Obama’s biggest woe

Obama: the true democrat

US President Barack Obama appears to be a true democrat. He has agreed to postpone his nation-wide television address on job creations originally scheduled for 7 September by one day on the request of his political rivals, the Republicans. If such a request has been made in any other democracy, especially in the so called emerging world, the response would have been in the opposite: advancing the address by one day. So, Obama’s positive response fits very well to the definition of democracy given by Nobel Laureate Amartya Sen in his 2009 book, The Idea of Justice.

According to Sen, democracy is ‘government by discussion’ and that discussion is not just a media blitz which one sees in many discussions made by both despotic and democratic leaders with their subjects.  The discussion has an ethical and moral backdrop in it leading to consensual government eventually since it is watched by Adam Smith’s ‘impartial spectator’ or driven by Sen’s ‘obligation to satisfy one’s conscience’. Both these concepts are same because impartial spectator is nothing but one’s own conscience telling him every time when he makes a move whether he is right or wrong.

But the world media branded Obama as ‘caving in’ to Republican pressure, a connotation that does not go well with the head of the most powerful state on the earth.

Economists see this type of an action by a person from a different point. Driven by the popular adage that ‘one does not harvest a honey comb simply to lick his palm’, economists believe that every human action, or for that matter every animal action too, has an economic value and strategy.

What was the strategy of Obama in this case?Selling Obamanomics to Republicans

Obama’s state of mind is not at peace these days. He has to seek a re-election next year, but his popularity is falling day by day. One commentator in a US blog has said that Obama’s election on the previous occasion was done by Americans who did not have wisdom to see things properly. He is being bombarded from every front. Economy-wise, he had to oversee an administration that had no alternative but to make a strong protest against the downgrading of the US sovereign debt with its economic outlook being changed from positive to negative by the Standard and Poor’s, a global rating company. His plan to raise the US government’s debt ceilings has been thwarted by the Republicans who hold majority power in the House of Representatives. Economy refuses to bounce back despite the liberal pouring of stimulus packages into it since 2007. Consumer confidence is at its lowest, economic growth remains closer to one percent and unemployment is on an upward journey refusing to relent. The latest data show that unemployment at the end of June rising to 9.1% of the labour force and remaining unchanged at that level at end August. The ratio of the employed to the total population stands at about 58%, down from a peak of 65% a decade earlier.

These are not in fact ills perpetrated by Obama. They were started in early 2000s by his predecessor and Obama’s sin has been the failure to put the sick giant into the cage at the appropriate time.

So, his strategy is to make the Republicans too share the unpardonable sin. Eventually, if anything goes wrong, in the eyes of the Americans, the Republicans too would be responsible. So, it is simply weakening your enemy by accommodating him first and making him a party to the whole of the sinful activities going on there.

So, it is a nice and may work strategy.

Alan Krueger: Strengthening of Keynesian Club in the White House

On Obama’s side, he has nominated the Princeton University Economist and labour market specialist Alan Krueger to head the White House Council of Economic Advisors. He was earlier US Treasury Secretary Tim Geithner’s Deputy in the Treasury and therefore is considered an apt person to fill the post. He also has faith in Keynesian type policy prescriptions that advocate the government’s role in driving the economy out of a recession.

As an academic, Krueger is ranked within the top 40 most leading economists of the world by publications he has made by IDEAS/RePEc ranking, an outfit of the Federal Reserve Bank of St. Louis of USA (http://ideas.repec.org/top/top.person.all.html).

So, Obama administration has a lot of hopes on Krueger to take the US out of its current malaise of surging unemployment and lead the economy along the path now known as Obamanomics. Krueger’s contributions are specifically important for Obama to make his now rescheduled nationwide address on job creation for Americans.

Karen Weise of Bloomberg Businessweek has summarised various theories propounded by Krueger with others during his academic career spanning for about three decades (available at www.businessweek.com ). Weise’s elaboration just gives a taste of what Obama could expect from Krueger, provided he still has an unchanged loyalty to his old ideas.

Krueger’s foot print

One such research study is on the drop in unemployment in USA in 1990s. Krueger with a colleague from Harvard found that the proliferation of temporary job placement agencies contributed to increase employment and thereby reduce unemployment during that decade. This is obvious because such job placement agencies facilitate the job seekers to find temporary jobs rather quickly without having to go through the hassle of doing the search by themselves. So, Weise has tagged that Obama could rely on such intermediaries to improve the efficiency in the job market by helping prospective job seekers to find their future employers more easily.

Of course, Obama could rely on these temporary job placement agencies to speed up employment and reduce the unemployment rate. But it does not help the US economy permanently. That is because in a prolonged recession, temporary jobs will be gone first and along with that, temporary job placement agencies too would go out of the window.

In another study which Krueger did with a Swedish colleague in 2011, it was established that the longer a job seeker has to do the job searching, the more frustrated he would become making him less active in his job searching efforts. As a result, even when the economy starts showing an improvement, the unemployment rate does not fall immediately. What does this entail on Obama who is seeking re-election to Presidency in a year’s time? He should create jobs rather quickly so that the job search time would get shortened. But it is not a simple task.

Krueger did research on education too. In a study he did with a Princeton colleague in 1992, he established that every extra year of schooling will enable a person to earn 16% more and smaller classes help students to acquire more skills than bigger classes. These two findings entail an unusual obligation on Obama. He will have to spend more on education so that students could be in schools longer and in classes not too large.

 Offshoring, Outsourcing and Bazaar effect

Krueger’s most important finding has been the impact which the recent trend of offshoring has made on US job creation. In a study he did with a Princeton colleague in 2009, he established several important facts: offshoring though beneficial to US corporate sector has transferred about a fourth of US jobs to overseas locations; jobs created in location specific industries like education, medical care, tourism and construction are not so vulnerable to offshoring and professions for which there is a licensing requirement do not suffer due to offshoring activities.

