In the ongoing American and British debates on the financial crisis and the best ways to bring the economy out of the woods, two opposite views repeatedly collide – the one represented by those who prioritize deficit reduction, the other by those who argue for recapitalizing the economy. The case of the United Kingdom shows that drastic cuts – if not supported by stimulus packages – instead of tackling the debt may actually inflate it. The American policy record on the other hand, proves that even substantial stimulus packages do not always lead to economic revival. It’s not enough to throw some extra money into the pool – equally important is what these resources actually fund and whether they are accompanied by structural reforms.

British clamps

Moody’s decision to downgrade UK’s rating from AAA to AA1 announced at the end of February was a serious blow to David Cameron’s government as it undermined the whole austerity program Conservatives embarked on precisely to regain the trust of both financial markets and rating agencies. Nonetheless, in a speech delivered on March 7th Prime Minister announced he would keep on the chosen course since – as his famous predecessor once asserted – for this policy “there is no alternative.”

Many British economists do, however, see an alternative, and their number grows as it becomes clear that the spending cuts introduced so far, instead of reducing the debt, have increased it (from 600 billion in 2008 to 1.1 trillion four years later to be precise). How is it possible to cut down on expenses and inflate the debt at the same time? Excessive savings lead to economic contraction, which in turn reduces state revenues and forces the government to continue on borrowing. “What truly is incredible” – argued Martin Wolf in his “Financial Times” column – “is that Mr. Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started”.

Even The Economist magazine, known for its “favorable neutrality” towards the Conservative Party, criticized the government’s policies and encouraged chancellor George Osborne to dig out some additional funds for infrastructure investments, which could boost the economic growth (compared to 2009 such investments were reduced from £48.5 billion to £28 billion). But where to get the money from?

At least some of the needed sum can be obtained by reducing expenses on civil service. Those – despite all the austerity rhetoric – not only were not diminished but increased in the past decade by £300 billion. However, in case these savings are not sufficient, should the government borrow the missing funds? “Economist’s” editors reply in the positive, but on the condition that these resources are spent on infrastructure – roads, bridges, railways, broadband, etc. – thus contributing to long-term economic growth and improvement of the competitiveness of the British economy. Then, the increase in debt will be offset by rising state revenues, and – thanks to the improving condition of the economy – interest rates should stay at their current low level. As a result, debt service costs will also remain low.

American stimulators

If, however, the money is spent on immediate tax cuts and exemptions, it will simply be wasted. The economy might benefit from such policies in the short run, due to the increase in personal consumption, but as soon as the money is gone, we will go back to square one. This is an argument Jeffrey Sachs makes in yesterday’s New York Times, thus criticizing anti-crisis remedies applied by President Barack Obama’s administration so far. According to Sachs, stimulus packages signed into law first by George W. Bush and then by Obama failed not because they were too small – as for example “The New York Times” columnist, Paul Krugman has long maintained – or too high – as the entire American right seems to believe – but because they have been poorly targeted.

“The original stimulus legislation” – Sachs wrote in another of his articles – “was overwhelmingly of the form of temporary tax cuts and temporary transfer payments, the kind of deficit spending especially likely to have little effect on aggregate demand. Only $88 billion of the $787 billion stimulus-package was in direct purchases of goods and services by the federal government. The rest was temporary transfers and tax cuts.” To make matters worse, in the debt ceiling deal signed by Democrats and Republicans on January 1, many of these cuts became permanent, which will further inflate American national debt. Currently it amounts to 15.5 trillion, which is about 105% of GDP.

According to Krugman – whose views Sachs openly challenged – we should not be particularly worried by these numbers. On the contrary, in order to succeed in reviving the economy, stimulus packages should be enlarged. To introduce any major savings at this stage would throw American economy back into recession, cause economic contraction and decrease government revenues, thus leading to a predicament roughly similar to the one British economy has found itself in. Following the advice of John Maynard Keynes, Krugman argues that the secret of managing the state economy lies in saving the money in times of prosperity, while spending surpluses in the time of crisis, when the economy needs a push.

