Wednesday, January 26, 2011

America's new 'Sputnik moment'

Jan 26, 2011

By Nayan Chanda
THE recent shootings at an Arizona shopping mall have ignited an impassioned debate in America about political responsibility. Did overheated Tea Party rhetoric inspire the gunman or was the carnage merely the product of a twisted individual mind?
President Barack Obama has called for calm and a return to civility in debate. However, the anger over the economic crisis that underpins much of the political blame game continues to smoulder. The fact that politicians from both parties are unwilling or unable to accept a painful overhaul to adapt to a globalised world does not, however, bode well for a return to civility.
Some figures reveal the challenges ahead. Corporations in the United States earned profits at an annual rate of US$1.659 trillion (S$2.13 trillion) in the third quarter of last year, the highest in 60 years. Most of these gains were derived from overseas operations. In addition, according to the Federal Reserve, US companies are sitting on cash reserves of nearly US$2 trillion. Despite this, about 15 million Americans remain unemployed, for corporations refuse to hire new workers for fear that there may not be a market for their products in the country.
The bitter debate between Republicans and Democrats has centred on how to kick-start the economy and create jobs. Republicans call for lowering taxes and cutting government spending, while Democrats argue for further stimulus and protectionist trade policies. That the facts defy both of these prescriptions does not seem to matter in a partisan debate over ideology. The tax cuts initiated by Republican administrations increased government debt without reducing unemployment.
Survey after survey has shown that companies have been holding back on expansion out of fear that unemployed and debt-ridden consumers will not buy their products. Even those who do expand their operations invest in machines rather than in their workers. At current rates of job creation, Federal Reserve chairman Ben Bernanke admitted it might take 'another four to five years for the job market to normalise fully'.
Democratic calls for greater government stimulus to create jobs hold appeal in the short term, but these run the risk of adding to an explosive accumulation of debt. With public debt rising to dizzying heights, wary investors will demand higher bond yields, which will force an end to the near-zero interest rate policy that has propelled the economy so far.
Calls to subsidise domestic industry will similarly produce minor short-term gains, while risking igniting a trade war. And demanding a revaluation of China's yuan is a double-edged sword: It could reduce the US trade deficit but would also eat into the profits of US corporations that use Chinese production facilities to export their goods. It will certainly end up costing American consumers more: The country's shopping malls are largely stocked with made-in-China goods.
The unpleasant fact is that over the past three decades, most manufacturing jobs have left the US for lower-cost countries. It is thus no surprise that the manufacturing sector earns most of its profits from overseas operations, and the major part of corporate profits in America is derived from the financial sector, which has global operations.
What the data shows is that while the globalisation of finance and manufacturing and the technological revolution have been a boon to nimble American corporations and individuals, most other Americans have been left behind by globalisation, facing a crumbling infrastructure and a failing education system.
With income concentrated in the top 1 per cent of the population - and the recent Supreme Court ruling giving rich corporations unprecedented power to spend on political campaigns - the debate is now focused on narrower topics like lowering taxes and cutting the deficit rather than the general direction of the US economy.
Not that ideas are lacking. In a speech last month, Mr Obama said the US cannot go back to its old ways and needs to wake up to a changed world, as it did to the Russian space challenge in 1957.
'Our generation's Sputnik moment is back,' he said. 'Once we put our minds to it, once we got focused, once we got unified, not only did we surpass the Soviets, we developed new American technologies, industries and jobs.'
In the growing rancour as a result of the economic crisis, big ideas have fallen by the wayside. Unless politicians wake up to the challenges of globalisation, mere civility in debate, however welcome, will not address the causes of the anger raging in America.

The writer is director of publications at the Yale Centre for the Study of Globalisation, and Editor of YaleGlobal Online.

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