Monthly Archives: November 2012

The new Energy Bill that the government has introduced into parliament appears to pass the main tests that will ensure that the UK’s electricity system keeps the lights on while also reducing its impact on our climate. The basic principles are sound and there is a clear and encouraging sense of direction.

However, it still sends worrying signs that the internal bickering within the government over the future direction of energy policy may continue, undermining the confidence of potential investors in the power sector.

On the plus side, the new “contracts for difference”, should provide greater certainty about the returns on investments in renewables, carbon capture and storage and nuclear power, at least up to 2020, particularly as a new government-owned company will act as a single counterparty to these contracts, and hence limit the risks for private companies.

(These contracts mean that if the market price of electricity drops below a “strike price” set by the government, investors will be compensated.)

The cost to consumers, capped by the “levy control framework“, should be modest and affordable, with the Department of Energy and Climate Change estimating that low-carbon investments will add £95, or 7 per cent, to the average household bill in 2020, an average increase of less than 1 per cent a year, compared with £20, or 2 per cent, in 2011. According to the energy regulator Ofgem, average electricity bills have risen by more than 10 per cent over the past four years, and there are, of course, understandable concerns about how rising energy prices affect the cost of living.

Consumers could be paying less in 2020 if the government’s energy efficiency measures have the desired impact on homes and businesses; and the advantages of alternatives to fossil fuels will be greater if the wholesale price of gas rises more quickly than in DECC’s projections.

This means that the Energy Bill provides the clarity which could underpin the scale of the investment in low-carbon power that is needed up to 2020 to provide affordable electricity while reducing emissions of greenhouse gases.

The guarantee of support for renewables, carbon capture and storage and nuclear means that the UK low-carbon electricity supply system should include a portfolio of technologies that is diverse and robust enough to deal with further development.

The creation of the power capacity market, to provide insurance against blackouts via financial incentives, with the first auction tentatively scheduled for 2014, should provide a greater security of supply. The pressures on capacity are strongly influenced by the level and pattern of demand and markets can play a strong role in their management.

The key elements of managing demand in relation to supply should involve time-of-day pricing and contracts for “interruptibility”, as well as, fundamentally, using energy efficiency measures to reduce overall electricity consumption.

Taking all these measures together, the package represents an encouraging move towards using markets to provide for the medium and long run, as well as the short run, in contrast to the current system, with its excessive focus on near-term competition. Fundamental to the markets doing their work for efficiency, flexibility and discovery will be a strong carbon price – already a government commitment.

All these measures provide a clear market-based framework that will encourage investment. Unfortunately, there are still some signals that may ultimately put off investors.

Over recent months, the coalition has appeared unclear about the direction of energy policy and its commitment to low-carbon electricity.

Last year, the government dithered over accepting the recommendations by the independent Committee on Climate Change about the cuts in emissions required by the mid-2020s, insisting that the carbon budget should be reviewed next year, with the possibility that it would be weakened.

In addition, some ministers and senior cabinet members have given the false impression that economic growth and environmental responsibility are not compatible, or exaggerated the costs and challenges of deploying renewables, particularly onshore wind farms.

As a result, the very sensible CCC recommended in September that the government should include in the Energy Bill a target to decarbonise the power sector by 2030, to try to re-establish clarity for investors.

But the government has fudged its response, only creating a provision within the Energy Bill to introduce such a decarbonisation target in 2016 during the next parliament. This is a clear sign that the simmering internal disagreements between ministers over energy policy have not been truly settled, creating an impression to the outside world of risks that policy may unexpectedly change direction in future.

So it remains to be seen how investors react not just to the contents of the bill, but also to its passage through Parliament. If they remain confident and optimistic about the UK’s power sector, they could invest billions of pounds, giving a much-needed boost to growth.

But if investors are unconvinced and uncertain about the Government’s intentions, households and businesses will find it increasingly difficult to gain access to affordable and secure sources of clean electricity.

President Morsi’s decree granting him more power has acted as a catalyst for widespread protests in Egypt and a rupture in relations between the executive and judicial branches of government. It has also placed Egypt’s allies in an awkward position. The renewed turmoil will also inevitably raise questions about the recent agreement with the International Monetary Fund, which many view as essential for the economy’s wellbeing.

Egypt has turned to the IMF not out of choice but of necessity. Its economy is yet to gain proper momentum. Unemployment is too high, especially among the young. Foreign exchange reserves have stabilised but show little sign of returning to prior levels. The budget deficit is under pressure. Local interest rates have risen. And foreign investors remain hesitant, adding to the financial rationing that is holding back the private sector’s considerable potential.

The political and social implications of Mr Morsi’s decision are potentially profound. Most importantly, the current situation impedes progress towards the important goal of the grassroots uprising of January 2011: to deliver greater social justice and broad-based economic improvement, as well as reorient institutions towards the common good and away from benefiting deeply-entrenched minority interests .

A derailment of the IMF’s support for Egypt would add to the country’s challenges. This institution is the only creditor able and willing to provide Egypt with fast, low cost financing. Its involvement would facilitate $10bn from other creditors, as well as the reported $4.8bn from the fund itself. The institution’s technocrats can support Egypt in the implementation of its own reform programme via a coherent economic framework

Getting broad-based local support for the IMF’s involvement was never going to be easy. Some Egyptians still view the institution as an arm of western domination. Many have no desire to return to the days of external dependency. And most worry that the fund’s involvement would complicate already-delicate measures to reform Egypt’s subsidy system and its bloated public sector.

Mobilising external support for a fund programme is also complex. With its involvement in Europe over the last three years, the IMF has sent confusing signals about programme standards, funding levels and the application of conditionality. Some countries expect the IMF to apply the same leniency to Egypt. Others worry that this would constitute yet another step down a very slippery slope.

