The UK Chancellor of the Exchequer, Alistair Darling, is fighting the good fight on policy towards the EU’s agricultural sector. Effectively, he has called for the abolition of the Common Agricultural Policy, the EU’s Welfare State for Farmers - a costly, distortionary, inefficient and inequitable arrangement overdue for the scrap heap. (more…)

In a recent Column for the Financial Times, Larry Summers has, once again, combined truth with half-truth and a fair measure of obfuscation, mixing of issues and blurring of key distinctions. What Larry says and writes matters, because he is an influential voice in the Democratic party on economic issues. Both candidates for the Democratic presidential nomination appear to have taken the King’s shilling and are about to set sail on the good ship Protectionism. For the sake of the US economy, its workers and the rest of us, they should think again. (more…)

I’m talking about the Fed. The Fed is highly likely to cut, later today, the target for the Federal Funds rate by somewhere between 75 basis points and 100 basis points, bringing it down to 2.25 percent or 2.00 percent. How do I know this? I look at what the Federal funds futures market has priced in. On 17 March 2008, the 30 day Fed Funds futures contract with expiration date April 8, 2008, traded at 98.055, implying a Federal Funds rate of 1.945 percent after today’s meeting.

The fact that the market expects the Fed to change rates by a given amount and that the Fed validates that expectation does not tell us whether the markets or the Fed are the tail or the dog, or indeed whether either one is either. (more…)

If Jagdish Bhagwati’s purpose in writing his FT column on March 3, Obama’s free-trade credentials top Clinton’s, was to cheer up those who support multilateral free trade and had become dismayed at the avalanche of protectionist drivel from both the Obama and the Clinton camps, he failed.

Professor Bhagwati writes: “… no Democratic candidate during the primaries can be anything but a protectionist. The only question is: of the two, which is likely to be friendlier as president to the cause of multilateral free trade? Careful scrutiny suggests that the odds are in favour of Mr Obama….” (more…)

Anne Sibert and I have just written a blog for Vox, the economic policy blog of the London-based Centre for Economic Policy Research, criticising the (mostly) dangerous or (occasionally) just plain silly protectionism of Barack Obama. The link is here .

Today the National Bank of Hungary (the country’s central bank) abandoned the currency’s ERM-style trading band (15 percentage points fluctuation margins in either direction from a central parity of 282.36 forints to the euro). At the end of the trading day, the market rate was 263,57; the abandonment of the band was from the ‘strong’ side of the band. It was meant to give the forint greater scope for appreciation than would have been possible with the band in place (the band would have ‘capped’ the forint at 240 to the euro).

The NBH was right to can the band. An exchange rate target zone or exchange rate band is the worst exchange rate regime designed by man or dog. It combines the major weaknesses of any fixed or managed exchange rate regime - lack of flexibility combined with, ultimately, lack of commitment - with those of a market-determined exchange rate regime - the exposure of producers, consumers and portfolio holders to large and sudden swings in the nominal and real exchange rate, often caused by nothing more fundamental than one of the many manifestations of foreign exchange market psychosis.

For reasons understood only by the authors of the Treaty of Maastricht (and quite possibly not even by them), membership of the ERM for a period of 2 years preceding the examination date for full (stage 3) membership in the EMU, is a prerequisite for becoming a member of the Euroclub. So for countries willing to join and with some hope of meeting all the other criteria as well (inflation, interest rate, public debt, public deficit, central bank independence, good table manners etc.) entering the ERM makes instrumental sense. The 2-year ERM purgatory remains at best, an exercise in futility and an investment without any prospect of a positive return; at worst it exposes a candidate Euroclubber to unnecessary risk of financial and macroeconomic instability.

Clearly, the Hungarian authorities have given up on joining the eurozone for the time being. Quite wisely too. They have serious economic problems on their hands; not meeting the criteria for eurozone membership is the least of these. Growth is the lowest of any CEE country (1.3% for real GDP in 2007; maybe around 1.5 in 2008 - with a global economy that is slowing down and an effective real exchange rate that may be appreciating in the short term). Inflation is high, starting off January 2008 at 7.1% (on a year earlier). Private sector unit labour costs rose by 8.0 percent in 2007. It will have to be a lot less than that if domestically generated inflation is going to be anywhere near the Bank’s target. (more…)

After a 49-year rule, Fidel Castro has decided to give up the presidency of Cuba, although he will continue to lurk in the background exercising influence as and when his failing health permits, through his position as first secretary of the ruling Communist Party. The most likely successor as president is his younger brother Raúl Castro, essentially Fidel without the charisma and without the beard. He represents perhaps a minor improvement in administrative competence, but no change in anything of substance.

