What's waiting for him
By Daniel M. Ryan
The U.S. election is tomorrow: only by late in the night Eastern time will we know who is slated to the next U.S. president come January 2009. We'll also know which party controls Congress, and to what extent. After the ballots are counted and transition teams assembled, we'll begin to see what the next Administration, House and (to a degree) Senate will have waiting for them. As the last month indicated, what really transpires is sometimes widely varied from what's expected – even generally expected. Prognostications, like the sketchy one you'll read below, are likely to fall short of the mark when prediction-checking time finally arrives. Nevertheless, there are certain likely contingencies that the new government will face that are already casting shadows as of now.
Economy – Surprise for the Party
The party that takes the White House is likely to be surprised by the economy in 2009– specifically, by the mildness of the ensuing recession. The Minneapolis Fed's Working Paper 666, a one-day-wonder when it was released, shows that the credit crunch has already abated except for financial firms. We're seeing a coincidence that isn't often seen in the U.S. economy: a recession caused by a previous credit slowdown, as documented within the supplementary graphs of Paper 666, hitting at the same time as a Wall Street implosion. The causal connection between a credit dearth and a recession is fairly straightforward, and a lead time of 6-9 months seems reasonable. The credit dry-up for Main Street businesses began about 8 months ago and has already ended. A freeze in the growth rate of interbank loans began about 10 months ago and is now close to ending. Overall consumer loans have been growing at a steady clip all through 2008. Put the three together and add a rough guesstimate for the effect of the real-estate collapse, and what pops out of the tea-leaf reader is "sharp but short recession." The economy might very well be on the mend by the time Inauguration Day arrives, although the residual damage will likely mute the honeymoon phase.
Unfortunately, the likely disconnect between the near-general expectation of a severe recession and the likelihood of a short one gives rock-ribbed tax & spend liberals the perfect opportunity to push through a tax hike. The damage done by such a hike will be muted by the draining away of the fear of imminent disaster for the U.S. economy.
To add to the woe, a tax hike could be justified by the above-mentioned flinty-hearted pro-tax liberals for two reasons: one, to take a bite at the deficit; two, to provide for a greater relief effect should the economy take a greater hit a few years down the road. Of course, conservatives could play it the same way, by coming up with a "New Contract With America" should the Democrats win this one.
Foreign Policy – Justice And Chastisements
Veteran watchers of al-Qai'da and other terrorist groups of similar ilk have likely noted that al-Qai'da terrorists attacked America during the last two Presidents' first years. There's no reason to assume that the next President of the United States will be spared this time.
The War of Terror will continue, and any extension of it into another Islamic country will produce a similar hunker-down that the antiwar folks like to peg as a "quagmire." (They don't seem to have realized that David Halberstam's Best and the Brightest are no longer ensconced in the Pentagon – they're now pushing anthropogenic global warming.) The reason for this protractedness lies in the primacy of punishment in the Qu'ran, something that old anti-Muslim stereotypes used to tap into. In Islam, there is an inclination to believe that swift and strict punishment for an offense is liberating, long-term, because it's better to have the appropriate punishment expiate the offense than to have guilt and shame fester in the believer's soul, indirectly corrupting the community.
Since Muslims are people too, they tend to see the geopolitical stage in terms of their own faith and associated culture. Through this lens, seeing NATO take over Afghanistan and Iraq swiftly makes for an impressive display of righteousness on the side of the avengers of 9/11. The relative dearth of aggressive hostility directed towards U.S. and allied forces in the region is indirect evidence of that righteousness.
The Achilles Heel of the occupation forces, though, is mildness combined with inconsistency over time: that combination can easily be spun as weakness by people in the occupied lands with an implacable hatred for the United States. Also, an eventual withdrawal by NATO forces can be twisted to make it appear that the U.S.-led coalition forces were never all that righteous to begin with. This dynamic, I believe, goes a long way in explaining why the two conflicts have been as protracted as they have been. It's a doleful conclusion, I know, but the experience of war with rogue Islamic states suggests that there's only one kind of bet allowed in this hand of geopolitical poker: all-in and mind your patience. As far as the present state of the War of Terror is concerned, the next President will discover – as the Bush Administration already has – that pulling out is likely to be far more difficult than anticipated.
Economic Geopolitics –The Shill's Kinging
Amongst economic nationalists, the People's Republic of China has a reputation as a government of shills, who make it easy for Americans to buy low-quality goods at a too-cheap price so as to keep the rights-disrespecting PRC government in charge.
Whether you take the globalist-optimist view of China as a facilitative partner in the quest for global growth, or the nationalist-cynical view of China as a power who props up the U.S. Treasury so as to keep the trade balance heavily in their favor, there is still a real interdependence between Chinese and U.S. economies. The Chinese have been a real help in keeping the U.S. economy afloat. Not only has the inflationary effect of the relatively heavy money-supply growth of former Fed Chairman Greenspan's tenure been staunched largely by cheap Chinese-made goods, but also the U.S. Treasury has had an unprecedented flexibility with respect to deficit spending thanks to wholesale Chinese purchasing of U.S. Treasury securities. The means of deployment of the massive surpluses racked up by the Chinese economy has muffled the crowding-out effect that huge deficits and a ballooning national debt would have otherwise visited upon the U.S. economy. To put it bluntly, Goldilocks has been happily eating Chinese porridge.
If the new President decides that U.S. geopolitical might can easily be translated into economic-geopolitical power vis-à-vis China, he'll soon be presented with those facts as a deterrent. If the new House gets a serious case of economic-nationalist fever, then the present mutual-advantage system (regardless of its long-term sustainability) will turn into a system of mutual disadvantage. We may not be living in the old-time liberals' version of "One World," but we are living in the trade-centered version. Economic nationalists, trade skeptics, and even well-meaning economic revivalists of the Warren Buffett stripe will have to wait for yet another day.
In my humble opinion, that day won't come until the United States consistently runs up surpluses in the same way that the Government of Canada has done since fiscal year 1996-97. However conceivable, mercantilism just won't work without a treasure chest already filled with gold.