The barbarians are again at the gates. The announcement this week of the largest ever private equity buy-out of a public company – the $45bn takeover of TXU, one of the largest utilities in the US, by Kohlberg Kravis Roberts and Texas Pacific Group – confirms the trend. To its defenders, private equity makes companies more efficient. To its attackers, its practitioners are financial manipulators and asset-strippers. So who is right? An obvious answer is that private equity is a growing activity in which willing sellers meet willing buyers. If it prospers, it must be profitable. If it is profitable, it should also be adding value. Where private equity finances start-ups or small and medium-sized companies, few would question this argument. The taking private of well-known public companies with huge numbers of employees is a different matter. Why, though, should the benefits of such deals be doubted? Do they not also fall under the broad category of beneficial transactions? To this there are three answers. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.
By Lawrence Summers A rising Asian power has emerged as an export powerhouse and enjoys rapid, export-led growth fuelled by extraordinarily high savings and investment rates. Its technological capacity is upgraded at prodigious rates and its businesses threaten an ever greater swathe of industry in Europe and the US. Its high level of central bank reserves and burgeoning current account surplus lead to claims that its exchange rate is being unfairly manipulated or, at a minimum, should be guided upwards. Its financial system is bank-centric, heavily regulated in ways that favour domestic institutions and has close ties to government and industry. Rapid productivity growth holds down product prices but asset price inflation is rampant. US congressional leaders demand radical action to contain the economic threat. Delegations of senior US economic officials engage in “dialogue” with their counterparts about the many aspects of the country’s economic policies that promote imbalances, warning of the congressional demons who stand ready to act if “results” are not achieved quickly. All of this describes what is happening in and with China today. It also describes the Japanese economy in the late 1980s and early 1990s before its lost decade of deflation and considerable deterioration in its international relations. While there are obvious differences, notably China’s much lower level of development, the similarities are striking enough to invite an effort to draw some lessons for China and its partners from the earlier Japanese experience. The definitive history of Japan’s dismal decade has yet to be written. But almost all knowledgable observers would agree that significant elements included the bursting of the stock market and land bubbles, the resulting problems in the financial system, the collapse of aggregate demand as banks stopped extending credit and the difficulty of moving from export-led growth to domestic demand-led growth once consumer and business confidence had been lost.
The Russian bear is awake. But this is not a Russia restored to past greatness. It is caught in a failed transition. So long as this continues, Russia will disturb its neighbours and disappoint its citizens. Is there a chance of something better? Yes, but it is a small one. Vladimir Putin expressed the attitudes of the new Russia, at once assertive and aggrieved, at the 43rd Munich conference on security policy this month. “I think it is obvious,” the president stated, “that Nato expansion does not have any relation with the modernisation of the alliance itself or with ensuring security in Europe. On the contrary, it represents a serious provocation that reduces the level of mutual trust. And we have the right to ask: against whom is this expansion intended?” Mr Putin knows the answer to this question, but does not address a deeper one, because the answer would be too painful: why do Russia’s neighbours trust it so little? For it is they who wish to join Nato, not Nato that has forced itself upon them. This is because his country brought oppression and mass murder upon them, as it is doing now in Chechnya. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.
Is globalisation a leading cause of rising inequality in high-income countries? The outcome of the debate on this question may determine whether the US will remain open to trade. If policymakers do not craft an imaginative response, protection against imports may be the outcome, regardless of its (non-existent) merits. Ben Bernanke, chairman of the US Federal Reserve, laid out the issues in a thought-provoking speech last week.* He embedded his analysis in three principles: “That economic opportunity should be as widely distributed and as equal as possible; that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy; and that people should receive some insurance against the most adverse economic outcomes, especially those arising from events largely outside the person’s control.” The question is how these principles apply today. It has become more compelling as inequality has risen. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.
In the public at large, including sizeable sections of the business community, a new consensus on climate change has emerged: it is happening; it is important; and something needs to be done. The publication last week of the latest assessment from the intergovernmental panel on climate change and discussions at this year’s annual meeting of the World Economic Forum in Davos made the growing agreement on all these points plain.
Yet there is one group among whom dissent reigns: economists. It was to them, above all, that Sir Nicholas Stern’s review on the Economics of Climate Change was addressed. It has failed to persuade. So much the worse for economists, the environmentally minded will declare.