The trouble is, replies Sachs, that American decision-makers have long spent much more than they should, both in times of economic prosperity under President Bush, and at the time of the current crisis. Besides, once they have decided to stimulate the economy, they chose wrong targets. The same dollar invested well can bring substantial return, but if invested badly, will either bring loses or have no effect at all. According to Sachs Krugman and other “crude Keynesians” – unlike Keynes himself – seem to have forgotten this simple truth. Sachs repeats in the U.S. the same arguments, which in Britain were put forward by The Economist. In his view American economy needs long-term investments in infrastructure (similar to those administered by the Federal Aid Highway Act of 1956 or the moon program launched a few years later), not short-term incentives and benefits. How to get the money for these investments? Part of it can be borrowed. The rest may be obtained by curbing short-term tax-relief programs and finally introducing significant spending cuts, chiefly in the defense budget, which consumes more than $700 billion a year, or in other words more than 20 percent of all the federal resources.

Is it then better to tighten or stimulate the economy in crisis? Challenges faced by the United States and the United Kingdom make it quite clear – the best solution is to do both these things at the same time.

Łukasz Pawłowski is a managing editor at ‘Kultura Liberalna’ and a PhD candidate at the Institute of Sociology, University of Warsaw.

He was meant not to come and he didn’t. Barack Obama decided to make Burma, Cambodia and Thailand his first foreign destinations after his re-election, revealing U.S. foreign policy priorities in the next four years. The American president plainly doesn’t have time for Europe now. It’s not a surprise, but it does require serious European deliberation and critical self reflections.

Historic Visit

Of special significance is above all Obama’s trip to Myanmar – a country under military rule since 1960’s, which until recently invariably occupied the very far end of every possible civil liberties ranking. Myanmar’s position began to change rapidly in 2010 when the new president, Thein Sein, for reasons not entirely clear, initiated democratic reforms and freed thousands of political prisoners, including the most famous regime victim, Aung San Suu Kyi, put under house arrest in 1989 and kept in custody virtually ever since. Suu Kyi was not only allowed to go on a triumphant international tour – in Oslo she finally received the Nobel Peace Prize awarded in… 1991 – but also to run in parliamentary by-elections. In April 2012 her National Democratic League won 43 of 45 seats under contention, thus becoming the largest opposition party. Only a few months after the reforms started, non-governmental organizations and independent media began to operate in a country not so long ago deemed as an “outpost of tyranny”.

And though democratic transformation in Myanmar proceeds quickly, there are still significant problems. Millions of its citizens live in extreme poverty. Hundreds of political prisoners remain in jail. The northern part of the country is being devastated by a civil war against one of many separatist groups. A military coup is an ever-present possibility, and the authenticity of president’s commitment to democracy is still difficult to assess. For these and many other reasons democratic changes in this former British colony may collapse at any time.

That despite all these uncertainties Barack Obama decided to visit Myanmar – becoming the first U.S. president in office to do so – is clear evidence of a fundamental change in American foreign policy, all the more so, because straight from Myanmar Obama flew to Thailand and then Cambodia, taking part in the Association of Southeast Asian Nations summit. And all this at a time when American ally, Israel, was engaged in a major military operation in Gaza, when Syria has been engulfed in a civil war for almost two years, and when Afghanistan still claims American lives on a daily basis.

Heading East… that is West

Reorientation in American foreign policy – the “Asian pivot,” as it is referred to by the White House officials – aims to strengthen U.S. presence in the Southeast Asia, turning attention away from its current involvement in the Middle East and Afghanistan, where Americans bogged down more than a decade ago. President’s visit is also a clear signal to China. Increasingly expansive foreign policy and Beijing’s massive economic influence in the region has aggravated its relations with neighboring countries, leading to serious territorial disputes with Japan on the one hand, and the Philippines and Vietnam on the other. In response to growing pressure from China, the United States already in June conducted trilateral naval exercises with Japan and South Korea in the ocean waters south of the Korean peninsula. Now, a few months later, in a speech delivered in Myanmar, President Obama left no doubts as to where Washington will concentrate its diplomatic efforts in the nearest future:

“The United States of America is a Pacific nation. We see our future as bound to those nations and peoples to our West,” he said in Rangoon.  “As our economy recovers, this is where we believe we will find tremendous growth. As we end the wars that have dominated our foreign policy for a decade, this region will be a focus of our efforts to build a prosperous peace.”

