The Democrats have merely bought time, while the Republicans have settled for spending cuts as a quid pro quo for a higher public debt ceiling, instead of agreeing to higher taxes on the rich.
The Republicans know pretty well that the United States is not an exporter of a scarce raw material like oil, and have left its well-heeled populace with just a slap on the wrist by way of taxes. It is common knowledge that though US tax rates appear to be frighteningly high, numerous exemptions and tax breaks make life easy, especially for the rich, whose cause is championed by the Republican Party. That the Republican Party has settled for a spending cut of $2.8 trillion over a 10-year period as a quid pro quo for a higher public debt ceiling, instead of biting the bullet and boldly asking its constituency to face the grim reality, is trite.
An Emir can buy peace with his people by asking them to look the other way collectively, even as he plunders the national wealth by offering in return a tax-free status on their income and wealth — though the stratagem has crossed the use-by date, as the all-enveloping revolutions triggered by the Tunisian Jasmine revolution show.
Be that as it may, a benign tax regime is not an option for a vibrant democracy, especially when it has no natural resource — especially of the kind that has no substitute and that can be exported perennially to bankroll its welfare schemes. It is therefore amazing that everyone in the drama has winked at each other. The Republicans have protected their flanks from attack. The Democrats have bought time and peace and postponed the denouement. The spending cuts will be addressed when the parties to the deal reach the bridge. And the rating agencies, especially the redoubtable Standard & Poor’s, have lost no time in giving a clean chit to the US government. Its AAA status will remain undisturbed because, for the time being, the ignominy of the US economy reneging on its debts has been averted. Touché!
The US is behaving ostrich-like. A storm is brewing. There are undercurrents of tension. But nobody is willing to make deep incisions into the body fabric of the nation. As an aside, Indian students there are sold on the idea of building their credit history and going on a binge, whereas their parents back home do the opposite — they build their credit history by belt-tightening. While doing this, they are only aping the Americans who have been brought up on the staple of enjoy now and pay not even tomorrow, but by rolling over debt obligations almost in perpetuity. The huge catharsis that shook the US economy, alas, has not had a chastening effect. Mortgage loans still are on a non-recourse basis.
In short, there is a certain amount of bravado and swagger associated with indebtedness. This is not surprising, because the microcosm behaves like the macrocosm. If only someone would take the lead in telling the US loud and clear that the admirable discipline that is enforced on its roads on pain of swift and deterrent penalty is also required while doing financial transactions at both the micro and macro levels.
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The spending cuts the Democrats may be mulling need not cut into welfare measures, especially on the Medicare front, if the economy is jolted out of its laidback approach (if not slumber). How the Big Three — Ford, General Motors and Chrysler — conspired to prevent the railroad industry from taking off is well known and documented. While this might have resulted in smooth roads across the country answering to the idealistic and romantic description of them given by the irrepressible Lalu Yadav in the context of the roads that he never built in Bihar — “as smooth as Hema Malini’s cheeks” — with many of them fit for emergency plane landings, the truth is that rail is conspicuous by its low-key operations, if not absence, in the US.
States like Washington and California might have done their bit to promote economy and reduce fuel-guzzling by reserving a special lane for Heavy Occupancy Vehicles (HOV), but this is at best tokenism. Mass transport systems like the metro are to be found in just a few cities. Train travel is the least preferred, because it is not only as slow as in India, but also as expensive as air travel. Transportation by rail is the least expensive option the world over, as countries like China and those in the Euro Zone have realised, if you for the time being ignore coastal transportation.
Way back in 1944, catapulting the US dollar to international reserve currency status might have been satisfying to everyone’s ego in the US, with its currency almost becoming a byword for a foreign currency. It was not realised then, indeed it is not being realised even now either, that the move was fraught and could backfire sooner or later. The move created a dollar thirst, leading to the rise of petrodollars and a massive build-up of dollar reserves, first by Japan and then by its emulator China, all on the back of massive exports.
The direct fallout of this strategy was the availability of cheap goods for Americans from out of imports, made cheaper still by the policy of undervaluation of domestic currency, carefully crafted by Japan to prise open the US market for its automobiles and later on duly emulated by China for a wide range of goods. When goods are imported with gay abandon, a country loses the stomach for a fight and becomes complacent, leading to lack of employment opportunities.
Compounding the problem is the inevitable rush of dollars back into the US financial system, leaving it awash with dollars that cannot be absorbed. It is a small mercy for the US Federal Reserve that European banks are functioning as a bulwark and a buffer against a complete deluge of the US economy caused by the flow-back of dollars — petrodollars are seeking the sanctuary of European banks rather than banks located in the US, for fear of reprisals on the back of Islam phobia, though lately many European nations too admittedly have come to display the same tendency.
In its own enlightened self-interest, therefore, the US should take the lead to debunk the notion of a single world reserve currency. How it does it, is a trillion dollar question that has foxed its trade adversaries as well. A currency belonging to a country that is in dire financial straits cannot be the world’s reserve currency. That it continues to be so is due to the TINA (‘there is no alternative’) factor, which somehow has to be overcome.
The author is a chartered accountant