For now these issues have been crowded out by the political turmoil. But they will soon return.

Once the country regains its footing, which will probably involve Mr Morsi rescinding parts of the recent decree, the government and the IMF will need to move quickly to anchor the agreement aimed at stabilising the country’s immediate economic situation and providing the basis for meeting the medium-term objectives of the revolution.

To this end, the IMF needs to be open and explicit about the trade-offs involved as Egypt attempts to move from a horrid past to a better and more inclusive future. For its part, the government will need to engage in broad discussions on any IMF programme.

This would inevitably involve lots of noise. Yet this is Egypt’s new reality. And fundamentally it is not such a bad one.

For the first time in a very long time, average Egyptians feel empowered and able to influence the destiny of a country that they now own. To outsiders, this comes across as loud and messy. And it is. But it is also an indication of Egypt’s new checks and balances and, more broadly, its bumpy journey towards a vibrant democracy.

Proper engagement with the IMF on an Egyptian-owned program could help the country progress on this important path. In turn, this would increase the likelihood that the Fund would go from being seen as an instrument of western colonialism to a supporter of Egyptians legitimately seeking greater social justice, inclusive growth and fairness.

A recent survey by the French Institute of Public Opinion (Ifop) showed that 68 per cent of the French are pessimistic about the future, a record for this early in a new presidency. This does not mean that France has become a dismal country to visit: the French rather enjoy gloom. They even have a word for it – morosite – which has no easy equivalent in English, though the sense is clear.

But while it is quite acceptable in Paris for a resident to be pessimistic, indeed it is almost de rigueur, the same indulgence is not granted to foreigners. The French have spent the last weeks shooting messengers. The rot set in at the end of October when the German news magazine Bild asked pointedly if France is about to be the new Greece. An Economist cover story described France as a time-bomb ticking at the heart of Europe. Then, to add insult to injury, Moody’s downgraded French debt, and left the country on negative watch.

This outbreak of Anglo-Saxon hostility has caused a degree of circling of wagons. The Prime Minister, Jean-Francois Ayrault, talked of sensationalism and the desire to sell papers. The right-leaning Le Figaro, no friend of President Hollande, the main target of the Economist article, charged the British press with “le French-bashing”. (The Financial Times is seen as an enthusiastic fellow-traveller of The Economist in this regard).

In fact the English language press is saying nothing that has not been said, more elegantly, and with more supporting analysis, by the Cour des Comptes, the French National Audit Office (though that pedestrian English term does not quite convey its grandeur) or in a report on competitiveness by Louis Gallois, the former boss of the European defence group EADS. Mr Gallois’ report raised the alarm, pointing in particular at high employment taxes and inflexible labour markets as impediments to growth.

But the recommendations, from a man with centre left credentials, were – to Anglo-Saxon eyes – a strange mishmash. He argued for a cut in labour taxes, funded by increased VAT, and some modest legal changes, but balanced by a set of measures to promote what we would call “industrial democracy”, with greater staff representation on works councils, whose impact on competitiveness is unclear and highly indirect, at best.

In response, the government set out a “competitiveness pact“, which included a promise to implement some of his 22 ideas. But French employers were underwhelmed, and it is unclear how committed the other social partners are to the pact. In any event, it is hard to see that it amounts to a Copernican revolution, as Finance Minister Pierre Moscovici characterised it. French policy remains built on an assumption that the sun will continue to circle France, and that investors will continue to look benignly on the state’s 56 per cent share of the economy.

So far, they are right. Markets have not reacted to the Moody’s’ downgrade: French borrowing costs remain very low. In relative terms, French credit looks secure. Though there have been rumblings from across the Rhine from German economists, and possibly from Finance Minister Wolfgang Schaueble himself (though that is denied) about France’s declining competitiveness, and unsustainable labour costs, the Germans still have greater worries further south, and no incentive to upset the applecart by questioning the soundness of their biggest partner.

Perhaps we should conclude, then, after a few weeks of Gallic angst, that it has been much ado about nothing, and all’s well that ends well. Life can go on as normal for the Normal President.

Perhaps, but the facts are inescapable. French unit labour costs have risen by 20 per cent more than German since the launch of the euro, and there is no sign of a change of trend. France’s public spending remains well above the EU norm, even five percentage points above Sweden’s. A present day Shakespeare might produce a bittersweet comedy under the title “If a thing can’t go on for ever it will probably end one day”. That day could dawn with little warning.

Below the surface, there are worries. At a dinner in Paris last week the conversation turned to the interesting question of who the French Mario Monti would be if a government of national unity were needed there. Pascal Lamy was the answer, now happily “au dessus de la melee” (above the battle) at the World Trade Organisation in Geneva. He knows the geography of the prime ministerial offices at Matignon quite well. Mr Ayrault should beware.

As a self-designated foreign policy curator on Twitter (@slaughteram), I have a front row seat to the Israeli-Palestinian Twitter wars, which began with the Israeli Defense Force tweet warning Hamas commanders to lay low and Hamas, tweeting under @alqassambrigade, replying that Israel had “opened the gates of Hell on itself”.

Over the past week both sides have provided blow-by-blow Twitter updates on each missile and rocket fired and the damage done. More powerful and pervasive than the official tweets, however, has been the verbal and visual war unleashed on both sides, as Israelis, Palestinians and their respective supporters around the world posted pictures, blog accounts, news articles and opinions. Each detailed the blood and grief on the ground and ties it to a larger narrative of terrorism and indiscriminate rocket fire, from the Israeli perspective, and occupation, blockade and targeted killings in the Gaza Strip, from the Palestinian side.

