Monthly Archives: January 2012

Last week’s decision by the Federal Reserve to provide a quantitative definition of price stability and the publication of the 17 Federal Open Market Committee members’ expectations of the Fed funds rate over the next few years aims at improving transparency and accountability of the central bank. It also raises several questions.

The first relates to the time horizon over which the Fed is supposed to achieve price stability, namely the long-run. This differs from most other central banks in advanced economies, where price stability is targeted over a horizon of two to three years. The reason for focusing on the medium term is that inflation forecasts over a longer period are not very reliable. Price movements 10 years from now will depend on factors that cannot be foreseen today and in any case are hardly affected by today’s policy decisions.

Monetary policy produces its effects with lags of one to three years. This is the period over which the central bank should be held accountable. Focusing over this time horizon also helps market participants. For instance, it’s not too difficult to anticipate a monetary policy tightening if a central bank publishes forecasts that show inflation rising above the stated objective for the next two to three years.

But if the objective of price stability is defined over the longer term, communication becomes more complex. In particular, the link between the inflation forecasts and the policy decision is unclear. What should market participants derive from a published inflation forecast above the two per cent target in the long run (but not necessarily over the next two years)? Should they expect a tightening to take place? And when? The long run is not a “policy-relevant” time horizon and thus has little value for those attempting to understand the central bank’s next moves.

The second question relates to the fact that the interest rate expectations formulated by the FOMC members are all conditional on the state of the US economy. If conditions change over time, the members will revise their forecasts at the next meeting. But for the market to understand this process, and to be able to continiously update its views, it needs to have some idea of the forecasting model used by each of the members. Without this, the task of Fed-watchers will become much more complicated. The suspicion may arise that the interest rate forecasts are ultimately dictated by the members’ short- term policy preferences, rather by than their ability to predict prices over the long-term.

Finally, while the concept of a conditional interest rate forecast is understood by market participants, it may not be by the public and politicians. This could lead to misunderstandings and recriminations. How will people react if, after having taken a decision (for example, take up a mortgage for a new house) on the basis of the Fed’s published expectation of unchanged interest rates until 2014, they find out that interest rates might rise earlier because the conditions underlying the central bank’s forecast have changed. Won’t they, and their elected representatives, blame the Fed for having induced them to take decisions that turned out to be more costly than expected? How easy would it be for the Fed to explain that the earlier interest rate forecast was conditional on assumptions that did not materialise and that people should have taken the forecast with more caution?

To be effective, central bank communication needs to be well understood not only by sophisticated market participants but also by the public. As they are currently designed, the new tools might turn out to be too complex, and risk creating confusion, for both groups. This could be exploited by those, in particular in Congress, who are looking for new excuses to undermine the independence of the Fed. This risk should not be underestimated.

The writer is a former member of the executive board of the European Central Bank and currently visiting scholar at Harvard’s Weatherhead Centre for International Affairs

Diplomats should have permanent cricks in their necks because most international crises are managed through the lens of the last one roughly like it. So the failure of the international community to stand up to the genocide in Rwanda was heavily influenced by the humiliation and fatalities an American UN force had suffered in Somalia that made Bill Clinton wary of intervention in distant African conflicts. Today, Syria is seen through the rear view mirror of Libya.

On the one side, Russia and China speak for those who worry that UN Security Council permission for a humanitarian intervention will be used as a licence for naked support for regime change, which is what they consider happened in Libya. On the other, the UK, France and the US are equally wary of what they see as the success of the Libyan operation not becoming a precedent for serial intervention in the political upheavals of the Arab spring. So, they too are resolute bystanders, even if they wish to see much tougher words, if not actions, from the Security Council condemning the actions of the Assad regime.

That has left the Arab League carrying, or rather, fumbling the ball. Its observer mission is now, however, stalled and the ball has been passed by Qatar, the current Arab League chair, to the UN. A hospital pass if ever there was one.

There is an urgent need for a strategy in New York that promotes President Bashar al-Assad’s early departure and a transition, perhaps via his vice-president, to a broader government and from there to elections. At the same time, there needs to be unified international pressure on the regime to stop the killing and for both sides to respect a monitored ceasefire. Now that the fighting has reached Damascus, this is becoming even more urgent. This is all broadly consistent with the Arab League’s own plan.

There is also a need for an organised system of humanitarian temporary sanctuaries for civilians fleeing the fighting. Turkey and Iraq remain the most likely destinations of any such exoduses and they should be supported in providing this haven just as the Syrian authorities need to be pressed to allow safe exit.

Establishing humanitarian protection and a plan for political transition, without the big stick of threatened military action to back it, might seem a tall order for a divided Security Council. Yet it is better than the hollow threat of intervention that offers a domestic propaganda coup for the Assad regime, which is adept at playing on nationalist conspiracy theories. If intervention is to come it will need to be a Muslim-led UN effort to protect lives with minimal advance notice because even this will rally the regime’s supporters. While there might be a supporting role for Nato logistics in such an operation, the Iraq experience has made actual western troops on the ground a non-starter. A broken Syria would be as hard for the west to put together again as Iraq was and without any of the allegedly compelling rationale to even try.

However, if the two major dynamics of the Syrian crisis are respected, there could still be a happy conclusion. The first is that Syria’s religious complexity, where a small Alawite minority has been reluctantly trusted by other minorities as well the Damascus urban middle class, to hold in check a Sunni majority that comprises three quarters of the population, needs to be factored into a solution. For these minorities, like for Copts in Egypt, an unpleasant regime at least offered stability and security. Promising an orderly transition that stems rising violence through dialogue and offers long-term protection of minority rights needs to be the key platform for the opposition. Then the Syrian National Council, the main umbrella opposition, becomes the guarantor of that critical social glue of stability and security and a violent regime’s enemy.

For the Security Council itself the second narrative is reflected in lessons not from Libya but from Iraq and Afghanistan. Holding together these complex and fragile countries was made much more complicated by the US and its allies initially ignoring the neighbours who had their own interests and clients inside both countries. Excluded from the peacemaking process, countries such as Iran and Pakistan became disruptive forces for fragmentation and partition, rather than finding common cause in maintaining stable neighbours.

This time the Arab League has led – even if imperfectly. Qatar, Saudi Arabia and Egypt have been the key architects. Impatient western members of the Security Council need to go on working with them because these countries, together with Syrians themselves, hold the key to ensuring that chaos does not follow change.

The writer is former UN deputy secretary-general and UK minister of state. He is chairman of global affairs at FTI Consulting and author of ‘The Unfinished Global Revolution’

The ancient Greeks thought that “those whom the gods wish to destroy, they first make mad.”  For them, the surest way to destroy a person is to fill him or her with success, power, prosperity and fame. Excessive success induces inordinate self-confidence, which inevitably leads them to make disastrous mistakes and to failure. Hubris, they called it.

Many centuries later we got the Brics: poor countries whose economic and geopolitical success and influence – and hubris – is growing quickly. And its not just these countries. HSBC, reckons that if current trends continue, by 2050 the 100 largest economies in the world will include (in addition to the Brics and traditional leaders such as the US, Germany and Japan) countries such as the Philippines (the 16th largest), Peru, Bangladesh and Colombia. Of course, the critical assumption is “if current trends continue”.

Here is where it is worth mentioning the meeting hosted by the World Economic Forum in Davos. After many years of attending these meetings, I have become a great believer in the existence – and the power – of hubris. I do not know if it is the gods or human nature, but success and failure are too frequently inextricably linked and the Davos meeting offers an extraordinary laboratory to observe the phenomenon.

I remember vividly one of the most exuberant parties in Davos,  hosted in the mid-1990s by the Mexican government. The host and star celebrity was then-president Carlos Salinas de Gortari. Shortly thereafter, the country - and its president – fell on hard times. I also remember Kenneth Lay, explaining to an enthralled audience that his business model, which generated $100bn in revenues in 2000, was the future. Soon after, his company Enron crashed. Mr Lay, if he had not passed away, would surely be in jail, joining several of his former colleagues. I also witnessed president Carlos Menem of Argentina describing the wonders of his country pre-debacle, and heard the triumphant narrative of the tycoons investing unjustifiable sums in internet companies with scant revenues and no profits. The acclaimed merger of the giant “old” Time Warner with the ”new” AOL was a prime example of this. The results were catastrophic.

Another shining star very visible in Davos was Jean-Marie Messier, who tried to convert Compagnie General des Eux, a water utility and garbage collection company, into a media conglomerate: VivendiUniversal. He entitled his autobiography Messier. In French this reads as Jean Marie Messier, myself, master of the world. I saw him at the 2002 WEF meeting in New York offering an fancy multimedia presentation of his company. A few months later VivendiUniversal announced the largest losses in French corporate history and Mr Messier was fired. I have not seen him at Davos since.

I also attended the presentations of the finance ministers of Thailand, Indonesia, Malaysia and South Korea right before the Asian economic crisis erased them from the lists of the most sought after speakers. Davos offers many more of these cases of rapid rises and dramatic falls.

This does not mean that all who go to Davos are success-crazed characters. From Nelson Mandela to Elie Wiesel, shy researchers working on the frontiers of knowledge about cancer, brain and genetics, or activists who risk their lives confronting despots and protecting the innocent, it is easy to find admirable people who are successful but far from arrogant. But it is also all too easy to trip over characters clearly possessed by hubris.

What does all this have to do with the Brics and other poor countries that have become fashionable? You can perhaps imagine. As I was recently talking in Davos with Turks, Brazilians, Indians, Indonesians, Russians and Chinese, the symptoms of the many fallen celebrities who no longer stalk the corridors of this Swiss mountain town seemed just below the surface. Are the gods plotting to put these new arrogant characters in their place? Could it be that a crash is in the future of these emerging countries? Could this be one of the most important warnings coming from this year’s meeting on the Alps?

The writer is a senior associate in international economics at the Carnegie Endowment

As world leaders meet in Davos to discuss “The Great Transformation: Shaping New Models”, a central question is how to grapple with the rise of regionalism – a consequence of a system of global governance that increasingly seems to have fallen short of expectations.

The effectiveness of many global institutions is under severe strain, as they remain largely unchanged from their postwar forms. Newer institutions have not filled the gap, because, since its largely-successful 2009 response to the global financial crisis, the G20 has been increasingly ineffectual as well.

The dearth of truly effective global institutions is consistent with a broader geopolitical trend, one in which the global agenda is increasingly influenced as much on a regional level as on a global one. With general agreement that the unbridled pursuit of individual national interests would produce suboptimal results, regionalism, while far from ideal, is emerging as a stopgap to the shortage of effective global decision-making.

But while the trend towards regionalism is real, many of these newer alliances, both formal and informal, remain nascent, and are at best, marginally effective. Many serve as little more than high-level discussion groups with rudimentary governance structures and skeletal institutions. They are seemingly unable to tackle the common challenges facing their regions. They also suffer from hang-ups stemming from bilateral differences, in particular questions of financing commitments and support.

