By John C. Dyer, UK Correspondent
(John Dyer is a Public Policy "wonk" with over 34 years public service experience, over 17 as state level policy counsel, legislative advocate and analyst. Writer. Poet. Dual citizen relocated to UK 2010.)
On Wed, 25 May 2011, President Obama entered Parliament, escorted by a shyly grinning, cherubic Speaker of the House of Commons, John Bercow. BBC replayed the moment every half hour throughout the following day.
The mood was, in a word, special. It would not be an exaggeration to say that the British public and leaders treat the President with an interest bordering on the adoration generally reserved for the Queen. Nor would it be much of an exaggeration to say that not a few in leadership would love to be leading the 51st state of the Union. Many (albeit not all for sure) hang much hope and longing onto the so-called “Special Relationship.”
But as the President addressed Parliament with his usual polished charm, there were elephants in the Commons.
The UK in serious social and economic upheaval
The UK is in serious economic and social upheaval. That sliding category, “Unemployed and Still Seeking Work,” stands at somewhere around 2 3/4’s million people. Youth unemployment is 20%. Economic growth has flat-lined. The Bank of England and the Business Secretary, Vince Cable, warn in dire tones that the next two years are going to be ugly painful.
Politicians, economists, and pundits all say the 2008 bursting of the mortgage bubble, and the subsequent melt-down of the financial markets were the root. Perhaps, but that is just the beginning of the analysis.
The UK Conservative-Liberal Democratic Coalition argue that at the root of the root is a “dole” culture economically based in government debt financing. They blame Labour for spending the Treasury Dry. They personalize it as all about former Prime Minister Gordon Brown’s dithering and irresponsibility.
Labour argues that they had everything under control until the Coalition took over in May, 2010. They argue that the current maladies are exacerbated by the “austerity programme” introduced by the Coalition, personalizing it as all about Chancellor George Osborne’s ideology.
So far the themes may be familiar, but the approach taken by the US differs markedly from the approach taken by the Coalition. I will not rehash all the specifics here, but summarize.
The basic facts
First the basic facts: The UK budget deficit at the end of Labour’s time in office was £176 Billion ($287.3 Billion US). The US deficit for the comparable period was $1.42 (£.868567Trillion. The UK national debt was £760 Billion ($1240.66 Billion US). The US deficit was $14 Trillion (£8.576 Trillion).
The US deficit continues to rise. The US strategy has been to employ “quantitative easing” and grow the economy. The US plans to cut $38 Billion (£23.27 billion) from its $1.42 Trillion (£.869 Trillion) deficit this year and reduce the National Debt $4 Trillion (£2.45 trillion) over the next 12 years.
The contrast is dramatic. The UK intends to eliminate its deficit by 2015. To do so it has slashed public services, transferred ultimate financial responsibility for higher education from the government to the student, jerked the reins hard on benefits of all kinds. Even Labour would have halved the deficit by 2015.
The IMF's "European plan"
The Coalition strategy owes what decreasing credibility it has to the International Monetary Fund. The UK is voluntarily following the so-called “European Plan” - “austerity” cutting of public services coupled with privatization of government services.
The IMF imposed this plan on insolvent nations receiving IMF brokered bail outs. As the Coalition took office, its officials chorused the IMF’s judgement that the UK “has no credible plan to reduce the deficit” as the Coalition imposed its draconian cuts. The Coalition argued (and continues to argue) there is no alternative.
Recently an IMF official has kind of tentatively offered the same comment on the US plans. Niall Ferguson, the philosopher-historian who mentored both the Conservatives in the UK and former Presidential candidate John McCain observed on the BBC”s “Question Time” that the hour glass was running down on the President’s strategy. Republicans began an attack on the President’s handling of the deficit and on Medicare expenditures.
But these forays seem muted compared to the UK's Conservative-Liberal Democratic rhetoric and actions. The US seems to remain committed to the President’s focus on economic growth first, deficit reduction second. Certainly, there is no hint of the US eliminating its $1.42 Trillion deficit in the next 4 years.
Why the difference between the UK and US approaches?
The interesting thing about these differences in approaches is, the US has 65% of the vote in the IMF. The elephant in the Commons begging for recognition was, why the difference between the IMF endorsed, even demanded, UK approach and the US approach.
Labour’s Shadow Chancellor, Ed Balls, has a ready answer. Because Obama is right and Osborne is wrong. He has made that point loudly and often as the dismal news releases surface week after week. Balls says, “It’s hurting, but it isn’t working,” parodying the grim “responsibility” of Coalition officials.
The President sought to smooth things over during his address. He acknowledged that he was approaching issues differently, but insisted,
“The one thing I am absolutely clear about is that David (the Prime Minister David Cameron) and I want to end up at the same point- a point at which we are making sure our governments are doing what they need to do to ensure prosperity but doing so in a responsible way that doesn’t mortgage our futures and leave a mountain of debt to future generations.”
