Forget Obama - Fear the Real State Capitalists
Ian Bremmer and Sean West

Since President Obama has taken office, a chief assertion from his critics has been that he is "socialist." But there is little evidence that he wants to dramatically revise the U.S. economic system with redistribution, not free market principals, at its center. While imprecise accusations of socialism score political points for the accusers given that a large share of the U.S. populace recoils from thoughts of living under such a system, in listening closer to Obama's critics they seem to actually be accusing him of being a state capitalist.

If Obama is a state capitalist, then, by our definition, he would want to turn America into a system where the state functions as the leading economic actor and the state uses markets primarily for political gain. Too much time is being spent on such a debate at home, as Obama is not guilty of doing so thus far and is not poised to do so in the remainder of his presidency. Too little time is being spent on understanding the risks posed to America and our system of free market capitalism by the marked increase in state capitalism abroad.

Why isn't Obama a state capitalist?

Certainly, he has presided over some of the largest economic interventions in U.S. history. He has been willing to allow the U.S. government to take ownership of large financial institutions and automakers -- and he used state ownership as leverage to extract temporary restrictions on executive compensation. He has dramatically increased government spending to stimulate jobs and pay for broader health-care coverage, skyrocketing a deficit already poised to grow in future years due to entitlement spending. To the extent that he has preferences for reducing U.S. debt, he seems more comfortable with freezing spending and increasing taxes than with significantly shrinking the size of government.

But a larger story rests in what Obama did not do in crisis. A political window was open to nationalize large U.S. banks, and the administration chose not to do it. In rewriting the rules of financial regulation, in fact, the White House and both parties in Congress seem to be in agreement that the U.S. should never bail out another firm. The U.S. has stayed largely hands-off in managing the stakes that it does own, and it eagerly wants to sell off its large stakes in Citibank and General Motors in coming months. There are rumors that Treasury could sell its stake in Citigroup to a Gulf sovereign wealth fund (SWF) and that Treasury is beginning to make decisions about an initial public offering of GM.

A state capitalist would be moving in precisely the opposite direction. A president who wants the state to be chief economic actor would retain state ownership to reshape the ways such large firms conduct business through shareholder influence. A president who wants to use markets for political gain would change the competitive landscape by providing incentives to government-owned firms to implement desired policies. We are moving away, not toward, such outcomes.

As political risk advisors to the investment community, we strongly believe that government actions matter to markets, and, as a result, we are often well-placed to hear investor gripes about perceptions of Obama's interventions. Since investors price their beliefs, the market should provide evidence of whether such investors really fear ongoing government intervention. Since state capitalism and socialism would both imply the transfer of private resources from existing owners to either the state or to the less-well-off, the stock market would be demonstrating concern, rather than the current recovery, if investors really felt this were likely. In fact, on financial sector intervention specifically, the market now seems more worried that credit raters are serious about downgrading the largest U.S. banks due to removal of government support than that the government plans to extend its reach.

We'd be remiss to not address the crown jewel of the Obama-as-socialist argument: health-care reform.

Obama certainly used crisis politics to reshape a massive slice of the U.S. economy. The bill he passed significantly increases government spending by extending an already robust U.S. social safety net to include more individuals. This could cost everyone else more over time in higher taxes. But along the way, Obama abandoned any support for the "public option" that seemed to be the litmus test for real government intervention. By fighting a months-long polarizing slog to pass a bill that moves the U.S. no closer to a truly socialized health-care system, Obama has actually done much to prevent America from getting there in coming decades, since such a battle will not again be fought for many, many years. While Obama's detractors claim that he has socialized health-care, the Dow Jones U.S. Health Care Index remains higher than it was in many years of the Bush administration, in part due to a recognition that there are significant opportunities for publicly traded health-care firms going forward.

Obama is neither socialist nor state capitalist.

He is simply a typical Democratic Party president who, as a function of crisis and control of both houses of Congress, has been able to pass more of his social agenda than his recent predecessors. But state capitalism does loom as a real risk to the U.S. way of life.

The real danger is that while too much time is spent on straw-man arguments about our president, too little time is spent worrying about the dramatic implications for U.S. competitiveness from a marked increase of state intervention abroad.

The rise of state capitalism in oil-rich countries implies growth of national oil companies that will make it easier for world politics to determine how much U.S. firms pay for the lubricant of economic growth. The rise of state-owned enterprises and national champions in China and elsewhere means that U.S. firms face new competitors with strong, state-funded advantages. And the rise of SWFs means that not only are U.S. financial firms and investors facing state-funded competitors in the open market, but that U.S. firms risk having foreign governments influencing their decision-making for economic or political reasons if SWFs buy large ownership stakes in them.

If these trends in state capitalism prove to be paths to prosperity for their governments, other countries will follow suit with similar policies. Indeed, the Chinese are quick to point out the resilience of their model as the rest of the world reels from a "global" financial crisis that barely impacted the Middle Kingdom. China's sphere of influence will grow if other countries imitate it.

The U.S. system of free market capitalism is coming under increasing fire. But the threat is from state capitalists abroad, not politicians in Washington.

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