Despite these shortcomings regional alliances continue to gain traction. Look at the increasingly assertive role of the Arab League in both Libya and Syria, the emphasis placed by the US on the Trans-Pacific Partnership and continuing efforts to shore up regional financing arrangements, such as the Chiang Mai Initiative in Asia.

The challenge is to manage the rise of regionalism in a way that helps us solve systemic and far reaching global problems. Seamless co-ordination between and among regional organisations and global ones is by no means assured. This presents a good opportunity to craft these evolving regional alliances and institutions to boost their ability to co-ordinate with one another, as well as with existing global institutions.

Europe, of course, remains the most developed example of institutional regionalism. To date, it has been the only area in the world where countries have successfully pooled sovereignty on the principle that all countries are (more or less) equal and they should all follow collectively agreed rules and work through supranational institutions. Whether and how Europe emerges from its current crisis is crucial to the future of how other regional organisations develop.

Even with its influence in decline, the EU model of regional co-operation is still the most highly developed in the world. The evolution of its governance structures, rules, institutions and power dynamics that emerge from the current crisis will be looked upon with great interest by those contemplating regional alliances of their own. While the future shape of the EU is currently more uncertain than it has been for decades, there is already increasing doubt that the EU will remain as concerned with equality for smaller countries, which may well find themselves less influential.

We have already seen the de facto creation of a smaller steering group – the Frankfurt Group – which allows stronger and more influential leaders to discuss issues in a less formal setting than the EU or eurozone treaties prescribe. While smaller countries may not like this, this more realistic approach to decision-making could, in the end, allow the EU to emerge stronger and with greater influence.

As for global institutions themselves, they find themselves increasingly integrated with these regional organisations – if not trailing behind them. For example, while the involvement of the International Monetary Fund in Portugal and Ireland was, and remains, crucial, its role has been as part of a ‘troika’, where its partners are regional actors – the European Commission and the European Central Bank. Similarly, in Libya, the UN Security Council played an important role but it was through the Arab League and the ad hoc alliance of the British, French and Americans via Nato, that concerted action was brought to bear.

The problem is that while demands on global institutions have increased, their ability to respond effectively and quickly has stagnated and even weakened. This is due, in part, to governance structures that lack legitimacy and insufficient support from today’s great powers, namely the US and China.

The G20, today’s premier “global” institution, is prone to all of the above, as well as a host of unique factors that make it a less than ideal organisation to confront today’s most pressing problems.

Its agenda has been expanded repeatedly, undermining its ability to focus and address any individual issue. Its membership is not comprehensive or representative, thereby calling into question its legitimacy. It lacks coherence, given that there is no consensus on fundamental political and economic values. It requires unanimity on every issue, thereby restricting its ability to make difficult decisions. It also lacks resources, as it has no permanent staff and often calls other institutions to undertake efforts to support its commitments.

A world where regional groupings and organisations address regional, and sometimes wider issues, is clearly second-best to a world of effective global governance. But it is nevertheless preferable to raw nationalism and reflects the broader diffusion of international power away from a pure “might-makes-right” system. The trick for global leaders is to recognise this new reality and try to ensure that the emerging institutions and alliances can work together. Global governance should not be allowed to go the way of the electric outlet with multiple, independent and inconsistent standards that vary region by region.

This article is co-authored by Ian Bremmer, president of Eurasia Group and vice chairman of the World Economic Forum’s geopolitical risk council, and Douglas Rediker, former member of the executive board of the IMF and chairman of the WEF geopolitical risk council.  The full report is available on the WEF website.

Policy experimentation continues unabated in the US with the Federal Reserve launching on Wednesday a new initiative to influence market valuations and, through this, the outlook for the country’s economy. The Fed hopes to use greater transparency to mould expectations in a manner that promotes economic growth and price stability. But this new approach could also create confusion and even greater hesitancy on the part of healthy balance sheets to engage in productive investments.

I suspect the Fed recognises that the policies at its disposal are a long way from ideal. Interest rates are already floored at zero and, according to the latest statement, will likely stay there at least through the end of 2014. Meanwhile, its balance sheet has ballooned to a previously-unthinkable 20 per cent of gross domestic product ($3,000bn) through direct purchases of securities in the market place. It is also “twisting”, as holdings of shorter maturity Treasuries are replaced by longer-dated ones.

This unusual policy activism has helped prevent a damaging deflationary spiral. But it has not been sufficient to restore America on the path of sustainable growth and sufficient job creation, nor will it. As acknowledged by Ben Bernanke, the Fed chairman, the benefits have come with “costs and risks”. Moreover, despite its repeated pleas for fiscal and housing engagement, the Fed has inadvertently provided cover for other government agencies to continue avoiding difficult, but necessary, decisions.

Notwithstanding these shortfalls, the Fed still feels compelled to do even more. For both moral and political reasons, it believes that it cannot be seen to stand on the sideline as the economy struggles with a deeply-entrenched unemployment crisis and political dysfunctionality – even if this means having to use even more imperfect, indirect and, increasingly, unpredictable policy measures.

On Wednesday, the Fed showed how it intends to use “communication” as a much more active tool to inform and influence economic outcomes. But this approach goes well beyond the concept of greater transparency. By publishing members’ individual forecasts – specifically, the annual evolution of the policy rate, the timing of the first hike and a long-term natural rate – the Federal Open Market Committee wants to provide a firmer and steadier outlook to encourage investors, in both physical and financial assets, to commit to long-term decisions.

Few expect this new initiative to have an immediate or durable impact. Beyond 2012, individual FOMC members’ forecasts are quite dispersed, including a 0.25 per cent to 2.75 per cent range for the target Federal Funds rate for end 2014. It will also take time for households, companies and investors to digest yet another set of signals. Moreover, they are much more interested in the likelihood of a new round of Fed purchases, QE3, than forecasts that deal with an unusually uncertain future and are likely to change frequently.

This latest Fed initiative would need to meet two conditions to be effective in the longer-term. We need to see a significant clustering of FOMC member forecasts that could credibly translate into a medium-term vision for policy rates, and greater responsiveness on the part of households, companies and investors to price movements. But even these will not prove sufficient unless the Fed’s continued activism is part of a more comprehensive policy response out of Washington. As yet, there is little to suggest that we are moving quickly enough to meet this requirement.

The writer is the chief executive and co-chief investment officer of Pimco

The longer-term refinancing operations launched by the European Central Bank in December have relieved the liquidity problems of European banks, but not the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger banks’ capital adequacy, half a solution is not enough. It leaves half the eurozone relegated to the status of developing countries that became highly indebted in a foreign currency. Instead of the International Monetary Fund, Germany is acting as the taskmaster imposing fiscal discipline. This will generate tensions that could destroy the European Union.

I have proposed a plan, inspired by Tomasso Padoa-Schioppa, the Italian central banker, that would allow Italy and Spain to refinance their debt by issuing treasury bills at about 1 per cent. It is complicated, but legally and technically sound.

The authorities rejected my plan in favour of the LTRO. The difference between the two schemes is that mine would provide instant relief to Italy and Spain, while the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage but has kept government bonds hovering on the edge of a precipice – though the last few days brought some relief.

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

One obvious objection is that this would reduce the average maturity of Italian and Spanish debt. I argue that, on the contrary, this would be an advantage in current exceptional circumstances, because it would keep governments on a short leash; they could not afford to lose the ECB facility. In Italy, it would deter Silvio Berlusconi from toppling Mario Monti – if he triggered an election he would be punished by voters.

The EFSF would have practically unlimited capacity to insure T-bills because no country could default as long as the scheme is in operation. Nor could a country abuse the privilege: it would be automatically withdrawn and the country’s cost of borrowing would immediately rise.

My proposal meets both the letter and the spirit of the Lisbon Treaty. The task of the ECB is to provide liquidity to the banks, while the EFSF and ESM are designed to absorb solvency risk. The ECB would not be facilitating additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost. Together, the ECB and the EFSF could do what the ECB cannot do on its own: act as a lender of last resort. This would bring temporary relief from a fatal flaw in the design of the euro until member countries can devise a lasting solution.

For the first time in this crisis, the European authorities would undertake an operation with more than sufficient resources. That would come as a positive surprise to the markets and reverse their mood – and markets do have moods; that is what the authorities have to learn.

Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle: structural reform alone will not do it. The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

The writer is chairman of Soros Fund Management. His latest book is ‘Coming Soon: Financial Turmoil in Europe and the United States’

One of the few potential areas for bipartisan cooperation in Congress this year is tax reform. There is broad agreement on both the right and left that the US tax system is a mess. Since the last major tax overhaul in 1986, the tax code has become cluttered with far too many special tax breaks that cost a great deal of revenue and show little proof of effectiveness. Meanwhile, American corporations are hobbled by one of the highest statutory tax rates and grave uncertainty about what tax regime will be in effect in 2013, as many tax provisions are scheduled to expire under current law at the end of this year. Unfortunately, Barack Obama effectively threw cold water on any tax reform effort in his State of the Union Address on Tuesday.

There is a consensus between Republicans and Democrats, at least among the tax experts, that the current situation is highly undesirable and in dire need of a permanent fix. They agree that the tax base needs to be broadened and tax rates reduced and that perpetually expiring provisions such as the research and development tax credit should either be made permanent or scrapped. Others, such as the alternative minimum tax, need be updated to better target those it was originally intended to cover and not those with modest incomes.

Since there are so many elements of the tax code that require rethinking and review, it would be best to do so in a comprehensive way, rather than in an ad hoc fashion. There is enough general agreement on what needs to be done that it is realistic to believe that something meaningful might be accomplished and enacted into law in the not too distant future.

But rather than proposing a cleaning-up of the tax code, Mr Obama is proposing several new tax preferences. He wants a special deduction available only to companies engaged in manufacturing to be doubled, but most tax specialists think this should just be abolished. He’s in favour of extending a tuition tax credit, which mostly gets capitalised into higher tuition fees and does little to improve access to higher education for middle class families. There’s also special tax relief for small businesses “that are raising wages and creating good jobs” that he wants to introduce even though no one knows how to target such incentives and past efforts have failed. Finally, he would like a new tax credit for “clean energy” and tax credits for companies hiring military veterans.

At the same time, Mr Obama proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.

Whatever the merits of these specific tax proposals, they do not move towards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess.

At a minimum, Mr Obama should have directed the Treasury Department to begin a study of tax reform as Ronald Reagan did in his 1984 State of the Union Address, which paved the way for the Tax Reform Act. Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.

The writer a former senior economist at the White House, US Congress and Treasury. He is author of ‘The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take’

Something interesting has happened at the World Economic Forum in Davos over the past few years. The debates that were taking place more frequently on the fringes – about the weaknesses of global markets, the shortcomings of capitalism and our tolerance of inequality – are now taking place well inside the congress centre itself.

This is more than just the natural introspection that comes at the bottom of the economic cycle. There is a clear sense that collectively we have spent 20 years building a system that can’t really last. Financial market volatility, personal and government debt and rising inequality are not the canaries in the global economic coal mine. They are the coal mine itself.

