Australian excitement over US overlooks its gridlock on finance and politics

WITH America now approaching a "tipping point" in its multiple battles to revive its economy, restore its middle class, and break its political gridlock, Labor and Coalition leaders have issued remarkable declarations of faith in the US as the exceptional nation.

The most high-powered group of Australian visitors for two years - including Tony Abbott, Kevin Rudd, Craig Emerson, Julie Bishop and Bill Shorten - has radiated a faith in the US that defies financial and political signals and testifies to the sheer power of underlying Australia-US bonds. Such ties at senior levels are much deeper than many people even begin to comprehend.

After four days of the annual Australian American Leadership Dialogue in Washington and New York, the toughest assessment came from the chairman of the Australia-China Council, Warwick Smith, a former senior Liberal MP and dialogue participant closely involved in our trade ties with China.

"The US has democracy and gridlock," Smith tells Inquirer. "And it's not a great advertisement for democracy. I think they will solve it. But it is absolutely apparent this coming election needs a categorically clear result. America desperately requires this.

"The irony today is that US corporates are in a strong financial position yet America, as a nation, is not. After several days of talks, we walk away feeling pessimistic, not optimistic."

China was the elephant in the room at this dialogue, where America's economic and political problems emerged as the overarching theme. Abbott, making his first visit to the US as Opposition Leader, delivered a series of startling messages with direct ramifications for how he would relate to the US as prime minister.

Taken aback by what he felt was America's worry fixation about China, Abbott offered a dose of emotional therapy. He came to America with his heart on his sleeve. And he told America it was still great, still special, still No 1. "America is exceptional," Abbott said in his main speech to the Heritage Foundation. "America needs to believe in itself the way others still believe in it."

For Abbott, the US relationship went beyond a mere close alliance. "We're family," he said. In a dubious claim revealing his own cultural foundations, Abbott said "few Australians would regard America as a foreign country". Abbott was impatient at America's many doubting Thomases. Sounding more pro-US than John Howard, Abbott, in office, obviously would seek fresh initiatives with the US probably designed to bind Asia, America and Australia more tightly together.

After the New York session, Liberal MP Josh Frydenberg said: "The former Liberal government showed the way - we can capitalise on the rise of China yet stay loyal to the US alliance. This is an article of Liberal faith."

Abbott visits China after America. With China, he is unemotional and calculating, unlike in the US where his emotions overflow.

Trade Minister Craig Emerson, heading the Australian government delegation, while alert to US troubles was bullish that America would power back. The reason? It is American exceptionalism.

Emerson told Inquirer at the end of the meeting that history showed America's recuperative ability. "What is it that is special about America?" Emerson asks.

"I think there are two defining features of American culture. First is its entrepreneurship, its risk-taking and its optimism that it can prevail. The second is its creativity. And today's sources of growth in the developed world pivot around creativity. So I am an optimist about America."

Emerson mirrors that deepest Australian conviction: that China and America can sort it out. His experience as a minister leads him to two conclusions - that the US government is "highly sophisticated" in its dealings with China (a view validated by the dialogue's closed sessions) and that China wants and needs a strong US economy.

Emerson has a vivid perception of what the rise of China actually means: "Every farmer in China who moves from the land into a basic factory delivers a huge increase in that person's productivity. In the first decade of the 20th century, we saw China's productivity growth exceeding 10 per cent per annum. In the West you are lucky to get 2 per cent per annum. When you take the compounding impact of that with 1.32 billion people, it is huge, just huge. And remember, China still has 700 million farmers."

When pressed on the issue of US political gridlock, Emerson says: "I would probably say I'm not a pessimist but a lot of work needs to be done."

It is a gross understatement.

The reality is the US economy is weak and will slow further. It is bumping along at about 2 per cent growth, with unemployment sticky at 8.2 per cent. Huge deleveraging is taking place across overextended households. The middle class suffers from job insecurity, diminished net wealth, weak income growth and falling home prices. The outlook is poor but the US won't slide back into recession. The chairman of the Federal Reserve, Ben Bernanke, speculates that its labour market is "stuck in the mud".

