Posted by Shyam Moondra
Today’s defeat of conservative parties in the French presidential election and the Greek parliamentary elections, combined with the recent government downfalls elsewhere in the EU, point to an emerging political trend that favors egalitarianism, the notion of equality of outcome, a state of economic affairs in which the government promotes equal prosperity for all citizens.
In France, the presidential winner, Francois Hollande, is expected to pursue socialist policies that could cause ripple effects in the rest of the Eurozone. During the campaign, Hollande said that he will raise the minimum wage, cancel scheduled spending cuts, hire back thousands of laid off government workers, and roll back the retirement age from 62 to 60. He also said that he will increase government spending for large infrastructure projects to provide stimulus to the economy. To pay for all this, Hollande wants to increase the top income tax rate from 45% to 75% for those who make more than a million euros a year. In addition, he wants to implement a financial transaction tax, which would hurt high frequency trading, a major source of profits for hedge funds and investment banks that operate in France. Hollande is particularly incensed at the idea of European Central Bank (ECB) printing euros and providing cheap funds to the banks in the hope that they will buy sovereign debt and also lend more money to the businesses and consumers, thereby revitalizing economy (in the U.S., we call it Quantitative Easing or QE). Of course, once the winning politicians are in office, they have to face reality and are often forced to temper their lofty campaign proclamations. At a minimum, Germany and the U.K. would now face a vigorous opponent to their emphasis on fiscal austerity and financial engineering in trying to save the euro.
In Greece, the exit polls of the national elections showed that a leftist party, the Coalition of the Radical Left (Syriza), was set to take second place, trailing conservative New Democracy and relegating incumbent socialist Pasok to third place. A drastic change in the political landscape in Greece would unravel the austerity programs put in place that facilitated the bail-out of Greece by ECB. In an ominous comment, German Finance Minister Wolfgang Schaeuble said that if Greece's new government deviated from its austerity commitments, the country would "bear the consequences," meaning Greece may be thrown out of the EU. The euro currency itself may be in jeopardy.
In emerging economies such as China, India, and Brazil, there is a widening gap between the rich and poor, showing that the economic boom has helped a tiny percent of the people at the top of social strata more than the rest of the population. In China, corruption in the upper hierarchy of the Communist Party is causing indignation among the ordinary people that may lead to instability, something that the Chinese government dreads the most. In a recent Gallup poll in India, almost 87% of the people said that they were economically suffering or struggling and only 13% said that they were thriving. These trends will bring political pressures on the respective governments to increase taxes on the rich and increase government spending to benefit the poor and the middle class. The socialist tendencies in the emerging countries would undermine foreign investment and global free trade, thereby slowing down the global economic recovery.
In the U.S., President George W. Bush started the wars in Iraq and Afghanistan, enacted income tax cuts for the rich (in a recent interview, Bush lamented that it would be better if the people stopped calling those cuts as “Bush tax cuts”), gave away tax rebates to rich oil companies, farmers and pharmaceutical companies, and created tax loop-holes that enabled companies like GE to pay 0%, Google pay only 2%, and Goldman Sachs pay only 10% in taxes. Bush also reduced federal regulations that led to the financial crisis, forcing the government to orchestrate a massive bailout of the banks. All of these things widened the federal budget deficit and increased national debt by $5 trillion during Bush’s two terms in office. Bush’s policies put the government’s financial affairs in a perilous condition that led to the Tea Party movement supported by the Republicans. However, their extreme tactics, including the support for an unprecedented default by the U.S. government on its debt, proved to be too toxic and ended up damaging the Republican brand. Another Bush legacy was the widening gap between the incomes of the rich and poor, mostly made possible by favorable tax treatments by the Bush administration for the rich, including lower tax rates for dividends and long-term capital gains that benefited the rich people the most. The inequality and excesses by the financial sector led to the Occupy Wall Street movement that advocates more stringent regulations of the banks and lower compensation for the people working on Wall Street.
The political upheavals in EU and in emerging countries have implications in the U.S. for the upcoming presidential and congressional elections in November. First, opposition within EU by France and others to quantitative easing and push for more stringent regulations of the financial sector will put the coordinated efforts between the U.S. and EU in jeopardy. Any slowdown in emerging economies will make it harder for the U.S. recovery to gain strength. In terms of policy implications, the worldwide political trends seem to favor President Barack Obama’s proposals to increase taxes for the rich and cut spending in a gradual fashion over a decade, combined with new spending on infrastructure, alternative energy technologies, and education. Assuming that the widening gap between the rich and poor in the U.S. is also prompting the American voters to feel the same way as the French and Greek people are feeling, the Republican Party would seem to be at a disadvantage. Likely Republican presidential nominee Governor Mitt Romney has proposed to reduce taxes and cut spending. This may only firm up the voter's belief that rich people would benefit and the middle-class and the poor will suffer under Romney. Under the circumstances, Obama has a good chance of winning re-election and Democrats have a reasonable chance of taking over the House. The Republicans are also suffering from the backlash against their extreme tactics during the debt ceiling debate that won condemnation of a majority of Americans, as reflected in the lowest approval rating of the Congress on record. But then, elections are six months away, which, in political time clock, is like eternity and anything unimaginable can happen between now and November.