This week the Institute of Public Policy Research, a British think tank, is publishing the report of a year-long review of globalisation, which I have led. It makes two fundamental points. Firstly, like our model of capitalism itself, globalisation is not working in the way it can and should in progressive societies. Secondly, globalisation remains one of the best tools we have to achieve those progressive goals at the global level as long as we have the right policies to guide it.

That sense of frustrated potential goes to the heart of the problem with globalisation. The term has become shorthand for the ills of economic change, whether job loss as a result of rapid technological change or rising inequality. And the huge challenge of integrating an economy of one billion relatively poor and phenomenally industrious people, such as China, into an economic system.

Undoubtedly, all these and many other changes are being accelerated by globalisation, because international competition is a spur to innovation and productivity. But it would happen anyway, and it is not a bad thing. We lived in a very unequal world before globalisation, so globalisation itself is unlikely to be the cause of inequality.

The problem is how we provide access to opportunity and share the benefits of economic growth. By potentially opening a global marketplace for goods, services, supply chains and ideas, globalisation has been a huge source of both opportunity and growth. We have, however, done a relatively poor job of sharing access to them, especially in the west. Stagnant middle class incomes and growing inequality between top earners and the rest tell their own story.

The consequences of that failure – blue collar anger at lost jobs, white collar anxiety at rising job insecurity and general anger at the way in which a small elite appear to be hoarding the economic gains of the last two decades – is now posing a serious problem for an open global economy. This is especially so in the US, where open trade is often distrusted, and globalisation blamed, with potentially disastrous consequences for the rest of the world.

The only answer is to stop seeing globalisation as a phenomenon, which implies it cannot be stopped or shaped. Of course the shipping container and the internet are genies that can’t go back in the bottle – nor would we want them to. But much of what we call globalisation results from policy choices.

The IPPR report focuses on these choices. It includes recommendations for a move towards a new reserve currency based on the International Monetary Fund’s special drawing rights, a new and open-minded debate on managing speculative financial flows and new approaches to corporate taxation as strategies for reducing excessive imbalances, taking the sharp edge off volatile capital movement and ensuring that states do not depend excessively on income and consumption taxes to fund vital social supports.

New approaches to industrial growth policy, as well as social welfare, are advocated as a way to make western voters feel that the demands to adapt that are placed on them by global economic competition are an invitation to greater opportunity, not simply a source of rising and intolerable insecurity. Again, we see a key role for intelligent government involvement in equipping people for a more uncertain economic world.

The report also warns that the shifting dynamics of economic power will force us to rethink global governance. A world in which the north Atlantic region no longer dictates the terms of global economic governance is not a tragedy. A world in which such rules give way to no rules at all would be. This requires not just expanding the reach of governance bodies, such as the IMF, to emerging economies, but widening the debate within them, to reflect some of the lessons of their twenty-year growth story.

This involves recognising that liberalisation of trade and financial markets requires a careful parallel process of building domestic institutions and capabilities. It is not the absolute level of openness in the global market that matters for growth so much as the fact that it is governed by shared rules and sustainable practice.

Globalisation is a means, not an end. This way of seeing things challenges equally the political right and left. The anti-globalisers of the left have always underplayed or ignored what is good about the expanding reach of global markets by focusing on the (legitimate) grievances of the short-term losers. The right has too often shrugged off the negative social effects of global markets as unavoidable or even a price worth paying for the benefits of ‘liquidity’.

Capitalism’s ability to adapt and reinvent itself is its greatest strength. The same is true of globalisation. Even in Davos there are few who would argue that the status quo ante of the last decade is tenable. Preserving the benefits that come with open global markets for ideas, trade and investment means acting now to reduce the risk in those markets and better share the benefits they bring to our own economies. The IPPR’s case is absolutely right: the complicated reality is that for global prosperity, like capitalism, globalisation is both the problem and the solution. Globalisation is dead. Long live globalisation.

The writer is former UK business secretary. He was EU trade commissioner between 2004 and 2008

The year has started well for financial markets. Equities are generally up. European sovereigns have borrowed with an ease that has surprised many observers. Economic data, particularly in the US, have beaten expectations. So as President Barack Obama prepares to give his State of the Union address, and as policymakers and corporate chiefs come together in Davos, there is less alarm among the global community, though not yet a sense of relief. Indeed, anxiety about the future remains a major driver of economic performance.

The news coming from financial markets is paradoxical. On the one hand interest rates remain very low throughout the industrial world. While this is partially a result of very low expected inflation, the inflation-linked bond market suggests that remarkably low levels of real interest rates will prevail for a long time. In the US, the yield on 10-year indexed bonds has fluctuated around minus 15 basis points: on an inflation-adjusted basis investors are paying the government to store their money for 10 years! In Britain, inflation-linked yields are negative going out 30 years.


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One might expect that with low real interest rates, income-generating assets would sell at unusually high multiples to projected earnings. If anything, the opposite is the case: the S&P 500 is expected to be selling at only about 13 times earnings. In historical perspective, stocks appear cheap relative to earnings. Similar patterns are seen in most forms of real estate.

The combination of low real interest rates and low ratios of asset values to cash flows suggests an abnormally high degree of fear about the future. This idea is supported by the recent strengthening in the association between higher interest rates and a stronger stock market. In our present economic environment this is exactly what one would expect: when people become more optimistic, both interest rates and stock prices rise due to rising expectations of higher profits and of greater demand for funds.

This is in contrast to the usual situation, where interest rates and stock prices often move in opposite directions because of reassessments about future fiscal and monetary policies.

Uncertainty about future growth prospects also correlates with other observations, such as the abnormally large amount of cash sitting on corporate balance sheets, the reluctance of companies to hire, and consumers’ hesitancy about big discretionary purchases of durable goods despite near-record lows in borrowing costs and low capital goods prices.

All of this suggests that for the industrial world as a whole, the priority for governments must be to engender confidence that the recovery will accelerate in the US and that the downturn in Europe will be limited.

How best to do this remains an area of active debate. At Davos and beyond there will be many who argue that we must prioritise increasing business confidence and who say that government stimulus is at best useless and at worst counterproductive. Others will argue that priority must be given to stimulus and that issues of business confidence are red herrings.

Seventy-five years ago, John Maynard Keynes saw through this sterile debate, writing to President Franklin Roosevelt that either “the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees”, or “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money”. The right approach involves borrowing from both contending lines of thought.

Government has no higher responsibility than insuring economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone a significant fall in joblessness. And without either of these there is no chance of reducing debt-to-income ratios.

There are of course risks: inflation, promoting excessive speculation and inefficient spending. But the simple fact is that, in the main, markets agree with business managers – increasing demand is the surest return to economic health.

Businesses are understandably uncertain about their prospects after the events of recent years. This is not the time to add unnecessarily to their worries. New regulations that burden investment should be avoided unless there is an urgent and compelling rationale. Inequality cannot be ignored but there is the risk that policies introduced in the name of fairness could actually exacerbate the challenges facing the middle class by reducing investment. Governments could do much to dispel current disdain for their dysfunction by devising clear plans to better align spending and taxing once recovery is established.

The best chance for economic recovery involves governments working directly to increase demand and to augment business confidence. At Davos and beyond, this should be the focus of economic debates.

The writer is Charles W. Eliot university professor at Harvard and former US Treasury Secretary

Coming from very different perspectives, the columns in the ‘Crisis in Capitalism’ series have each provided insights and identified steps that, in their opinion, could make things better. But, is there a way to reach a clear overall conclusion? I think the answer is yes, although the implications are disconcerting.

The majority of writers agree that the crisis in capitalism is caused by two distinct failures: the inability of the system to deliver sustained prosperity through economic growth and jobs; and the perception that it is grossly unfair and socially unjust.

To fail on one count is a problem. Yet many would have probably glossed over that, especially those who – erroneously in my view – believe that there are rigid trade-offs between efficiency and equity. However, to fail on both counts, and to do so in such a spectacular manner, is indeed a “crisis.” It raises legitimate questions about the model itself.

There are three main reasons for this.

Firstly, capitalism has always, and will always be, prone to traditional market failures. The answer is to accept this, and work harder at reducing the chances of a catastrophic failure reaching the few areas that amplify the good and bad aspects of the system.

Finance is clearly one of these. In the last decade, five countries in particular (Iceland, Ireland, Switzerland and most importantly given their systemic role, the UK and US) lost sight of the fact that finance is not a standalone industry but, instead, depends on its ability to serve the real economy. This failure was compounded by the view held by some that finance could even constitute the next phase in the natural evolution of capitalism (from agriculture to industry, services and, ultimately finance).

These illusions were aided and abetted by patchy prudential regulation, bad incentives and horrid compensation practices. They coincided with the revolution in structured finance, an innovation that suddenly and dramatically opened up new global credit windows.

Society as a whole produced and consumed too much finance, especially through a disruptive technology that was insufficiently understood and tested. The result was the mother of all capitalistic overdoses, the implications of which are enormous and will be felt for years to come.

Secondly, during the past decade, in another part of the world, a set of countries embarked on their own capitalist economic revolution. This enabled them to pull millions of their citizens out of poverty. In the process, they added considerable productive capacity to a global economy, which only partially understood the consequences.

Countries such as China used the mix of technology catch-up, low wages, and quality improvements with great success. But imbalances inevitably reached unsustainable levels.

Lastly, too many of the institutions that are critical for the smooth functioning of capitalism utterly failed to deliver when they were needed most. They were hindered by poor governance, uneven global representation and partial information. This is true for both the private and public sectors.

Each of these areas can be corrected. Theoretically at least, what has occurred is less a calamity of the system as a whole, and more an issue of how it was run. Yet, four years into the crisis, little has been done to repair the damage coherently and comprehensively and to safeguard the real victims, let alone counter the risk of further costly dislocations. Until this is done, it will be difficult to convince the world that capitalism itself is not the problem.

The writer is the chief executive and co-chief investment officer of Pimco 

The slowdown in China’s economic growth last year has fostered mixed reactions. Some argue the recently-released 9.2 per cent annual rate exceeds expectations and is consistent with a soft landing. Others see the fall from 10.4 per cent in 2010 as an indication that a sharper drop is still to come.

Surprisingly, domestic consumption has held up well. However, this is partly due to the early arrival of Chinese New Year, which is likely to have shifted activity forward at the current year’s expense. Without actions to support growth, the pace may fall below eight per cent in 2012.

Beijing is likely to lower taxes and consider special incentives to spur consumption. But the real challenge is to encourage less frugality among the Chinese, especially among migrant workers. Policies must be designed to deal directly with the exceptionally high rates of saving by people and corporations. This would have big implications for the trade balance, a contentious issue with the west.

Attention has focused on the rapid increase in China’s investment, which now exceeds 45 per cent of gross domestic product – the highest of any major economy. Less attention has been paid to the even faster rise in the savings rate, which exceeds 50 per cent of GDP. Since the trade balance is the difference between savings and investment, China has substantial trade surpluses that exceeded six per cent of GDP several years ago. Clearly, global imbalances would moderate and growth would be more robust if only the Chinese were less frugal.

