As the New Year is about to begin, I wish to talk about the big trends that are evolving and the potential consequences beyond.
The global economy is slowly recovering led by the United States and China. In the US, the main momentum comes from the recovery of the housing market and business investments assisted by record low interest rates. Nevertheless, the slow growth will only reduce unemployment little by little from the current high rate of 7.7% because of the huge job losses during the great recession of 2008-09. It will take a few more years for the unemployment rate to fall back to the pre-recession level of 5% barring any unforeseen economic disasters. Luckily, the high unemployment rate does not seem to seriously dampen consumer spending that accounts for 70% of the US gross domestic product.
In the European Union, fixing the public finance of Greece and Spain seems to take forever. Furthermore, the major economies such as Germany, France and the United Kingdom adopt an austerity approach that may further worsen the current stagnant situation, and delay a potential recovery. Their approach contrasts with the stimulus approach taken by the United States.
The US federal budget will improve in the years ahead due to better economic conditions, not necessarily government policy of slash and cuts. Looking back, the budget has dramatically turned from a surplus of $0.5 trillion in 2000 to a deficit of over $1 trillion in 2008. The deficit has remained this high since then. The following are the major causes:
*Bush tax cuts $1.6 trillion (government revenues lost)
*Wars in Afghanistan and Iraq $1.4 trillion (financed with deficit)
*Bank bailout $0.8 trillion to avoid total meltdown in 2008
*Incremental interest $1.4 trillion due to higher government debt
*Increased non-defense spending $1.6 trillion
*Recession effects, $3.5 trillion mainly reduced tax revenues
*Obama economic stimulus $0.9 trillion during recession
When 2013 begins, all the Bush tax cuts are due to expire, bringing in more tax revenues for the government. The US is already out of Iraq now, and is winding down the war in Afghanistan. There is a potential budget saving of $3 trillion from two wars of choice, and a big tax cut thanks to the Bush Administration. Furthermore, the interest paid on government debt will also decrease due to these savings. As the economy picks up, there will be more revenues coming in the form of income and excise taxes. Chances are the federal deficit will be reduced significantly within a few years’ time without major cuts in spending. You only worry about the deficit when the economy is down.
All the bickering about cutting the federal deficit is put up by the Republican Party long opposed to Social Security and Medicare that benefit the middle class. The current huge deficit due to wars and recession has given them an excuse to clamor for cuts, without the courage to admit that the deficit was caused by the Bush Administration when the Republicans were in power to grant big tax cuts, finance two wars with the deficit, and fail to prevent a financial meltdown that wrecked the economy. The American people did not forget those disastrous policies. As a result, they re-elected President Obama decisively despite the unacceptably high unemployment rate of 7.7%.
Although the current negotiation to avoid the so-called fiscal cliff hits a deadlock, a breakthrough will be achieved by New Year’s Eve or a little later. Why? The Republicans cannot afford to be obstructionists anymore. If they don’t cave in to raising taxes on the top 2% income group to bring in more revenues for the government, the public will blame them one more time for catering to the rich at the expense of the middle class. The current deadlock is normal political posturing before caving in to raising taxes for the rich.
The long-overdue comprehensive immigration reform will be the next big project for Obama due to the power of the Hispanic vote demonstrated in the recent election. As the Republican opposition recedes, a path will be found to allow an estimated 14 million illegal residents (mostly Hispanic) to earn legal status over a period of several years.
The Obamacare enacted in 2010 can prove a lasting legacy for the President when it goes into effective in 2014. Its ultimate aims are: to contain the runaway inflation of health care, and to achieve universal health insurance for all citizens. If costs are contained, universal insurance will definitely be achieved. Everybody agrees that health care costs in the US must be clamped down. Otherwise, half of the federal budget will be eaten up by health care within the next few years. Maybe half of the household budget will be spent on health care, too. People will be forced to choose between going to see a doctor and the next vacation. Despite the high cost, the quality of health services delivered has not improved. This is outrageous compared with the health care systems of other developed countries.
Cost containment is very difficult due to existing health care practices in the US driven by a dysfunctional market. One of the biggest yet subtle challenges is the wrong incentive so pervasive throughout the entire industry. The most notable one is that doctors and other health providers are paid according to the quantity of work done, rather than the quality of service rendered that benefits the patients. For instance, the World Health Organization recommends an optimal range between 5% and 10% for childbirth requiring cesarean section. In the US, the cesarean rate is 33%. Why? Doctors and hospitals get more pay this way than natural childbirth, thus they perform more cesarean operations. Other examples include unnecessary medical tests, drugs, and surgeries for various not-so-serious illnesses. Changes are now being made to rectify this crooked and costly incentive system in the US health care industry.