Reading these streams allows us all to see the conflict through the radically different lenses that shape and distort reality on both sides; lenses ground from a mixture of history, politics and the manipulation of victimhood. It allows us to see how impossibly far apart Israelis and Palestinians are with regard to both the past and the present and underlines that the only hope for real peace is to fashion a credible and powerful vision of the future.

That vision is not going to come from the parties themselves – despite Wednesday’s welcome ceasefire. It has been an article of faith in Israel and the US that only the two sides – the Israelis and the Palestinians – can negotiate a peace settlement; that bystanders can help create the conditions for those negotiations but must not broker the terms of the settlement itself. Yet both sides continually find reasons not to negotiate and give endless justifications for why the stalemate is the other side’s fault.

In the end, too many politicians have more to gain from prolonging the present than committing to an uncertain future. Hamas leaders are willing to sacrifice the lives of thousands of Gazans and the repeated levelling of houses, shops and infrastructure to bolster their position as the “true representative” of the Palestinian cause.

Their rivals in the Palestinian Authority have done their best to create a better life for the Palestinians in the West Bank, but will not risk their own precarious political position by sitting down to negotiate without preconditions. And the government of Benjamin Netanyahu benefits from the steady expansion of settlements in the West Bank and Jerusalem that slowly make a genuine Palestinian state impossible, all the while convincing Israelis that they can literally wall themselves off from the oppression, discrimination and injustice flowing from decades of occupation and conflict.

It is time for the US, EU, Egypt, Turkey, Jordan, Qatar and Saudi Arabia to agree on the outlines of a peace settlement that they could all could live with and put it forward as the basis for negotiations. The terms, which are already broadly known to anyone who has paid any attention to the peace process over the past decade, create two viable, secure and prosperous states that would be recognised and supported by all countries across the region. The vast majority of Palestinians and Israelis would accept such a settlement if they could see a tangible vision of a better future for themselves and their children and actually believed it could happen.

Governments across the Middle East now have a much greater stake in making that vision a reality. Whereas the political calculations of current Palestinian and Israeli leaders push against a deal, their Egyptian, Jordanian, Turkish, Qatari and Saudi counterparts are now operating on a different calculus. Particularly in Egypt, but to a lesser extent rippling throughout the region, newly empowered publics are demanding that they support the Palestinians in ways that could result in regional war if Israel were to push ahead with ground invasion of Gaza. Adding a wider Arab-Israeli hot war to the volatile politics and conflicts of the Arab awakenings and the Saudi-Iranian rivalry is a recipe for conflagration.

The stake of these governments in a definitive, durable peace is higher than it has been for decades.

The Arab awakening has also changed the picture for the US and to a lesser extent the EU. Many of the Egyptians, Syrians, Jordanians, Bahrainis, Saudis and others that I follow on Twitter are reputable journalists, expert commentators and resistance figures demanding democracy and basic human rights from their governments. Their views are much harder to dismiss than the propaganda put out by Hamas and other Palestinian groups that deny Israel’s right to exist and openly support terrorist attacks on Israeli civilians. Moreover, the pictures they send of a powerful Israel and a desperately poor and shattered Gaza are now echoed nightly by live reporting from Gaza by CNN and other mainstream news programmes. These images put an unavoidable human face on political abstractions.

It is time for a game-changer, of the kind that can only come from real political courage. President Barack Obama of the US and President Morsi of Egypt, perhaps joined by Catherine Ashton of the EU and prime minister Recep Tayyip Erdogan of Turkey, must find the strength and independence to come together and reach a common position on the way forward, even in the face of vehement opposition from their allies and their publics.

Beyond Gaza and Israel, the killing continues in Syria, shattering the country and threatening sectarian fragmentation that will destabilise all five of its neighbours. Iran continues to enrich uranium and roil the region with its support for dictators and terrorists. Iraq faces an almost daily toll of violence on top of deep political dysfunction. Unrest simmers in Jordan, Kuwait and Lebanon.

The Israeli-Palestinian conflict holds one of the most important keys to unlocking the iron cage of poverty, violence and political and religious manipulation that has imprisoned the people of the region for so long. This new round of conflict, as heart-wrenching and ugly as it is, creates an opportunity and even a catalyst to turn that key at last.

The writer is the Bert G. Kerstetter ’66 University Professor of Politics and International Affairs at Princeton University and former director of policy planning for the US state department

Israeli missiles continued to fall on Gaza; meanwhile, a bus was blown up in Tel Aviv. But by the end of Wednesday, a ceasefire agreement between Israel and Hamas, and brokered by Egypt and the US, was signed. However, there is a big difference between a truce that is an interlude between rounds of fighting and one that presages a promising political process. It might take a willingness to learn from Northern Ireland, of all places, to tip the scales towards the latter.

Decades of violence – “the troubles” – set the backdrop to negotiations. Success had its roots in British policy. London’s objective was to end the terrorism and bring about a political settlement. Doing so required persuading the Provisional IRA that it would never be able to shoot or bomb its way into power and that there was a political path open to it that would satisfy some of its goals and many of its supporters, if it would act responsibly.


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The government of Israel has internalised the first but not the second part of Britain’s strategy. Israel has carried out massive air strikes that have reportedly destroyed the bulk of Hamas’s Iran-supplied, longer-range missiles and killed dozens of Palestinians, including Hamas’s military chief.

But military force has limits. Israel cannot bludgeon the Palestinians into submission. Nor should it want to reoccupy Gaza: there is no reason to believe the results would be any better this time round.

Israel needs a Palestinian partner if it is ever to enjoy peace and be the secure, prosperous, democratic, Jewish state it deserves to be. But such a partner will not just emerge; Israel, as the stronger party, actually needs to help the process along.

Right now Israel has two potential but deeply flawed partners. The Palestinian Authority in the West Bank has an apparent desire to make peace but is too weak to make meaningful concessions. Hamas is easily strong enough but is unwilling to reject violence and accept Israel.

