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CHANGED CONDITIONS

- Obama may still lack a clue to the root of the US’s problems

Bill Clinton famously highlighted the decisive theme of any American presidential election with his declaration, “It’s the economy, stupid.” Any analysis of the results of the 2012 elections would, however, suggest that economic considerations were far from decisive this time. The subterranean motif in this election, the unmentionable elephant in the room was, of course, race. With 95 per cent of the black vote, Barack Obama had a 9 per cent lead in the popularity stakes. Mitt Romney chipped away at this handicap, but not dramatically enough to neutralize it. Obama had small leads in two other constituencies — Hispanics and women; and the fact that he held on to 40 per cent of the white male vote ensured that he crossed the finishing line, huffing and puffing but marginally ahead, albeit by the slimmest margin ever of any reelected president of the United States of America.

But why were economic issues not central to this election? Why didn’t they override race, gender, age and other such considerations in determining electoral preferences, as Bill Clinton firmly believed they would? The answer lies in the failure of both candidates to articulate a credible policy that might resolve America’s economic predicament. Clinton’s two successors have coped consecutively with a deeply diseased US economy, applied what they believed were panaceas, and failed resoundingly in reviving the patient. Meanwhile, Europe has fared no better — and not for want of curative effort by governments, central banks and supranational institutions. Both the standard schools of macroeconomic theory and policy have been experimented with and have achieved no significant success. George W. Bush followed the classic prescription of a freer market and more money in the hands of the public (though he could do little to reduce the vast deficits that his military misadventures generated); Obama used the Keynesian method of government stimulation and limited regulation. Neither has worked. The US economy continues today to languish in a recession more profound and refractory than any it has experienced since the Great Depression.

The crucial question that the US election underlines is the following: what accounts for the long chronicle of American — or, for that matter, European and Japanese — stagnation? Was Karl Marx right after all? The Marxians have a spectacular record as failed prophets of doom for the capitalist system, beginning with Marx himself, first in 1848, then in 1867, followed by V.I. Lenin in 1916 and many — indeed all — lesser Marxians ever after. Their predictions of the imminent collapse of capitalism have been somewhat muted since 1989, when collapse indeed occurred — but alas, only of the socialist world. Could this be their moment of redemption? Do the ills of the US, European and Japanese economies constitute the terminal malady of the capitalist system?

Devoutly wished though such a consummation may be, one doubts that the time is as yet entirely ripe for it. All over East and South Asia, capitalism seems to be in rudely robust health. Even India, which the media regard as an economic disaster area, riddled though it is by corruption and misgovernance, is nevertheless growing at twice the rate it achieved with ‘a socialist pattern of society’. The story of the last 25 years has been the shift in the balance of economic performance away from the West and towards Asia. As yet, this shift has been reflected mostly in relative rates of growth rather than in per capita income rankings. But the rate of Asian catch-up has been spectacular.

These economic events have earlier parallels in world history. The last quarter of the 19th century witnessed a prolonged depression in Britain (till then the world leader in affluence and growth) and in Western Europe as a counterpart to a surge in growth in the New World, Russia and Germany. The process was driven by the absorption into the orbit of world trade of the virgin land and natural resources of the great continental countries as their interiors were opened up by the railway revolution. A consequence was the immediate collapse of British agriculture and the eventual eclipse of British manufacturing by the industries of the continental countries, leaving Britain as only a commercial and financial metropolis. Meanwhile, the US, Germany and Russia became the powerhouses of the world economy.

This process was replicated over the last 50 years in the relations between Asia and the developed world. Beginning from the mid-1960s, a progressive dismantling of trade barriers, a geographical redistribution of world wealth and a revolution in communication and transport technology led to the integration into the mainstream of world trade of the labour surpluses of densely populated Asia. Initially confined to the Pacific rim, the process spread rapidly and, by the 1980s and 1990s, had engulfed the two largest reservoirs of surplus labour in the world, China and India. Thanks essentially to its low labour costs, Asia came to dominate labour-intensive manufacturing, capturing export markets and attracting outsourcing contracts and direct investment from the advanced world. The astronomical spurt in Asian growth was matched by the decline in demand for high-wage Western labour, accentuating the West’s specialization in capital — and technology-intensive industries and services. The returns to capital and technology rose in the US while the demand for labour contracted. Where wages were flexible, they fell or stagnated. Where they were rigid, unemployment emerged as a long-term phenomenon. With profits soaring, inequality intensified, leading to agitations — like the ‘Occupy Wall Street’ movement — and fuelling the outrage against big business that Obama exploited in 2008.

In fact, Obama is right in his diagnosis of America’s malady: it is indeed the migration of American jobs to Asia that is the cause of US unemployment. Where he is wrong is in his prescription. If he forces US companies not to outsource labour-intensive operations to low-wage countries, he raises their costs and reduces their profits: they cannot then compete in home or foreign markets with rivals who are under no such constraints, and will be forced to contract US operations and relocate abroad. In his efforts to arrest the outsourcing of labour-intensive operations,Obama will have accomplished the outsourcing of whole industries.

The US cannot swim against the tide of history. Globalization has so changed the potential comparative advantage of nations that no country can cling to its earlier economic and industrial structure with any reasonable hope of success. The US has no option but to embrace the role that the new international division of labour has defined for it: it must discard its traditional industries (autos, steel and so on) with their now-standardized technology, focus on research-intensive new sectors at the frontiers of knowledge — aerospace, biogenetics, ocean-bed mining, lasers, robotics, satellite-based imaging and communication and the like — and massively reorient its educational system and the incentive structure of its population to do so. This will imply much short-term pain for long-term gain — an exchange that no politician willingly endorses. Further, in this process, the US will have to confront the massive obstacle that inhibits the generation of new knowledge — the fact that it inevitably overflows from pioneers to later free-riders and that in consequence investors in such industries can capture only a small fraction of the benefits they create. No US president will have a solution to this dilemma; none are likely to even comprehend its dimensions. Bush certainly did not; neither did Obama in his first term. This election, like those that went before, signals four more years of presidential cluelessness.