Energy production and usage continue to be the biggest challenge due to the opposing forces of energy needs and climate change. Within a few years, the US will surpass Saudi Arabia to become the world’s largest oil producer. Unlike OPEC, the US has absolutely no power in lowering world oil prices because it consumes more than it produces to the tune of 8 million barrels per day. However, energy independence for the US is finally within sight as its oil import shrinks due to higher domestic production. At present, an energy boom is underway in North America as a result of advanced technology in drilling and extraction rather than more discoveries of reserves underground.
Besides oil, natural gas is also booming, where the US has tremendous reserves. A retail infrastructure for natural gas is being built to facilitate the conversion of heavy vehicles such as buses and trucks to run on CNG or LNG (compressed or liquefied natural gas respectively). This will further reduce oil consumption and importation into the US.
Non-fossil energy such as bio-fuel, solar and wind are also gaining momentum, especially solar whose prices are still plummeting due to technological change and over-production. Non-fossil fuels will receive a continued push as oil prices rise and the technology of alternative energy advances. One area deserves close attention — battery technology. A breakthrough in terms of duration and cost will boost the sale of electric cars to a great extent, thus further reducing oil consumption.
What will happen if oil plays a less important role in the US economy? The Middle East may become a region of benign neglect, with consequences especially relevant for Israel. Will this enhance peace or war? Who knows? What we can say is that when the US was heavily dependent on oil from the Middle East during the past decades, the region went through several wars and was never stable. Perhaps it’s good for a change now that the only superpower in the world is losing interest in oil.
A ray of hope shines from the 2011 Arab Spring, where the people toppled the Egyptian authoritarian regime and others. The situation still remains fluid and the consequences unclear, because democratic revolutions are always chaotic and messy. What about the Iranian nuclear pursuit? We know that Israel worries about it the most. Being a patron of Israel, the US worries about being sucked into a conflict with Iran rather than being threatened by Iran’s infant nuclear industry. It should be noted that the US got burned badly in Iraq that is less than half the size of Iran. Does it have the stomach for another war of choice in the Middle East?
The Pacific region will see high dramas in the next few years and beyond, where the three largest economies and military powers meet (US, China and Japan). These three world powers will bark at each other from time to time. They cannot afford to go to war because so much investment, trade, and money are at stake. Besides, nobody wins should a war break out. What about North Korea that acts as a spoiler even though some of its people are starving? Do they dare to hurl a nuclear bomb at one of its neighbors? Japan and South Korea may have a reason to worry. On the other hand, the North Korean regime understands the massive deterrent very well: Their major cities will be evaporated the next day in retaliation if they dare.
It’s interesting to see how the three Pacific powers behave toward each other. China and Japan are never friends despite being neighbors, but they are business partners in many industries. Japan and the US are unequal friends after Japan’s defeat in World War II. They are only friends of convenience through the defense treaty where the US protects Japan with its nuclear umbrella. China and the US sleep together because of economic necessity developed organically after China’s opening to the world decades ago. They view each other with suspicion because they differ widely in culture, philosophy and governance. Over the last decades, the US has turned from being a major creditor to debtor. It relies on China and Japan to regularly buy US treasury bonds to finance its deficits. We can say these three Pacific powers are in effect “friendnemies”.
One thorny problem is the breakaway Chinese province of Taiwan. Taiwan has no powerful supporters except the US. The US takes advantage of this situation by selling Taiwan inferior weapons at inflated prices for Taiwan’s self-defense. The sale of weapons irritates the Chinese every time, but it does not constitute a real threat to China due to the weapons’ inferiority. China knows it has a heavy price to pay by attacking Taiwan that has a large military force. Taiwan knows it cannot survive a Chinese attack if the US sits on the sideline without receiving protection money. Despite all the political drama, Taiwan businessmen love to invest in China because of the huge profits made. What about the people? They may not love each another, but they like to visit across the Taiwan Strait. So the travel business is booming too in both directions. You have to ask, do the people want to make money or war?
Finally, there exists the wild card of technological change, especially in the areas of electronics, military hardware, wireless technology, social networking, and alternative energy. We have already seen how much modern technology has transformed the world. One thing we are sure, the world will change even faster as the years go by.