Middle Class - Chinese

Todayonline - The heir apparent and China's middle class

By Peter Foster
The writer is The Daily Telegraph's China Correspondent. He moved to Beijing in 2009.

From behind the walls of a faceless government building in west Beijing came the news this week that China's mandarins have identified the man who will, in all probability, lead their country after 2012.

It was delivered through a typically obfuscatory communique from the official Xinhua news agency, which said the individual in question had been promoted to a job on the commission that oversees China's armed forces. By such signals do we come to know the identity of the man who will take the helm of the world's second-largest economy.

Mr Xi Jinping, a 57-year-old technocrat with degrees in chemical engineering and law, also happens to be the son of one of China's revolutionary leaders: A "princeling".

What he stands for is far more difficult to divine. Some say he's an economic reformer, or at least presume so since Mr Xi made his name pushing through economic development in the coastal provinces in the 1990s. His success may have something to do with that revolutionary lineage - his father Xi Zhongxun was a communist guerrilla fighter who was purged during the Cultural Revolution, but rehabilitated under Mr Deng Xiaoping.

Perhaps, say the rune readers, this makes Mr Xi the son more liberal-minded when it comes to political reform. Equally, say others, having suffered during the Cultural Revolution himself, Mr Xi is burdened with that same deep fear of political chaos that has made China's top leadership so resistant to change.

The truth is that nobody knows: There has been no manifesto, no hustings, no televised cross-examination, just the coded announcement that Mr Xi will become the leader of an organisation and a country that plays its cards disconcertingly close to its chest.

Perhaps it is a mistake to try and decipher the man. Like the current President, Mr Hu Jintao, he is almost anti-charismatic, a deliberately faceless embodiment of the consensus that rules China. (His wife, a folk singer popular with the over-50s, is far better known.)

Understandably, after the madness of the Mao years, big personalities are no longer welcome in Chinese politics; instead Mr Xi stands at the apex of a labyrinthine network of committees set up to inch China forward, step by step, towards a socialist nirvana with Chinese characteristics.

And therein lies the problem: While China's rulers are dealing in increments - "crossing the river by feeling the stones", as Mr Deng put it - the country they govern is plunging into the turbulent waters of the future.

When Mr Hu stepped out of the shadow of Mr Jiang Zemin in 2003, China had 190? million mobile phones. Today, it has over 800?million. Only 50?million were online; today, it is 420?million. During the same period, China's share of global GDP doubled to 8 per cent, and by 2019 - the mid-point of Mr Xi's putative reign - China could account for nearly 15 per cent.

Such momentous material advances are changing the social fabric of China at a far greater pace than the ruling party is adapting to meet the people's expectations. China's middle classes increasingly want to know why they can't afford to buy a house or why their children can't find jobs after graduation, just as its millions of migrant working classes want to know why, when they live and work in a city, they don't have the right to send their children to school there.

Increasingly, China's individuals think they know their rights and are prepared to defend them against rent-seeking officials, bullying commercial interests that cover up their mistakes and damage public health, and bent policemen and courts that put the interests of the party over the constitutional rights they pledged to uphold.

It is this changing reality that Mr Liu Xiaobo, the Nobel Peace laureate, was reflecting when he wrote Charter 08, a document that offered a blueprint for gradual reforms that would bring basic rights and freedoms - of expression, association, religion and property ownership - within the grasp of ordinary Chinese.

Those demands are arguably the natural consequence of the economic and social development that the party has engineered. But whenever faced with pressure to take the next step, China's leaders have suffered from a 20-year attack of political vertigo, of which Mr Liu's 11-year jail sentence is but the latest expression. As Mr Sun Liping, a sociology professor who was Mr Xi's PhD supervisor, has written in an essay much read on the Chinese Internet, the result of this has been "social decay" - which has its origins in the uncontrollable power of the party that Mr Xi looks set to lead.

