Monday, 19 January 2009

America At The Crossroads

All eyes turn to Washington this week for the inauguration of President Obama. In winning the election, he has done much to impress. The campaign has set all sorts of records for fundraising, galvanising grass roots support, mobilising the popular vote, and taking on the vested interests in Washington. It is so fitting that the Senator from Illinois will become the first Afro-American President of the United States. At this point, it might be helpful to take stock about why this Presidency in particular is likely to be pivotal in the story of America.

President Obama will inherit two sets of problems – the US economy and the position of the US in the world. The US economy is in a dire position. As the global economy moves into recession, there is evidence to suggest that the US economy is one of the hardest hit in the OECD group of nations. It has not benefited from the fiscal stimuli that other economies are starting to feel. Much of the benefit of the financial bail-outs has been devoted to shoring up the balance sheets of the banking sector rather than getting the economy working again. There is a great deal of anger in the US about the way in which Wall Street has been bailed out and Main Street has been left to its own devices.

This erosion of trust, and its consequential impact on confidence, is the first thing that the new President will have to tackle in his fiscal stimulus. Even if the US has a ‘good recession’, there are a number of longer term adverse factors that will start to arise during this Presidency. Last year the first Boomers reached retirement age. The numbers achieving this status over the next four years will rise dramatically, and even more will join their ranks should President Obama be re-elected in 2012. There are likely to be a number of very unhappy voters in the next few years. The financial crisis has severely reduced the value of the Boomers retirement accounts at exactly the wrong time for them. As a generation, the Boomers have been led to expect a comfortable retirement, but the prospects are not favourable for this outcome.

In addition to that, the expectation of medical entitlements has risen just at the point where the demands on the system are likely to take it towards breaking point. The health and retirement entitlements in the Federal Budget are likely to place it under considerable pressure in the coming years. Healthcare reform has been a central promise of the Presidential campaign. However, the realties of office, combined with the entrenchment of vested interests, lead us to think that major reform could well take longer than a single Presidential term and that the pressure of growing entitlements will cause the federal deficit to grow during this Presidency.

Of course, the US does not face these problems in isolation. They are a common set of problems experienced across the OECD. It is unlikely that any one nation – even the US – will be able to solve these problems in isolation. This is where the position of the US in the world might start to be problematical. The ‘awkward squad’ are already forming. The Financial Times reports that Germany and France have warned President Obama that the EU intends to set the agenda for reform at the G20 in April (see article).

In a different article the FT also reports that the Saudis have reduced oil production by an amount greater than the amount agreed at OPEC in an effort to force up the price of oil (see article). This is significant because the Wall Street Journal reported an estimate that oil at $80 a barrel gave the US economy a stimulus of $275 billion (see article). One way of interpreting this news is that the covert stimulus of $150 billion given by the Saudis to the Bush Presidency – by holding oil at $40 a barrel instead of the target $75 a barrel – is not going to be given to the Obama Presidency. Indeed, one consequence of filling the State Department with people sympathetic to the pro-Israel lobby is likely to be that the Arab members of OPEC are unlikely to be greatly sympathetic to the plight of the US economy.

This interplay between global geopolitics and the global economy is likely to dominate the next Presidency. In Afghanistan, the US would like to see greater NATO involvement and a commitment of more European troops. The European refusniks – led by Germany – are unlikely to respond to this call. In turn, this circumscribes any attempt to reduce the cost to the Federal budget of overseas engagements. We seem to be at a time where two certainties of the past have become very uncertain.

For the last twenty years we have relied on the certainty that market capitalism is the best way to arrange our affairs, and that the US would take the lead in making market capitalism work. Events of the past two years have demonstrated that market capitalism, as a system, has its deep flaws. In dealing with these flaws, the economies of the world are heading towards a more socialised arrangement – market socialism, if you like. In this, the US does not have a great deal of authority, Europe does.

Equally, recent events are starting to show that the US is not the unchallenged superpower that it once was. A new order is emerging. Authority is seeping away from nation states towards supra-national bodies. Even the UN is finding a revitalised role in this new order. Of the nation states, the emerging powers now want a greater say in the organisation of global affairs. The G7, then the G8, is now the G20 to include the reality of the development of India, China, and the other emerging economies. Whereas once the US could dominate such groups, now it cannot. A different conversation has arisen that few in the US have yet to hear.

And so we find America at a crossroads. President Obama has much promise in finding the right path. It is in all our interests that he doesn’t take a wrong turn.

© The European Futures Observatory 2009

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