So Israel has a choice: it can work to strengthen the secular leadership on the West Bank or it can work to moderate Hamas. The former argues for dropping sanctions put in place to weaken and humiliate the PA. The latter means not just frustrating Hamas militarily but demonstrating that negotiation is likely to yield better results.

It is not clear whether Hamas is open to compromise. Even less clear, though, is what it has accomplished with this latest round of fighting. Hamas has again demonstrated its willingness to take the fight to Israel but also its inability to get results.

What has made the Hamas action singularly counterproductive was that it came on the heels of a visit to Gaza by Qatar’s prime minister and an infusion of financial support. Hamas had essentially weaned itself from dependence on Iran and Syria only to squander the opportunity.

Hamas is in competition with the PA that rules over the West Bank for who represents all Palestinians. Hamas enjoys an advantage, though: its agenda of political Islam much better captures the zeitgeist in Egypt and throughout the region, whereas those ruling the West Bank, including many former associates of Yassir Arafat, are widely seen as in the image of Arab strongmen who have been removed from power.

But Hamas only benefits from this comparison if it fully embraces political Islam as a means and not just an end. Distancing itself from armed aggression will not deliver a viable Palestinian state.

Israel needs to put Hamas to the test. It can do this by putting forward the outlines of a fair and comprehensive settlement and a reasonable path for getting there. The US should work closely with Israel in framing this proposal. Hillary Clinton, secretary of state, should use the rest of her time in the region to urge this course. Her goal should be to stimulate a debate in the Arab and Palestinian worlds that would press Hamas to change its ways or risk being caught between those who are even more radical and those prepared to compromise.

This was the dynamic created in Belfast. In the end, Gerry Adams and Martin McGuinness – the leaders of Northern Ireland’s Hamas equivalent – met the British challenge. They put down their arms, entered the political process and reached agreement with those they had fought for decades. Leaders of both communities deserve credit – but no more than the British, Irish and US governments that created a context for diplomacy.

It is up to Israel, the US and Arab governments to do the same now. No one can be certain the effort will pay off; what is sure, though, is that the choices and options will only become worse with the passage of time.

The writer is the president of the Council on Foreign Relations. He was the US envoy to the Northern Ireland peace process from 2001-03

Despite a courageous public stance by the International Monetary Fund, European officials failed again on Tuesday to deal with the critical issue of Greece’s debt sustainability. If this continues, they will undermine yet another bailout package for Greece and suffer further erosion in credibility, especially in the eyes of their own citizens. They also risk seeing another hard-fought cash infusion do little more than buy a few months for a struggling Greek population.

Greece’s problems are well documented. Years of economic mismanagement and resource misallocations have left the country with poor competitiveness, a bloated public sector, way too much debt, and bankrupt banks. To complicate matters further, the country’s short-term economic aspirations are yet to converge with the country’s inconvenient truths.

The political and social dimension is also concerning. Unlike other notable sovereign debt crises (South Korea in 1998, Brazil in 2002-3, Iceland in 2008-9, and Ireland in the past three years), Greek citizens continue to protest and disengage, showing no sign of rallying behind their elected officials in a national recovery effort.

This latest bailout package is meant to improve things: by injecting more money into an economy riddled with payments arrears and virtually no financing for working capital (let alone new plants and equipment); and by accompanying this temporary financial relief with measures to bring the budget under control, recapitalise banks and expand growth-enhancing structural reforms.

While well-intentioned, this bailout would likely fail if a major sticking point — Greece’s need for another major debt reduction — remains unresolved. The country would thus stay stuck in a recession that has ravaged the country for more than four years. Youth unemployment, already in excess of 50 per cent, would become more deeply embedded. And the social problems would continue, with a particularly devastating effect on the most vulnerable segments of the population.

When confronted with yet another failure, European officials would again point the finger of blame at the Greek government for not implementing the programme in full. Greece would again blame programme design. And the challenging regional environment would be lamented by all, as would the lack of responsive institutional mechanisms.

Thanks to the IMF’s willingness to speak out, a new element would now be hard to ignore: European officials’ repeated wish to brush under the rug Greece’s debt overhang.

The IMF’s insistence — at the cost of angering some of its most important political masters — is anchored by solid theory and experience.

Think of what happens when a huge dark cloud hangs over a home. Occupants will delay as much as they can any outside activities pending the passage of this menace. Same for a visibly outsized and unsustainable sovereign debt stock; in addition to draining government resources, it discourages fresh capital inflows critical for the “four Rs” of overcoming a debt crisis: recapitalisation, rehabilitation, restructuring and recovery.

Deep inside, European officials understand this. After all, they did fund a couple of years ago a significant haircut on Greek bonds held by private creditors. Today, some are suggesting another round of such “PSI” (private sector involvement). But the problem no longer resides with the private debt.

The devastating debt overhang now consists primarily of debt owed to European governments, institutions and the IMF. And all that Europe seems willing to consider right now is to extend principal maturities and reduce interest rates. Explicit official debt reduction operations — or “OSI” for official sector involvement — appear off the table.

By again refusing to take a meaningful haircut, European officials believe they are avoiding precedents that are not just politically tricky but could also fuel disruptive regional contagion. To the extent they are correct — and it is debatable — they would be winning a small battle by increasing the probability of losing the war.

Until recently, many European officials stubbornly held to the belief that “advanced countries” – and especially those that had risen to membership of such a privileged club as the eurozone – were structurally immune to “developing country debt crises.” Their outmoded mindset undercut responsive policy responses, wasting billions of Euros and undermining millions of lives. By again shying away on Tuesday from meaningful official debt reduction, Europeans signaled that they still lag realities on the ground.