"The system of government in China will change. It will change in Korea, Taiwan, Vietnam. It is changing in Singapore. But it will not end up like the American or British or French or German systems. What are we all seeking? A form of government that will be comfortable, because it meets our needs, is not oppressive, and maximises our opportunities. And whether you have one-man-one-vote, or some-men-one-vote or othermen-two-votes, those are forms which should be worked out. I'm not intellectually convinced that one-man-one-vote is the best. We practise it because that's what the British bequeathed us ... "- Lee Kuan Yew

For the foreseeable future, the centre holds; but the tension created by political paralysis, by the ruling party's refusal to submit to checks and balances, to explain itself and even argue its case to a society increasingly expecting explanations, is not going to abate.

The world can only hope that out of its secret huddles and conclaves, the party has found a leader in Mr Xi with the ability to manage the consequences.

THE DAILY TELEGRAPH

21 October 2010

Free Flow II

Paul Krugman - Rare and Foolish

Comments:

Bill Pieper

Taiwan
October 18th, 2010
12:13 pm

While the behavior of the PRC government may well be despicable, one almost has to admire how they consistently school western “barbarian” nation, especially the oafish Americans, at nearly every turn. This time they might have overreached, but so what. They have gotten what they want and can sit back while the US officials wring their hands, desperate not to upset their mighty corporate pay masters with a response deemed too harsh. The hand wringers will of course be fully supported by an army of allied ideological warriors from DC think tanks, universities, federal regulatory sleeper cells and elected/selected members of Congress on both sides of the aisle.

The Chinese are masters of two classic strategic and tactical policies used in concert and with complimentary effects. One is divide and conquer, that is, pitting nations which should be naturally allied against the PRC to instead quarrel with one another. This is frequently accomplished by pitting the US exporters and financiers against their European counterparts for example. The other is to exploit an opponent’s weakness, using it as a weapon. In the case of United States, the weakness would be the American slavery to an ideology of “free” trade and unrestricted capital flow; an ideology that provides a near perfect cover for unfettered greed on the part of the nation’s political and financial class. In a hyper-financialized oligarchy such as the US, this fanatic devotion to ideology has benefited a handful of players enormously, while contributing greatly to the ongoing decimation of the middle class.

After the epidemic of tainted products from China, toys poisoning children, toxic drywall, pet food, bad baby formula (presumably none of which reached American shores) etc., etc., a responsible government would have simply imposed a flat out ban of any product that can be consumed, worn or used to build homes until the Chinese government can demonstrate that it has the ability and the will to police its own manufacturing industries. If the US had a government that cared about its people and actively worked in their long term interests, such a ban would have been in place years ago. As far as I can tell it would be perfectly legal within the framework of WTO and other international trade agreements to do so, since public safety interests trump trade deals. In fact, I imagine that if the shoe were on the other foot and US companies had routinely shipped tainted and dangerous products to the Chinese, the PRC would have stepped in and halted such trade until the US can prove it is a responsible trading partner.

The REE debacle illustrates an alarming trend that has been going on for decades. The loss of REE processing resources will take years to replace, so even if mining commences tomorrow, the ore cannot be processed until the plant and expertise is in place. But it is not just rare earths that should concern Americans. When a nation loses its ability to create things, even non-strategic industries will decline over time because there is a lot to learn by making stuff.

Even when products are produced using high level design, creation and engineering talent located in the US, many innovations in process and design are taking place in the locations that actually manufacture the products. The US is losing the “culture” of manufacturing, a culture that contributes to improvements of the products being produced. In addition to this, there is an enormous amount of technological transfer and outright theft of intellectual property from western companies going on, especially in China where western companies are forced to partner with local operations to produce at least some components. These local partners will flat out steal patented technology, even highly sensitive defense related technology, all while being protected by political allies in the PRC. The western companies go along with these risks and costs because they either feel they have no choice in order to remain competitive, or they are eyeing the alluring and thus far illusive carrot of a billion person market. Some companies are finding out too late that it has simply not been worth the cost. But the C-level managers who made the decisions to go to China in the first place - as well as their eager financier partners - have long since made their millions and care not a bit about the costs to their home countries and fellow countrymen.