Over the past decade, there has been a sharp increase in savings rates for all three major sectors – households, enterprises and government. The trend has been nurtured by a combination of good and bad policies, and thus it is possible to reshape savings patterns to improve the quality and equity of China’s growth.

The greatest potential lies in moderating household saving rates, which have increased by ten percentage points as a share of disposable income in ten years. Although many factors have contributed, the impact of urbanisation has gone largely unnoticed. The urban population is now larger than the rural with persistent labour inflows. In the major coastal cities, savings rates of migrant workers are much higher than those of established residents. Without formal residency rights to public services, migrants have more incentive to save. And because they now account for the bulk of the labour force in many coastal cities, urban savings rates have soared.

The increase in corporate savings comes mainly from a surge in retained earnings. But because enterprises do not pay significant dividends, some of these surpluses have fuelled wasteful investments – including speculation in real estate. If China’s enterprises paid the same share of their retained earnings as dividends as companies in other countries, this could significantly increase consumption.

Government savings have also increased significantly over the past decade. Some of this has supported investment, but some has also been used to build up the social security system. Thus higher government consumption is unlikely unless revenues are increased.

Overall, providing migrants with more security and encouraging higher corporate dividends could increase consumption by some five percentage points of GDP. This could turn China’s current trade surplus into a deficit. These distinct and politically sensitive reforms would also lessen China’s alarmingly high income disparities. This strategy, with benefits for all, contrasts with that of pressuring China to strengthen the renminbi, perceived by Beijing as benefiting the US at China’s expense.

The writer is a senior associate at the Carnegie Endowment and a former World Bank country director for China

Capitalism earns its keep through Adam Smith’s famous paradox of the invisible hand: self-interest, operating through markets, leads to the common good. Yet the paradox of self-interest breaks down when stretched too far. This is our global predicament today.

Self-interest promotes competition, the division of labor, and innovation, but fails to support the common good in four ways.

First, it fails when market competition breaks down, whether because of natural monopolies (in infrastructure), externalities (often related to the environment), public goods (such as basic scientific knowledge), or asymmetric information (in financial fraud, for example).

Second, it can easily turn into unacceptable inequality. The reasons are legion: luck; aptitude; inheritance; winner-takes-all-markets; fraud; and perhaps most insidiously, the conversion of wealth into power, in order to gain even greater wealth.

Third, self-interest leaves future generations at the mercy of today’s generation. Environmental unsustainability is a gross inequality of wellbeing across generations rather than across social classes.

Fourth, self-interest leaves our fragile mental apparatus, evolved for the African savannah, at the mercy of Madison Avenue. To put it more bluntly, our sense of self-interest, unless part of a large value system, is easily transmuted into a hopelessly addictive form of consumerism.

For these reasons, successful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded in a larger set of values. Max Weber explained that Europe’s original modern capitalists, the Calvinists, pursued profits in the search for proof of salvation. They saved ascetically to accumulate wealth to prove God’s grace, not to sate their consumer appetites.

Keynes noted the same regarding the mechanisms underpinning Pax Britannica at the end of the 19th Century. As he put it, the economic machine held together because those who ostensibly owned the cake only pretended to consume it. American capitalism, more secular and less patriotic, created its own vintage of social restraint. The greatest capitalist of the second half of the 19th century, Andrew Carnegie developed his Gospel of Wealth, according to which the great wealth of the entrepreneur was not personal property but a trust for society.

Our 21st century predicament is that these moral strictures have mostly vanished. On the one hand, the power of self-interest is alive and well and is delivering much that is good, indeed utterly remarkable, at a global scale. Former colonies and laggard regions are bounding forward as technologies diffuse and incomes surge through global trade and investment.

Yet global capitalism has mostly shed its moral constraints. Self-interest is no longer embedded in higher values. Consumerism is the world’s secular religion, more than science, humanism, or any other -ism. “Greed is good” is not only the mantra of a 1980s Hollywood moral fable: it is the operating principle of the top tiers of world society.

Capitalism is at risk of failing today not because we are running out of innovations, or because markets are failing to inspire private actions, but because we’ve lost sight of the operational failings of unfettered gluttony. We are neglecting a torrent of market failures in infrastructure, finance, and the environment. We are turning our backs on a grotesque worsening of income inequality and willfully continuing to slash social benefits. We are destroying the Earth as if we are indeed the last generation. We are poisoning our own appetites through addictions to luxury goods, cosmetic surgery, fats and sugar, TV watching, and other self-medications of choice or persuasion. And our politics are increasingly pernicious, as we turn political decisions over to the highest-bidding lobby, and allow big money to bypass regulatory controls.

Unless we regain our moral bearings our scope for collective action will be lost. The day may soon arrive when money fully owns our politics, markets have utterly devastated the environment, and gluttony relentlessly commands our personal choices. Then we will have arrived at the ultimate paradox: the self-destruction of prosperity at the very moment when technological knowhow enables sustainable prosperity for all.

The writer is director of The Earth Institute at Columbia University and author of ‘The Price of Civilization’

Pakistan’s deepening political crisis has escalated dramatically, with the Supreme Court initiating contempt proceedings against Prime Minister Yousuf Raza Gilani. The judgement could lead to the dismissal of Mr Gilani and eventually President Asif Ali Zardari, as the army appears to be giving full backing to the courts.

Since the 1950s every political crisis Pakistan has faced has been a result of civilians trying to wrest power and control from the military. This crisis is no different except for one important aspect – the military has no intention of seizing power. Instead it has allied with the Supreme Court in an attempt to get rid of a government that is widely perceived to be corrupt and irresponsible.

But in an era when hope of democracy is spreading through the Arab Muslim world and powerful armies in countries such as Thailand and Turkey have learnt to live under civilian control, Pakistan is an ongoing tragedy. Its military refuses to give up power, its huge stake in the economy and its privileges, while its politicians refuse to govern wisely or honestly and decline to carry out basic economic reforms such as taxing themselves.

The crisis would be more manageable if Pakistan was not so important. But for the fifth largest nuclear power to be tipping into economic and political disarray, just as the US and Nato needs Islamabad’s help in extracting itself from Afghanistan and be supportive in dealing with Iran is clearly troubling the world.

In the past, friends such as the US, the UK or Saudi Arabia have been able to mediate between political factions and the army, but this time nobody is trying to play such a role. No country wants to back a military that continues to sponsor Islamic extremism, but no country can afford to support a government that is so inept.

Pakistanis face a similar dilemma. One reason the military is so wary of a coup is that it knows that having staged four coups and messed up the country’s political progress so completely, a large section of the population would never support another military takeover.

In the past year Pakistan has become more and more isolated even in its own neighbourhood while a 60-year-long relationship with the US collapsed – for which both sides are to blame. The killing of 24 Pakistani troops by US helicopters in November on the border with Afghanistan was the last straw for Islamabad. 

To the frustration of Nato forces, Pakistan has continued to support the Afghan Taliban even while the government called for talks between the Taliban, the US and Kabul. These talks are finally underway but the three sides have effectively bypassed Pakistan, thus further infuriating the military.

For weeks now the army and the prime minister have been engaged in an escalating war of words, with Mr Gilani insisting there cannot be a state within a state run by the military and that the army is breaking the law. The army in turn has accused Mr Gilani of violating the constitution and telling lies. A separate battle has ensued between the courts and the government, with Mr Gilani insisting that parliament is supreme and should decide all issues and the courts should not interfere with how he runs the country or the constitution.

Meanwhile the country is paralysed with huge energy shortages, the shut down of industry, the near collapse of the railways and the national airline as well. It comes against the backdrop of a continuing war against the Pakistani Taliban and Sunni sectarian extremists. Every week dozens of people are killed in suicide attacks, bombings, shootings and sectarian massacres. Unsurprisingly, all this has made the government extremely unpopular.

The government, which rules through a coalition, is also facing loss of support from some of its coalition partners thus weakening its position. Smaller regional parties are reluctant to oppose the wishes of the all-powerful army, while others have had enough of the misrule of Mr Zardari’s Pakistan People’s Party.

The military cannot afford a coup nor do they need one. Once the courts order the expected dismissal of Mr Gilani and perhaps Mr Zardari, the army and opposition politicians can mount relentless pressure on the two leaders to accept the court’s verdicts and resign.

What would follow would be an interim government followed by general elections within three months. That may not be such a bad thing. The tragedy is that nothing is in place to prevent such a crisis occurring again and again.

The writer is author of books about Afghanistan, Pakistan and Central Asia, most recently ‘Descent into Chaos’

It is far too easy to blame the crisis of capitalism on global finance and sky-high executive salaries. At a deeper level the crisis marks the triumph of consumers and investors over workers and citizens. And since most of us occupy all four roles, the real crisis centres on the increasing efficiency by which we as consumers and investors can get great deals, and our declining capacity to be heard as workers and citizens.

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

Great deals can also have devastating environmental consequences. Technology allows us to efficiently buy low-priced items from poor nations with scant environmental standards, sometimes made in factories that spill toxic chemicals into water supplies or release pollutants into the air. We shop for cars that spew carbon into the air and for airline tickets in jet planes that do even worse.

Other great deals offend common decency. We may get a low price or high return because a producer has cut costs by hiring children in South Asia or Africa who work 12 hours a day, seven days a week. Or by subjecting people to death-defying working conditions. As workers or as citizens most of us would not intentionally choose these outcomes but we are responsible for them.

Even if we are fully aware of these consequences, we still opt for the best deal because we know other consumers and investors will also do so. It makes little sense for a single individual to forgo a great deal in order to be “socially responsible” with no effect. Some companies pride themselves on selling goods and services produced in responsible ways but most of us don’t want to pay extra for responsible products. Not even consumer boycotts and socially-responsible investment funds trump the lure of a bargain.

The best means of balancing the demands of consumers and investors against those of workers and citizens has been through democratic institutions that shape and constrain markets. Laws and rules offer some protection for jobs and wages, communities, and the environment. Although such rules are likely to be costly to us as consumers and investors because they stand in the way of the very best deals, they are intended to approximate what we as members of a society are willing to sacrifice for these other values.

But technologies are outpacing the capacities of democratic institutions to counterbalance them. For one thing, national rules intended to protect workers, communities, and the environment typically extend only to a nation’s borders. Yet technologies for getting great deals enable buyers and investors to transcend borders with increasing ease, at the same time making it harder for nations to monitor or regulate such transactions.

Goals other than the best deals are less easily achieved within the confines of a single nation. The most obvious example is the environment, whose fragility is worldwide. In addition, corporations routinely threaten to move jobs and businesses away from places that impose higher costs on them – and therefore, indirectly, on their consumers and investors – to more “business friendly” jurisdictions.

