Sunday, 24 January 2010

The Limits of Elected Power

The Limits of Elected Power

24th January 2010

The Malta Independent on Sunday

Alfred Mifsud

Barack Obama and Ben Bernanke are probably the two most powerful people in the USA, if not the world. At present they are both experiencing the limits of their true power.

Ben Bernanke has been re-nominated for a second term as chairman of the Federal Reserve Bank of the US, the equivalent of the European Central Bank of the euro area. He was originally nominated for his first term by the Republican administration of President George W. Bush. Democratic President Obama announced his proposed re-appointment last September.

You would think that Bernanke’s appointment would enjoy the bi-partisan support of both Republicans and Democrats in US Congress. This does not seem to be the case as Bernanke’s nomination is still languishing in Congress, even though the expiry of his first term is just a week away – on 31 January. In the hearing sessions so far, there has been strong criticism of his record, especially the years prior to his appointment as chairman, when he was a board member under Alan Greenspan.

Bernanke’s record is highly contrasting. As a member of the Federal Reserve Board, he is certainly guilty of blindly supporting the free market liberalism and light regulation advocated by Greenspan, which has been discredited by the financial crisis of 2007/2008. It is difficult to fault Greenspan and exculpate Bernanke. On the contrary, as chairman of the Federal Reserve, Bernanke deserve full credit for saving the system from imploding, for learning the lessons from the crisis of the Great Depression of the 1930s, and for going to the extreme edges of his executive authority in devising creative solutions to keep the system floating and help restore confidence when it seemed irrecoverably destroyed.

Maybe Congress is finding it difficult to make up its mind over whether it wants to appoint someone who can prevent a crisis by taking away the punchbowl while the party is heating up, or someone who can address the crisis when this becomes unavoidable. Bernanke’s credentials are dubious on the former criterion but rock solid on the latter.

President Obama is also learning the hard lesson the limits of his executive authority. Just one year after he was sworn in as the US’s 44th President, enjoying a commanding Democrat majority in the House of Representatives and a filibuster proof 60 per cent majority in the Senate (including the independents), the Democrats suffered a crushing blow when, in the Massachusetts election for a Federal Senator to replace the seat held by the late Edward Kennedy, they lost to the Republicans, thus losing the filibuster proof majority in the Senate.

Massachusetts is a rock solid Democrat constituency and a Democrat Senator had occupied this seat for decades. With the Massachusetts seat lost in January, then God only knows how many other marginal constituencies could be lost in the mid-term elections next November.

How could there be such a major shift in public sentiment in such a short time? How could euphoria for Obama’s election swing into dissatisfaction in such a short time?

Obama has made great achievements in his first year in office. These achievements are under-appreciated for three reasons. Firstly, because expectations were unrealistically high and many expected Obama to miraculously and instantly work his way through the inherited problems; secondly, because Obama has been dealt a very tough hand in the form of an economy in shambles, unemployment shooting up and a financial system on the verge of collapse; and thirdly, because his achievements are intangible.

The President is probably discovering the wisdom of Machiavelli’s advice to the Prince: “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.” Change meets the resistance of those losing out due to the destabilisation of the status quo and has only the lukewarm support of those who might gain from the change, which is still considered doubtful and far from assured.

The people of Massachusetts did not give credit to Obama for averting a financial disaster. It is difficult to prove what could have been and take credit for a negative. While most economists agree that without the fiscal stimulus quickly introduced by Obama, the US economy would have fallen into a protracted recession, the electorate judges the actual outcome and not by what was averted, which is hard to prove, even in the best of circumstances.

Massachusetts voters must have judged Obama by the fact that his determination to re-engineer the health system to extend coverage to some 40 million who are living without any insurance or state support would have meant a tax increase without any benefits to Massachusetts’ residents who already have the sort of health system that Obama wishes to roll out across the nation.

As Massachusetts is solidly Democrat, their senators, especially the late Ted Kennedy and former presidential candidate John Kerry, brought to the state a health service that is more in the liberal European tradition. The voters of Massachusetts had nothing to gain and something to lose from Obama’s success in rolling out such system throughout the nation. It was easy and populist for the Republican candidate to gain support by promising to block the health bill in the senate to defend the narrow interests of his state constituents, even if, in the process, he would be denying the whole country a health system worthy of the most advanced economy in the world.

Obama has to learn another lesson from Machiavelli’s advice to the Prince: “It is better to be feared than loved, if you cannot be both.”

In his first year, Obama tried hard to be loved. It is now time to switch a bit to being feared. His announcement of his intention to tax banks and stiffen regulations announced soon after the Massachusetts result may be the first signal of a switch in presidential posture. Soon, very soon, he will have to adopt the same attitude on the international scene, especially when dealing with Iran.

