With debt spiralling upwards, the US president must act to make the system fairer and stop pandering to baby-boomer greed
There are cliffhangers and then there are cliffhangers. President Obama, we are told, needs to strike a budget deal this weekend to avert the so-called “fiscal cliff”. The fraught process will require soul-searching on both sides: within his own camp reform of featherbedding subsidies and outmoded benefits looks overdue, while the Republicans need to stop protecting breaks for well-off Americans, many of whom are willing to pay a little more tax.
A deal will be cobbled together, if not today, but almost certainly in the coming weeks. All we can be sure of is that it will involve the meagrest of concessions from either side. Talk will then turn to a bigger, grander budget package to be agreed some time later next year to stop the country’s escalating debt situation from spiralling out of control. But it will be just that: talk.
The US is adding more than $1 trillion to its debts each year, compared with around $150bn in the years before the crash. The central government debt ceiling, which must be voted on each year – and again in a few months’ time – has jumped to $16.4tn from $14.3tn in the summer of 2011.
As all Keynesian economists would argue, governments need to step in when the private sector and, in the case of the US, state legislatures, are pulling in their horns. The level of cuts in investment by corporations and local public sector bodies is colossal. Hence the need for the Obama administration to spend $2tn it doesn’t have in less than a year and a half.
But this is not a situation that can persist. At some point the tax base must harmonise with spending demands. That doesn’t mean budgets must balance, just that ongoing spending needs to be covered while borrowing is limited to investment spending.
The US, like the UK, has a declining tax base. Corporations like Facebook, Google and Apple are keeping trillions of dollars offshore, waiting for Obama to concede an amnesty. They, by which we should say the big pension funds that hold the shares, want him to cut the corporation tax rate from 40% to nearer 10% before they will agree to repatriate the cash. It would be easy for Obama to see a big pay day and allow it, even if he forgoes billions of dollars.
These same shareholders want to retain pension and health benefits promised over previous decades but never paid for. They also refuse to allow their elected representatives to concede subsidies for everything from pharmaceuticals to milk. No one, especially the over-50s, wants to pay the proper price in case it dents their living standards.
The same situation persists across Europe and Japan. These democracies have become preoccupied with the concerns of a baby-boomer generation desperate for someone else to pay for its gilded lifestyle and future care. So bad is the situation that a visit to Congress, the Japanese Diet or the Strasbourg parliament elicits the same sense of a body politic that has given itself over to squabbling on a scale that makes it incapable of long-term decisions.
Baby boomers are not easily squeezed into one box labelled “greed”. Plenty want to help the younger generation at their own expense, and not only their own offspring. However, they are in a minority. The boomers who want to protect their property and savings wealth want political and economic decisions delayed. They want the can kicked down the road.
The more they can gum up the process the better – and the longer governments will stick to old, unaffordable promises.
Fight to clean up ENRC
Back in June last year, Richard Lambert, the former editor of the Financial Times and erstwhile director of the CBI, wrote a cutting editorial in his old newspaper. “It never occurred to those of us who helped launch the FTSE 100 index 27 years ago that one day it would be providing a cloak of respectability and lots of passive investors for companies that challenge the canons of corporate governance, such as Vedanta, ENRC [Eurasian Natural Resources Corporation], Kazakhmys, Fresnillo,” he said. “Perhaps it is time for those responsible for the index to rethink its purpose.”
If those comments represented a blow during a terrible 2011 for ENRC, then 2012 has arguably proved worse. The company has avoided 2011’s sensational boardroom coups, but the shares have lost 55% of their value this year, despite new chairman Mehmet Dalman eulogising about improving governance standards.
Only 20% of ENRC shares are held by outsiders – so the pain has not been widely felt. Even so, the slump is hardly great PR for London’s blue-chip index, and there is little sign of improvement during 2013.Dalman, who used to be an investment banker, is a convincing figurehead, but his arguments about bringing ENRC’s internal standards up to the level of his former, also embattled, sector merely show how much work he has to do. Conducting that work also tends to harm the shares, and the price has hardly been buoyed by ENRC’s well-publicised investigations into allegations of corruption in its businesses in Kazakhstan and Africa, which it will share with the Serious Fraud Office.
Meanwhile, the forces lined up against ENRC – some of which are probably still unknown to the company itself – seem unwilling to relieve the pressure and apparently the only short-term boost for investors is a long-rumoured bid from commodity trader Glencore.
That might happen. But it looks a brave bet.
If Sants can sort out Barclays he should be sainted
There is, in some quarters, unease at Hector Sants being knighted for his service as Britain’s financial regulator during the banking crisis. After all, on his watch RBS boss Fred Goodwin (since stripped of his knighthood) was allowed to take over Dutch rival ABN Amro, creating a monster bank with a balance sheet bigger than the UK economy. The deal appeared to have been merrily waved through by a Financial Services Authority blind to the global credit crisis.
This is not fair. In truth, much to the consternation of his predecessors, Sants had been agitating for reform within the FSA well before his promotion to chief executive in July 2007. By the time he was in the hot seat, nothing could realistically be done to avert the ensuing disasters. Perhaps the consequences of the bailouts and reforms that he helped push through are yet to fully play out, but it would be premature at this stage to dismiss out of hand Sants’s contribution to keeping Britain from the financial precipice.
It remains to be seen whether he can once again conjure a similar cultural sea change as head of compliance at Barclays. It is on this considerable challenge that his reputation may ultimately rest.