Paul Cohen

Hartford, CT
October 18th, 2010
12:34 pm

Paul,

There are already too many conflicts around the world that could embroil everyone. We are fighting two endless wars to protect our access to oil, without which, our mighty military machine would collapse. Now you want to escalate tensions with China because they won’t share their rare-earth materials? Let’s throw in Panda Bears. And hey, they have the Great Wall for tourism too. We need to end our colonial foreign policy, not extend it. The greed and selfishness (the ever escalating concentration of wealth flowing to the top) of Corporate executives is the reason we export jobs to exploit cheap labor. If there were a more equitable distribution of wealth in this country, Americans could support demand without having to cut jobs and the opportunity for amassing wealth would still flourish. I’m a bit surprised at the hawkish tone of this piece.

19 October 2010

Middle Class

President Obama on Small Business Jobs & Tax Cuts: "We Don't Have Time for Any More Games"

Posted by Jesse Lee on September 15, 2010 at 06:05 PM EDT

Having just emerged from a Cabinet meeting focused on getting every agency doing all they can to help America create jobs, the President zeroed in on two major fights for the middle class.

The first was the long-overdue breaking of the Republican blockade against help for small business -- for which he thanked the two Republican Senators who stepped up and abandoned their party's parliamentary gimmicks. The second was the ongoing attempt by Republicans in Congress to hold middle class tax cuts hostage to additional, excessive tax cuts for the very wealthiest Americans.

And while I am grateful for this progress, it should not have taken this long to pass this bill. At a time when small business owners are still struggling to make payroll and they’re still holding off hiring, we put together a plan that would give them some tax relief and make it easier for them to take out loans. It’s a bill that’s paid for. It won’t add a dime to the deficit. It’s a bill that was written by both Democrats and Republicans.

Right now, we could decide to extend tax relief for the middle class. Right now, we could decide that every American household would receive a tax cut on the first $250,000 of their income.

But once again, the leaders across the aisle are saying no. They want to hold these middle-class tax cuts hostage until they get an additional tax cut for the wealthiest 2 percent of Americans.

We simply can’t afford that. It would mean borrowing $700 billion in order to fund these tax cuts for the very wealthiest Americans -- $700 billion to give a tax cut worth an average of $100,000 to millionaires and billionaires. And it’s a tax cut economists say would do little to add momentum to our economy.

Now, I just don’t believe this makes any sense. Even as we debate whether it’s wise to spend $700 billion on tax breaks for the wealthy, doesn’t it make sense for us to move forward with the tax cuts that we all agree on? We should be able to extend right now middle-class tax relief on the first $250,000 of income -- which, by the way, 97 percent of Americans make less than $250,000 a year. So right off the bat, 97 percent of all Americans would get tax relief on all their income. People who are making more than $250,000 a year, say, you’re making half a million dollars, you’d still get tax relief on half your income.

And everybody agrees that this makes sense. Middle-class families need this relief. These are the Americans who saw their wages and incomes flat-line over the last decade, who’ve seen the costs of everything from health care to college tuition skyrocket and who have been hardest hit by this recession.

Extending these tax cuts is right. It is just. It will help our economy because middle-class folks are the folks who are most likely to actually spend this tax relief -- for a new computer for the kids or for maybe some home improvement.

And if the other party continues to hold these tax cuts hostage, these are the same families who will suffer the most when their taxes go up next year. And if we can’t get an agreement with Republicans, that's what will happen.

So we don't have time for any more games. I understand there’s an election coming up. But the American people didn't send us here to just think about our jobs; they sent us here to think about theirs. They sent us here to think about their lives and their children’s lives, and to be responsible, and to be serious about the challenges we face as a nation.

That's what members of both parties have now done with the small business jobs bill. And I hope we can work together to do the same thing on middle-class tax relief in the weeks to come.

25 September 2010

NEW WORLD ORDER

18 August 2010

Putting Singapore’s GDP in perspective

By Furry Brown Dog

Supporters of the ruling party and status quo are fond of citing Singapore’s GDP per capita, one of the highest in the world as evidence that its government has done well. Measuring economic success by GDP has many disadvantages as various other netizens have elaborated. I don’t intend to add to those, but in this post I will endeavour to show how this metric is flawed even without disputing that GXP (where ‘X’ refers to any of various national income accounting measures) measures the economic well-being a country’s people.