The IMF is right. Greece urgently needs OSI. The longer Europe resists, the greater the risks to the integrity of Greece and to the credibility of Eurozone policy responses. Let’s hope that good sense prevails when European officials convene again next week.

On Monday, Turkish Prime Minister Recep Tayyip Erdogan denounced Israel as a “terrorist state”. Whether you find yourself nodding or shaking your head in response, take a moment to consider those words.

This judgment did not come from predictable quarters: from Syria’s soldiers, Iran’s mullahs, or even Saudi royals. Turkey is a moderate Muslim democracy, a member of Nato, one that has traditionally protected constructive relations with Israel. And Mr Erdogan did not simply denounce a particular Israeli action, as he did in 2010 following an Israeli raid on a Turkish aid ship bound for Gaza.

He labeled Israel itself as a source of terrorism.

What’s truly new about Israelis and Palestinians exchanging fire? It isn’t Israeli politics. Early elections are on the way, and there are few signs that Prime Minister Benjamin Netanyahu faces a serious leadership challenge. Nor is it the increasing number and accuracy of rockets fired by Hamas and its Al-Qassam brigades.

It is the surrounding landscape that has changed. The immediate neighbors are the first worry. Egypt’s embattled civilian leaders have little incentive to give Israel any breathing room. The same can be said for Jordan, and Israel has very few friends on any side of Syria’s grinding civil war. In fact, governments in the Middle East, even those that are relatively stable, must worry about public opinion as never before. And outside the US, it’s getting hard to find a country in which public opinion remains on Israel’s side.

That’s why it is especially worrying that Israel is behaving as if none of this matters. For the near term, perhaps it doesn’t. Though Hamas has managed to stockpile a substantial number of increasingly sophisticated weapons, Israel plainly has the means to restore order-with brute force where necessary-and its “Iron Dome” anti-missile system will hold. Hamas will fight on knowing that its forces are overmatched.

But on the international stage, this conflict and the response it has provoked from moderate governments like Turkey’s are game-changers. There are no longer persuadable partners in the region.

Washington will defend its old friend. President Obama has made crystal clear that Israel’s operations in Gaza have his full support. Hillary Clinton, the US secretary of state, is expected to travel to the region today. Yet, the US is not the power looking to become more active in the Middle East in years to come. That country is China, a still-emerging power that has no cultural and ideological ties with Israel to protect as it looks to ensure the steady long-term flow of crude oil.

For all these reasons, it has never been more important for Israel’s long-term security for Israelis leaders to build and protect a workable peace with Palestinians. Sadly, after years of diplomatic inaction and now another surge of deadly violence, that peace looks more remote than ever.

The writer is the president of Eurasia Group, a political risk consultancy, and author of ‘Every Nation for Itself: Winners and Losers in a G-Zero World’

As the deadline to avert the fiscal cliff gets closer, US policy makers may want to learn some lessons from the way eurozone authorities managed their crisis. Let’s consider four.

The first is that policy authorities tend to act too late, after financial markets have lost confidence. This is because of a belief among policy makers that the unpopularity of decisions will diminish only when voters understand that the alternative is much worse. Only on the verge of disaster do citizens understand that unpalatable policies are necessary. But by that point, financial markets start questioning the determination and ability of policy makers to face the situation and tend to lose confidence. At that point, even more unpalatable actions may be required.

The eurozone experience has shown how costly such a strategy can be. For instance, finding a consensus in Germany for providing financial support for Greece became possible only when the crisis reached a peak, in May 2010, and the euro seemed at risk. But at that point the size of the overall package required to stabilise the markets had risen substantially.

If the US authorities follow the same path and wait for market pressure to force a compromise, the decision might be more acceptable to both sides, being the last resort, but the burden on the economy might be dear. The sooner a solution is found, the less costly it is.

The second lesson to be learned from the European experience is that open political brinkmanship fuels financial instability. Games of chicken are won by the party which convinces the other that it will not compromise, even if it makes everybody worse off. Negotiations should ideally take place confidentially, and the result would be known only when it is reached. This is obviously difficult to achieve in democratic systems.

In the eurozone, brinkmanship has been frequently used to convince the other party in the negotiation. In particular, eurozone authorities had at times to threaten openly that they would let Greece fall out of the euro, in order to make the Greek policy-makers understand that there was no room for compromising on conditionality. This might have been effective in convincing the Greek government to stick to their commitments, but it also scared the markets away from Greece, and the eurozone.

If the opposing parts in the US start negotiating in public, from their apparently uncompromising positions, the risk of catastrophe will increasingly be discounted by the markets, with negative effects on confidence.

The third lesson is that partial solutions may temporarily solve problems but ultimately a piecemeal approach requires more comprehensive action later on, generally much earlier than expected. The political cost of such a strategy has been quite high.

European summits have had less and less impact on market sentiment, as the prospected solutions appeared to be partial and lacking a comprehensive plan. For instance, markets reversed the initial positive reaction to the agreement on the ESM last June, when they understood that the agreement on the banking union and fiscal union was still vague.

In the US, much emphasis has been put recently on the need to avoid the fiscal cliff, but less so on how to achieve the result in a sustainable way. Confidence is likely to vanish if policy makers do not come up with a credible medium term plan, based on realistic assumptions about growth and interest rates.

The fourth lesson which can be drawn from the eurozone crisis is that fiscal and structural problems can ultimately be settled only by the respective policies. Monetary policy can only help buying time for the relevant political sphere to design and implement concrete solutions. Experience shows, however, that if the time is too long the authorities in charge tend to relax, thinking that favorable market conditions are there to last, and ignoring that these conditions are partly the result of a deliberately accommodative monetary policy.

