Saturday, February 28, 2009

It's the middle class, stupid

Feb 28, 2009

Obama's socio-economic experiment bears watching by Asia

By Chua Chin Hon

WASHINGTON: WATCHING from afar, readers in Asia would naturally be drawn to all the eye-popping figures in US President Barack Obama's US$3.55 trillion (S$5.49 trillion) budget proposal.

There is the US$634 billion to be set aside for a decade of health-care reforms, US$205 billion for combat operations in Afghanistan and Iraq up to 2010, US$6 billion for cancer research, and a US$250 billion 'contingent reserve' in case the US$700 billion effort to rescue the banks is insufficient.

Take a step back, however, and one might see in the document the genesis of a bold socio-economic experiment with potentially interesting lessons for Asia.

The 140-page proposal lays out clearly the underpinnings of the Obama administration's thinking behind the budget.

It argues forcefully for an activist government to use all the big guns at its disposal - tax policy, fiscal spending, and regulation - to ameliorate one of the most worrying mega-trends of our time: the unrelenting squeeze on the middle class.

'There is nothing wrong with people succeeding and making money. But there is something wrong when the opportunity for all Americans to get ahead, to enter the middle class, and to create a better life for their children becomes more and more elusive,' the report said.

'The ladder into the middle class and beyond has become harder and harder to climb.'

This lament is one that is likely to resonate with many lower- and middle-income families in Hong Kong, Taipei and Singapore.

Like their counterparts in the United States, they have seen their real wages stagnate or even fall despite the boom of recent years. The cost of living keeps going up. New jobs seem harder to come by, while those that were lost to low-cost manufacturing centres like China never returned.

Meanwhile, those riding high on the frontiers of the globalised economy, be it in financial services or information technology, have seen their fortunes shoot through the roof.

According to the Obama Budget, the median income for US households headed by those under 65 years old fell by US$1,951 between 2000 and 2007. But by 2004, the combined net worth of the top 1 per cent of US households was already bigger than that of the bottom 90 per cent.

Experts and policymakers alike agree that these are all the downsides of globalisation. But there is no consensus on how best governments should respond to these trends.

In much of Asia, even in nominally communist China, the implicit policy preference is to grow the economy sufficiently big and fast so that the rising tide of prosperity would lift all, or at least enough, boats.

The Obama Budget, however, weighs in unequivocally against this 'trickle down' approach.

'The past eight years have discredited once and for all the philosophy of trickle-down economics - that tax breaks, income gains and wealth creation among the wealthy eventually will work their way down the middle class,' it argued.

'In its place, we need economic opportunity to trickle up. We need policies that will strengthen the middle class.'

To this end, the US President wants those benefiting most from globalisation - high-income earners and multinationals - to pay more taxes in order to lessen the burden on the middle class, and help fund policies that would make the workforce more competitive overall.

It is estimated that in a decade, the US government can reap US$656 billion in additional taxes from couples earning more than US$250,000 a year and singles earning US$200,000 or more.

In the same period, multinationals may have to pay US$210 billion more in taxes after the government steps in to limit their ability to shield overseas profits from taxation, the Wall Street Journal estimated.

These additional revenues would help finance tax cuts for the middle class, and pay for much-needed health-care and education reforms.

'There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favour of so few,' said the Obama Budget blueprint.

'It's a legacy of irresponsibility, and it is our duty to change it.'

But will this work, even assuming that Mr Obama passes this budget despite the gathering political opposition?

There are reasonable doubts as to whether such tax policies will backfire by choking off entrepreneurial drive and further slow economic activity. So it is probably fair to say that no Asian country would be rushing out to emulate this plan.

But these bold budgetary prescriptions do raise pertinent questions for Asian policymakers trying hard to address the Achilles' heel of their economies - weak domestic consumption.

The region's experience in recent years, particularly in China, is that heady gross domestic product (GDP) growth alone is not enough to generate a consumer boom. For that to happen, real household incomes must go up.

Can this happen with policymakers sticking to the existing growth model and playing defence, instead of offence, against the mega trends brought on by globalisation?

Mr Obama seems to have made up his mind, declaring in his budget blueprint: 'There are the years that come along once in a generation, when we look at where the country has been and recognise that we need a break from the troubled past, that the problems we face demand that we begin charting a new path.'

Asia will be watching.

[One comment on why consumption is low in many Asian countries is because of the lack of social safety nets. When there is no universal healthcare so when a medical calamity befalls the member of the household, it will take household savings to fund the medical costs and so on. So one argument for spurring consumption is for the govt to take on the role of saving for healthcare? One billion people saving for medical emergencies that will fall on 100 million people is inefficient? Better for the govt to do the saving? Or to sponsor a medical insurance programme? Same for other social safety nets like unemployment or unemployment insurance at least? Welfare is not a bad word. It can help the economy?]

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