In 1959, when the PAP first took power in Singapore, Singapore’s GDP per capita (US$2186) in constant 1990 USD (hence adjusted for inflation and PPP) was second only to Hong Kong’s (US$3027) and Japan (US$3554) in East Asia. In this respect, Singapore was already ahead of all the countries in East Asia including China and Taiwan, and South Korea. This did not change when Singapore split from Malaysia in 1965, GDP per capita at US$2667 was highest in the region excluding Hong Kong (US$4825) and Japan (US$5934). These figures are a far cry from the nominal US$500 GDP per capita in 1959 often cited by PAP supporters which ignores both PPP and inflation adjustment. Fast forward to 2008, Singapore’s GDP per capita has overtaken Japan (which was mired for a decade and has yet to recover) but still trails Hong Kong.

Secondly, it is misleading to use GDP per capita when comparing between countries because Singapore only comprises of a single city whereas larger nations have rural areas and smaller towns. A fairer standard of measurement would instead be between cities rather than countries adjusted for purchasing power. This gives rise to the measurement of gross metropolitan product (GMP) per capita , PPP. This measurement compares between cities and towns instead of between countries where the relative poverty of rural inhabitants would distort the measure of GDP per capita. Because PPP involves a routine measurement of a country’s consumer price levels, data is much harder to come by compared to nominal GDP.

The latest data I could find dates back to 2005. Singapore’s GMP per capita PPP when measured against other cities worldwide ranks only at 53rd out of 100 (many other cities above belong to the same country), whilst not a bad showing is far from its spectacular perch of 9th ranking if one considers ranking by country only. This is certainly nothing to crow about.

Lastly, GDP (per capita) suffers from the fatal flaw as a economic indicator because it does not subtract profits earned in Singapore but which is remitted back to foreign shareholders and foreign investors. It also ignores incomes sent back by Singaporean corporations overseas. A more appropriate measure would be gross national product (GNP), which measures national income and profits held by Singaporean firms and residents (citizens + PRs) only. The latest figures for 2009, show that Singapore’s GNP for that year was S$182.536 bn, compared to its GDP of S$265.057bn. In other words, total income and profits for 2009 earned by Singapore residents and firms is only a mere 69% of GDP; the remaining 31% is repatriated overseas.

How does this compare to other countries? Expressing GNP as a proportion of GDP and ranking all the countries worldwide shows that Singapore is ranked only at 32nd place (figures appear to be dated 2007):

If you’re wondering how impoverished countries like Seychelles and Djibouti could rank above Singapore, remember we’re not talking about GDP or GNP (per capita) here as an absolute measure, but instead GNP as fraction of GDP. Such a metric is a loose way of determining how much of economic growth is generated by local employees and firms, while netting out foreign contributions. Singapore doesn’t appear to fare particularly well in this category, which likely reflects its over-dependence on foreign-owned corporations (MNCs) and the lack of a strong local economy and comparatively minor contributions to national income of Singapore firms which have ventured overseas.

Update 7th Aug: A commenter named Jason pointed out that the numbers seem off because it only lists 3 countries worldwide as having greater GNI than GDP, which doesn’t make sense since total world GNI and GDP should theoretically equate. So I went to look for another more reliable source and settled on World Bank figures here. More specifically I used GNI Atlas and GDP current US$.

Using data for both GNI and GDP for the year of 2007, and excluding countries for which no GDP and/or GNI figures are provided (for 2007), Singapore ranks about 138th place out of 183 countries worldwide for GNI/GDP:

Here’s the raw data which I used for those who want to see the full ranking. So while the earlier data is off, my conclusion doesn’t change, since Singapore’s ranking according to World Bank figures is even worse.

PS. The GNI data from the World Bank uses a special Atlas method which smoothens out exchange rate fluctuations and inflation over a few years, whilst the GDP figures are stated in USD terms for the exchange rate of a single year. This may account for some of the discrepancies observed. So like many things in economics, it serves as a reasonable first approximation, but certainly far from ideal. Cross-country comparisons are difficult, I’ll grant you that.

