Monthly Archives: August 2010

FT column: It falls to the Fed to fuel recovery

My latest column is on the Federal Reserve and the US economy

The US recovery is stalling. As a matter of economics the balance of risks strongly favours further fiscal and monetary stimulus. Politics appears to rule out the first, and a divided Federal Reserve is hesitating over the second. America’s leaders are letting the country down.

Doubtless it marks me out as a member of the uncomprehending godless elite, but I find the popularity of Glenn Beck very hard to understand. Sarah Palin’s popularity, I think I do understand. However much of an illusion it may be — all politicians deal in illusions — she projects an appealing, proud, self-sufficient ordinariness that makes her a credible spokesman for many Americans. Beck sets himself up not as a spokesman so much as an inspirational teacher and guide, blackboard and all. There he stands, with the answer to everything, gravely propounding his theories of life, the universe and everything that surrounds it. Wrapped up in his own psychodrama, his self-regard seems limitless.

He strikes me as a huckster drunk on his own pitch, a true believer in his own cult, ready to hurtle off the rails at any moment — and all of this seems obvious. Yet he, not Palin, was very much the star of the rally in DC on Saturday. They love the guy.

The Fed chairman’s eagerly awaited speech at Jackson Hole was, as Gavyn Davies says, no more than a holding operation. I would have been astonished if he had outright promised more QE or other steps: this was not the occasion. Even so, the neutral tone was a bit more neutral — a bit less friendly to renewed action — than I had expected. He said that the current risk of falling into deflation is not “significant”, partly because the public trusts him and the Fed to get it right. That seems just a little complacent. Of course, he says he is attentive and ready to change his mind, but still…

[T]he FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.

Noted. Elsewhere Bernanke says that monetary conditions in the US are already loose.

To provide further support for the economic recovery while maintaining price stability, the Fed has also taken extraordinary measures to ease monetary and financial conditions… The decision [to resist passive tightening, by maintaining the size of the Fed's balance sheet despite maturing MBS] also underscored the Committee’s intent to maintain accommodative financial conditions as needed to support the recovery. We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial.

How easy is policy, really? Scott Sumner is worth reading on this.

The current issue of Reason features a symposium on the question, “Where do libertarians belong?” Not in partnership with today’s Republican party, argues Brink Lindsey. The alliance of conservatives and libertarians has worked badly, he says, despite the tea party and its apparent fondness for libertarian themes.

FT column: A missed chance to quell the fanatics

My latest column is on Barack Obama and US politics

How much trouble Barack Obama and the Democratic party are in as the US heads towards November’s elections is debatable, but few would deny that the past week has set their prospects back. The president may have hoped to calm the controversy over the proposed mosque and Islamic cultural centre near Ground Zero in Manhattan, but he inflamed it. His supporters have divided on the issue, with many accusing the larger part of the electorate of bigotry. This is not good.

From the left (broadly speaking) Obama is being criticised for spineless vacillation in walking back from his first statement on the mosque. From the right (broadly speaking) he is attacked for being out of touch with the American public. First he affirmed the centrality of religious freedom and the Constitution’s protection of it — which was widely assumed to mean he wanted the mosque to be built. Next day, he said he would offer no opinion on the wisdom, as opposed to the legality, of building the mosque. The muddled message exposed him to attack from both sides. Those who extravagantly praised his first statement, going beyond what he said and reading it into it what they wanted to see, were left looking stupid.

It was incompetent politics, all right, yet the position Obama stated — including the walk-back, not despite it — strikes me as both principled and reasonable. The Constitution protects the core value of religious freedom, and the mosque builders are perfectly within their rights to go ahead. Whether it is wise to go ahead in the face of so much public unease is a separate issue.

FT column: Might Hillary be a better co-pilot?

My latest column is on US politics

Hillary Clinton’s future has been a subject of renewed interest in Washington in the past week or two. Some are advising Barack Obama to ditch Joe Biden as vice-president and put the secretary of state on the ticket for the presidential election in 2012. Commentators are enchanted. Issues of substance and tactics are being pored over delightedly.

Obama needs to abandon the temperament of a conciliator, and turn more aggressively on an opposition out to destroy him, advises Robert Kuttner. But don’t misunderstand all the griping from the left.

[F]or the most part, liberals are criticizing our president out of tough love. We dearly want him to succeed.

Good to have that confirmed.

Jeffrey Goldberg’s article for The Atlantic, “The Point of No Return”, is a remarkable piece of journalism. It analyses in great depth whether Israel will soon attack Iran’s nuclear facilities, and puts the chances at better than 50-50. I think the piece is an amazing intellectual coup. It takes an issue of enormous importance, a decision on which the history of our times could pivot, which has been on people’s minds for ages–and through prodigious reporting and force of analysis makes everything that has been written on the subject up to now seem completely inadequate. I can’t think of anything else quite like it.