Obviously Obama’s hands are not entirely free in this matter. He cannot bring peace to Afghanistan and Iraq by decree; he will not solve the Israeli-Palestinian conflict, nor abandon American commitment to Israel; it’s beyond his powers to singlehandedly democratize Iran or foster an overnight regime change in Syria – in short, he cannot entirely give up on American involvement in the Middle East. Even the leader of the most powerful country in the world has limited room for maneuver, as he must take into account a complex interplay of geopolitical interests and honor previously taken commitments. Still, the same leader may put different emphasis on different aspects of foreign policy and make decisions that will gradually change, if not the global balance of power, then at least the focal point of global diplomacy. For many years after the Second World War the center of the world lied in Europe, later on attention moved to the Middle East. Today it is shifting again to the South-East Asia.

Does Anybody Need London?

And what role in this new order will the Old Continent play? If domestic and foreign policies of the European Union do not change dramatically, probably a marginal one. Incurable Euro-optimists may keep on hailing the Union as the largest and one of the most competitive economies in the world, but even they admit its actual importance on the global stage is disproportionately small. Obama’s visit to Asia and the latest Israeli-Palestinian conflict have once again confirmed what everybody knows but does not dare to say aloud. Alarmed by the events in the Gaza Strip, President Obama and Secretary Clinton called the leaders of several countries with the greatest influence in the region: Egypt, Turkey, France and Qatar. The idea to dial the number “to Europe,” in this case to Catherine Ashton, was not even mentioned.

European countries are rapidly losing their status of valuable partners to the United States, though some governments, especially that in London, do all in their powers to ignore this fact. On the day of Obama’s reelection, British Prime Minister David Cameron in a short interview aired by BBC congratulated the winner and expressed his hope for a close cooperation primarily in two areas: pulling the global economy out of the crisis, and helping to end the conflict in Syria. No profound geopolitical insight is needed to notice that in neither of these projects can the United Kingdom on its own may be of much assistance to the American president. Nevertheless, the bulk of British political class still seems to believe that UK’s foreign policy should be based on an Anglo-American “special relationship,” with London acting as a mediator in the dealings between America and Europe. The problem is that today Washington not only doesn’t need a middleman in its relations with the Continent – yet another side would make them even more difficult. And in fact, it’s need for the Continent itself is diminishing.

A true Euro-American partnership is possible only if the European Union acts as a whole. Many European politicians – including, I’m glad to admit, Poland’s foreign minister – are aware of this fact. Britain, probably because of its imperial past and relatively recent loss of a global superpower status, still has difficulty coming to terms with the new reality. London’s cognitive difficulties, however, seem to render Brussels increasingly impatient. They also further marginalize Europe on the international scene. Obama’s Asian trip and the way Israeli-Palestinian conflict was dealt are proofs. Hope lies with an embolden European Community to take a firmer stance towards Britain and demand a clear statement as to its future in the European club. Should this not happen, it will be another reason for presidential trips to the Old Continent to become even less frequent.

The jobs report on Friday was bad, as David Howell analyzed here. This immediately was interpreted across the board as good news for Mitt Romney and his party, bad news for President Obama and his. It’s the economy stupid, and bad news about employment means that Obama’s chance for reelection has declined precipitously. And things are worse then that. It’s now or never. It is in the summer that the public’s perception of the economy is locked in for Election Day. Even if things improve in the fall, there won’t be enough lead-time to change the public’s perception.

I know that this is based on solid evidence. Considerable scholarly research has demonstrated the strong correlation between the state of the economy and election results.  But the way this research has been directly applied in daily political commentary is troubling, especially because it can become a political factor itself. As the “Thomas Theorem” posits: If people define situations as real, they are real in their consequences.  I add, especially when they are doing the defining on television.

