Stephen Foley: Congress must realise America is on the verge of a fresh economic crisis

Click to follow
The Independent Online

US Outlook: The intensity with which Barack Obama buzzes about announcing new plans to kickstart America's economy has become inversely proportional to the chances of those plans making it into law.

The President has been busy this week, broadcasting his intention to create a $200bn (£130bn) tax write-off for businesses that invest in new equipment, a $100bn (£65bn) giveaway to spur research and development, and $50bn (£33bn) on new transport infrastructure project.

Amid the often ideologically driven debate about how effective any of these measures might be, one thing has emerged as a consensus: the likelihood these modest plans will make it through the polarised, intensely partisan Congress is roughly nil.

The White House is not even close to getting its 2011 budget passed, with just a month left of the fiscal year, and other administration initiatives to boost small businesses have been knocking around all year with no progress.

The coming fight over personal tax rates, which Mr Obama wants to keep low for the middle class and which Republicans want to extend for the wealthy, will expend all remaining political energy before the November elections.

The US political system is deliberately designed with checks and balances that make federal legislation hard to accomplish without consensus. Whether the system is fit for purpose in the modern world seems doubtful to me, but it is hardly going to be reformed.

The result is that fiscal policy does not exist as insurance against a second downturn in the US economy. The American public's disillusion with last year's $787bn (£512bn) stimulus bill has seen to that. As Paul Ashworth of Capital Economic put it yesterday, the US economy will sink or swim on its own. Businessmen and investors often say that there is little harm in government gridlock: the less government, the better. It certainly didn't hurt the economy during Bill Clinton's presidency.

That may not remain the case if the mid-term elections create gridlock between a Democratic White House and Republican Congress, as they seem likely to. The demographic timebomb about to go off in the US – with an explosion in pension and healthcare costs to the federal government that, unchecked, will take national debt to an impossible 350 per cent of GDP in 2050 – is moving quietly up the agenda among Wall Street economists and strategists. The bond market has faith now that, because something must be done, something will be done to rein in social security entitlements. If that faith is tested, the consequences could be new financial turmoil.

The constitutional position in the US is that the President proposes, and Congress disposes – meaning that it considers and enacts his suggestions. But in the present dysfunctional partisan atmosphere, when this President proposes, Congress reposes. And the US continues in its sleepwalk to crisis.

Nokia is sending mixed signals with Elop hire

There is an irony in Nokia turning to Microsoft for its new chief executive. While the Finnish handset maker is quickly becoming an also-ran in high-end smartphones, the software giant has suffered its own eclipse in the mobile market, which has largely failed to adopt Windows as an operating system for internet-enabled phones.

To say Stephen Elop faces a daunting challenge at Nokia is an understatement. The firm has less than 10 per cent of the US market, and its share elsewhere is under increasing pressure as consumers turn to iPhones and other snazzy devices.

It is difficult to be optimistic in the short term. New products that the company is launching in London next week will certainly be an improvement, now that Nokia has updated its fusty-looking Symbian operating system, but the ground has shifted even more significantly under the company's feet.

In the world of old-school voice-only phones which Nokia came to dominate in the Nineties, it took just one or two hot devices from the development labs to win market leadership in a country. Remember when clams were all the rage? Or ultra-thin phones?

Now device makers are required to do something much harder, and just a little mystical. They have to germinate an entire ecosystem of apps and other content. Nokia, with its disastrous forays into music (Comes With Music) and gaming (N-Gage), is trying to do too much of this by itself. iPhone and Android have generated the excitement they have thanks to the apps created by a horde of enthusiastic third parties.

Nokia has not helped itself in the US by failing to strike up close working relationships with the main carriers. Whether it likes it (or think it is anti-competitive) or not, the operators here demand exclusivity on hot phones and unique services built in.

By hiring Mr Elop, Nokia signals that it understands the vital importance of software to the success of hardware manufacturers, but not that it yet gets the collaborative, open source world in which it now operates. And that is not something that Microsoft has ever got, either.



Citigroup escapes the Goldman treatment

There is something out of kilter about the $75m (£50m) Citigroup is paying to settle charges that it misled investors, compared with the $550m (£360m) Goldman Sachs had to pay earlier this year to make fraud charges go away.

The Securities & Exchange Commission was having to explain why the figure is enough to a sceptical judge this week. Goldman admitted imperfect disclosures in the construction of one toxic mortgage derivative, sold to European banks. Citigroup and two executives are accused of repeatedly misleading the public and its investors by telling them the bank's subprime mortgage exposure in 2007 was about $40bn (£26bn) less than they knew it to be, all told. A $75m penalty is no deterrent, and not nearly enough.

Comments