It's time to speak about a
potential new Grand Bargain - not the side show we
just witnessed in Washington DC - but how
unlocking the US$3.5 trillion of capital sitting
in Beijing could be transformational to the growth
of the world economy.
One economic
relationship - not only because of its size but
because of its ability to shift the psychological
momentum - can change everything. If we can find a
way to unravel the economic stalemate between
China and the US, and create a flow of capital
free of political constraints, we can change the
economic
trajectory of the world
economy for the next decade. This is where our
energy should be focused.
The elections we
just had in the US were very consequential in this
regard. We still have a very divided electorate
and divided government, but in arguably the
weakest economic environment since the Great
Depression, the opposition party was unable to
win. This has led to more soul searching about the
nature of the opposition party's message then has
occurred in the last 30 years. In the lingo of the
entrepreneur, the Republican Party is coming to
terms with the fact that it has a 'product
development' problem, not just a "marketing"
problem. This in turn, I believe will set the
stage for a new grand bargain.
The
economic narrative that launched Ronald Reagan to
the presidency, a narrative that celebrated the
stimulative effects of cutting taxes and reducing
the role of Government, still dominates Republican
thinking, but it has proven unsuccessful in a year
that was its to lose. That has created a huge
opening for new thinking, one that could have
enormous consequences for the "convergence of
interests" between Democrats and Republicans, and
ultimately between the US and China.
Throughout the presidential campaign,
Americans were peddled the false choice between
raising taxes on the rich (who are the ones who
can invest) and draconian cuts to social services
to the less fortunate (who are already badly off).
This same bad choice played out on a state
by state basis to varying results. In the state of
California, the issue was framed between the rich
paying a little more and public education
suffering. Framed that way, it actually sounds
like a simple choice except when you consider that
the top 1% already pay 50% of the taxes in
California, are highly mobile, and have access to
accountants that can maneuver around our highly
complicated tax code.
The bottom line is
that neither solution, taken in isolation, works
well in a fragile economy. One needs look no
further than Spain and the UK to see the
depressing effects of purely contractionary fiscal
policy. So each party developed an approach to
address this.
The Republicans would lower
tax rates to counter the dampening effects of
cutting spending, and the Democrats advocate
investing in infrastructure in order to offset the
negative impact of tax increases. That then leads
to a new round of arguments.
Republicans,
while agreeing that infrastructure investment is
vital for reviving growth, counter that we need to
find a way to pay for it, that this so called
"investment" is just spending by another name that
will further inflate the deficit. The Democrats
say tax cuts will do the same thing. Neither party
gives credit to the other party's auxiliary fiscal
plank for creating growth which would reduce the
deficit.
This is why we have a stalemate
in the US and why the economy is paralyzed. But
there is a way out of the box, a political and
financial solution that starts at the state level
and that provides the necessary knowledge and the
means to move out of the present financial
trajectory. This new economic narrative, which is
tailor-made to become the new economic platform of
the Republican party, starts by looking at how to
make the trillions of dollars of state public
assets more efficient. They have been completely
overlooked in the fiscal debate, and they
represent the biggest piece of wiggle room that
exists to restart the US economy today.
Instead of only looking at annual budgets
and liabilities, we must go deeper and thoroughly
examine the asset side of the balance sheet. A
full balance sheet is the first step to
reassessing what can actually be done on a state
by state basis. Incredibly, this has never been
done- not even in a state the size of California,
despite its massive problems.
When you
look at the balance sheet, you see a very
different picture state by state of the US
economy. You start to see a much bigger pie, and
with that comes more room to maneuver. All of a
sudden a scenario exists where you can avoid the
most draconian cuts, avoid further taxes on the
rich, and invest to kick start the US economy
while deleveraging it. None of this obviates the
need for serious entitlement reform, but it's a
lot easier, with this new information, to see how
we can create a solution to the partisan divide.
Most people think that California is
bankrupt. I maintain that it's actually rich, and
probably getting richer with the shale energy
revolution. We feel it when we walk the streets,
when we look at our forests, our cities, our
parks, our incredible beaches, and the creativity
of our people. We are home to the best and most
innovative companies in the world - Apple,
Facebook, Google - brands that are larger than
many states. We are home to the one place
producing dreams and imagination for the whole
world - Hollywood.
Once we tally all this
up, and finally know what the state really has,
things start to change immediately, just like they
would for a person with a debt of $1,000 who
discovers his assets are worth $1 million. In the
case of California, there are estimates that put
the value of public assets at over one trillion
dollars, dwarfing even the worst case estimate of
total liabilities for the state. When the
financial markets see that California is not
bankrupt, that its assets are worth more than its
liabilities, the state's interest payments,
contributing to the deficit, will go down
immediately.
Other benefits will accrue
over time. Once we have the balance sheet, a
logical next step would be to create a "California
enterprise fund" and accept investments in it.
This is where China comes in, with its huge
reserve of dollar denominated "soft assets". These
assets are potentially at risk of being eroded by
future US inflation. China has made it clear it
would like to convert these into hard, inflation
protected assets. It has two problems in that
regard.
One is the sheer volume of money
that needs to be moved. It will be difficult to
find enough large assets. But public assets are
sufficiently large to solve that problem. Second,
there has been political resistance to even
relatively small acquisitions because of the fear
of outsourcing jobs. That problem is also solved
by public assets because the jobs associated with
them are immobile and can't be outsourced.
Of course, no state will give up control
over its assets, nor should they. But even selling
a non-controlling 20-30% stake could yield
hundreds of billions of new capital in a state
like California, capital that could be earmarked
for paying off debt (and likely would be through
investor covenants), investing in dilapidated
infrastructure, and providing a bridge that makes
unnecessary the false choice proposed in this last
election.
Once the transfusion of capital
is in, Democrats get money to rebuild
infrastructure and avoid the worst cuts to social
services. Republicans avoid the worst of the tax
increases that dampen investment and hurt the
economy, and they get to ride the improvements in
infrastructure without increasing the debt. They
also get, and this is critical, the discipline of
outside investment in public assets, a "public
private" partnership that leads to more
efficiency.
This is a new, improved way to
harness big government which allows Republicans to
stay true to their conservative principles. China
gets to structure their US holdings in a safer and
potentially more prosperous way, and avoid the
political backlash of other types of investments
in the US. And America gets to recapitalize itself
and kickstart its growth engine.
This
grand bargain represents an initial convergence of
interests between the two main political parties,
and could set the stage for a real deal on
entitlements. It also represents a significant
convergence of economic interest between the
United States and China, and that will make it
much easier to solve our other differences. As
presidents like to say "Elections have
consequences", and this one perhaps more than most
people think.
(This is adapted from a
speech delivered on December 11, 2012 in Beijing
at The Third Forum on Global Entrepreneurial
Economy.)
Bill Mundell is a
Californian entrepreneur who has advanced
market-based solutions to economic and policy
issues in the Wall Street Journal, the New York
Times and the Financial Times. He is spearheading
a citizens’ campaign to attack gerrymandering in
American politics.
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