Each time the ECB succeeded in calming the markets with extraordinary measures, either the Securities Market Program or the Long Term Refinancing Operations, the pressure eased on the eurozone political authorities to pursue the adjustment and complete the institutional framework underlying the euro.This is the reason why the ECB’s Open Market Transactions had to be made conditional on the political authorities’ signed commitment to do their part of the job. Acting without such conditionality would entail the risk of losing credibility and compromising the effectiveness of monetary policy.

If a central bank gives the impression that it stands ready to be the “only game in town”, it will end up being played. The other policy makers will have no incentive to take on their own responsibilities. This will ultimately drag the central bank into monetising the debt and lose its reputation.

The writer is a visiting scholar at Harvard’s Weatherhead Center for International Affairs and a former member of the ECB’s executive board

The three independent reviews of the Bank of England’s performance before and during the financial crisis must have been sobering for the court, its governing body. In polite but pointed language the reviews, published on November 2, confirmed that the BoE was ill prepared to recognise or deal with the crisis in its early days. The BoE’s forecasting was also found to be subject to groupthink. The reviews provided many detailed recommendations but also made it clear that a full-scale cultural change is needed to address the root causes of the problems. This will be a high priority for the next governor.

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It will not be easy. From the four years I spent on the Monetary Policy Committee and the subsequent four years on the court, these criticisms ring true. The hierarchy was strong and self-perpetuating. Junior staff rarely spoke up in meetings where senior people were present. When, as an MPC member, I asked for a detailed briefing on a research note prepared by a bright young economist, their boss always came along and did most of the talking. There were few women in middle management, let alone at the top.

The central bank’s culture will not be changed by the imminent addition of a chief operating officer to its top-heavy hierarchy. There needs to be a flatter structure and a replacement of long-serving middle and senior managers with new people from outside the bank. This will be difficult in such a sheltered and self-financing public sector organisation. It will take time and may get stalled unless the court supports the new governor and keeps up the pressure.


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In addition to implementing the reviews’ technical recommendations, there are three looming issues that the new governor will need to address: the exit strategy from quantitative easing, fixing the forecasting model and avoiding conflict among the departments.

Deciding and implementing an exit strategy for QE will be the most important challenge for the MPC over the next year or two. The US Federal Reserve faces a similar problem. “Nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves,” says Richard Fisher, president of the Federal Reserve Bank of Dallas. With interest rates near zero and huge holdings of government debt on central bank balance sheets, it will be a long road back to functioning financial markets and positive real interest rates.

The first, seemingly small, decision about the exit strategy for QE will arise in March next year when the initial tranche of gilts bought during QE1 begins to mature. Only £7.7bn of redemptions are due in 2013, but the MPC’s decision on whether to reinvest the proceeds will be an important signal to the market.

The second looming issue is how to fix the bank’s forecasting model to improve its performance and give better guidance to the MPC and the markets. The review by David Stockton found that the MPC’s forecasts have been worse recently than before the crisis and marginally worse than those of outside forecasters. The bank’s model has little financial market detail, yet credit constraints and household deleveraging are major factors affecting Britain’s recovery. And now that QE has become the dominant policy instrument, a model that lacks detailed financial channels to analyse how QE actually works is a major problem.

The next governor must find a way to avoid policy conflict among the MPC, the Financial Policy Committee and the micro-prudential functions of the Prudential Regulation Authority which will supervise individual banks. Having them all report up through the BoE’s hierarchy to a single person is no guarantee of policy coherence. Having different outside members on the MPC and FPC puts additional onus on the bank governor and his deputies to ensure that everyone has the same access to information and analysis. This too will require a culture change in an organisation whose tradition is for secrecy rather than openness and where outsiders can be kept in check through a strategy of divide and conquer.

The BoE has a proud tradition, but its reputation has suffered from the crisis and its ways of working constrain its effectiveness. The new governor and court face a formidable task. At this critical time, the sooner they begin the better.

The writer is a former member of the court of directors of the Bank of England and of the Monetary Policy Committee

The minutes of the US Federal Reserve released on Wednesday are an essential read for those interested in a real time snapshot of the complexity of modern day central banking. They are also a cautionary note for all who believe that, acting on their own, today’s hyper-active central banks can engineer good economic outcomes.

While the Fed is already deep in experimental mode, the minutes confirm that officials there are already considering additional measures. There are two reasons for this. First, their baseline economic expectations remain subdued as more positive housing and consumption indicators are offset by slower business activity. Second, they recognise the “significant downside risk” to the baseline forecast due to the global economy’s synchronised slowdown and the possibility of further financial shocks, such as the US falling off the fiscal cliff.

The minutes also reveal considerable confusion as to what exactly the Fed should do next. With interest rates at zero and forward interest rate guidance already extended to mid-2015, policy is faced with a shrinking set of options. This includes evolving further its communication role by moving to “quantitative thresholds” (ie, specific targets for the unemployment rate and inflation or, alternatively, for a broader concept such as nominal GDP); and/or expanding the programme to purchase securities on the open market (or “QE3”) in order to change the private sector’s behaviour.

While many Fed officials appear to favour additional policy activism, the minutes cite the need “to resolve a number of practical issues” before taking another major step. That is not surprising. What the Fed is now considering is fraught with even greater operational complexity. And this applies to both components.

As regards communication, the challenges go well beyond the tricky specification of the quantitative thresholds. Should the Fed target actual or forecast levels? Should its policy reaction function involve a glide path or a step function? How conditional should its commitment be?

The Fed is also running against practical concerns when it comes to the possibility of more QE. Already, its large purchases have turned this traditional referee into a non-commercial player with influential ownership of many individual market issues. The Fed has imposed a sizeable footprint on the markets for US Treasuries and mortgages. In doing so, it has altered not only valuations but also the efficient functioning of markets. As such, it is also far from straightforward to expand the institution’s securities program without creating significant damage.

