From the January 24, 2010 Sunday Times (London)
January 24, 2010
by Irwin Stelzer
Enough is enough. That is the message the most reliably Democratic state in America sent to Barack Obama and his Democratic Congress last week when its voters chose Republican Scott Brown to represent them in the Senate. Brown entered the race for the Massachusetts seat vacated by the death of Ted Kennedy some 30 points behind in the polls, and won with an astonishing margin of five points.
Britain is accustomed to by-elections that often portend a shift in voters’ moods, but the Massachusetts result did more than that: it ended the Democrats’ super-majority in the Senate, a 60-40 margin that allowed them to pass legislation without a single Republican vote. Now, the Republicans have enough votes to prevent the passage of legislation by filibustering — talking it to death.
The majority of Americans style themselves as somewhere between centrist and centre-right, and were not happy to see centrist candidate Obama morph into leftist President Obama. He pressed for a government takeover of the healthcare system, and government involvement in the banking, energy, car, insurance and other sectors. And he launched a spending spree that will leave future generations to pick up the bill for huge deficits.
Never mind that his bank bailouts might have prevented a collapse of the financial system, and at least some of the spending made up for the collapse of private-sector investment and consumer spending. The president’s effort to convert America into a European-style social democracy was more than voters could abide.
The message from Massachusetts will have a profound effect on economic policy. When the president delivers his State of the Union message next week we will see the new populist Obama — not the elitist who derided senator-elect Brown for driving to campaign meetings in his truck. Banks beware: there is more to come in addition to new taxes as Obama appeals to disaffected voters by beating up bonus-laden bankers. His wish list includes, among other things, a ban on the operation of hedge funds and private-equity funds by any “bank backed by the American people”.
We will also see a president who has, to use the Washington word, “pivoted” from “transforming” the economy to cutting the deficit and creating jobs.
The president wants to appoint a commission to devise ways of reducing the deficit from double digits to 3% of GDP by 2015. But Republicans see this as a way of kicking the problem into the long grass until after the 2010 elections, and implicating their party in the tax increases the president and congressional Democrats favour. The last such com- mission, created to save the social security (pension) system from collapse, made little progress until President Ronald Reagan and Democratic House leader “Tip” O’Neill, both likeable, pragmatic politicians, cut a deal. But pragmatism and likeability are in short supply in today’s Washington. Still, it seems likely that some form of co-operative effort to restore fiscal sanity will emerge from the negotiations.
So much for the deficit. On to jobs.
It is easy for economists to say that the jobs market is improving. It is. But it doesn’t feel like that to the 17.2% of Americans who are out of work, involuntarily working only part time, or so discouraged that they have stopped looking for jobs. Or to their neighbours, who fear they might be next for the chop.
So the president will offer a mélange of alleged job-creating policies ranging from modest tax breaks for companies that add staff to spending on specific green energy projects and on infrastructure. However, the words “a second stimulus” will not pass his lips.
The drive to bring down unemployment will not stop with the proposals in the president’s State of the Union message. The Massachusetts election increases the party’s reliance on the trade unions that have the cash and the manpower to deliver Democrat core voters in the 2010 congressional and 2012 presidential elections. And those unions are not exactly disciples of Adam Smith.
The president has already imposed tariffs on tyres and some steel products imported largely from China. The next target of the unions is Chinese glass. They point out that the World Trade Center’s twin towers were sheathed in good old made-in-the-USA glass, but the building that is springing up to replace it will be covered with glass imported from China. Whether that is because Chinese glassmakers receive government subsidies, as the unions allege, or because the Chinese are more efficient glassmakers, matters less to politicians, and to many Americans, than the symbolism of America’s new Freedom Tower being covered in Chinese glass.
Add to the mix the fact that many of the world’s leading economies are depending on export-led growth to get out of recession, and that the Chinese show no signs of allowing their currency to appreciate. These countries continue to see Americans as the world’s consumers of last resort, while at the same time calling on the US to reduce its trade deficit.
What our trading partners see as the export of goods and services, our politicians will see as importing unemployment. True, consumers here benefit from cheaper imports, even from those subsidised by job-hungry China. Consumers are the winners, workers the losers. And unlike consumers, unions are organised to put pressure on Congress.
Policymakers live in dread of the “unintended consequences” of their actions. One unintended consequence of Brown’s election might just be greater reliance on protectionist measures by politicians who believe they have to cut unemployment now, regardless of the long-term consequences.
Another, and cheerier possibility, is that the Democrats’ new need for a bit of bipartisan co-operation from Republicans will produce legislative compromises of the sort that resulted in tax reform during the Reagan years and welfare reform when Bill Clinton occupied the White House, the sort of centrist compromise Americans prefer.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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