Thursday, November 06, 2008

More on the implications of the Obama victory

A rant first. Am a bit frustrated by the British coverage of the Obama win - they are going on about "defining moments" in American history, and then showing pictures of Kennedy, who was a very minor president indeed (he merely responded to events during his presidency, he didn't "make the weather" in the way FDR, Johnson or Reagan did). It's almost as though they think, Obama handsome, Kennedy handsome, they must be similar presidents!

They are also going full-on about the historic "black" win, with footage from civil rights etc (which of course they prepared earlier). But of course the reason Obama was elected had nothing at all to do with colour. Instead the contest, which had been close, tilted decisively to him when the meltdown happened in the financial markets. The really historic thing is that though Obama is half-black, the election was about policy, and people would honour the spirit of the moment better if they explored those policies.

American journalists however are focusing on policy. Joe Klien had this to say in Newsweek:

"Unlike Bill Clinton, whose purpose was to humanize Reaganism but not really challenge it, Obama offered a full-throated rebuttal to Clinton's notion that "the era of Big Government is over." He was a liberal, as charged. But the public was ready, after a 30-year conservative pendulum swing, for activist government."

Now, New Labour's strategy was modelled on Clinton's. The idea was that we couldn't dismantle the Thatcher settlement, but we could modify it. So higher rate taxes were not touched (apart from Brown raising N.I. above the upper earnings limit by 1% for the first time). And redistribution was done by stealth. It was only during this third parliament that Labour people actually started openly acknowledging the amount of redistribution taking place (through raising the minimum wage much faster than the growth in average earnings and through tax credits). Everyone kept quiet about it in the first eight years.

Obama however means to turn away from the Reagan-Thatcher settlement. He's a potential FDR if he wants to be. The financial meltdown has made Americans give him a fair hearing, and there is a fair amount of goodwill behind him. Ordinary people are irritated at the rich being bailed out while they struggle with basics and are scared to get sick. I've been saying for some time that the current crisis is very different from the early 90's one. Then government was blamed and the markets were heroes. This time the market is the villain and people are looking to government to protect them.

Obama's solution is to increase public spending, cut taxes for the poorest, and pay for it by raising taxes for the richest. It's something Labour would love to do, but the difficulty is the "raising taxes for the richest" bit. One big difference between the UK and the USA is that the Americans don't have any such thing as a person non-domiciled for tax. If you are a citizen, you pay tax, regardless of where you are living. There is no escape. They have double taxation agreements with most countries, but if you are paying less locally than you would in the USA, you pay the difference to the US treasury. So an American in Monaco will pay full federal tax to Uncle Sam. A Brit in Monaco pays nothing to the Inland Revenue (Monaco has zero income tax and Britain allows the concept of non-domiciles). So it's easier for Obama to collect his revenue than for Gordon Brown - unless we change the law to say that citizenship comes with the responsibility to pay tax.

The other interesting thing is that much of Obama's public spending may go on infrastructure. Many Americans look back to the era of Eisenhower with nostalgia for the full employment and job security. What is now forgotten is that Eisenhower had a top rate of tax of 90%, and he used the money to build the American Interstate system. In 1999, the building of the US Interstate system was voted the most important event of the 20th century that shaped US business, as it enabled goods to get to market, and thus powered the growth in the US economy. However, not much spending has taken place on US infrastructure since Reagan (with dire consequences in New Orleans). That might change. It's also something we should consider here, especially if the downturn means that government has to step in with projects to make up the shortfall in activity.

We are living through a once-in-a-generation shift to the left. I just hope on this side of the pond we have the nerve to seize our moment.


Hughes Views said...

The great tragedy for New Labour in general and Tony Blair in particular was to have been in power during the rump years of the Clinton administration and all of George W Bush's tenure.

Whatever the dreamers on the left or right believe, the reality is that no European government is powerful enough nowadays to resist the zeitgeist in the US*. If the new President can deliver on his rhetoric they'll be no reason not to be more radical in the demolition of the Reagan-Thatcher legacy.

* Do you know when and/or why that federation lost the A in its title that it had when I was young?

snowflake5 said...

Hughes views- the contraints on Blair weren't just American. In Britain too in the mid 90's, the voters simply wanted Thatcherism humanised. The feeling was very much that the markets knew best. Indeed, what brought John Major down was the feeling that his government were very bad to join the ERM, and the markets were right to eject Britain from it (the markets were the heroes). Of course he only joined the ERM because Thatcher-Lawson policies created rampant inflation, and he needed a mechanism to squeeze it out.

This time round it's very much the market being the villain, and the government being the only thing stopping armageddon. I hear that General Motors wants to get nationalised. If the US govt goes ahead, they might as well try proper socialism, with rewards for the little man, rather than only socialising the risks (burden on the little man) and privatising the profits (rewards for the fat cats).

We live in interesting times.