Now this may be just diplomatic nice nice. It could be interpreted as a rebuke to Mr. Balls. But both sides of the debate in the UK simply spun the President’s statement their own way. One might argue that it was the President’s responsibility to straddle the fence in a UK political issue. One might also argue that the UK’s economic environment is different from that of the US. In fact, at one point the President did make that statement.
Why isn't what's good for the gander(s) good for the goose that dominates the IMF?
But it isn’t so. The environment is precisely the same and the question remains, why isn’t what is good for the gander(s) good for the goose that dominates the IMF?
I don’t intend to enter the debate in this article as to who has “it” right and who has “it” wrong. I suspect all sides are offering “The Right Answer” to the wrong questions.
Today's world too small for national questions or answers
Today’s world is too small for national questions much less national answers. One only has to look to the dangerously unregulated currency and commodity markets, so vital and yet so vulnerable to speculation. Indeed one might argue these markets are currently being ravaged by speculators. Neither the UK nor the US can control their economies from within the nation.
For clarity, I am going to use a personal example of the interplay of just two elements, exchange rate and taxes. I will then generalize to a commercial setting. The explanation will be superficial and exact accuracy sacrificed to afford a ball park understanding.
When I moved to the UK, I reckoned I could afford the move at an average exchange rate of £1 equals $1.63, the general average over the prior 30 years. I did not take into account taxes, because the tax picture was unclear to me at the time. Over the year prior to my leaving the US through the year I have now lived in the UK the exchange rate ranged from a low of £1 equals $1.324 and $1.645. At a £1,000 a month that becomes a difference of $320 a month. At £5,000 a month that becomes $1,620.
Without considering taxes, one can see that it might well influence choices as to both the timing of exchanges and the choice whether to buy in the US or the UK, depending on current rate. For the merchant selling to me, he must consider whether he wishes to be paid in pounds or dollars. Depending on the day and the exchange rate the same price will be of significantly different value.
Then factor in taxes
Factor in taxes for me. Assume a 40% UK tax bracket. The interesting impact of that is that in effect the UK government softens the $1,620 loss discussed above into a roughly $960 loss (because it reduces my taxes 40%). It also moderates a $1,620 gain into a $960 gain. Turning to the merchant it becomes more complex, because depending on whether the merchant has a tax presence in the UK, the USA, or the Bahamas, the same transaction will have different tax consequences, making the calculation relatively simple for me significantly more complex.
Project these principles to a transnational company, for instance a mythical manufacturer of jet engines, ZOOMCO. ZOOMCO sells RICKETY AIR 70 planes of mixed type for 4.2 billion pounds in 2011. The dollar value of that transaction is potentially $6.946 billion in today’s exchange rate. But in 2007 this same 4.2 billion pounds would have been worth as much as $8.4 billion. The exchange rate that year hit $2.00 per pound.
In 2010, on the other hand, the exchange rate hit as low as $1.324. The 4.2 billion pounds would have been worth as little as $5.5 billion. From the point of view of ZOOMCO the curve of the relative value of the pound in dollars as the dollar falls relatively in value due to quantitative easing and other factors on paper gives ZOOMCO a potential of more money. But from the point of view of RICKETY AIR it means the same planes at the same price become relatively more expensive in real terms.
Of course, it isn’t that simple. There are hedge strategies. Companies doing international trade know the ground rules. Often sales are placed in terms of the strongest currency of the day, historically the dollar. But you get the principle.
The simple tax considerations for me become a game of “go” for a transnational corporation. Transnationals can face tax obligations in each country in which they do business. I will spare the reader the ins and outs of all that.
Transnational world economy
For better or worse, the world economy is transnational. Our opportunities and our challenges are transnational. The movements we fear, whether Al Qaeda, the Arab Spring, Internet Privacy are transnational. The very controlling institutions of our economy (finance and manufacturing) are transnational. If a bank doesn’t like UK regulations it can move to the Bahamas. If an apparel manufacturer does not like UK employment regulations it can move to Jamaica. If a rich bloke doesn’t want to pay his UK taxes he can move to the Isle of Man or hide his money in an off shore bank. These issues are for the moment simply beyond the leverage of any one nation operating alone.
Robert Reich made the point superlatively in “Supercapitalism.” Niall Ferguson’s world is no more. Perhaps also Paul Krugman’s.
No one knows the full extent of how these changes have changed our world. As a result of a FOIA request, I discovered to my surprise that the UK Treasury does not track aggregate taxable income. It simply doesn’t know how much money is lost through off shore deposits or “tax avoidance” practices.
Needed: to manage the transnational highway
But the transnational highway is precisely what both the US and the UK need to document and manage if either are to take advantage of the possibilities and manage the risks. In a world where quantitative easing in the US pushes up the value of the pound, thereby lowering the attractiveness of UK manufactured goods, the UK’s economic woes are the problem of the US and the huge US National Debt the problem of the UK.
It was courteous and diplomatic of the President to smooth over the differences between the approach of the UK and the US during his address to the Commons. But, unless and until the President and the Prime Minister face the elephants in the Commons, management of the possibilities and the risks may elude each to the detriment of both.