This concerns me as a scholar and as a partisan. As a scholar, I worry about the philosophic anthropology of this. The voting public is being depicted as simpletons, not capable of critical thought, of the most basic examination of the facts. There is a kind of economic determinism involved and the determinism is quite mechanical. People vote their pocketbooks and they don’t think critically about it. They don’t wonder about the causes of their economic woes and just vote the bums out. It amazes me how in the same broadcasts talking heads suggest both that the job numbers are a result of long-term trends beyond the control of the President and that Obama’s chances of victory have greatly diminished because of the state of the economy as indicated by the latest job report. They propose a simple Pavlovian stimulus and response vision of voters, never inquiring about how they may interpret the news.

Thinking comparatively, in this way, it’s not the austerity policies, along with other non-economic issues, that is leading to a left political shift in Greece, France and Germany, as we have reported in Deliberately Considered. It’s just a turn against incumbents, and the U.S. will make a right turn for the same economic reason. Might it not be a little more complicated that this?

As a partisan, I wonder are Americans capable of noticing that the persistent unemployment is the result of both the rise in employment in the private sector, and radical cuts in the public sector, including masses of teachers? They surely are capable of noticing that the Republican policies in Congress led the U.S. to the brink of default last summer, and that Romney is offering more of the same, with economic proposals that look a lot like those of George W. Bush and have about as much chance of success as those of David Cameron in Great Britain. Americans also are capable of noticing that in fact Congress is a co-equal branch of government and has moved economic decisions in the direction of austerity, and that state and local governments have been cutting jobs very rapidly during the recession. In effect, Obama is continuing to push in the opposite direction, while a national austerity policy is in place because of the Republicans, as Paul Krugman argued in his piece “This Republican Economy” in today’s New York Times. I know not everyone is going to agree with this Keynesian economist’s political assessment, though I do. What disturbs me is that many posit that argument doesn’t matter. Gross economic statistics, they assume, is political destiny. Following this logic, FDR would have been a one-term president.

And while economics are important in deciding Presidential elections, it is not the only thing. The Republicans, especially as they appeared in the primary elections and in Congress, state legislatures and state houses, are fighting a rearguard action against major social trends in America.

They became the reactionary party when it came to the issues of race and racism, when Nixon adopted his infamous southern strategy. This approach was continued by Bush the elder with his Willie Horton ad and his nomination to the Supreme Court of Clarence Thomas as the most qualified jurist in the land (a strained anti-racism). And the reaction is alive and well in the Birther movement of Donald Trump and company, and the crazy wing of the Tea Party, with which the Republican establishment has toyed, and the Islamophobia to which many Republicans are deeply committed, fighting against Islamofascism and Sharia law in Oklahoma and beyond. Yet, America is a much more diverse, much more tolerant society. The American Dream more and more looks like the one depicted and embodied by Barack Obama.

And there is much more, concerning the rights of women to equal pay for equal work, immigrant rights, equal rights for gays to serve in the military and to marriage, full healthcare rights for women, including access to contraception and abortion, and much more. For significant segments of the population these are not just social issues, a euphemism that disguises the degree to which survival and fundamental dignity are at issue.

I know that the studies that predict election results take all this into account. They assume that people do vote on these issues, but that the turn of the election to the Republicans or the Democrats is decided by the state of the economy with a high degree of accuracy. Yet, it will matter who people hold accountable for their economic woes, and it will matter which candidate appears to make sense about the economy, often as this is related to other issues.

Perhaps when the economy went into deep crisis, McCain lost the last presidential election. But certainly when he declared in the face of the crisis that the economy was fundamentally sound, he put the nail in his election coffin. For the young, people of color, women and members of the LGBT community, his cluelessness on issues of their special concern magnified his apparent economic ignorance. Across the board, he didn’t make sense about the pressing issues of the day.

I believe this is the central factor: the struggle to make sense to the public about our problems, economic and non-economic, indeed as they are related. As a partisan, I think and I believe Obama still has an advantage in this regard over Romney and the Republican Party, which over the past year has revealed its radicalism. My next post: more reflections on the issue of making sense and communicating it. How it relates to the question in American identities and the issue of America’s place in the new global order.