In the US, there are two different but related evils - finance and politics. The financial sector remains in unresolved crisis and the political system is deadlocked. Foreign Minister Bob Carr scored a recent hit by telling prominent Republican and former World Bank chief Bob Zoellick, also a dialogue participant, that the US was only one big congressional budget deal from regaining its pre-eminence. In your dreams. Carr, like Abbott, was trying spin to boost US spirits. There's only one problem - no such deal is coming.

With the White House contest between Barack Obama and Republican candidate Mitt Romney mired in negativity, there is pessimism that either candidate post-election can break the toxic polarisation of US politics. Sure, the congress under pressure will find a fix to avert the "fiscal cliff" horror, where action is needed to prevent automatic cancellation of the Bush tax cuts that would involve a fiscal tightening of 2-3 per cent of GDP and guarantee a recession. But halting disaster does not equate to restoring America.

The campaign is expected to be costly, nasty and tight. The New York Times poll at week's end shows the struggling economy puts Romney ahead of Obama 47-46 per cent. Political guru Charlie Cook of the Cook Report argues it is not enough. He says that Romney, given falling economic confidence, should be further ahead. "The mistake the Romney camp have made is to let Obama define their candidate at the outset," Cook tells Inquirer.

The result is not pretty. Romney is depicted as rich, dodgy on taxes and a business leader who outsourced jobs. Cook's argument is that the economy alone won't change the White House. People need to be satisfied about the alternative president. It is an argument familiar to Australians.

Speaking outside the dialogue, Bush's former adviser, Barry Jackson, says: "Obama is the most divisive president of modern times." The point is that US financial troubles have brought to the surface the depth of philosophical divisions over America's future. The "bottom line" from conversations with US figures is that it will take a number of years for America to resolve its financial difficulties. There is no prospect of any immediate easing in the extent and bitterness of its political polarisation.

Zoellick left nobody in doubt that the world had changed fundamentally. "We now see the end of the trilateral world - the world that used to be dominated by decision-makers in the US, Europe and Japan," he says.

"The eurozone is muddling along but is still on the precipice, Japan is shrinking and the US faces a series of uncertainties. The risks for the world economy are on the downside. We are in for a bumpy ride. The politics of economic reform are in trouble in most developed nations. The danger of a breakdown cannot be ruled out."

Zoellick is still an optimist about America. Yet the numbers show the sheer extent of the adjustment the White House and congress confront. Tax as a proportion of GDP has slipped to about 15 per cent while spending got as high as 25 per cent. Somehow, some way, they must be reconciled - tax must lift to about 18-19 per cent of the GDP while spending is contracted. The task is complex: keeping activity going in the near term while legislating the big shift for the medium term.

Australia needs to think more adroitly about how it manages both the US and the changing world. One message from the dialogue was US concern about our sharp defence cuts. Unless these are corrected soon, serious trouble looms. Kevin Rudd gave an artful exhibition inside and outside the meetings - he has the respect of the US, offers constructive advice on how to handle China (where his views are highly regarded) and believes in the value and virtue of US power. Rudd covers all bases. He is more highly regarded outside Australia than inside.

When the bipartisan Australian delegation (Abbott, Bishop, Emerson, Rudd and Shorten) met Vice-President Joe Biden, Rudd waited some time before offering his thoughts on China. "Maybe you should work for me," Biden said. "We think that's a good idea," Abbott interjected.

Australia does not have America's economic problems, yet a US visit highlights the extent of our complacency. "I would warn Australia about over-reliance on commodities," Zoellick says.

"The risks associated with commodities-based growth should not be underestimated."

Abbott needed this trip, badly. He has made only one US visit in the previous decade. He needs to better judge the mood, pace and challenges of the US. His preference for Republicans over Democrats cannot be disguised. For those who think the next political generation may be less pro-American, forget it. Bishop and Shorten both emerged as significant figures in this dialogue in the alliance context.