Life is going to get complicated for Barack Obama, 44th President of the US. Historically, managing great powers in economic decline has never been easy. There are few examples that Obama can emulate. What makes his task doubly difficult is the weight of expectations that he has generated in the past few months. There is a grave asymmetry in the resources at his disposal and the magnitude of the task that awaits him.
The obvious challenges for Obama, who will be sworn in today, are economic and geopolitical. The problem is they are interlinked, with economic weakness spilling into the geopolitical domain. Because of their interlinked nature, they defy simple attempts at resolution. But these are only external manifestations of deeper problems at hand.
Illustration: Jayachandran / Mint
Consider the economic problem first. Figures cannot express the historic decline that America is facing. But they do give a glimpse of it. US gross domestic product (GDP) stood at approximately $13.8 trillion in 2007. It has contracted since December 2007, when the recession officially began. Early in January, the congressional budget office estimated that the gap between potential and real output this year could be around $2 trillion. Consumption has fallen drastically, with retail sales falling in December by 2.7%, the sixth month in a row of declining sales. US public debt crossed the $10 trillion mark in 2008 (more than 73% of US GDP).
There are few effective tools that Obama has at his disposal to revive the American economy. On the monetary policy side, the US Federal Reserve has brought the federal funds rate to the 0-0.25% range. That only leaves the fiscal side for some action. Economists such as Paul Krugman have advocated huge fiscal measures to overcome the freeze in the economy. In fact, in his New York Times column, Krugman said the $775 billion “stimulus” package was too small to reduce the $2 trillion output gap mentioned above.
Krugman is right when he says that spending may be the only way out of the worst contraction the US economy has seen since the Great Depression. But he has not so far provided an answer to the question: Where will the money come from?
In recent years, American consumption was fuelled by “easy money” from Asia. But with the global slowdown, that source is not available any more. This is where Obama’s foreign policy challenges begin. Writing in the January/February issue of Foreign Affairs, Roger Altman, a former US deputy treasury secretary, said economic weakness poses a grave threat to all that the US has stood for. There are pre-existing challenges in West Asia that have defied resolution for long. The US has little diplomatic traction with Iran and is in no position to militarily confront it. Russia is hostile for all practical purposes. China has the economic, diplomatic and military might to defy any US diktat.
At the same time, the US has little financial muscle for the kind of sustained involvement the pacification of Afghanistan needs. In her senate confirmation hearing, the new US secretary of state, Hillary Clinton, said her effort would be to restore the balance between diplomacy and armed might in America’s external posture. That’s easier said than done. Even at the height of George Bush’s “war presidency”, with a military squeeze on them, countries such as Pakistan provided less than effective support to fight terrorism.
These problems are only a manifestation of deeper problems in the American economy. Structural weaknesses have emerged at least since 1970, ones that cannot be solved overnight. This is not a single problem, but a host of interlinked problems. Almost one-third of citizens in the US have no medical insurance. Then, there are glaring economic disparities that breed resentment and insecurity. In a growing economy with broadly equal opportunity, this does little damage. But inequalities in a sclerotic economy spell trouble and fast American economic growth stopped a while ago.
In this, Obama faces serious challenges: Managing the current crisis is problem enough, but eliminating its root causes may prove almost insurmountable.
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