As real as these problems are, they pale in comparison to what is really at issue: the worrisome signal that – with other policymakers essentially missing in action and politicians again playing Russian roulette with the economy – influential members at the Fed feel that they have no choice but to do more using imperfect, untested, partial and, potentially, risky tools.

This policy dilemma is amplified by the fact that, until now, the Fed’s unusual policy activism has failed to deliver the growth and employment results that its policymakers expected. At best, Fed officials have provided more time for the system to heal, but at the risk of growing collateral damage and unintended adverse consequences.

Judging from the minutes, some Fed officials are worried, questioning “the effectiveness of current purchases.” Yet this will not stop the institution from implementing additional highly experimental policies – and not because it wants to but, rather, because it feels it has no choice but to do so. And it could happen as early as the December or January Fed policy meetings.

Expect the Fed to move to quantitative thresholds, announce additional outright purchases of securities, and reintroduce Treasuries to their list of targeted instruments. But unless (and until) politicians and other policy making entities step up to their responsibilities, this unusual policy activism will fail to deliver the economic outcomes that the country needs and deserves.

China’s change of leadership comes at a precarious time for the world economy. Europe is still trying to find a politically sensible solution to the eurozone crisis; the US is at the edge of the fiscal cliff. The adjustment in the developed world is likely to take many years, possibly the rest of this decade. For China, this means that fast export growth will be permanently sealed in the historical drawer.

Challenges inside China are no less demanding. The 18th Chinese Communist party congress pledged to double Chinese per capita income by 2020. This is a modest goal when judged against historical records. However, several factors may make it a challenging aim in the rest of the 2010s. Facing an export slowdown, China needs to enlarge its domestic market. However, there is no clear sign that household consumption will increase as a share of the economy, after more than a decade of decline. China’s labour force will peak in 2015; after that, China has to rely on technological progress and human capital to generate more growth. Manufacturing, China’s growth engine, will probably reach a peak in terms of its share in the economy sometime between 2015 and 2020. Change is afoot.

It seems that the new party leadership has noticed. The 18th congress has highlighted several reforms to address these challenges, among which the reform of the hukou system, or the household registration system, is the most significant. This system was introduced in 1958 to restrict labour mobility, especially migration from the countryside to cities. In effect, it confines a person’s legal residency to his birthplace. However, 240m people, including 160m with rural hukou, do not presently live in their birthplaces.

In fact, a new hukou policy was announced in February 2012. Through this new policy, migrants in small cities can apply for local hukou if they have a stable job and a place (including a rented home) to live. Migrants in medium-sized cities can do the same if they have worked and lived in the same city for three years in a row.

This policy, if it is implemented, will greatly boost domestic consumption for two reasons. First, rural migrants save much of their income because they have to prepare for going back home someday; giving them urban hukou will stabilize their expectations and allow them to consume more. A rough calculation shows that China’s household consumption would be increase by 4.2 percentage points as a share of GDP if the consumption level of rural migrants were increased to the average level of city-based Chinese.

Second, migrants will bring their children and parents to the city once they get the urban hukou. A larger urban population will provide a larger market for services, a sector very much underdeveloped and with the potential to fill the gap left by the falling share of manufacturing in the second half of this decade.

In China, leaders are not elected. But political cycles still exist. Market-oriented reforms between 1978 and 2002 had increased the efficiency of the Chinese economy, but also left the country’s social security system shattered and its countryside untended. In the last decade the Hu Jintao-Wen Jiabao government took serious steps to rebuild the social security system and to increase investment into the countryside, especially in its education system.

In a sense, this government has turned the country toward the left. It is thus reasonable to expect that the next government of Xi Jinping and Li Keqiang would go back to the reform track. The political report of the 18th congress did not mention the payroll reform, a mandate carried out by the current premier Wen Jiabao in the hope to correct China’s enlarging income inequality. Clearly, the next leadership does not want to continue the left-leaning policies of the current administration.

There are daunting challenges for the next leadership if it wants to carry out the reforms spoken of during the 18th congress. There is still no concrete plan to implement the hukou reform, eight months after its announcement. Both local governments and local residents are against the reform. Local governments believe that accepting the migrants would greatly increase the burden of local public finance, and local residents believe that migrants would endanger their children’s chances of education and shrink their already tight living spaces. Unlike previous reforms that brought clear gains to the society and only burdened isolated groups of people, the hukou reform does not bring immediate gains but poses clear and immediate threats to the interests of a majority of the population.

It will take great courage and political wisdom for the new leadership to gather proper supports for the reforms pledged by the 18th party congress. The motion has been set out; now we wait for real actions.

Mistakes happen, even in great news organisations such as the BBC. If they are bad enough, heads will probably have to roll. But what matters much more than the bloodletting is that lessons should be learnt from what went wrong, so that the error is not repeated. In the case of the most recent Newsnight affair, there are three main conclusions to be drawn.

The first is that the BBC’s news is always going to be held, very properly, to a much higher standard than the work of its commercial rivals. The whole point of a public service broadcaster is that its editors can be relied on to exercise sound news judgment, and to deliver accurate and authoritative information. That does not mean that they shouldn’t seek to break exclusive stories, or to undertake investigative journalism. On the contrary, it’s in the public interest that the BBC should be using its vast resources to take on challenging projects that are beyond the reach of other news organisations. But this is by its nature difficult work, and must be managed with great care.

In the first place, there need to be clear rules about sourcing, about giving individuals named in the story the right to respond ahead of publication, and about the authority that is required to approve the broadcasting of contentious material. Such stories need to be checked and rechecked, and never rushed onto the air. Above all, senior editors have to trust the journalists that are involved in projects of this kind, and be confident that they share the organisation’s values. Among other things, this means that work like this should never be subcontracted to outsiders, as appears to have happened at least in part with the inaccurate Newsnight story.