If Obama takes these findings seriously, it is bad news for countries which are planning to solicit US foreign direct investments or FDIs to their countries.

What Krueger and his colleague have found was the simple truth established by the German economist Hans-Werner Sinn earlier in 2004 relating to the German economy and now known as the ‘Bazaar effect’. What Sinn found was that German enterprises in a neck-breaking race for cutting costs and remaining competitive were increasingly relying on outsourcing and offshoring to procure much of the inputs needed for the production line produced in cheap labour countries. This helped German industries to remain competitive and increase exports, but at the cost of losing some 1.6 million manufacturing jobs at home and low economic growth due to much of the value addition produced outside the country. So, Bazaar effect has made the other two leading industrial nations, USA and Japan, too poorer with prolonged economic recessions which do not respond positively to stimulus packages proposed under the Keynesian type of policies. The simple truth: you pump money into the economy to create jobs at home, but that money creates jobs elsewhere.

The casualties of Obamanomics

 The failure of Obamanomics has been found elsewhere also. According to Timothy Carney, the senior political columnist of the Washington Examiner, Obama administration in a bid to promote clean energy had subsidised two companies, namely, Solyndra and Evergreen, and sponsored another company to produce cellulosic ethanol. All three had declared bankruptcy and the last one had gone out of business without producing even a single drop of ethanol. At the same time, some other companies like General Electric and Goldman Sachs also supported by Obamanomic policy have become big money makers without creating jobs at home.

What is wrong with US employment? There are many.

The US employment and unemployment data are published by the Bureau of Labour Statistics or BLS every month after collecting the data through a sample survey known as ‘Current Population Survey’. For this survey, 60,000 households representing some 110,000 persons are surveyed by 2200 interviewers. This is a large survey compared to many public opinion surveys which interview only about 2000 persons

US unemployment data: why not use a loose definition like Sri Lanka?

According to the BLS Website, a person who has a job is employed and an illustration in the webpage shows that a person who works for 40 hours per week is considered as employed. Unpaid family workers are also counted as employed if they have worked at least 15 hours per week. So, an unemployed is a person who has no job (or has not worked at least 40 hours in the preceding week), is available for work and has made active efforts to find a job in the previous four weeks.

This is a tough employment and unemployment definition compared to the much loose definition used by Sri Lanka, though it conforms to ILO requirements. In Sri Lanka, an unemployed person is a person who has not worked at least for one hour in the preceding week for pay or as unpaid family workers. But prior to 1990, Sri Lanka used a little more restrictive definition by which a person to be categorised as unemployed, he should not have worked at least 20 hours in the preceding week.

If Obama too follows a loose definition like Sri Lanka, USA too could have reduced its unemployment rate dramatically.

The Bazaar effect on unemployment

 The root cause of US unemployment has been its high wages which have caused its jobs to fly away to low wage countries. This is the impact of Bazaar effect found by Sinn. Bazaar effect has not adversely affected the exports of both Germany and Japan, and as a result both countries have continued to generate trade surpluses year after year. This was partly due to relying more on outsourcing than offshoring and where offshoring has been practised, goods manufactured in off-shore centres being brought back to the home country for re-export to other destinations. It was also partly due to historically high import propensity of Americans who use much of the German and Japan produced goods.

But this was not the case with USA. Historically, it ran a wide trade deficit facilitated by its ability to print US dollars as the world’s central banker nation and dump them on other nations. Hence, the stimulus packages introduced through Keynesian deficit financing and special packages sponsored by the Federal Reserve System did not help to create domestic employment or output but employment and output elsewhere. The main beneficiary was China which could afford to maintain a high export growth, a high economic growth and a high foreign reserve accumulation.

Worried about unemployment? Take a voluntary wage cut

If USA wants to reduce unemployment permanently, US workers should be prepared to take a substantial wage cut and improve its economy’s competitiveness. When Krueger took up the position at the White House, as reported by www.bloomberg.com/news , he took practically more than a 50% salary cut from $ 369,807 per annum from Princeton to $ 191,300 from the White House, leaving aside his other earnings by way of delivering high paid special guest lectures etc. This is an example which all Americans have to accept today for otherwise their destiny would be very fragile and dark in the future.

USA is still the technology powerhouse in the world. As Wikipedia, the cyberspace encyclopaedia has reported, it still leads by a significant margin the rest of the countries in the world by the number of patents in force: its 1.9 million patents in force is significantly higher than the 1.3 million patents in force in the second highest country in the list, Japan. However, with regard to the new patents granted, it has been overtaken by Japan in recent years. In 2008, it granted approval for 141,871 new patents when Japan approved 239,338 patents. However, in 2007, USA was marginally above Japan (available at: http://en.wikipedia.org/wiki/List_of_countries_by_patents). Though it has slipped one notch down in 2008, it is still a country to be reckoned for generating new technology in the world. This competitive advantage could be used by USA only if it becomes competitive with respect to wage levels too. This is why Milton Friedman blamed USA’s minimum wage policies for the wide spread unemployment in that country in the Friedman family book on simple economics for laymen, Free to Choose.

Will Keynesianism help USA?

Critics charge that Obama’s White House is filled with Keynesians, Obama himself leading. The addition of one more Keynesian to its staff will make it a fully fledged Keynesian Club. Hence, Obama’s much publicised nationwide tele address on 8 September will not have many surprises. It will simply be a continuation of the current stimulus driven economic policy package pursued by Obama administration.

The ability of this package to deliver quick results will be the determining factor of Obama’s re-election to Presidency in a year’s time.

(W.A. Wijewardena can be reached at [email protected] )