Monday, January 30, 2012

Business Times - 31 Jan 2012

Economic nationalism is back

This time round, it's bipartisan, with both the Democrats and Republicans standing up to China


WE TAKE it for granted that the current political discourse in the US is dominated by the struggle for power between the Democrats and the Republicans, and the ideological clash between the 'liberals' and the 'conservatives' - and their many respective sub-groups and orientations.

But a more traditional way of studying the major battles in American politics is to apply an ideological dichotomy that goes back to the founding of the republic and the great political divide between 'Jeffersonians' and 'Hamiltonians' - which seems to be more relevant than ever these days as the American political and economic systems are going through another historic transformation once again.

The conflict between the Federalists who were led by Alexander Hamilton (who would become the first US secretary of the treasury) and Thomas Jefferson (who would be elected as the third US president) and his anti-Federalists, reflected contrasting philosophical visions and policy agenda about the role of the federal government.

Hamilton, a New Yorker, favoured a strong central government that would help provide order and support for the growth of business and industry. His vision was that of an America as a strong industrial power - with productive enterprises rather than speculation. And he believed that - not unlike Great Britain and other European nations - the US should have a national bank to fund the national debt and should promote an activist industrial policy through selective tariffs, subsidies to targeted industries, and investment in infrastructure.

The Virginian Jefferson, on the other hand, was opposed to a concept of a strong central government and wanted to devolve power to the states ('states' rights') and local and private entities, and promoted a vision of America as a peaceful nation of farmers and small businesses that refrained from pursuing the mercantilist and realpolitik foreign policy of the major European governments. Jefferson's America was one that was ruled by the people as opposed to the educated and the wealthy who would be in charge in Hamilton's America.

So imagine these two Founding Fathers listening to President Barack Obama's State of the Union Address last week, in which he was promoting a message of economic nationalism, promising to rebuild American manufacturing and to fix the country's infrastructure while asserting the right of the US to challenge other nations' unfair trade practices.

And now try to guess which of these two political and intellectual giants - Hamilton or Jefferson - would be applauding a speech in which the president decried that America has become a nation of 'outsourcing, bad debt and phony financial profits' and promised to rebuild 'an economy that's built to last'.

'Our workers are the most productive on Earth,' President Obama said, stressing that 'if the playing field is level, I promise you, America will always win.'

Mr Obama celebrated his decision to use the power of the federal government to bail out Chrysler and General Motors in 2008, noting that the two Detroit car companies are now booming, and pledged to pursue similar government intervention in the economy in other areas.

'It can happen in Cleveland and Pittsburgh and Raleigh,' Mr Obama said, referring to places in the country that once upon a time used to be the symbols of American economic strength, where thousands of workers were employed in flourishing factories that exported their products worldwide. Today, many of these jobs have disappeared as a result of technological changes and globalisation, and are being outsourced to Asia.

'We can't bring every job back that's left our shore,' Mr Obama admitted, but stressed that the US has 'a huge opportunity, at this moment, to bring manufacturing back'. 'But we have to seize it,' he added, laying out concrete plans for ending tax breaks for US corporations that move offshore and for imposing a tax on their overseas profits, and at the same time, cutting taxes on domestic US manufacturers.

There is no doubt that the economic nationalist Hamilton who had laid the foundations for the modern American industrial policy would have been smiling during President Obama's speech. Mr Obama seemed to compare America to a military unit that can marshal its resources to win the war.

Mr Obama did not reject the ideals of individualism and free markets that were seen by Jefferson as embodying the American spirit. But he argued that at a time when the structure of the post-1945 American economy is crumbling and the global status of the US is being challenged, there is a need to revive the Hamiltonian approach - under which Americans are brought together as one people where a more activist federal government provides incentives and support through initiatives to promote manufacturing, clean energy, infrastructure, education and research.

And as part of creating the basis for a functioning national community, the federal government would need to narrow the widening social-economic gaps and bring more fairness into the system under which every American would have a 'fair shot' at achieving his or her dreams. The tax code would demand more of the wealthiest Americans, not only as part of an effort to achieve fairness but also in order to provide for more revenues to finance government 'investments' in the common good. Hamilton would have approved.

In fact, Hamilton may have been winking not only at Mr Obama's speech but also during the debates between the Republican presidential candidates. Former Pennsylvania senator Rick Santorum called for eliminating taxes on domestic American manufacturers and taking steps to encourage American businesses to relocate their factories back to the US, while former Massachusetts governor Mitt Romney portrayed the emerging Chinese economy as a major threat to long-term US economic security and urged the imposition of retaliatory tariffs on Chinese imports if the Chinese continued to hold down the value of its currency.

In a way, even the Republican presidential candidates who continue to preach the gospel of free markets and denounce government intervention in the economy have come to the conclusion that in the aftermath of the financial meltdown and the ensuing Great Recession, it is becoming more difficult to win the votes of blue-collar workers and economically distressed members of the middle class by continuing to promote laissez faire economics at home and free trade policies.

These are the kind of policies that are seen by more and more Americans as contributing to the mess in Wall Street, the economic 'squeeze' of the middle class, the shrinking of the manufacturing industry, and the outsourcing of American jobs to China and elsewhere.

Both President Obama and his Republican challengers recognise that the US is facing similar challenges to the ones that it confronted at the end of the 19th century and early 20th century when the rise of manufacturing, the expansion of the large urban centres, growing social-economic inequality and the changing dynamics of the global economy forced major changes in national economic policies and led eventually to the Progressive Era, to the New Deal and the evolution of the welfare state.

Get out of the way

President Obama believes that the federal government needs to maintain and revitalise the welfare state while trying to help create a new industrial base. The Republicans, on the other hand, seem to be playing defence in response to the president's Hamiltonian strategy by insisting that private businesses should and could play the leading role in the process, and the best that the government can do is to get out of their way.

Both sides have yet to come up with a coherent strategy to achieve what seems to be the most perplexing issue: How to encourage Apple and other advanced high-tech industries to continue thriving while creating more American jobs at home, as opposed to creating more jobs in China.

But there is one area on which the Democrats and the Republicans seem to agree, and that is the need to take a more aggressive approach towards China and other emerging economies that are seen as not playing by the rules of global free trade. In particular, the White House - which has been promoting the idea of creating new 'green' industries - regards China's state subsidies to solar and wind power companies as a major threat to its plans.

Hence, President Obama's proposal to establish a trade enforcement unit to investigate foreign violation of trade rules and to propose legal actions against the violators read: China.

So expect both President Obama and his Republican challenger to be campaigning on an aggressive economic nationalist platform this year.

Democrats and Republicans have yet to provide a lot of details on how they plan to create new jobs in America. But they seem to think that by standing up to China, they would convince American voters that they do have a plan.

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