It is possible that at some point in the next 12 months, the imposition of devastating economic sanctions on the Islamic Republic of Iran will persuade its leaders to cease their pursuit of nuclear weapons. It is also possible that Iran’s reform-minded Green Movement will somehow replace the mullah-led regime, or at least discover the means to temper the regime’s ideological extremism. It is possible, as well, that “foiling operations” conducted by the intelligence agencies of Israel, the United States, Great Britain, and other Western powers—programs designed to subvert the Iranian nuclear effort through sabotage and, on occasion, the carefully engineered disappearances of nuclear scientists—will have hindered Iran’s progress in some significant way. It is also possible that President Obama, who has said on more than a few occasions that he finds the prospect of a nuclear Iran “unacceptable,” will order a military strike against the country’s main weapons and uranium-enrichment facilities.

But none of these things—least of all the notion that Barack Obama, for whom initiating new wars in the Middle East is not a foreign-policy goal, will soon order the American military into action against Iran—seems, at this moment, terribly likely. What is more likely, then, is that one day next spring, the Israeli national-security adviser, Uzi Arad, and the Israeli defense minister, Ehud Barak, will simultaneously telephone their counterparts at the White House and the Pentagon, to inform them that their prime minister, Benjamin Netanyahu, has just ordered roughly one hundred F-15Es, F-16Is, F-16Cs, and other aircraft of the Israeli air force to fly east toward Iran—possibly by crossing Saudi Arabia, possibly by threading the border between Syria and Turkey, and possibly by traveling directly through Iraq’s airspace, though it is crowded with American aircraft.

Putting aside what Israel will do, what should it do — and (a separate issue) what should the US want it to do? Goldberg goes into these questions very carefully and says he is deeply ambivalent. After reading the piece, you will know this is not because he has failed to think things through. There are no good answers.

It is no help to point this out, but one wonders about what might have been. As Goldberg relates, Israel’s calculations, and Iran’s, would be quite different if the United States itself could credibly threaten to attack unless Iran abandons its weapons programme. But even if America chose to make that threat, could it make it credible short of actually carrying it out? If not for Iraq, the answer might have been yes. If that war had never been fought, if it had been prosecuted successfully, if the allegation that Iraq was developing WMDs had not been exploded (thus denying legitimacy to the venture, successful or otherwise), then a US threat to use force in Iran’s case might have been credible enough to work. Because the Iraq war turned out so badly, because the rationale offered for it turned out to be a mistake, because the US appetite for more of the same is zero, Iran may very well calculate that any US threat will be a bluff, and will call it.

When you have finished reading Goldberg’s piece–but, do yourself a favour, not before–also take a look at the articles discussing it by Fred Kaplan on Slate and by Flynt and Hillary Leverett at Foreign Policy.

I admire this level-headed piece by the IMF’s Olivier Blanchard and Carlo Cottarelli. The debate on the need for further fiscal stimulus in the US and elsewhere has indeed, as they argue, become needlessly ideological and extreme. The choice is not about stimulus or austerity. It is about how far to front-load the fiscal adjustment, and how far to persist with it when circumstances permit.

[S]ome clearly prefer more front-loaded consolidation, others less. Front-loaders point to the need to maintain credible fiscal policy, which is hard to gain and easy to lose. They note that market perceptions of fiscal health can shift in a heartbeat, so countries must move pre-emptively.

Back-loaders respond that, if hasty adjustment derails growth, credibility will also be a casualty. To use Larry Summers’ apt expression, recent growth numbers show that advanced economies have not yet achieved escape velocity. Withdrawing fiscal accommodation too early could therefore jeopardise the recovery, especially when – measures announced this week by the Fed notwithstanding – the monetary policy arsenal has been effectively drained. When private demand picks up, they argue, consolidation will be easier and safer.

Fortunately, there is a path through these thorns. Front-loading can be avoided if moderate adjustment today comes with further savings in the future. And such options are available, desirable and, in many cases, more politically feasible than front-loaded spending cuts.

Yes. Blanchard and Cottarelli also underline another important point.

Today’s debt problems, therefore, result not from how fiscal policy was managed during the crisis, but rather from how it was mismanaged before the crisis. Advanced countries entered the crisis with some of the highest public debt ratios ever reached in the absence of a major war. A basic fiscal policy lesson of sowing in good times and reaping in bad times was ignored.

This matters not because one wants to know who to blame for what has happened–although it is as well to keep that in mind. It matters because, once this crisis is behind us, it will be essential to prepare for the next. Imagine going into the next Great Recession with levels of public debt at anything like currently projected long-term levels.

It will be a mistake to move too soon. And I don’t know if I agree with the article when it calls for “an initial downpayment”, at least so far as the US is concerned: the US has room for additional short-term stimulus. But refusing even to discuss longer-term consolidation until the economy is back on its feet is an even bigger mistake.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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