Daily Archives: February 13, 2012

There is not much good news when it comes to managing the global system. The euro is (still) in crisis; trade talks are stuck; the Group of 20 has run into the sand; and then there is climate change – the greatest global challenge met by the greatest global short-sightedness. Or are we missing something?

Certainly, the 2009 Copenhagen conference ended in stalemate and the “climategate” affair has given sceptics a field day. Also, the financial crisis has turned attention away from the climate challenge. But, at a bad time in the news cycle just before Christmas, the parties to the UN climate convention, meeting in Durban, agreed that a global legally binding approach to controlling emissions would be undertaken, to be signed in 2015 and implemented from 2020.

Europe played a vital role in Durban. But the key shift was from China. Under pressure from vulnerable and poor states in Africa and elsewhere, it has shifted from naysayer to supporter of a global deal. The US found itself outflanked – with Saudi Arabia and Venezuela for company.

The challenge now is to avoid a repetition of Copenhagen. The world cannot afford three years of talks that founder at the last minute. Success in 2015 depends on several factors. First, we need to change the debate from being narrowly about climate to being broadly about resources. This means food, water and energy – on land and in the oceans. All three are obviously affected by climate change. All three interact in dangerous ways. Increasing our resource efficiency not only helps the climate but also will help our economy.

Second, Europe needs to show how low carbon contributes to our economic benefit not hardship. George Osborne, the UK chancellor of the exchequer, is fond of saying that “we will not save the planet by bankrupting the UK economy”. Of course we will not, but we can enrich Europe’s including Britain’s economy by putting ourselves at the head of a low-carbon revolution that represents an economic transformation at least as big as the entry of China into the global economy. Today, more than ever, Europe needs a common project to counteract the forces pushing it apart – leading the low-carbon revolution can be such a project.

Third, the debate needs to be rebalanced from “climate-makers” – countries that emit CO2 – to “climate-takers”, the people and countries that suffer from climate change. There are new political coalitions to be built here, aligning countries with common interests in a low-carbon future, outside the confines of the traditional monolithic UN blocs and balancing the powerful voices of carbon-burning industries.

Fourth, we cannot just hope for a shift in US politics on climate change. Barack Obama’s personal commitment is clear, but I do not know anyone who sees how a global agreement could get the necessary two-thirds support in the Senate. The Republican party is in the hands of the climate-change deniers. We need to work out how to accommodate the US without excusing them – or it will again become a pretext for others to refuse to move.

Fifth, national pledges of action made under the Cancún agreement of December 2010 need to be fulfilled. These do not get the world on track to keep emissions below the level likely to lead to a rise of 2°C this century, but they do provide a base on which to build.

Sixth, technological innovation is vital for action on emissions and for the political support necessary for transition to a low-carbon economy and society. The incentives – from prices to regulatory standards – need to be structured to drive investment and innovation in low carbon. This includes the vital issue of decarbonising energy supply. Europe and China could forge a remarkable low-carbon trade deal to promote low-carbon technological progress.

Seventh, there is the pressing issue of finance for adapting to and mitigating climate change. In Copenhagen, leaders made grand statements and pledged $100bn, but to date little real money has been committed. Not much will happen without finance and the right mechanisms for getting public support and private sector capital flowing to the low-carbon economy.

Finally, the scientific community has to rehabilitate itself. In 2014, the UN’s fifth assessment is set to report a significant worsening of the trends. But the communication of those facts and the strengthening of trust in climate science is critical.

Achieving a global deal will help, but a treaty is only as good as the actions countries take to implement it. Before the crisis, Britain enacted some of the world’s strongest pro-climate policies and was staking out a position as a leader in the green economy. We cannot let the age of austerity be the age of inaction – the climate will not wait. Reducing our dependence on foreign energy, investing in low-carbon infrastructure and innovating, and exporting, green technologies are critical levers for reviving the UK’s economy.

