Friday, 23 January 2009

Yes We Must

23rd January 2009
The Malta Independent - Friday Wisdom

Barack Obama is now formally the 44th President of the United States, holder of the most influential political post in the world and for the next four years the man in the Oval Office.

He comes wrapped in a sort of mystique, someone who has the power of character and the force of persuasion to make the impossible possible. His accession to the presidency by and of itself is a demonstration of a will to succeed against all odds. An ability to turn problems into opportunities, to inject enthusiasm where most would lose heart and feel overwhelmed, and to engage hard-headed adversaries in fruitful negotiation.

However, the real test for Obama is ahead. The skills to get elected are not necessarily the same skills needed to govern. Obama has to show he has both. He comes disadvantaged with great expectations which could easily lead to disappointment. He comes advantaged with very broad support for doing what needs to be done even if unpopular, and can consider himself lucky that the financial turmoil was not only a decisive factor in his election to presidency (the crux of the financial crisis came in the last six weeks of the election campaign and the issue dominated to an extent that any other consideration, including the colour of his skin, was rendered irrelevant in the circumstances) but also establishes a low watermark against which Obama’s performance will eventually be judged. When things are so bad they can only get better!

He referred to the financial turmoil in the opening part of his inauguration speech and there he stated something which in Malta we had better note carefully. He said that the turmoil was in part the result of excessive greed by individuals but it was also the result of “collective failure to make hard choices and prepare ourselves for a new age”.

In terms of the US he was surely referring to his predecessor’s reckless fiscal policies where he attempted not only to have guns and butter but even added tax cuts to change a fiscal surplus inherited from the Clinton administration to a horrendous trillion dollars plus deficit which is being passed on to the Obama administration. The simple truth is that even a reserve currency country cannot finance two wars, Afghanistan and Iraq, without raising taxes and still keep a stable macro financial structure. Financing two wars while conceding tax cuts is even worse. It is a vain attempt to challenge the laws of natural economics.

Are we in the process of creating future problems by our collective failure to make hard choices to prepare ourselves for a new age? Indeed we are. We are doing next to nothing to preserve the sustainability of the social package so painstakingly built over the last 50 years. Our health service is clearly unsustainable and hard choices need to be taken soon, whatever easy promises were made before the elections. The big deficit in our pension system means that with the passage of time, as the ratio of economically active for every pensioner continues to shrink, the pensions would become quantitatively irrelevant to afford comfortable retirement, forcing people to continue working beyond pension age by necessity rather than choice.

Our fiscal enforcement mechanism leaves much to be desired. We have created systems where people have to pay income tax on profits that are not real (as in case of withholding tax of 12 per cent of sales value of real estate held by the vendor for more than five years) and wide space for others to under-declare their income with impunity resulting from lax enforcement.

Shifting tax on real estate sales to a withholding tax system has weakened the effectiveness of enforcing compliance through VAT mechanism. We need to develop a vision to reduce the marginal rate of tax to a level where lack of compliance will be more costly (through high punitive measures) than cost of compliance where low tax rates would be further rendered attractive by the possibility of re-investing a larger portion of post-tax earnings without being questioned by tax authority about unexplained wealth accretion.

Hard choices are being avoided in persisting with old legacies that render our labour markets inflexible. The COLA system has clearly outlived its purpose. The rigidities in public sector employment not subject to the same discipline of the private sector continues to absorb scarce resources and fosters social injustice with those in the private sector where the only guarantee of continued employment is efficiency and dedication.

Like Obama we now have to pass from the pre-election “Yes we can” – Flimkien kollox possibbli to “Yes we must”. Continuing to avoid hard choices will make the unavoidable adjustment much harder when crisis will force us into it.

I do not know if I am imagining but I sense that Obama has already been instrumental in the unilateral ceasefire announced by Israel last Sunday from their hostilities in Gaza and their complete withdrawal from Gaza by the time Obama was sworn in as President. I find no other explanation for the disproportionate Israeli response to Hamas rocket irritations in the last few weeks of the Bush tenure. Much less is it possible to explain the sudden unilateral ceasefire just two days before Obama’s inauguration except through perceptions that the new administration will be less willing to tarnish their credentials as honest brokers for peace in the Middle East by defending or even tolerating Israel’s over-reaction.

Israel may have temporarily disabled Hamas capacity to irritate but in the process it has probably given birth to a generation of terrorists on its doorstep. The Gaza adventure has really done nothing to win for Israel friends and sympathisers where it matters. Wars can be won by military force. Peace has to be won through diplomacy, engagement and adherence to international rules of law and UN resolutions.

If as I suspect Obama’s inauguration to presidency has influenced the cessation of Gaza hostilities and the withdrawal of Israeli forces than it is a very good start (indeed pre-start) for the new US administration.

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