US voters have a poor choice
Bharat Jhunjhunwala on how Obama and Romney are ignoring harsh economic realities
DEMOCRATIC PRESIDENT Barack Obama will be facing a challenge from Republican Mitt Romney in the US elections due in November. Obama strongly opposes outsourcing. Romney, on the other hand, supports it: American companies should be allowed to outsource in order to remain competitive in the global economy, he says. As 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 US government support, should not be outsourced. But he forgets that US companies using more expensive labour will be priced out of the global market and the jobs will evaporate anyway. Romney, on the other hand, is correct insofar as supporting American businesses is concerned. But he has no prescription for creating jobs. The ground reality is that the high standards of living of American peoples are not sustainable in a global economy in which wages have to be equalised.
President George W Bush had provided tax cuts to help ward off the impact of global recession. These tax cuts are due to expire in December 2012. Obama wants to end tax cuts for richer persons earning more than $250,000 per year. He also wants to continue with the present policy of providing generous unemployment compensation to the people. In contrast, Romney wants to reduce tax rates for all persons — poor as well as rich. And he wants to replace unemployment compensation with ‘unemployment savings accounts’ where individuals will deposit part of their incomes, which will then be used to pay unemployment compensation to them should such a need arise. This arrangement will be somewhat like the Provident Fund in India. Romney does not want the government to be burdened with the provision of unemployment compensation.
The third major difference in the position of the two candidates is regarding the educational system. Obama is focussed on reform of the primary educational system and on improvement of quality. Romney, on the other hand, is focussed on pushing frontline research. Both actions are important. However, the glory of the American economy is largely due to research. Any failing on this front will be irreparable.
Obama tilts towards China. He mentioned China’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 symbolisms, nothing concrete was achieved. Observers declared the visit a failure. Obama did support India’s candidacy for a permanent seat in the United Nations Security Council, which is welcome, but is mere talk because the matter is not on the global agenda at present.
Romney is hard on China in comparison. He has highlighted the complicity of the Chinese government in encouraging 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 of keeping the value of the yuan low. Romney has explicitly said that he favours closer cooperation with India and Indonesia in order to counter Chinese hegemony in Asia. From the global geopolitical standpoint, therefore, Romney will be more favourable to India.
Indian expatriates living in the US 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 the less-favourable position of Obama towards India.
The Obama-Romney divide, however, misses the main faultline of the US economy. According to CIA and Eurostat data posted on Wikipedia, the United States now stands in the company of major countries that have government debt in excess of the GDP in 2011. The figures speak for themselves. Japanese debt was 208 percent of GDP, Greece’s 165 percent, Italy’s 120 percent and Ireland’s 108 percent. All these countries are in economic crisis today. The United States is following the same trajectory with its debt at 103 percent 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 US has got into this unfortunate circumstance by continued borrowing and spending. Cheap loans were given in the early part of the last decade for housing. That led to the property bubble bursting in 2008. Then tax cuts, increased welfare spending and continued involvement with wars abroad have led to bloating budget deficit.
NEITHER CANDIDATE is cognisant 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.
Obama and Romney need to understand that the party is over. The strength of the United States in the last 100 years arose mainly from its technological edge — assembly line, atomic reactors, jet airplane, space exploration, computers and internet. 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 do not realise the need of the hour is belt-tightening.
Neither Obama nor Romney will provide stable relief to the American people. Romney may be more beneficial for the American people in the long run. Outsourcing may help American companies survive against global competition. But these benefits will come, if at all, in the long run. Benefits from increased expenditures on research will also come in the long run. Romney’s administration will bring much pain on the American people. His integrity is also doubtful. He had implemented health reforms as Governor of Massachusetts. Obama is trying to implement the same reform at the national level now but Romney is opposing this is on flimsy grounds. His history smacks of repeated flip-flops and opportunism. On the other hand, Obama’s efforts to provide relief to the people may not sustain. Obama would 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.
Bharat Jhunjhunwala is a former economics professor at IIM Bengaluru. The opinions expressed are his own.