Low-carbon development raises issues of justice, security and prosperity. It is one of the hardest nuts to crack in the multilateral system. As leadership elections and transitions dominate politics in the next 18 months, this is a challenge the winners cannot be allowed to duck.

The writer was Britain’s foreign secretary and is a Labour MP

President Barack Obama’s budget for 2013 will set off a vitriolic battle. Republicans will rail against the Democrats’ “class warfare” and Democrats will rail against the Republicans’ “coddling of the rich”. Yet it is mostly for show. The rich will win in their fund balances while probably losing at November’s presidential polls, and the poor and working class will probably re-elect Obama but suffer a continuing decline in relative and perhaps absolute incomes.

Consider the bottom line of the Obama budget. The policy is to cut total primary (non-interest) federal spending from about 22.6 to 19.3 per cent of gross domestic product from 2011 to 2020, while revenues would rise from recession lows of about 15.4 per cent of GDP in 2011 to some 19.7 by 2020. Compare that with Republican congressman Paul Ryan’s budget a year ago. Mr Ryan’s budget aimed for about 17 per cent of GDP in primary outlays by 2020, with revenues at about 18 per cent of GDP. The difference is modest, but the important fact is this. Both sides are committed to significant cuts in government programmes relative to GDP. These cuts will be especially swingeing in the discretionary programmes for education; environmental protection; child nutrition; job re-training; transition to low-carbon energy; and infrastructure. The entire civilian discretionary budget will amount to only 2 per cent of GDP, or less, as of 2020, in the budget plans of both Obama and the Republicans.

There are far better alternatives for America’s future. Successful northern European countries spend much more as a share of GDP on early childhood development, family support, job training, science and technology, and infrastructure, and they raise higher tax revenues to pay for them. Through a better balance of private and public investments they achieve lower unemployment, lower trade deficits, lower budget deficits, less poverty, longer holidays, better child care, higher life expectancy and higher reported life satisfaction.

The true nature of Washington politics is thinly disguised by the heated political debate between them. Both parties depend on the money of rich corporate contributors from Wall Street, big oil, private healthcare, real estate, arms contractors and other corporate lobbies. Both cater to corporate desires, especially for tax cuts, unregulated executive pay and weak corporate regulation.

It is true that the parties’ economic policies are not identical. Mr Obama proposes to raise the top tax rate slightly from 35 per cent to 39.6 per cent. He advocates a minimum tax rate of 30 per cent on millionaires. These are modest measures and will be blocked by Republicans in Congress. He also resists even larger Republican cuts to programmes for the poor that are already on the chopping block. Yet Mr Obama also dangles the lure of further “tax reforms” to cut top personal and corporate income tax rates.

The plutocratic Republicans rail at Mr Obama’s modest proposals as if small tax increases or continuing small benefit programmes for the poor would end the liberty of America’s “job creators” – to use the Republican sobriquet for the rich. The public knows better. The public will likely back Obama for re-election, yet will earn thin rewards indeed for their successful vote.

Conceptually, US politics fits a modified version of the famous “median-voter theorem”, in which two political parties gravitate to nearly identical platforms to contest elections in the “middle”. In the US version, the parties converge not to the centre of public opinion, but well to the right of centre. They do so because electoral success depends not only on policy positions but also on raising huge campaign funds. Mr Obama has calibrated this well. His core constituencies of poor and working-class voters are the losers for it, though still better off than with a Republican president.

There are very high long-term costs to all this. Main street is in decline, despite the recent optimism over a revival of hiring. One of every two Americans is now in a low-income household. Only about one-third of Americans aged 25-29 have a bachelor’s degree, and the college completion rate falls to a distressing 11 per cent among young Hispanic men. Mr Obama’s policies are slightly more responsive to these realities than the Republican alternatives, but the larger truth is that a shrinking federal government will fail to meet America’s skill, education and infrastructure challenges.