07 August 2010

By Alex Au

Domestic costs drive inflation, not import prices

For a long time, the Monetary Authority of Singapore (MAS), our central bank, has used the management of the Singapore dollar exchange rate as the chief tool to influence inflation locally. It argues that since Singapore’s economy is so open to external trade, inflation tends to come in via rises in prices of imported goods. By shifting our exchange rate up or down, MAS compensates for changes in import prices, thus moderating inflation.

An economist from the National University of Singapore says this is less than half the story. His conclusion is that managing the exchange rate is not good enough for the task.

In an article published in the Straits Times, 29 July 2010 (headlined: Rising Sing$ may not keep prices low), Tilak Abeysinghe dealt with the question: Why are consumer prices rising while the Singapore dollar is appreciating and import prices are falling?

His answer opened with these words:

" From 2006 till last year, consumer prices rose by 3.1 per cent annually while import prices fell by 2.3 per cent. Last year alone, import prices fell by a hefty 8 per cent, while consumer prices went up by 0.6 per cent. The general trend of import prices since 1981 has been downwards and consumer prices upwards. Given Singapore’s extreme dependence on imports, this has puzzled some.

My co-researcher Choy Keen Meng and I examined this puzzle and found, somewhat unexpectedly, that non-tradeables account for 55 per cent of Singapore’s consumer price inflation, while import prices account for the rest. "

Further down, he explained what he meant by non-tradeables. These include labour costs, rental and storage costs, government fees and charges and so on, he explained.

What he is saying therefore is that even as we manage to enjoy lower import prices through the deliberate strengthening of the Singapore dollar, this is more than wiped out by increasing domestic cost elements such as salaries, rents and payments to the government. The result is that we still continue to suffer inflation.

So why not strengthen the dollar some more until it balances out domestic cost increases? There’s a limit to how far the dollar can strengthen; at some point, it will severely affect our export competitiveness.

Abeysinghe was too polite to discuss the far-reaching implications of his findings, especially on policy, but they are not hard to see.

Firstly, the long-standing belief that inflation is mainly the result of external price movements may have blinded our policy-makers to the true impact of domestic cost pressures. Has our government been raising fees and charges, and pushing up land prices in the mistaken belief that these do not have much impact on inflation?

Secondly, if salaries are another domestic cost component that has been pushing up prices of goods and services in Singapore, this begs another question: whose salaries? In 2009 when we faced a worldwide recession and Singapore’s GDP contracted an inflation-adjusted 1.3 percent, the median household incomes of all sectors (by housing type) fell. However, those living in more modest homes suffered the greatest contraction in income. Here are data from a paper titled Key Household Income Trends 2009, from our Statistics Department.

What you see in the table is part of a much longer trend wherein the income gap widens year after year. There is a tendency for salaries to increase more for those already earning more, or in the case of 2009, to decrease less when bad times hit. But salary-rises feed into overall inflation, and inflation affects the poorer segments of society disproportionately. This is because they spend a larger portion of their income. The rich save a substantial part of their income, putting it into interest-bearing or dividend-producing assets.

Then there is the huge influence that the government has over land prices. They impose massive redevelopment charges when an owner wishes to redevelop a piece of land for more intensive use while empty parcels of land are not auctioned off until a minimum bid price is reached. This minimum bid price appears to be quite arbitrarily set. Between them, the ever-rising cost of land results in rents going up inexorably, cyclical downturns excepted.

In turn, land for public housing are then revalued to catch up with notional “market” values (which as explained in the preceding paragraph are heavily affected by government action), and the selling prices of flats marked up accordingly.

In other words, the government’s failure to act effectively on inflation hurts the less well-off particularly hard. The belief that tackling inflation is a job that can be left to the MAS managing the exchange rate is misplaced. There are plenty of domestic cost pressures, many related to government policies, that have a greater effect.

03 August 2010

Regressive Taxation and Fiscal policy

Martin Wolf:

The political genius of supply-side economics

July 25, 2010

The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what Jon Kyl (Arizona), a senior Republican senator, has just said:

“[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans”

What conclusions should outsiders draw about the likely future of US fiscal policy?

First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).

Second, the White House will probably veto these cuts, making itself even more politically unpopular.

Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.

Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

02 August 2010