Even during the late sixties-early seventies, when almost every western male is his late teens or early twenties sported a poster of Che and/or Fidel on his wall, that particular cultural bacillus passed me by. I was fortunate that my father took the time to explain to me that this duo stood for a repressive, totalitarian regime. My father spent his entire life fighting totalitarian regimes at home and abroad. This started in earnest when he was 18 and the Nazis rolled into the Netherlands, but like much of his vintage of European and American democratic socialists, his political education began with the Spanish civil war. After World War II he was, as a Dutch trade union official for the Metal Workers, then as Secretary General first of the European Trade Union Confederation and later of the International Confederation of Free Trade Unions, involved in resistance to communist dictators in central and eastern Europe and in China, fascist dictators in Spain and Portugal, fascist Colonels in Greece, military dictatorships throughout South America and in Indonesia, white racist regimes in Rhodesia and South Africa, black dictatorships throughout Sub-Saharan Africa, repressive regimes in North Africa, the Middle East and elsewhere in Asia.

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A while ago I argued in this blog that the US might benefit from a recession, because it was highly unlikely that the fundamental adjustment required in the US economy – a substantial increase in the national saving rate – is achievable without a period of growth below potential. Others have made similar points, and not just the usual European suspects, with post-colonial chips on their shoulders and an excess of Schadenfreude whenever the US trips over a banana peel. In recent contributions to the FT, Chrystia Freeland (Canadian, I believe) and Ricardo Hausmann (Venezuelan, when last I met him) have also made the point that the US needs, or would benefit from, an early serious slowdown in economic activity/recession. As the proud owner of both a US and a UK passport (and the former owner of a Dutch passport), my motives are, of course, beyond suspicion.

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In a Senate Finance Committee hearing held Tuesday, January 22, Jim Bunning, R.-Ky., exploded after Congressional Budget Office director Peter Orszag noted that "Chairman Bernanke and many economists" believe that the risk of a recession in 2008 "is substantially elevated relative to normal conditions." Bunning bellowed: “Please don’t bring Chairman Bernanke into this, because he’s been wrong so many times … Chairman Bernanke and his predecessor put the U.S. economy in this situation by their monetary policy. And now they are getting into the business, the Federal Reserve, into advising the Congress on fiscal policy, which is none of their darn business. So, I get a little upset sometimes when our Federal Reserve gets into our job, which is to try to stimulate the economy if we think it’s in dire straits.”

Senator Bunning has a point.  To borrow a felicitous phrase of Alan Blinder: central bankers should stick to their knitting.

Chairman Bernanke has played a prominent, high profile public role in gathering support for a fiscal stimulus package to counteract the US slowdown/recession.  On Thursday, January 17, for instance, in testimony to the House Budget Committee, he backed calls for a fiscal package to stimulate economy, but stressed such a plan should be "explicitly temporary." … "Any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit," He went on to say that the nation faced daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors, and that a fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult. "Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone," .

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This post is a slightly expanded version of a comment of mine on Larry Summers’ op-ed article in the FT on January 6, 2008 "Why America Must Have a Fiscal Stimulus".

Larry Summers wants a tax cut for the US of between $50 billion and $ 75billion. Robert Rubin, the former US Treasury Secretary, wants a fiscal stimulus worth $100 billion.  Who bids more?  And on top of this, the chairman of the Federal Reserve Board has declared (using either the royal ‘we’ or speaking for the FOMC): “We stand ready to take substantive additional action as needed to support growth and to provide additional insurance against downside risks.”

I consider further policies to stimulate demand in the US economy undesirable.  The US needs a fall in domestic absorption (the sum of private consumption, private investment and government spending on goods and services, or ‘exhaustive’ public spending) to support a lasting depreciation of the US real exchange rate.  Such an increase in the relative price of traded to non-traded goods is in turn required to reduce the US trade deficit to sustainable levels, say by a permanent three percentage points of GDP.

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