Saturday, November 10, 2012

Dancing with Obama

The elaborate courtship between the President, democrats and republicans has begun with the background music being more like Schonberg than a baroque minuet.

The President is sticking to his position of tax, loop hole closing, budget cuts and possibly a tax on CO2 as replacing the automatic "fiscal cliff" (no relation to Cliff Richard) which would cut 4-5% of US GDP over the next eighteen months. Republicans are making it clear that spending, loop holes and putting on smiles to lure the confidence fairy is what is needed. For them, taxes are a no-no. The republican spirit of compromise in the face of defeat lasted less than twenty four hours. The democratic "mandate" argument is already in play.

So let us begin by understanding the problem. Apart from the technical fact that the fiscal cliff is a self-imposed form of Hari-Kari, the real challenge of the US economy is the lack of growth and the fact that there are in excess of 9 million unemployed (not to mention massive underemployment of those in work). The challenge is "how do we stimulate growth"?

The republican answer is to cut taxes to create a competitive fiscal climate, especially for the wealthy, which would create confidence so that they feel inclined to invest. This is a theory within economics and the evidence is very clear: it doesn't work. Economies, now global and integrated, nimble and responsive to even inaccurate news (e.g. the idea that Romney might have won) or development, are much more complex. It is clear signals that there are opportunities for growth and that the regulatory climate is such that it favours growth are more important than balances budgets or tax structure. The scale of taxes Obama is talking about for those earning $250,000 or more is modest - not a barrier to growth.

Republicans adopt a different view - fiscal responsibility requires, they say, substantial cuts in spending so as to move towards deficit elimination.  This also supports their view that the US is "over governed" and that "the people" (meaning the rich people) should have more say and control over their affairs. Their belief in the market is such that they oppose ideas based on equity in health, education and social services - they call it "socialism". This despite being the biggest spenders of health and education (per capita) they cant show the world's best outcomes.

So what to do. Obama should lead the negotiations personally and put a specific detailed and costed proposal on the table. He should stare down the republicans and compromise on cuts and loop-holes but not taxes. Let them trigger the cliff (it was their idea in the first place) and let them take the blame. The President should be available every day between now and January 1st for negotiation and make it clear that this is his first order of business. Shame them and face them down. They will blink. If not, they will lose in 2016 too.

Tough love. That's the deal.

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