Finally, corporate money is undermining democratic institutions in the name of better deals for consumers and investors. Campaign contributions, fleets of well-paid lobbyists, and corporate-financed PR campaigns about public issues are overwhelming the capacities of legislatures, parliaments, regulatory agencies, and international bodies to reflect the values of workers and citizens. The US Supreme Court has even decided that, under the First Amendment to the Constitution, money is speech and corporations are people, thereby opening the floodgates to money in politics.

As a result, consumers and investors are doing increasingly well but job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term but no one has yet figured out a way to get capitalism back into balance. Blame global finance and worldwide corporations all you want. But save some of your blame for the insatiable consumers and investors inhabiting almost every one of us, who are entirely complicit.

The writer is a professor of public policy at the University of California at Berkeley, and was US secretary of labour under president Bill Clinton

Friday’s actions from Standard and Poor’s were hardly the biggest surprise in the financial universe: the ratings agency warned in December that eurozone nations were in danger of being downgraded.

Germany is, in effect, the last man standing. Others have succumbed to a mixture of three deadly sins: optimism, inaction and omission.

Too many countries are too optimistic about recovery when all the evidence is now pointing towards a eurozone-wide recession. Contracting output will only exacerbate the revenue shortfalls which have already placed countries on unsustainable fiscal paths.

Inaction is, perhaps, inevitable for politicians faced with a difficult trade-off between political expediency and fiscal reality. France, for example, needs to deliver austerity to bring its primary deficit back under control – and also to persuade its eurozone colleagues that Paris is serious about fiscal discipline – yet Nicolas Sarkozy hopes also to win the presidential election this spring.

As for omission, the idea of a fiscal pact is all very well but it doesn’t deal with the shortfall of income which led to today’s crisis. Until the 2008 economic collapse, many countries in Europe had good fiscal records. They would surely have met many of the conditions associated with the proposed fiscal pact.

Fiscal conservatives in the eurozone have, up until now, argued that austerity will bring its own rewards: tighter fiscal policy will lead to lower deficits and lower deficits, in turn, will lead to lower interest rates and, hence, faster economic growth. Throw into the mix the gains to competitiveness of lower labour costs associated with austerity and it suddenly looks like austerity really can pay off.

Within the eurozone, however, the argument hasn’t worked. Greece has its own problems which, if Friday’s breakdown of restructuring talks are anything to go by, are set to get worse. Even those who have been fiscally-conservative, however, have not been rewarded. Irish 10-year government bond yields are still up at 7.8 per cent, a ludicrously high level given the weakness of economic activity.

In the months ahead, the eurozone’s difficulties are likely to mount. As the contagion spreads, and as investors lose confidence in the ability of countries to deliver lasting fiscal austerity, countries which, to date, have benefited from immunity will also begin to suffer.

Next in the firing line may be Germany, not so much because its bond yields are about to spike higher but, instead, because its exporters are hugely exposed to trade with the rest of the eurozone and its financial institutions are groaning under the weight of the region’s financial disorder.

The narrative may then change. Until recently, the orthodox German take on the crisis was simply to argue that other countries should be more like Germany delivering fiscal conservatism, hard work and a current account surplus. But Germany may end up more like the others, unable to avoid a descent into recession.

That, in turn, could provide the eurozone with an unexpected lifeline. Faced with recession in both the periphery and the core, and with interest rates already close to zero, the European Central Bank may have to bite the bullet and begin a programme of quantitative easing, using newly-created money to buy government bonds. It won’t solve the crisis – that requires a leap of political imagination – but it would at least make the crisis easier to solve.

The writer is group chief economist at HSBC

DeAnne Julius, chairman of Chatham House, tells the FT’s comment and analysis editor, Alec Russell, the Chinese model has proved effective for development and that alternative models will continue to evolve.

How close is Mitt Romney to locking up the Republican party’s nomination for president? Close enough that his remaining viable GOP rival is now accusing him of committing capitalism.

Newt Gingrich wants voters to know that, under Mr Romney’s leadership, Bain Capital, the private equity firm, bought up poorly performing companies, fired workers to revitalise them and sold the newly-streamlined firm for enormous profits. Mr Gingrich’s charge may be smart politics during a period of high unemployment, but it seems a bizarre charge from a man who uses the word socialism almost as an expletive. Even the most populist Democrat concedes that creative destruction is crucial for an economy’s long-term dynamism.

We haven’t heard the last of this. Long after Mr Gingrich has returned to his role as author and professional provocateur, the Democrats will be working to define Mr Romney as a soulless child of privilege who likes to fire people. That’s too bad, because it obscures a much more important debate: what is the proper role of corporate money in American politics?

In fact, if Mr Gingrich seems angry and desperate these days, it’s in large part because Mr Romney’s supporters have spent millions in recent weeks to destroy Mr Gingrich’s candidacy with a barrage of negative television ads. And they did it without Mr Romney having to utter a word. Following a controversial Supreme Court decision in January 2010, super-political action committees, known as super-Pacs, that support a particular candidate without formal ties to his/her campaign, can now spend unlimited sums without having to disclose where the money came from.

This gives corporate America extraordinary power within the US political process. No longer does the public have a right to know which companies are spending millions to influence the outcome of an election. In the past, candidate A had to accept public responsibility for attacks on candidate B. Now, corporate-funded super-Pacs can cast all the aspersions they want without their preferred candidate getting mud on his suit.

Americans won’t hear their public officials debating the wisdom of this system because elected officials in both parties know that it provides incumbents with crucial electoral advantages. Corporations are much more likely to invest in the candidate who already occupies a seat than in the one they don’t know. This system gives public officials an even more obvious incentive to craft policies and cast votes that potential corporate donors will like.

“If someone who is very wealthy comes in and takes over your company and takes out all the cash and leaves behind the unemployment? I don’t think any conservative wants to get caught defending that kind of model.” So says Mr Gingrich of Mr Romney. But America needs more creative destruction, not less, particularly in the financial, energy and automotive sectors.

It is corporate influence in US politics, not “predatory capitalism”, that is the primary force now widening the gap between America’s haves and have-nots.

The writer is president of Eurasia Group, a political risk consultancy

The unexpected departure of Bill Daley as Barack Obama’s chief of staff and replacement by Jacob Lew, director of the Office of Management and Budget, is a setback for economic policy going into a critical period. But it also presents the president with an opportunity to improve his case for re-election.

Mr Daley, scion of a famous political family from Chicago, generally got low marks as chief of staff since taking over the position last January. Liberals often complained that the former Commerce Department secretary was too close to the business community and inattentive to the concerns of Democrats in Congress.

Nevertheless, it is not good for any president to have to deal with such an important change going into a tough election year. The White House chief of staff must juggle the president’s political needs on the campaign trail and those of the cabinet as well. He must also keep the ship of state on course while the president’s attention is necessarily heavily focused on campaign strategy. And the chief of staff is often the principal liaison with the Democratic National Committee and other senior political officials.

Moreover, the White House itself is a large organisation that requires a significant amount of nuts-and-bolts managerial attention. (I worked there during the last two years of Ronald Reagan’s presidency.) In short, the chief of staff is sort of an executive director for the entire government. Any change in the position is unsettling.

Mr Lew will have no difficulty filling Mr Daley’s shoes. He has significant government experience both at OMB and the State Department, where he was the number two official from 2009 to 2010. However, his departure leaves the OMB, which has primary responsibility for drafting and implementing the federal budget, without a leader at a time when budget issues are unusually sensitive, both economically and politically.

Democratic partisans will question whether Mr Lew, who is known principally as a technocrat, has the political skills to be chief of staff during a presidential election year. While his managerial skills are unquestioned, Mr Lew has never been known as a “politico”. Mr Obama may need to bring in a seasoned political operator in a senior capacity to fulfil that function.

The president’s annual State of the Union address is scheduled for January 24, followed shortly by submission of his budget and economic report. These documents will lay out the White House’s agenda for the coming year and also be the foundations of Mr Obama’s case for re-election. With the economy being both the most important political and substantive issue he faces, failure to put forward viable economic and budgetary strategy could be highly damaging, politically, and leave policy adrift until after the election.

But while there is obviously danger in being forced to make a major staff change at an inconvenient time, Mr Obama may benefit by having an opportunity to set a new tone and direction for his presidency. In Mr Lew he has someone he can rely upon, who is well versed in the issues upon which his re-election will succeed or fail. It could be a blessing in disguise.

The writer served in the administrations of Ronald Reagan and George H. W. Bush. His latest book, ‘The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take’, was reviewed in the Financial Times this week

Another day and another previously unthinkable development becomes reality in Europe. Yet what on the surface appears to be good news for Germany – the record low yield at its latest government debt auction – is actually an indication of growing stress elsewhere in the region.

At Monday’s regularly-scheduled auction, the German government sold six-month securities at a negative yield of 0.012 per cent. Investors who bought them made history. Rather than receive interest income for lending money, they were the first to pay the German government for the privilege of converting their cash into securities that, at the margin, are less liquid and subject to mark-to-market volatility.

The outcome should not have come as a great surprise. Negative yields had already occurred in secondary market trading for short-dated German government securities. Moreover, a similar phenomenon had taken place in the US at the height of the global financial crisis.

Some Germans may be tempted to welcome the cheap source of funding. But before celebrating too much, they would be well advised to consider both the causes and the implications.

Investors fleeing dislocated government debt markets elsewhere in Europe are attracted to Germany by its solid balance sheet and its fiscal discipline. Moreover, the fruits of years of structural reforms by Berlin are being harvested in the form of vibrant job creation and solid international competitiveness.

Part of this investor repositioning is funded by the sale of other European government debt. Another is being  channelled through the banking system, with German banks gaining deposits at the expense of most other European banks.

Operational stress in Europe’s financial system is also a factor. Due to technical dislocations similar to what America experienced three years ago, some banks are forced to scramble in order to get their hands on high quality collateral, helping to push German yields to artificially low levels.

The longer these factors persist, the greater the likelihood that other private sector entities will also be pulled in the short-run into buying German securities. Over a longer time horizon, however, negative yields on the bills will reverse course, especially if conditions improve elsewhere in Europe. Yet, even then, there is a risk that a large portion of the new money pouring into German debt could prove more durable given that it is being hardcoded through investor- and depositor-driven changes to investment guidelines and benchmarks.

German rejoicing for borrowing money at negative rates should thus be tempered by the reality of Europe experiencing an accelerating disengagement of the private sector from the region’s economic integration project. This undermines growth and employment, shifts more of the load to taxpayers, and places even greater demands on creditor and debtor countries alike – all serving to aggravate an already-strained process for agreeing on the appropriate policy response and related burden sharing.

At a time of considerable domestic resistance, governments in surplus countries (essentially Germany, but also others such as Finland and the Netherlands), as well as the European Central Bank, will face even greater external pressure to substitute more of their solid balance sheets for the delevering private sector. Meanwhile, debtor countries will be expected to do even more on the austerity front, thereby aggravating internal tensions and sacrificing both actual and potential growth.

