Obama and his 7 nagging headaches

PUBLISHED : Tuesday, 28 December, 2010, 12:00am
UPDATED : Tuesday, 28 December, 2010, 12:00am

As US President Barack Obama enjoys his holidays in balmy Hawaii, far away from the winter storms raging against the United States east coast, one of his worries is how to revive the American economy before his country starts slipping inevitably into the league of former powers. There are at least seven powerful and interlinked reasons why he should worry about the future of the US.

In the final days of the US Congress before Christmas he won two and a half notable political victories, in signing the repeal of the 'Don't ask, don't tell' law against homosexuals in the US military, and in ratifying the New Start treaty with Russia to curb nuclear weapons.

The problem is that the half victory in political terms - and one which triggered the other two - was a compromise to extend the tax cuts of George W. Bush for two more years, and the other half of the deal was a clear economic defeat saddling the government with another US$900 billion it cannot afford. Equally important, it was symbolic of potentially damaging polarisation in the US.

Many economists and probably most American business executives say the US is so massively economically and technologically superior that there is no way China or any other country can push it from the top position in any of our lifetimes.

Check out the economic numbers and this begins to look like overconfidence. The US gross domestic product is just over US$14 trillion, whereas China's is about a third of that, possibly rising to US$6 trillion in the next year. However, according to the CIA's World Factbook, on purchasing power parity figures, China is rapidly catching up. The CIA gives PPP figures for the US of US$14.3 trillion, with China already on US$8.8 trillion, way ahead of other contenders such as Japan on US$4.2 trillion or India, US$3.6 trillion.

The Economist magazine invited readers this month to guess when China would overtake the US. It summed up: 'Our best guess for the next decade is that annual real GDP growth averages 7.75 per cent in China and 2.5 per cent in America, inflation rates average 4 per cent and 1.5 per cent, and the yuan appreciates by 3 per cent a year. Plug in these numbers and China will overtake America in 2019. But if China's real growth rate slows to an annual average of only 5 per cent, then (leaving the other assumptions unchanged) China would become number one in 2022.'

Actually, according to the CIA, the US is already number two. First place is occupied by the European Union, with GDP of US$14.5 trillion. The EU is such a motley collection of highly ambitious national economies and shows how playing these games of numbers is foolish. As the old saying goes, if you laid all the economists in the world end to end round the earth, they wouldn't reach a conclusion.

Behind the soaring success of China are a billion and one flaws, especially in the abiding poverty and rich-poor gap. According to the CIA numbers, per capita income in the US is US$46,000, whereas that in China, using the more generous PPP figures, is only US$6,700, languishing in 130th place, below the world average of US$10,400, notionally 103rd place. The US is not even top of the per capita world, ranked in 11th place below Liechtenstein (US$122,100), Qatar (US$121,000) and even Singapore, placed seventh with US$53,900.

There are also at least 101 reasons why the fragile Chinese polity might explode or implode for political, economic or social reasons. But it would be foolish to underestimate the pride and determination of the Chinese people to achieve economic success.

On the other side of the world there are at least seven reasons why the US economy is on the skids. In Chinese style, we could call them 'the Seven Bigs'. There are overlaps and links between them, which give powerful catalytic force to them.

US military spending, on which it will spend more than US$700 billion next year, twice as much as in 2001, and as much as is spent by the rest of the world's militaries combined. China spends about 12 per cent of what America does, and only 2 per cent of GDP, against more than 4 per cent by the US. Beijing understates its military spending considerably and has been increasing spending rapidly as the People's Liberation Army begins to feel its adolescent muscles. It would be naive to write of all military spending as wasted money, but both Washington and Beijing would be advised to read US president Dwight Eisenhower's speech on the dangers of the military-industrial complex.

The magpie fascination of the new US generation, which seems attracted to anything that is glittering and turns away from things requiring effort or planning or thought or time. A key example is the increasing rejection of e-mail as too troublesome and slow. 'I can send a message by Facebook or Twitter and get an answer almost before my message has been sent,' one US college student said.

Lack of faith of corporate America in America. Big US companies are turning their backs on America and outsourcing work to Asia, where it can be done more cheaply. This is fine, as long as better-paying hi-tech jobs are created to replace lost jobs, but this is not happening.

China's determination to squeeze every advantage from foreign investors, including demanding that they share their latest technology and know-how with local Chinese companies, which will then use it to their advantage against the foreign suppliers of the technology. Allied to this is the fascination of foreign companies with the billion-person Chinese market and their reluctance to complain about Beijing's onerous conditions even as Washington appeals to the World Trade Organisation against China's allegedly illegal practices. It reminds of Karl Marx's dictum that if you give a capitalist enough rope, he will hang himself.

China's Tianhe-1A (Milky Way) supercomputer, capable of performing more than 2.5 petaflops (a petaflop is 1,000 trillion calculations a second), or almost 50 per cent as fast as its closest US rival. It is symbolic of China's advances in science and technology, leaving America trailing.

The failing US education system. Robert Reich, a professor of public policy at the University of California at Berkeley and labour secretary under US president Bill Clinton, wrote in his blog before Christmas: 'American students rank low on international standards of educational performance. Too many of our schools are failing. Too few young people who are qualified for college or post-secondary education have the opportunity.' The problem cannot be solved merely by throwing money at it, but it is foolish to slash spending on education. Reich asked rhetorically: 'Have we collectively gone out of our minds? Our young people are America's future. In the name of fiscal prudence we're endangering that future.'

Political polarisation and the US deficits. The November congressional polls and emergence of the 'tea party' conservative movement and right-wing Republicans dedicated only to ousting Obama from power and taking the US back to the mythically pure days of the Founding Fathers is an example, but polarisation is occurring at all levels of society. Look at the bankers-cum-gamblers, the highest paid people in America and determined to resist attacks on their privileges.

Obama has a lot to think about. Doing enough to put the US back on track will be much tougher.

A determined race

China is rapidly catching up with the US, based on purchasing power parity

The Economist magazine says China could overtake America in as early as: 2019