand, is correct insofar as supporting American business is concerned. But he has no prescription for creating jobs. The ground reality is that America’s high standard of living is not sustainable in a global economy in which wages have to be equalised.

The former President, George W Bush, had provided tax-cuts to American citizens to help them ward off the impact of global recession. These cuts are due to expire this December. Obama wants to end tax-cuts for the richer persons earning more than US$250,000 a year. He also wants to continue with the present policy of providing generous unemployment compensation.

In contrast, Romney wants to reduce tax rates for all--the poor as well as the rich. And he wants to replace unemployment compensation with ‘unemployment savings accounts’ where individuals will deposit part of their incomes and which will then be used to pay unemployment compensation should the need arise. This arrangement will be somewhat like the Provident Fund in India where a person deposits part of his salaries and gets certain benefits later. Clearly, Romney does not want the government to be burdened with the provision of unemployment compensation.

The third major difference is the position of the two candidates vis-a-vis the educational system. Obama is focused on reforming the primary sector and on improvement of quality. His Republican rival is focused on encouraging frontline research. Both initiatives are important.

However, the glory of American economy stems largely from research. Any failing on this front will be irreparable.

Obama tilts towards China. During his visit to China, he spoke of that country’s positive role in South Asia during his visit to China. That was a direct affront to India’s dominant position in the subcontinent. Obama hosted Manmohan Singh in the first State dinner of his presidency in 2009. However, shorn of symbolism, nothing concrete was achieved. Observers declared the visit a failure. President Obama did support India’s candidacy for a permanent seat in the Security Council which is welcome, but that is merely ‘talking in the air’ because the matter is not on the global agenda at present.

In comparison, Romney is hard on China. He has highlighted the complicity of the Chinese government in encouraging the violation of patent laws by Chinese manufacturers. He has demanded that the US government impose countervailing duties on Chinese goods that are made artificially cheap by the policy to keep the value of the Yuan low.

Romney has explicitly stated that he favours closer cooperation with India and Indonesia in order to counter Chinese hegemony in Asia. From the global geopolitical perspective, therefore, Romney will be more favourable to India.

Indian expatriates living in America appear to support Obama more than Romney. Perhaps this is due to the historically soft position of the Democrats on immigration. This may also be due to the race factor. Brown-skinned Indian NRIs may feel closer to black Obama.

But Indian expatriates will have to make a difficult choice between their sentimental preference for Obama and his less-favourable position towards India.

The Obama-Romney divide, however, misses the main faultline of the economy. According to CIA and Eurostat data posted on Wikipedia, the United States now stands in the company of the major countries that have government debt in excess of the GDP in 2011. The figures speak for themselves. Japan’s debt was 208 per cent of the GDP, Greece’s 165 per cent, Italy’s 120 per cent and Ireland’s 108 per cent.

All these countries are facing an economic crisis today. The United States is following the same trajectory with its debt at 103 per cent of GDP. The US economy is fast sinking. It has already been downgraded by Standard and Poor’s and lost its coveted AAA ranking. The main reason for this is the continued borrowing and spending.

Cheap loans for housing were advanced in the early part of the last decade. And that led to the property bubble burst in 2008. Then tax-cuts, increased welfare spending and continued involvement with wars abroad have led to bloating budgetary deficits. Neither candidate is sufficiently aware of this serious problem. Both want to continue with the policy of borrowing yet more. The difference is that Obama wants to borrow more for financing unemployment compensation and health benefits, while Romney wants to borrow for an aggressive foreign policy.

Both leaders need to understand that the party is over. The strength of the United States over the past 100 years arose mainly from its technological edge--assembly line, atomic reactors, jet airplane, space exploration, computers and internet have all been American inventions. America has lost that edge lately. The present high standard of living has been built and sustained by the monopoly profits made by companies working with these pioneering technologies.

These profits are no longer coming in. Therefore, the imperative is for the American people to adjust to lower standards of living and to be easier towards the environment. Unfortunately Obama and Romney display no recognition of this hard reality. Both should realise that  the need of the hour is to tighten the belt.

Neither is in a position to provide stable relief to the American people. Romney may be more beneficial for the people in the long run. Outsourcing may help American companies survive against global competition. Benefits from increased expenditures on research will also come in the long run. For the people, Romney’s administration will be more difficult to deal with. His integrity is also doubtful. He had implemented health reforms as Governor of Massachusetts.

Obama is now trying to implement the same reform at the national level. Yet his rival is opposing the move on flimsy grounds. His background smacks of repeated flip-flops and opportunism. On the other hand, Obama’s efforts to provide relief to the people may be difficult to sustain. Nonetheless, he will be on a stronger wicket if he replaces unemployment compensation with employment subsidies; and health benefits with cost reduction strategies that enable people to access health without State support.

The writer is former Professor of Economics, Indian Institute of Management, Bangalore.

 

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