Rather than welcome negative yields, Germany should interpret the outcome of Monday’s auction as further indication of the gravity of the situation facing the eurozone as a whole. It is another alarm bell calling for more forceful steps to improve the region’s policy mix, counter banking fragility, and strengthen the institutional underpinning of a “refounded” Europe.

The writer is the chief executive and co-chief investment officer of Pimco

Barack Obama’s new defence strategy caps the most important year in American foreign policy for a decade. Whatever grade one gives to the president’s decisions, they are certainly consequential, adding up to the most profound shift in US foreign policy since the convulsive period between September 2001 and August 2002.

The shift is reflected in the planned defence posture outlined last week by the Obama administration, which makes clear that the “Atlantic community” is being eclipsed by the rising Asia-Pacific one.

Some of the Asia-Pacific move reflects older initiatives; some is mainly symbolic. However, the cumulative boost of American energy and commitment is palpable. Indeed, the main challenge now for Washington may be to restrain the momentum of the large, coarse Sino-neuralgic political forces it has set in motion. Some of America’s Asian friends are uneasy. They wanted more reassurance, but not at the expense of rattling the table.

In central Asia, the US operation that killed Osama bin Laden put the al-Qaeda threat into less nightmarish proportions, highlighted the anomaly of dedicating so much American energy to nation-building in Afghanistan and accelerated the breakdown of a schizophrenic relationship with Pakistan. The decision to take most US forces out of Afghanistan seems to be a firm one, the only remaining question being how fast. The Pakistani military had, by their lights, done a rather brilliant job of playing the Americans while denying them victory in Afghanistan. Now the fundamental incompatibility of Pakistani and American interests is staringly apparent.

In south-west Asia, Mr Obama ended the US military intervention in Iraq. Resisting calls from his men in the field, he held to his resolve to leave Iraq’s future to Iraqis, come what may. Meanwhile, confrontation with Iran has sharpened, with the US assembling coalitions of military and economic partners across the Gulf and in Europe to squeeze a weakened, divided, unpopular and quite dangerous regime. Iran remains the wild card in all US foreign policy plans.


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Revolutionary turmoil across the Muslim and Arab world has focused on internal malaise. That is healthy. The two biggest regional losers from the revolutions are probably Iran and Israel. Despite some stumbling, the US and its European allies ensured that in Libya Muammer Gaddafi did not lead a successful counter-revolution. In Syria they are completing the cordon that has brought the regime of Bashar al-Assad to the brink.

In fact, one of the more interesting phenomena of the past year or so is the rising US reliance on “grey power” – neither traditional diplomacy nor conventional military might – that operates in twilight worlds of special operations and financial clearing houses.

These examples are part of a giant global pivot in US foreign policy, the “rebalancing” to which President Obama is deeply committed. Despite a renewed outbreak of declinist expectations, this “rebalancing” is not necessarily a withdrawal. It is conservative with a small c, reminiscent of President Dwight D. Eisenhower’s consolidating moves in 1953 and 1954.

So far Mr Obama’s moves are enlarging the room for US strategy to manoeuvre. For example diminished reliance on Pakistani supply lines frees up US policy choices. US capabilities have not materially diminished. Spending on the armed forces is not reverting to pre-9/11 levels. Fielded forces will be leaner, relying more on reserves for large and sustained operations.

The period of post-1940 US dominance in global politics did not come to an end this year. It came to an end about 40 years ago. Since the early 1970s the US role in world politics has been central, not dominant. On its good days it has helped to shape epochal choices made principally in Asia and Europe. That can still be so.

The more interesting question about the great pivot is where Mr Obama now takes the ball. He has not yet offered persuasive leadership for a renewal of capitalism and the global political economy. He has not yet contributed much to shape the emerging agenda of transnational “formestic” concerns.

The core problem is not a lack of fiscal or military brawn. And, recently, we see tactical competence. The moves are unusually coherent. Practically all of what the US did in 2011 was done by leading coalitions in different regions. That required considerable skill. Contemporary US government has many professionals steeped in process.

The challenge for the president is to offer more substantive direction. A little more personal engagement one-on-one might also help. Many foreigners would like to see more US leadership, not less. They don’t miss American sanctimony. There is still enough of that on offer. What they do miss is American drive and purposefulness, even the kind that makes them smile.

Mr Obama has a cool, reticent style. During the past year, a very consequential year, that style has worked for him. As he completes his big pivot, he may need to step in and be more of a playmaker.
The writer is a dean and professor of history at the University of Virginia. From 2005 to 2007 he was counsellor of the US Department of State

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It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on “Capitalism in Crisis”. That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.

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Americans have traditionally been the most enthusiastic champions of capitalism. Yet, a recent public opinion survey found that among the US population as a whole 50 per cent had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people aged 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.

Three elections in a row in the US have been, by recent standards, bloodbaths for incumbents. In 2006 and 2008 the left did well; in 2010 the right won comprehensively. With the rise of the Tea Party on the right and the Occupy movement on the left, this suggests that far more is up for grabs than usual in this election year.

So how justified is disillusionment with market capitalism? This depends on the answer to two critical questions. Do today’s problems inhere in the present form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?


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The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialised world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class. The problem is genuine. Few would confidently bet that the US or Europe will see a return to full employment, as previously defined, within the next five years. The economies of both are likely to be demand constrained for a long time.

But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto” problem – like the failure of a car alternator – that can be addressed with proper fiscal and monetary policies and which will not benefit from large scale structural measures. I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand, than to contribute to putting people back to work. I suspect that if and when macro-economic policies are appropriately adjusted, much of the contemporary concern will fade away.

That said, serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramatic rises in the share of income going to the top 1 per cent (and even the top 0.01 per cent) of the population and declining social mobility. The problem is real and profound and seems very unlikely to correct itself untended. Unlike cyclical concerns there is no obvious solution at hand. Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years ago suggests that the roots of the problem lie deep within the evolution of technology.

The agricultural economy gave way to the industrial one because progress enabled demands for food to be met by only a small fraction of the population freeing large numbers of people to work elsewhere. The same process is now under way with respect to manufacturing and a range of services, reducing employment prospects for most citizens. At the same time, just as in the early days of the industrial era the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.

The nature of the transformation is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone services, where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the price of housing, healthcare, food, energy and education.

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As fewer people are needed to meet the population’s demand for goods like appliances and clothing it is natural that more people work in producing goods like healthcare and education where outcomes are manifestly unsatisfactory. Indeed as the economist Michael Spence has documented, a process of this kind is under way: essentially all US employment growth over the last generation has come in non-traded goods.

The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of healthcare and education is much more involved with the public sector than is the case with the production of manufactured goods. There is an imperative to move workers from activities like steelmaking to activities like taking care of the aged. At the same time there is the imperative of shrinking or least slowing the growth of the public sector.

This brings us to the charge that the governments of industrial market capitalist societies are bankrupt. Even as market outcomes seem increasingly unsatisfactory, budget pressures have constrained the ability of the public sector to respond. How and when – not whether – basic programmes of social protection will be cut back is now back on the table. The basic solvency of too many capitalist states seems in question.

Again the problems are very real. While I believe more than most that the US government will be able to borrow on very attractive terms for a long time, if – as I fear – private borrowing remains depressed, there is no denying that the current path of planned spending and planned revenue collection are inconsistent. And Europe is teaching us that markets can take significant fiscal problems and make them catastrophic by becoming too alarmed too rapidly.

At one level the answer here is simply to insist on more political will and courage. But at a deeper level, citizens of the industrial world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection. Paradoxically, the answer lies in the very success of capitalism which has made the opportunity-cost of an individual teaching or nursing or administering that much more expensive

When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to pursued with increased vigour and those who argue for a radical change in direction. That debate is somewhat beside the point in the case of market capitalism.

Where it has been applied it has been an enormous success. The challenge for the next generation is that that success will increasingly be taken for granted and indeed will become an increasing source of frustration for in these pinched times, its success cannot be matched outside the market’s natural domain. It is not so much the most capitalist parts of the contemporary economy but the least – those concerned with health education and social protection that are in most need of reinvention.

The writer is former US Treasury secretary and Charles W. Eliot university professor at Harvard

With US non-farm payrolls posting an unexpectedly strong 200,000 gain in December and German industrial orders now shrinking, are we about to see a great transatlantic decoupling?

Germany was always vulnerable to the chill winds blowing in from southern Europe.  A greater proportion of German exports goes in aggregate to Italy and Spain (9.8 per cent in 2010) than to either the US (6.9 per cent) or China (4.9 per cent). While German companies are usefully exposed to demand for capital goods from the emerging world, the European Union remains by far Germany’s biggest export market. Demanding austerity from fiscal sinners is all very well but German exporters are now being presented with the bill: export orders are clearly in retreat – and not only to destinations within the eurozone.

At first sight, the December payrolls gain, alongside a further welcome drop in the unemployment rate, suggests the US has some degree of economic immunity from the eurozone crisis. Decoupling may be a dirty word but it does, occasionally, happen.  After all, the US decoupled from Asia following the 1997 Thai baht crisis.

At the time, economic and financial Armageddon seemingly beckoned. Asian economies were in a state of meltdown, the western world was heavily exposed to trade with Asia and it seemed obvious that the US economy would be brought to its knees. Business surveys at the time supported this view.

Instead, the US went from strength to strength. Within the space of two years – helped along by rapidly rising equity markets – the Asian crisis was largely forgotten. In its place came the productivity miracle otherwise known as the “new economy”.

Other than the good fortune that comes from unexpected moments of technological advance and the willingness of Americans quickly to embrace these new technologies, the resilience of the US economy stemmed from a reversal of capital flows. Money that had been routinely flowing into Asia in the mid-1990s headed elsewhere and, in particular, to the welcoming arms of Uncle Sam. Bolstered capital inflows allowed the US to run a bigger current account deficit alongside a stronger dollar (which kept inflation in check) and lower interest rates (which boosted domestic growth). Seen this way, the new economy was born out of an external crisis.

Could the same thing happen again? At the beginning of 2012, there’s certainly a more optimistic attitude towards “brand USA”.  Notably, the dollar is up, helped along by continued eurozone unease.

Compared with the late-1990s, however, there are also some big differences. Back then, payrolls gains were running at 300,000 or more a month, growth was ticking along at 4 per cent, the housing market was a picture of health, the word “subprime” had not yet been invented and the financial system worked (often a little too well).

Today, the US is vulnerable to the eurozone crisis both via trade and through its myriad financial connections. Bond yields can’t fall much further. The housing market is in the doldrums. There is no room for a “Greenspan put”, at least not of the conventional kind. And the US, even more so than the eurozone, has a terrible fiscal outlook.

Significant decoupling can happen, but only if the domestic conditions are right.  For the US in 2012, sadly they are not.

Stephen King is group chief economist at HSBC

Lest we needed another reminder, Thursday’s announcement that the Italian automaker Fiat had achieved the final performance target in its alliance with Chrysler underscored once more the remarkable success of the rescue of the American automobile industry.