In his first year, the President proved to the world that Iran was unwilling to engage in any sensible dialogue for nuclear limitation. He has also, unintentionally but successfully, given a strong voice to the opposition movement inside Iran and possibly weakened the regime there far more than we can know or realise from the outside.

But soon Obama and the world will have to stop being nice to Iran and start being feared.


Sunday, 10 January 2010

Taxing Visitors

Taxing Visitors

10th January 2010

The Malta Independent on Sunday

Alfred Mifsud

Never minding some controversy, the year started with a shouting match between the Ministry of Tourism and the sector’s operators, who joined forces to complain about the introduction of a 50 cents tax on every tourist bed night that will come into force in April.

If it were possible to load taxes on visiting tourists without compromising the health and growth of the industry, we would all be happy about it. If tourists pay taxes, it means that locals will find there is less pressure from the government to fund itself by taxing them.

Life, however, is not that simple. While residents have little choice but to pay whatever taxes governments choose to impose, tourists have a choice. Ultimately, they care little about the constituent costs of the various portions of their package. What they care about is whether the total cost of our product, taxes included, compares favourably with similar products obtainable in competing destinations.

However, it is a gross exaggeration to state, as some industry operators have argued, that this tax will be the final nail in the coffin of the industry. If our tourist industry is so fragile that it can be broken by the imposition of a 50 cents per night tax, then we are really in trouble. But I don’t think this represents the reality.

For all our problems and defects, of which we have many, our tourist product remains marketable, sensitive to pricing competition, but able to withstand a breezy headwind in the form of higher taxes. If some operators in the industry cannot withstand such minor adversity, and will have to be buried in the coffin for which such taxes represent the last nail, then I would say that this would be part of a necessary creative destruction process. It would signify the elimination of those operators who have lost their competitiveness through lack of investment and upkeep. The industry in general would be served better by their demise to make space for newer, more attractive and more efficient outfits that can absorb such adversities without crisis.

Where industry operators have a valid point is regarding the timing for the introduction of such a tax, which was announced in the Budget for 2009, read in parliament in November 2008, when the current recession had not yet exposed its full ugly force.

Obviously, the government will argue that taxpayers will never agree that it is the right time to introduce new taxes. But in normal times I would say that the tax would have been absorbed without protestation, especially given that a forewarning lead-time of nearly 18 months was employed. These are, however, not normal times.

While internationally there are encouraging indications that the economy has bottomed out and has started to grow again, albeit from a much lower base, governments and monetary authorities are being extra careful, given the gravity and depth of the recession, to exit out of their stimulus packages very gently in order not to force the fragile recovery into a double dip recession.

Apart from countries such as Iceland and Greece, that really have no choice, given the disastrous state of their public finances, governments are in no mood to raise taxes and are planning fiscal repair to their deficits over the medium to long-term through economic growth.

Why should we be different? This is especially applicable in our case, when we have contemporaneously dismantled the energy subsidies that were allowed to hotels and industry through the former capping mechanism and suddenly exposed such outfits to the full force of market pricing for their energy consumption. It is even more especially so when our export operators (and tourism operators are exporters of services, with the difference that these are not shipped out but tourists are flown in to consume such exports among us) are having to compete with a an over-valued euro (some expert opinions put such over-valuation in the 20 per cent range) that is being squeezed upwards by the silent war going on between the US authorities on one hand and Asian monetary authorities on the other.

The US financial crisis can only be resolved by a weak US dollar that helps the US rebuild its manufacturing base and repatriate, or at least stop the outflow, of manufacturing processes to cheaper Asian locations. For all the lip-service being paid to the strong dollar policy, the US authorities are in practice doing very little to give such policy any tangible value and clearly intend to maintain a low interest rate policy for the whole of 2010, which does not help strengthen the dollar. On the other hand, Asian monetary authorities, China in particular, continue to peg their currencies to the US dollar and those that have no such rigid peg, such as Korea and Japan, have begun verbal intervention to abort their currency hardening. The euro is being caught in the middle of such fits of pique which, unfortunately, could well lead to escalating protectionism during 2010, which would in turn almost certainly halt international growth in its tracks.

Without any support from Sterling, due to the UK’s domestic problems from the financial crisis, the euro is carrying this burden almost alone, with limited assistance of minor currencies such as the Swiss Franc and the Scandinavian Kroner.

Given such a particular set of unfavourable circumstances, it would not be amiss if government were to adopt a dose of reality and postpone the introduction of the bed night tax for 12 months, hoping that the euro over-valuation will have worked itself out in the meantime, and expecting to introduce it in April 2011, when economic growth, and the tourism industry in particular, will hopefully be on a clear sustainable upswing.