The Hindu Business Line : Now for Obamanomics

For Barack Obama the most important, and disconcerting, discovery will be that this is not the America he set out to conquer. Two years ago, when he launched his campaign, Iraq was the issue with the economy a mere blur in the background. The first wave of banks’ troubled assets swept Bear Stearns away, midway through the campaign, and since then gained tsunamic power to devastate economies from America to Ukraine.

Considering the leap of faith by Americans in this historic election, Obama’s first priority will be the domestic economy. Besides footing the bills for the $700-billion Troubled Asset Relief Programme and sundry other bailouts, Obama will have to quickly stimulate the economy that is contracting and could slip into recession. With the IMF putting America’s 2008 year-on-year growth at 0.52 per cent, the world’s No. 1 economy finds itself ranked among the bottom 10 of 181 nations.

The US Federal Reserve has acted with alacrity by cutting interest rates but needs fiscal policy back-up, both to re-capitalise lenders and to stimulate spending directly through increased public expenditure or tax cuts. Immediately, Obama will try to find the $50 billion he promised to “jumpstart the economy”.

Tax reform

On the tax front, Americans, already paying lower rates compared to Europeans, could be in for some bonanza. If Obama implements his promise, at least 10 million Americans will escape the tax net thanks to the ‘Making Work Pay’ tax credit of $500 per person, or $1,000 per working family.

He also plans to eliminate all income tax for senior citizens making less than $50,000 per year. This will eliminate taxes for seven million seniors, who will, on an average, save $1,400 each year. As part of the tax reform measures is the simplification of tax filings that will apparently save “Americans up to 200 million total hours of work and aggravation and up to $2 billion in tax preparer fees”.

If these measures put money in the pocket of the American, the people will feel vindicated with their Presidential choice, even if the economist is left wondering where Obama will get the money to fund this Keynesian solution. Obama and his team of impressive advisers, including such veterans as Paul Volcker and Larry Summers, had planned to levy a windfall tax on the profits of oil companies but with oil prices falling, this idea may not yield much.

Obama may have to rely on the dollar and the Treasuries to do the trick. As the current favourite safe haven, dollar/Treasury purchases should continue apace, especially by the cash-rich Middle Eastern and Asian economies. The dollar has been rising to the detriment of the pound and the euro. So, yet again, America may manage to make someone else pay for its profligacy. The US’ current-account deficit will balloon but so what?

Foreign policy

However, to sustain the dollar prowess, Obama will have to re-capture the commanding heights of global politics. Discredited, reviled even, in the post-Iraq phase, there is ennui in American foreign policy. That is why, perhaps, the US did not give the usual lead in tackling the financial crisis but ceded leadership to Britain. With politics and economics inseparable, Obama will have to work on the former to flex the latter, especially if he is to keep spending.

An unknown quantity on foreign policy, Obama would perhaps do well to win world confidence by affording international institutions such as the UN a role in global politics that had been usurped by Washington. He can, indeed must, also demonstrate the US commitment to world good by signing the Kyoto Protocol. All these may be necessary actions for Obama if he wants to reassert the US’ world leadership position.

Obama’s first foreign policy trial will be his stance on Iraq and how he disengages gracefully and without letting that country slide into anarchy and chaos. It may also help Obama, and rest of the world, economically if he manages to get the Iraqi oil flowing into the global market. That may lead to stability in the oil market and some price certainty that can be crucial for Obama to concentrate on other fronts.

He will also have to deal with the fast-sliding Afghanistan situation and, in turn, handle Pakistan. Obama can leverage his popularity in Afghanistan by doing something rather than talk of doing everything, like his predecessor. He will need to get less antagonistic with Iran.

Hope amid challenges

Much as the times are difficult and Obama will have his task cut out, in some ways the financial crisis could also be an opportunity for the US to re-establish its political hegemony. Though the European leaders eventually came with rescue programmes, their initial panic and headless-chicken reaction showed up the fragility of the European Union and, more important, the differences in the economies constituting the bloc.

The UK took the lead in tackling the financial crisis but the European Union did not seize on it to take on a larger role. As Europeans nations scrambled to the rescue of their economies, indeed at one time there were genuine fears over the future of the euro.

Elsewhere, Japan seems still caught in the 1990s while China, no doubt for its own reasons, was restrained in reacting to the world problems. Russia is hardly the superpower it was and continues to be roiled in internal contradictions. The current cash-rich Middle East economies have no global political stature.

Countries like India may be respected on the world political firmament but do not yet have the wherewithal to take on a global leadership role. So, the US, legitimately and by default, fills the role.

Obama need only avoid making the wrong moves, especially in his first year in the White House. Liberal Americans are quite tired of making apologies for their nationality the past decade.

And rarely has a US President been elected with so much hope amid such intimidating challenges.

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