He speaks like an angel. His wife, everyone agrees, is poise, intelligence and grace personified. Even the first puppy, a Portuguese water dog called Bo, seems blessed with the ability to charm cats, never mind the world’s media. And yet, 100 days into his presidency, the outlines of Barack Obama’s economic strategy are becoming clear. And there is just one snag. Rather than slowing down the global recession, or even turning it around, the steps the US president is taking appear more likely to prolong it.
No one can doubt the energy and commitment of the president. In his first three months in office, he’s sunk billions into vast spending packages, bailed out the collapsing US auto industry, and launched a clampdown on offshore tax havens.
“We can’t go back to an economy that’s built on a pile of sand, on inflated home prices and maxed-out credit cards, on overleveraged banks and outdated regulations that allow the recklessness of a few to threaten the prosperity of all,” he said last week. Ambitious stuff. The trouble is, the reality is a lot murkier than some of the high-flown rhetoric.
Start with the auto industry. Last week, Obama pushed through a rescue for auto giant Chrysler, which, via bankruptcy, will create a new entity, jointly owned by the employee association, the US and Canadian governments, and Italy’s Fiat. Bondholders and hedge-fund managers who may have had stakes in the outcome were quickly hustled aside. The Chrysler deal looks set to serve as a template for the much larger bail-out of General Motors, a company in just as poor shape as Chrysler, but with even more jobs at stake. Fiat may well step up to the plate again – the Italian group looks set to take control of its European brands Vauxhall and Opel as part of that rescue.
Let’s put this as kindly as we can. If the answer to what’s wrong with the economy is Fiat, you must have been asking the wrong question. In reality, Chrysler has been a dog of a company for more than a generation. Ever since poorly engineered, gas-guzzling cars with built-in obsolescence went not-very-surprisingly out of fashion in the early 1970s, it has struggled to come up with a new role for itself. Daimler Benz chewed its way through tens of billion of euros trying to re-invent it, and completely failed – and Daimler is, along with Toyota, one of the finest auto companies in the world. The idea that a combination of Fiat, the White House and the auto workers’ union can turn things around is absurd. That, however, is what is about to be attempted – first with Chrysler, and then, on a far larger scale, with GM.
The reality is that the Americans are not very good at making cars and would be better off closing down their whole industry, much as the British did in the 1980s. Autos are turning into a Japanese-German industry, just as, say, aerospace is an American-French industry, or banking an American-British industry. There is no point in sinking billions into denying that simple reality.
The big danger the world faces right now is a revival of protectionism. If Chrysler and GM are part-owned by the US government, and are still struggling to compete, how long will it be before there are demands for curbs on their rivals? How long before there are restrictions on those irritating European, Japanese and Korean cars people keep buying? Not long. Worse, Obama is propping up an industry where everyone acknowledges there is too much capacity, so postponing the inevitable point when the industry is slimmed down to a handful of companies that can actually make money. As for an exit strategy – no one has even mentioned one.
The same mistakes are likely to be played out elsewhere. Obama has launched a crack-down on what he terms ‘tax avoidance’. In fact, it’s just US firms shifting profits around the world. It doesn’t make any sense to treat the likes of Boeing or Microsoft or McDonald’s as US companies. They are multinationals that happen to do some business in America.
Whatever the problems of the global economy, they won’t be fixed by either a retreat into protectionism or an attack on globalisation. But when you look past the rhetoric, that is precisely what is happening. Both are only going to postpone the eventual recovery from this recession – and leave the US economy that emerges a lot weaker. Meanwhile, money is being squandered on French-style ‘Grand Projets’, such as attempting to introduce high-speed trains to the US. But trains struggle to make money even in small, densely populated countries: they have little chance of prospering in a huge, thinly populated one such as America.
The root causes of the credit crunch are well established. Monetary policy was too lax for too long. And the trade imbalances – mainly between the US and China – created a system in which too much capital was being recycled through the global capital markets. Nothing much, however, is being done to address either issue. The rhetoric of Obama-nomics is sweetly judged. But the reality is that many of the policies he is pushing aren’t going to fix the problems of the global economy – in fact, they’re likely to make them even worse.