For all the sense of history associated with Barack Obama’s inauguration as U.S. President on Tuesday, he doesn’t really have the luxury of time to savour this defining moment laden with powerful symbolism. Perhaps no other leader in contemporary political history has come into office with as long a to-do list waiting at his desk or as heavy a burden of global expectations. Almost never – outside of comic books featuring superheroes – was so much ever asked of one man by so many others infused with the “audacity of hope”.
Yet, of all the compelling crises that compete for Obama’s attention, there is one that, depending on his response to it and the degree of success he has in addressing it, will eternally come to define his presidency, and will either make or break his term in office. That crisis is the one that confronts the U.S. economy.
Beyond the immediate problems that require fire-fighting efforts – the sub-prime and housing crises, the bailout of banks and perhaps the Big Three automobile companies – lies a darker truth about the U.S. economy: it’s broken, and requires not just minor tinkering but an overhaul. Yet, the U.S. cannot undertake that enterprise by itself because it doesn’t entirely control the economic levers to fix the problem.
Just one piece of statistics is illustrative of this mess: U.S. personal consumption expenditure was 72% of GDP in 2006, the highest in economic history. America has in recent years gone on a consumption binge, spending money it didn’t have (and wasn’t earning), to live far beyond its means by borrowing from savings-rich countries halfway across the world, in developing Asia. That reckless party ended with the spectacular bursting of the sub-prime housing bubble.
Precisely the inverse of that has been happening in developing Asia, where consumption fell from 65% of GDP in 1980 to about 46% in 2006. During the same period, its exports grew from 17% of GDP to a peak of 45%.
The symbiotic nature of this East-West economic relationship is hard to miss. As global trade boomed in the 1980s and 1990s, developing Asia leveraged its low labour costs to export goods to the U.S. and other developed economies; in the absence of social safety nets in Asia, these dollar earnings were compulsively saved – and lent back (through, for instance, the purchase of U.S. Treasury bonds by Asian governments), which served to keep U.S. interest rates low and the consumption party there going full swing.
To ‘fix’ the U.S. economy now, Obama needs to do two unpopular things: first, he must persuade Americans, long used to the Good Life of consumption excess, to look up the word ‘thrift’ in the dictionary – and live by it – and get down to doing some work in the real world, not just in the parallel universe of paperless money. In the midst of a brutal recession, that’s not an uplifting message to convey.
But Obama’s bigger challenge is to address the other half of the global imbalance – by persuading Asian governments to introduce social safety nets and let their currencies appreciate, and encourage their people to stop exporting or saving, and instead start spending. That’s a tall order, as evidenced by China’s knee-jerk response to falling exports: it halted the gradual appreciation of its currency, reintroduced export subsidies, and rolled back implementation of labour laws that were seen as the building blocks for a safety net. Even without a protectionist-minded U.S. Congress, that runs the risk of triggering a ruinous trade war.
Obama has thus far proven himself to be a man of prodigious talent who thinks issues through. Yet, for all the intellectual capital he and his All-Star economic team possess, the Big Ideas he has formulated and the tremendous political goodwill he starts his term with, this is one challenge that may overwhelm him. Perhaps only in comic books can superheroes always win.
Why ‘Mahatma’ Obama may fail