Andy Xie’s Insights On The US Economy After the Election

Andy Xie, renowned Chinese economist, shared his insights on the US Economy after the election – what he coined the “Obama 2.0 Era”:

Going over the cliff is good for the United States in the long run. Even though it would cause a recession in the short term, it would roughly halve the Federal deficit. It is at least a major step towards fiscal sustainability. But, as the baby boomers retire, government expenditures on health care and social security will escalate. Going over the cliff merely postpones the debt crisis.

U.S. fiscal sustainability requires both controlling expenditure and raising revenue. On the expenditure side, some increase in the retirement age may be inevitable. Also, means testing for social security, i.e., reducing benefits for well-to-do seniors, is also needed. Most important, there must be control over the escalation of health care costs. A McKinsey study shows that higher doctor and hospital charges explain half of the U.S.’ health care costs, which are twice as high as in other developed economies. Unless the government does something about it, the escalating health care costs will bankrupt the U.S. government.

Even with maximum possible expenditure cuts, the United States’ local and Federal governments can’t cut expenditures significantly below the current 35 percent of GDP. For an aging society, it is hard to see how this could be done. Hence, the Republican intransigence against raising taxes is not realistic. Unless it compromises, a debt crisis is a matter of time.

The grand bargain is not coming anytime soon. The U.S. government will likely have more temporary measures to keep the budget going. The uncertainty will linger until next crisis.

The second Obama term will be significantly more protectionist than the first. Without the auto industry bailout in 2009, the Midwest swing states may not have voted for him and there would be no second term. In a divided electorate, micro-targeting is highly effective in determining an election outcome. Learning from this lesson, the Obama administration is unlikely to do anything harmful to the manufacturing interests in the Midwest.

Full article by Andy on the subject at Caixin here.

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