Even as Democrats praise Mr Obama and Republicans castigate him for his headline proposals to tax the rich, the budget is actually more grim news for America’s poor and working class. The poorer half of the population does not interest the Washington status quo. A third political party, occupying the vast unattended terrain of the true centre and left, will probably be needed to break the stranglehold of big money on American politics and society.

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

President Obama releases the politically-weighty final budget of his first term on Monday. It covers the fiscal year beginning October 1 and also contains long-term budget projections. However, none of the major proposals it contains will pass Congress in this presidential election year; it is as much a campaign document as an actual budget. The key budget date in 2012 is not now, but December 31. That’s when some major tax cuts expire, the mandatory budget cuts triggered last year commence and legislation raising the federal debt limit will again be needed.

So what does the President’s new budget tell us that is of interest? It may look different after the election, but, for now, enormous deficits will continue. Namely, a higher than expected $1,330bn for this year and $901bn for next year. As a share of gross domestic product, these deficits continue to be among the largest ever experienced. That translates into a grim outlook for federal debt, which currently exceeds 65 per cent of GDP and is widely expected to be above 90 per cent by 2020. Since 1789, it has been that high only during the second world war.

The main cause of these deficits is the financial collapse of 2008 and the Great Recession that followed it, which President Obama inherited. Federal tax revenues plunged, and higher countercyclical spending, such as unemployment insurance, was triggered. Indeed, the US economy is still very weak, having grown only 1.6 per cent last year. That’s why this new budget will propose one last round of fiscal stimulus ($350bn in tax cuts and spending increases) to accelerate recovery. That would be followed by $3,000bn of deficit reduction actions (half of which would come from tax increases on individuals), beginning next year. This approach of stimulus now and long-term deficit reduction soon thereafter is, in my view, the correct one.

Let’s return to the critical issue of timing. This presidential election year, in keeping with history, is not one for major tax and spending changes. Knowing this, the Obama administration has made Monday’s budget a framework for re-election. Indeed, it is consistent with the president’s recent more populist stance, especially in its call for broad tax increases on wealthy individuals.

But, there will be a profound budget moment on December 31 this year – one of the biggest in American history. This is the day when all of the Bush tax cuts expire, including the ones affecting the middle class. If these aren’t renewed, federal tax revenues are projected to rise sharply, by some $3,600bn over ten years. The date is also the starting point for $1,200bn of mandated discretionary spending cuts over the next decade, triggered by the failure of the Congressional Super Committee last November to reach agreement. Half of these will come from defence. And lastly, the date also marks the point when legislation to raise the federal debt limit, the object of much acrimony last summer, will be necessary again.

This confluence of important budget events is virtually unprecedented, especially during a lame duck Congressional session and just after a presidential election. It presents a golden opportunity for truly fixing America’s alarming deficit and debt trajectory. That’s because the new president, whoever he may be, can veto any new tax and spending legislation, such as an extension of any of the Bush tax cuts. But, December 31 is a world away, and it’s much too soon for that sort of optimism.

The writer is founder and chairman of Evercore Partners and former deputy US Treasury secretary, 1993-94

The A-List

About this blog Blog guide
Welcome. This blog is available to subscribers only.

The A-List from the Financial Times provides timely, insightful comment on the topics that matter, from globally renowned leaders, policymakers and commentators.

Read the A-List author biographies

Subscribe to the RSS feed

To comment, please register for free with FT.com and read our policy on submitting comments.

All posts are published in UK time.

See the full list of FT blogs.

What we’re writing about

Afghanistan Asia maritime tensions carbon central banks China climate change Crimea emerging markets energy EU European Central Bank George Osborne global economy inflation Japan Pakistan quantitative easing Russia Rwanda security surveillance Syria technology terrorism UK Budget UK economy Ukraine unemployment US US Federal Reserve US jobs Vladimir Putin


Africa America Asia Britain Business China Davos Europe Finance Foreign Policy Global Economy Latin America Markets Middle East Syria World


« Jan Mar »February 2012