ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
Can the US adjust to changing world realities?
, October 25, 2008
If the US fails to recognise and adjust to changing world realities, it is destined to decline in influence, writes Colin Teese.A British Labour MP announced to the parliament that Adam Smith's invisible hand had found its way into the pockets of the British taxpayer. His quip was a marvellous and timely send-up of deregulationist free market economics.
Unreconstructed supporters of neo-liberal economics, of course, continue to pretend nothing has changed. At the opposite end of the political spectrum, unreconstructed socialists are convinced that capitalism is at an end. Both are wrong.
Rest assured, capitalism is not threatened - no credible alternative system of economic organisation is available. Whether the doctrine of neo-liberalism survives in its present form is really the question. But more on that later.
First, let us review the bailout package, as finally passed by the US Congress. The US Treasury is authorised to borrow US$700 billion to bail out banks. Within limits, it can decide how and where the money is spent.
The package looks as if it were hastily cobbled together to give bounce to Republican Senator John McCain's campaign for the US presidency. If so, it has failed.Stricken US banks
Secretary to the US Treasury, Henry Paulson, despite the authority given to him by Congress, at first seemed reluctant to use the money purposefully.
The US$700 billion authorised by Congress has to be borrowed. Presumably, the Treasury will offer government bonds on the world market. Ordinarily, investors would swoop on such an offering, guaranteed, as it will be, by the US government.
But this is different. The US is ill-equipped to take on further debt obligations. The US dollar's hitherto enduring strength is uncertain. The nation continues to run deficit budgets, and is fearsomely over-committed militarily - currently, defence is costing US$750 billion annually.
Lenders, who will have to be found in Asia and the Middle East, won't be generous or forgiving of these circumstances.
Asia and the Middle East won't be rushing to take more US Treasury paper than they already hold - especially as Treasury Secretary Paulson, architect of the bail-out, has confidently predicted that over time the bad debts will be recoverable. Disposing of them, he has said, may ultimately deliver a profit on whatever the US government spends on the bailout.
Potential lenders will be alive to that possibility. If the bailout holds the promise of profit, they will want to gather some or most of it for themselves.
Won't they want equity in the banks, even if Paulson doesn't? Looking at what has happened elsewhere with banks bailouts, investors have frequently gained big benefits from taking up direct investment, rather than accepting mere passive investor returns.
It therefore seems likely that the bailout could result in a large measure of ownership and control of the US financial system passing into the hands of foreign interests.
Asian (mostly Chinese) and Middle Eastern interests could end up with a large measure of control over the US financial system. Locations of the banks may not change, but effective ownership would. Whether or not the US imposed greater regulatory controls, there would be a shift in international power relationships away from the United States and towards China and the Middle East.
What precisely might follow for what we call "the West" from any serious decline in the power and influence of the US is impossible to anticipate. Some would argue that this is already happening - with the growth and economic development of China, the rest of Asia and India. Quite so, but to date the shift in power has not yet taken hold in the financial sector of the economy.Flow-on effects
Any shift away from the US of both industrial and financial power - happening simultaneously - would obviously be of great concern to the West. Think about possible flow-on effects.
For example, Japan, which since the end of World War II, has found it convenient to align with the West, might be tempted towards some kind of association with the emerging strength which just happens to be in its part of the world.
The industrial/financial strength associated with this kind of power-shift - with which Russia might also identify - could lead to changes in policy direction of a kind the West might not prefer.
Unpleasant though this side-effect of the financial crisis might turn out to be, it should not necessarily be seen as a threat to capitalism.
The emerging economies in Asia, including communist China, along with the oil-rich Middle East, are not the slightest bit interested in dismantling capitalism. They are as much attracted to the accumulation of wealth and the power associated with it, as is the most committed capitalist.
What they won't care for is the neo-liberal economic agenda, which has been the basis of economic management in the West for the last 25 years. (In Australia, we call it economic rationalism). With any significant shift in power away from the West, therefore, free marketeers might expect to have a harder time of it.
The emerging powers are savers rather than spenders. Thus far, they have been willing to bankroll extravagant Western spending, which in turn ensures steady demand for the output of their emerging manufacturing industries.Profligate spending
They understand what we do not: that the US and much of the rest of the West have got themselves into the current mess by their commitment to profligate spending. And, the biggest spenders have got into the most trouble.
Under this new emerging influence, capitalism itself certainly won't be threatened, but unrestrained, deregulationist free market capitalism (in effect, the love-child of Reaganomics and Thatcherism) almost certainly won't survive in its present form.
Is there anything the US can do to arrest the likely decline in its industrial and financial influence? Possibly, but it won't be easy.
To understand why, we should try to understand how the US got to this point.
Democrat presidential candidate Barack Obama has been quick to blame the Republican administration of George W. Bush, and it seems to be working for him. Actually, Bush's adverse influence is indirect, though still telling. It is a spin-off from his foreign policy.
In the context of his Iraq adventure, he was quick to pronounce US independence from contrary influences, even from within the Western alliances. Thus, it is hard for him now to try to rekindle among the Western powers the spirit of international cooperation he now so much desires.
Fundamentally, the problem of what's happening now goes back to President Ronald Reagan. It was he who, having read too much into the economic shortcomings of the failing Soviet empire, insisted that world markets should follow the economic model developed by his administration - the so-called "Washington Consensus".
This was the idea, promoted jointly by the US Treasury, the International Monetary Fund and the World Bank, that deregulated financial markets, free trade and privatisation should, under US leadership, be the guiding economic aspiration for all economies.
Reagan led the way with the idea of small government and low taxes. From all of this began the era of US budget deficits and borrowing to fund expenditure.
These ideas grew out of the triumphalism of Western policy-makers as they proclaimed the superiority of Western capitalism over the failing Soviet-style centrally-planned economies. Reagan vigorously promoted the idea that America's economic strength would bring the Soviet empire to its knees.
The US mistakes did not begin and end with Reagan. Democrat President Bill Clinton, too, cannot escape responsibility - he and his Treasury Secretaries Robert Rubin and Lawrence Summers are worthy of special mention. This pair, along with Alan Greenspan, then chairman of the Federal Reserve, convinced Clinton to urge Congress in 1999 to repeal the Glass-Steagall Act, the legislation that had regulated the behaviour of investment banks since the 1930s Great Depression.
Ominously, both Rubin and Summers are back in the limelight as advisors to Barack Obama, and are talked about as potential Cabinet members in a future Obama administration.
Beginning with what happened 20 or so years ago with Reagan, what has become embedded in US economic life will probably act as an impediment to progress as US policy-makers attempt to work their way through the current crisis.
Many believe that the Soviet Union collapsed, not so much because of anything Reagan did, but because the Soviet Union itself, as head of an empire, could not change its ideology in light of new circumstances. We must hope that US policy-makers are not confronting the same difficulty.Decline in power and influence
Whether Democrat or Republican-driven, US leadership must recognise and adjust to changing world realities. If it cannot, then the US is destined to decline in power and influence.
It would be all too easy, and misguided, for Australians to assume that, because of our economic ties with China, any change in power alignments may not affect us as much as others.
In matters of trade and economics, that is probably so. But, those considerations aside, much of our political thinking and cultural identity are closely associated with the West. Making those adjustments would not be easy.- Colin Teese is a former deputy secretary of the Department of Trade.