"Are We Going to Roll Up Our Sleeves or Limp On?"
Comment of the Day

September 21 2011

Commentary by David Fuller

"Are We Going to Roll Up Our Sleeves or Limp On?"

My thanks to a reader for this insightful and topical column by Thomas Friedman for The New York Times. Here is the latter portion:
I've argued that the only way for Obama to expose just how radical the G.O.P. has become would be for the president to put out in detail his version of a credible "Grand Bargain" and then go sell it to the country. But that proposal had to include real long-term spending cuts in Medicare and Social Security so they can be preserved, tax reform that raises revenues by asking more of the rich - but also demands something from everyone - and an agenda for investing in our growth engines, like schools and infrastructure, right now to stimulate the economy today in ways that also increase our productivity for tomorrow. That plan should have been a combination of the Simpson-Bowles deficit reduction proposal and Mr. Obama's new jobs agenda announced last week.

Such a credible, fair "Obama Plan" for deficit reduction married to a credible jobs initiative would have captured America's radical center and made life very difficult for the G.O.P., which can't accept any tax increases and has no investment agenda other than tax cuts. It was the only chance for maneuvering the G.O.P. into a Grand Bargain.

Mr. Obama gave us the credible $447 billion jobs program, but his deficit reduction plan announced on Monday to pay for it and trim long-term spending does not rise to the scale we need. It may motivate his base, but it will not attract independents and centrists and, therefore, it will not corner the Republicans.

As The Washington Post reported: "The latest Obama plan 'doesn't produce any more in realistic savings than the plan they offered in April,' said Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget. 'They've filled in details, repackaged it and replaced one gimmick with another. They don't even stabilize the debt. This is just not enough.' The most disheartening development, MacGuineas and others said, is Obama's decision to count $1.1 trillion in savings from the drawdown of troops in Iraq and Afghanistan toward his debt-reduction total. Because Obama has no intention of continuing war spending at last year's elevated levels, that $1.1 trillion would never have been spent."

A Financial Times editorial summarized my feelings: "American voters are not looking for champions of their preferred redistributive stance, but responsible attitudes to the country's challenges. If Mr. Obama suggests a millionaire's tax can save ordinary voters from pain, he will fail, economically and politically."

My fading hope is that this is Obama's opening bid and enough Republicans will come to their senses and engage him again in a Grand Bargain. My fear is that both parties have just started their 2012 campaigns. In which case, the rest of us will just sit here, hostages to fortune, orphans of a political system gone mad, hunkering down for a bad century.

David Fuller's view I regard this as a thoughtful, concerned and bipartisan column as the US enters what may be the most divisive political campaign in many a decade. I hope to be wrong on this impression as I would much prefer Thomas Friedman's "credible Grand Bargain" between Democrats and Republicans. That would certainly be better for the US and also the global economy.

I think that American politicians will fashion a 'Grand Bargain' - eventually, but probably not before the 2012 election. In other words, events may have to become worse before they get better.

What about the consequences for investors?

A polarised political system is obviously not good for the economy, especially if the electorate is similarly divided. President Obama urges America's multinational companies to repatriate capital, invest it in the USA and create jobs. Unfortunately, given increased regulation and the rising cost of doing business in America, the opposite may occur.

American multinationals may prefer to reduce overheads in the USA over the next year or more, and expand overseas development where regulatory, employment and taxation is more favourable, and GDP growth is often stronger.

That appears to be the better business decision if companies which are increasingly multinational feel that their first loyalty is to their shareholders who are increasingly international. From an investment perspective, Fullermoney continues to like these successful multinational companies which are leveraged to Asian-led GDP growth, especially if they are among the 'Dividend Aristocrats' so often reviewed by Eoin (see links in his section last Monday).

The usual risks apply and seem acceptable provided these companies maintain their medium-term relative strength. However, there is one possible risk, seldom mentioned, which we need to be aware of. If redistributive governments ever consider raiding the treasuries of their successful multinational companies 'in the national interest' their stock market performance would obviously suffer. Hopefully, it will not happen.

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