No capitalist (and I consider myself to be a full-throated one) likes the notion of government intervening in the private sector. But we must recognise the rare moments when deviations from this principle are not only to be tolerated, but welcomed.

As the events of the past three years demonstrate, General Motors and Chrysler were such an undeniable exception. At the end of 2008, the entire auto sector was on the brink of total collapse, a near casualty of the financial crisis, oscillating oil prices, uneconomic labour agreements and poor management. General Motors alone lost $30bn in that single year.

Due to courageous decisions by both former President George W. Bush and President Barack Obama, the industry is now thriving. US sales of autos and light trucks rose last year by 10.3 per cent to 12.8m, compared to 10.4m in 2009.

More remarkably, when the books close on 2011, General Motors will have recorded its largest annual profit since 1999, even though vehicle sales remain well below pre-recession levels.

Chrysler’s turnaround is at least equally stunning, thanks to the extraordinary management skills of Sergio Marchionne, Fiat’s chief executive. Its tired fleet refreshed under Mr Marchionne’s lash, Chrysler’s sales rose by 26 per cent last year, yielding the biggest increase in US market share of any automaker.

Of equal importance to job-hungry America, employment in the auto sector rose by 129,000 over the past two years.

Had the US government not stepped in, the outcome would have been the diametric opposite. By the end of 2008, the two giant automakers would have run out of cash, shut down and liquidated. Likewise, their many suppliers. The lack of available parts would have forced Ford into at least a temporary closure. By any measure, well more than a million jobs would have been lost, at least temporarily.

Those who steadfastly oppose bail-outs – including Mitt Romney and the other Republican presidential hopefuls – insist that somehow this potential disaster could have been averted without government assistance.

That is, quite simply, ridiculous. In late 2008 and early 2009, not a penny of private capital was available to finance companies in this sector, with or without bankruptcy. I know this because we looked assiduously and vainly for it.

I recognise that opening the door to government intervention can be a slippery slope; particularly outside of America, examples of inefficient companies propped up on life support by transfusions of public money are plentiful.

To that extent, the ardour of defenders of free market capitalism can serve the useful purpose of making such interventions very much the exception. But at the same time, let’s not forget that not all government is bad, and markets are not always utterly efficient.

The writer is a former counsellor to the secretary of the Treasury and contributor of a monthly column to the FT.

Is there anyone not frustrated by Mitt Romney’s narrow win in the Iowa caucuses? Conservatives are disappointed because they recognise that Mr Romney, who used to favour legal abortion and was for Obamacare before it was called that, is only pretending to be one of them. Seventy-five per cent of Iowa’s Republican voters wanted someone farther to the right. But because their votes were divided among a large field of weak candidates, the only moderate running in their state came out on top.

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Liberals are disappointed because Mr Romney has moved closer to inevitability and is the strongest potential challenger to President Barack Obama. This shows up clearly in head-to-head polls, which put Mr Romney tied with or slightly ahead of Mr Obama, while other Republican contenders trail by 10 points or more. It was hard for Obama campaign officials to suppress their glee last month when Newt Gingrich, the only even remotely plausible alternative to Mr Romney, briefly ran ahead of the pack. But even they knew this was a momentary aberration. Short of Republicans committing collective suicide by picking someone else, Democrats would like to see Mr Romney win the nomination after a protracted struggle that would deplete his financial resources, sully his image and drag him farther to the right. That now looks less likely.

Journalists are most disappointed of all because Mr Romney gliding to victory is a weak story. Were the press any other industry, cynicism about its self-interest in promoting marginal challengers would prevail. Local television stations, many of them owned by giant media companies such as Fox, count on election-year revenue bumps from political advertising in important primary states. If the nomination contest is effectively over by, say, the Michigan primary on February 28, money will remain on the table. But for reporters, rooting for the underdog, any underdog, it is really a matter of wanting a more dramatic story. The strait-laced frontrunner winning Iowa and New Hampshire before securing the nomination early on does not count as a compelling narrative. Hence the media’s pretence of taking seriously a succession of non-viable candidates with outlandish views.

Thanks to all this, there is tremendous reluctance on all sides to call the outcome before “the voters have spoken”. So expect to hear more and more about less and less likely alternatives to a Romney victory. Jon Huntsman, the only candidate yet to enjoy a moment of popular enthusiasm, could do better than expected in New Hampshire. Once Rick Perry joins Michele Bachmann in dropping out, conservative sentiment could coalesce around the unlikely survivor Rick Santorum. Given how unloved Mr Romney is, someone new could still enter the race. Anything is possible, of course. But in the end, the GOP is overwhelmingly likely to nominate Mr Romney because it is his turn and because he is the most electable candidate available.


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The party Mr Romney is likely to lead into battle has, however, revealed itself in a diminished state – dominated by its activist extreme and deaf to reason about the country’s fiscal choices. To survive a Republican debate you are required to hold the incoherent view that the budget should be balanced immediately, taxes cut dramatically and the major categories of spending (the military, pensions and healthcare for the elderly) left largely intact. There is no way to make these numbers add up and the candidates mostly do not try, relying on focus-group tested denunciations of Mr Obama and abstract hostility to the ways of Washington.

Above every other issue, the candidates pandered about how thoroughly they would ban abortion. Mr Paul, an obstetrician by training, blanketed the state with ads making the dubious claim that he once saw doctors dispose of a live baby in a rubbish bin. (If so, why did he not intervene?) Mr Gingrich proposed throwing out the constitution to defy judges who invalidate anti-abortion legislation. In the closing days of the campaign, Mr Perry augmented his opposition to abortion to include cases of rape or incest. Mr Santorum toured with members of the Duggar family, who are featured in the reality-TV programme “19 Kids and Counting”. Like the Duggars, Mr Santorum believes contraception is “not OK”.

The Tea Party has clearly nudged the centre of politics to the right but the notion that it stood for something new on the right has all but dissolved in favour of a familiar range of radical, not really conservative tendencies. Iowa clarifies this factionalism by presenting it in exaggerated form. There is radical libertarianism, represented by Ron Paul. There is theocratic moralism, offered in evangelical Protestant flavours by Ms Bachmann and Mr Perry and in a Catholic version by Mr Santorum. There is the idea of ideas-based politics, represented by Mr Gingrich.

When these alternatives fall by the wayside, what will remain is the attempt to actually win a national election, represented by Mr Romney.

The writer is editor of

Iran has been relentlessly provoking America for the last 10 days. Its military recently threatened to close the Strait of Hormuz, and Tehran warned on Tuesday that US aircraft carriers should not return to the Gulf. But Iran is bluffing, and war with the US or Israel is very unlikely in the foreseeable future.

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Tehran is indeed angry, and its rage has been steadily building in recent months. The latest and strongest trigger was a sanctions bill, signed by President Barack Obama on December 31, which will make it more difficult and less profitable for Iran to sell oil. The legislation goes after its economic lifeline: oil revenues. The move doubtlessly chafed Ayatollah Ali Khamenei and his inner circle, and led them to respond predictably – by rattling western markets and diplomats.

But Iran doesn’t want war. Military conflict in the Strait would block its own ability to export oil. An attempt to close the Strait would be fruitless because the US Navy could open it within weeks. War could easily spread and lead to an attack on Iran’s crown jewel – its nuclear program. Ayatollah Khamenei has his hands full at home with a plummeting currency and infighting among his elite. Tehran’s main goal is to scare the US and its allies away from implementing sanctions against Iran’s oil exports. And despite the bellicose rhetoric, there are signs that the regime seeks to return to talks – suggesting a two-track policy.


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For a war, Iran needs an opponent; but neither the US nor Israel are interested in an imminent fight. Israel is pleased with the new oil sanctions. An attack on Iran would have serious challenges – Israel could only inflict limited damage on the nuclear program and would face severe retribution from Tehran. Meanwhile, leading members of the US military have spoken out against attacking Iran, the American public has no appetite for another war, and conflict in the Gulf would lead to a spike in oil prices, potentially plunging the global economy into full-blown recession.

Undoubtedly, however, miscalculation by Iran or the US could lead to conflict, as the sides’ naval and other military hardware are in proximity. In the more distant future, as yet unseen progress by Iran on its nuclear programme, especially in building faster centrifuges, could cause conflict – particularly if the new equipment is used to build a bomb.

But many observers are misreading the current joust in the Gulf. Iran is bluffing and baiting, but neither the US nor Israel will bite.

This article is co-authored by Ian Bremmer, president of Eurasia Group, and Cliff Kupchan, a director at the political risk consultancy

The failure of the “Super Committee” last year to reach a budget deal underscored the underlying wedge in US politics. The distribution of the electorate through most of the post-1945 years has been a dominant centre, slightly to the left or right of centre. This enabled legislative compromises to be reached with relative ease.

But a political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance. That was a dominant force for over a century, but has faded since the New Deal. The Tea Party has yet to obtain sufficient traction to forge majorities for new legislation. But its influence beyond its numerical strength has created an effective veto of new legislation before the current heavily Republican House of Representatives. It has so altered the distribution of votes within Republican Party’s House caucus that the party’s centre has moved closer to the Tea Party. Moreover, the heavy House Democratic losses of moderates in 2010 shifted the centre of gravity of their caucus to the left.

This has created something of a bimodal distribution leaving a much diminished centre. The Senate, although less affected by the 2010 election has not been immune from this shift. The days of Senators Pat Moynihan, Bob Dole, and Lloyd Bentsen seem a long time ago.

The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the centre’s decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies by the International Monetary Fund have demonstrated, trying to solve significant budget deficits predominantly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent.

The only viable long-term solution appears to be a shift in federal entitlements programmes to defined contribution status. The assets of private defined benefit pension plans, confronted with the same economic forces, have already fallen from 67 per cent of private pension plans at the end of 1984 to 37 per cent at the end of last September. But the political problems of such a switch can be seen in state and local governments’ attempt to trim public defined pension plans. Public sector unions have fought mightily to avoid having their pensions shrink, as they have in the private sector.

Cutting back on benefits that are “entitled” is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfill than the economy seems likely to be able to supply. Not only is the labour force starting to lose its most productive workers (the baby boomer generation) to retirement, but the generations scheduled to replace it will be the same individuals who in 1995, shocked us by scoring so poorly on maths and science in international competitions. America’s students had slipped badly after a long tenure at the top of the global educational ladder. The cohort of people aged 25 and younger is suffering the consequences in lower earnings and productivity when compared to earlier generations. Fortunately the statistical weight of the erosion in overall productivity growth is still quite small, but it will mount if our education system does not improve and we don’t increase immigration quotas of skilled workers.

With rising concerns about income inequalities, it is a disgrace that these quotas are protecting upper income groups from competition. Such a slowdown in productivity growth will create, with slowed population growth, Professor Gordon of Northwestern University says, “the slowest 20-year rise in real per capita GDP in American history”.

I do not pretend to be able to forecast how this will turn out, but we face a true revolution, not so much in the streets but in the fundamental choices we will have to make to secure our fiscal future. Arithmetic demands it.

The writer was chairman of the US Federal Reserve

I bravely predict more of the same in 2012. By this I mean the following.

First, Mitt Romney will win the Republican nomination after the party has exhausted its one-week-long love affairs with each of the non-Romneys: Michele Bachmann, Rick Perry, Herman Cain, Ron Paul and Newt Gingrich. Mr Romney is the only one of the list that is even plausibly qualified to be president. Somehow the Republican party’s bizarre reality TV-style nominating process, much closer to American Idol than to politics for adults, will actually sort this out.

Second, Barack Obama will win re-election. This will not be a triumph of party, accomplishment or experience. It will not have been earnt by economic recovery, political bravery, or long-term vision. It will not reflect a renewal of the love affair with Mr Obama in 2008. It will occur because his one consistent strategy – to stay one step towards the centre of the rightwing Republican party – will prevail. The Republicans and Mr Romney will have cornered themselves.

Third, the presidential elections will do nothing to reinvigorate American society. Government will remain corrupt, incompetent and shortsighted. Both political parties will remain firmly to the right of centre. The rich will keep most of their existing tax breaks. Loopholes and lack of enforcement will offset any increased taxes that might be enacted on paper. Good jobs will remain scarce for the young, returning veterans and many others. A chronic budget deficit will lead Congress to continue to slash education, family support, health for the poor, infrastructure, and science and technology. American exceptionalism will mean that the US is the only leading country at war with its own teachers and children.

Fourth, the world will become less stable. Though word has not yet reached (drought-stricken) Texas, climate change is real; so too is a rapid increase of population whenever families have no access to family planning and basic healthcare. As a result, our world of 7bn inhabitants (8bn by 2024) will be buffeted by more droughts, floods, food shortages, natural disasters, epidemics and violence. These will turn into more coups, drone missiles, UN Security Council resolutions, but not more common sense to invest in poverty reduction, population control and mitigation of climate change.

Fifth, Asia, Latin America, and now Africa will continue to outpace the sluggish or stagnant economies on both sides of the northern Atlantic. Convergence will remain the dominant macroeconomic force of the global economy.

Sixth, the young generation will increasingly tire of the increasingly turgid baby-boomer politics. The groups that took to the streets this year from Tunis to Cairo to Tel Aviv to Santiago to Wall Street to Moscow will be back. By the next US election in 2016, America will have at least a third, if not a fourth, major political party building on the progressive energies of the millennial generation.

This, then, is the meaning of more of the same: the continuity of change. As the great A-lister of the sixth century BC, Heraclitus, put it much better: “All is flux, nothing stays still.”

The writer is director of the Earth Institute and author of ‘The Price of Civilization’

The big issue of the coming year will be more of the same: rolling protests across multiple countries that will morph into revolutions in many. They are the result of “disruptive technology”, and we are only just beginning to grasp exactly what this means. It means that disruptions in the lives of individuals – through arrest, beatings, torture, rape, detention, kidnapping, and murder – have a much higher probability of disrupting entire societies.

The difference from traditional technology is speed, scale and resilience. The immediacy, apparent veracity and emotional power of words and images that are instantly transmitted to thousands and then millions of people can transform existing currents of dissent into a raging flood. Equally important, when the state takes action to crush the first waves of protest, the resulting images create instant martyrs and a steadily growing determination that the lives lost shall not be in vain. Finally, success in one country fuels a sense both of possibility and of competition across a region. The Egyptians marching to Tahrir Square were inspired by both hope and a friendly but real rivalry: “If the Tunisians can do it…”

In 2012 we should see many more protests in sub-Saharan Africa. Zimbabwe is one obvious candidate; Sudan is another. Nigeria could rise up en masse against enormously pervasive corruption; uprisings are also possible in Ethiopia, Uganda, and a number of smaller countries. In Russia, shame among educated classes that Vladimir Putin is just the latest czar, combined with growing economic desperation and corruption in rural areas, makes another Russian revolution plausible if not probable. And I would not be surprised to see mass protests in several central Asian countries, in Pakistan, again in Iran, in Algeria, Mexico, Venezuela or Cuba.

In the US, the Occupy movement will operate through rolling flashmob-type disruptions, but we should also see much more concrete actions such as defending against foreclosures – a tactic pioneered in Spain. In European countries that are choking on eurozone-imposed austerity, protests are also likely to turn into coordinated civil disobedience, centred on a refusal to pay new or higher taxes. And the Middle East will continue to burn.

Revolution is the ultimate disruption; it is an overturning rather than a reshaping through reform. Rolling disruption is somewhere in between. Wise governments will preempt revolution and respond to protests with rapid and meaningful reform. But wise governments are few and far between; and wise governments able to act quickly are far fewer. Expect a very turbulent year.

The writer is a professor at Princeton University and a former director of policy planning at the US State department

Inequality will be the central theme of 2012. It has always existed and is not going away, but this year it will top the global agenda of voters, protesters and politicians running for office in the many important elections scheduled.

There is nothing new in the fact that a few people have too much and too many have too little. In some places (the Soviet Union and most countries with authoritarian regimes) inequality was once largely hidden from the population, in others (Latin America) it was known but tolerated and in some (the US) it was celebrated. In 2011, the economic crisis made the world more aware of the extent and scope of economic inequality. In 2012, peaceful coexistence with inequality will end and demands and promises to fight it will become fiercer and more widespread than they have been since the end of the Cold War.

Headlines such as this recent one in the Los Angeles Times – “Six Walmart heirs are wealthier than US’ entire bottom 30 per cent” – epitomise the new mood. Such scrutiny of the lives and deeds of the “one per cent” will become obsessive. Alongside the newfound intolerance for inequality, we will also see the occasional attempt to explain that not all inequality is bad. Jamie Dimon, chief executive of JPMorgan Chase, said recently: “Acting like everyone who’s been successful is bad and that everyone who is rich is bad – I just don’t get it.” Behind his perplexity is the assumption that great wealth often results from innovation, talent and hard work that are justly rewarded by society.

But as we know, great wealth and inequality can also originate in corruption, discrimination, monopolies, abusive corporate behavior or Madoff-like malfeasance. Students of inequality like to equate it to cholesterol: there is bad and good inequality, and the trick is to boost the good one while keeping the bad one at its lowest possible level.

Therein lies the problem: lowering inequality without harming other goals (investment, innovation, risk-taking, hard work) is not easy. The fight for a more equal society was the goal of countless experiments that resulted in even more inequality, widespread poverty and loss of freedoms.

Yet there is compelling evidence that high inequality is also bad for a nation’s health: it leads to higher political instability, more violence and it also hurts competitiveness and long term growth.

Elections will take place in the US, France, Russia, Taiwan, Mexico, Egypt, and Korea in the coming twelve months. Spain and China will also change leadership. Inequality will become part of electoral debates that will influence the conversation even in countries where it has long been taken for granted. Inequality will be the protagonist of 2012.

The writer is a senior associate in international economics at the Carnegie Endowment

The big debate of 2012 will be over the role of government in the economy. Although this sounds like an economic issue, it is really about politics. There is no economically optimal size of government. Voters must choose whether they prefer high public sector spending and generous entitlements coupled with higher taxes to pay for them, or modest public provision and basic entitlements along with lower taxes and therefore more take-home pay. The ongoing financial crisis provides stark evidence that the current model of high public sector spending financed by growing public sector debt has hit the buffers.

The US election campaign is already taking shape around this issue. The Republican candidates seem determined to outdo each other in their opposition to government spending, whether for healthcare or road repairs. Their arguments vary with their political stripes. The more moderate point to the inefficiency and low quality of public sector services. The more extreme think it is immoral for government to confiscate people’s income through taxation for anything other than “pure” public goods such as defence. They believe individuals should have the right to keep their income and spend as they choose, rather than having choices made by bureaucrats.

On the Democratic side, Barack Obama is fighting to maintain his healthcare reform and extensions to unemployment compensation. But he continues to claim that such entitlements can be financed by higher taxes only on “millionaires and billionaires”. Few economists support that view. More importantly, the polls show that the public is very concerned about rising government debt and sceptical that higher deficits will stimulate growth.

Despite this heated pre-election debate, the US may be able to fudge the issue for a little longer. There are still willing buyers of US debt in Asia and, if 2012 brings more financial shocks, the dollar will benefit from safe haven flows. But Europe is running out of time and it starts from a worse position. Taxes are already so high that they depress growth, both by making Europe an uncompetitive location for many businesses and through what economists call the “deadweight loss” they impose on the economy. This problem is compounded for eurozone members, which cannot adjust by depreciation. Meanwhile welfare spending and public sector employment now benefit so many voters that it is hard for politicians to win backing to cut them. The social contract that underpins democracy requires compromise. But the political debate will grow more confrontational in 2012. This will be the year that the financial crisis turns into a number of political crises.

The writer is chairman of Chatham House and a former member of the Monetary Policy Committee of the Bank of England

Technology is profoundly changing the world’s energy equation, and all its geopolitical implications. Energy efficiency in the advanced countries has risen sharply, implying that their demand has peaked, and vast, commercially exploitable discoveries of oil and gas – especially gas – have been made in politically stable areas, including in the US. This suggests that in future, gas will account for a much larger proportion of the world’s energy supply. While these developments are positive for geopolitical stability, they may pose difficulties for the climate.

Since the embargo of 1973, there has been a global preoccupation with the centrality of oil, its supply, its cost and the international politics of it. As economies grew and global demand for energy increased, oil and gas exploration and production increasingly moved to distant and politically unstable countries, such as Russia, Iraq, Libya, Iran and Venezuela. At the same time, Opec rose to power; the US military assumed protection of the Persian Gulf; and concerns grew that the world might run out of oil.

This difficult era is now approaching an end, and technology is the main reason. New techniques of exploring and drilling in very deep water and tar sands have been developed. New approaches to hydraulic fracturing and horizontal drilling have made it possible to extract deposits of oil and especially gas profitably from shale. The implications are huge. Vast reserves of natural gas are now accessible, and the role of gas in world energy supply is growing fast. Within 25 years, gas should outstrip coal to become the second biggest source of global supply, behind oil. This is positive because gas is much cleaner than coal.

America is experiencing both higher efficiency and an energy boom, in both offshore and onshore production. This means that it will reclaim its role as the world’s biggest energy producer and, incredibly, become a net energy exporter. Brazil, Canada and Australia, all stable countries, are experiencing similar energy booms.

Huge changes like these always have a downside. The environmental implications of these new technologies are not clear. The movement towards renewable energy sources, nuclear power and climate stability may be slowed by the new abundance of oil and natural gas, and the relatively low price of gas. Even in 2040, respected forecasts now envision that fossil fuels will still supply 80 per cent of the world’s energy needs.

However, energy security and national security for much of the world will be improved, as the influence of rogue oil states diminishes. That is quite a plus.

The writer is the founder and chairman of Evercore Partners and was US deputy Treasury secretary in 1993-94

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