The second lesson is that the whole ethos and mission of the BBC must be different from that of commercial broadcasters. Its journalists should not be attempting to compete with their very different range of news priorities, or to build audiences in any other way than through the sheer quality of their work. And editors must be reminded that quality reporting is not boring – as a whole bunch of talented BBC people from Nick Robinson in Westminster to Mark Mardell in Washington demonstrate every day.

The final lesson is that when trouble comes, as sooner or later it very probably will, the Director General’s job will always be on the line whether or not he or she is called editor in chief. It follows that the overriding priority of the job must be to protect and enhance the organisation’s reputation for quality journalism. Since one person can only take direct oversight of a tiny fraction of the BBC’s immense news output, the Director General must have a series of trusted lieutenants with direct responsibility for specific areas of coverage. It’s also necessary to have colleagues with a remit to monitor the social media, in order to help inform the overall news judgment.

A set of clearly understood rules is also required to make sure that the most sensitive material crosses the Director General’s desk in a timely fashion. The priorities would change as the news agenda moved on, but would always apply to stories which could potentially involve big legal liabilities, or which could have serious political consequences. The inaccurate Newsnight story, which broke all the rules of sound journalism, would have been caught on both these counts. The Director General simply cannot afford to be blind-sided as he was in this case.

Its public service broadcaster is an invaluable asset for the UK and the wider world, and must be cherished as such. The present furore will eventually die away, but when it does it’s vital that these three lessons should remain etched in the BBC’s corporate memory

Pakistan and Afghanistan look on the spectacular landslide re-election of Barack Obama for a second term as US president with some trepidation. Pakistan has just come out of a nine-month breakdown of all talks with the US, the worst state the two countries relationship has been in for 60 years. Pakistan thinks the US under Mr Obama has no strategy, while the US thinks Pakistan lies as it continues to harbour extremists. Mr Obama has frequently called Pakistan his biggest headache but he has been unable to come up with a satisfying painkiller.

In Afghanistan, a war of words has persisted between Obama officials and President Hamid Karzai. Washington has in effect told the Afghan President to be quiet and be grateful for the sacrifices that the US is making. Mr Karzai keeps reminding everyone that he enjoyed better days with George W. Bush and that Mr Obama has tried to undermine him.

For leaders of both countries, Mr Obama’s first term has been the worst of all possible worlds, periodically using carrot or stick to drag Islamabad and Kabul into line, but often using threats without clear strategic goals. Moreover, acts declared as victories by the US such as the killing of Osama bin Laden, the start of the US troop withdrawal from Afghanistan or the refusal to provide the Afghan army with heavy weapons have been viewed with enormous suspicion by Pakistan and Afghanistan.

In Washington, the problems have been magnified by internal rivalries. Mr Obama had allowed the US military to run his policies towards Pakistan and Afghanistan – starting with the surge in Afghanistan in 2009 and then planning for the US withdrawal in 2014. More important political strategies such as talking to the Taliban, making sure free and fair elections are held in Afghanistan and Pakistan and trying to revive relations with Islamabad have been run by a weak state department, stymied by the lack of presidential support.

Now Mr Obama gets a chance to do things differently. What should he do?

Well, for starters, everything.

If the US withdrawal from Afghanistan in 2014 is high on his agenda than he should prioritise talks with the Taliban that would aim for a ceasefire between all sides before troops depart and before Afghan presidential elections are held in April of that year.

Many of the Taliban leaders have become advocates for a political settlement rather than a bloody power grab for Kabul that the Taliban know would prompt a civil war they cannot win.

Last year’s US-Taliban talks broke down, partly because the military and the CIA in Washington undermined them. Now US officials say all parts of the administration are on board. Mr Obama needs to swiftly compose a team of experts and diplomats and enlist the help of some European countries to talk to the Taliban with the aim of reducing violence in Afghanistan in a step-by-step process that could lead to a ceasefire. Another major diplomatic effort is also needed to revive talks with all neighbouring states, including Iran and Pakistan, about a non-interference regional pact that would protect Afghanistan.

Despite the country’s internal chaos, a clear US strategy to talk to the Afghan Taliban leaders based in Pakistan would be attractive to the warring military, judicial and political factions. That is especially so for the military, which is now feeling the heat from the growing threat posed by the Pakistani Taliban. A US dialogue to achieve a cease fire in Afghanistan that includes Pakistani participation may act as a glue to help bind the bickering Pakistani establishment.

The new Obama administration needs to re-engage with Pakistan on all fronts but particularly to help it deal with the growing internal jihadist threat and that includes helping Pakistan devise a comprehensive policy to disarm the anti-Indian extremist groups that inhabit the important province of Punjab. On its own and without financial help Pakistan is presently incapable of devising any such strategy. And if left out of any peace equation in Afghanistan, its intelligence agencies will be tempted to act as spoilers rather than healers.

At the beginning of his first administration Mr Obama took several positive steps to try and ease tensions between the US and the broader Muslim world but there was no follow through by the White House or the State Department. Events such as the Arab Spring, the civil war in Syria and the worsening relations with Iran overwhelmed those early initiatives. There was no effort to deal with the Israeli-Palestinian quagmire.

What is needed is a more consistent, more deeply engaged and well led political-diplomatic effort by the US in the broader Muslim world in which the newly elected President Obama is more involved in than what he has been in the past four years.

Jeffrey Sachs, economist and president of the Earth Institute at Columbia University, tells the FT’s John McDermott that the president’s strengthened position is an opportunity to repair the US economy

The US election was fought on first principles: should government be strengthened or dismantled? The answer was resounding. The public wants better government, not less government.

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Much of the economic debate in the US has been over short-term stimulus but the election turned on long-term structural issues. Barack Obama almost all of the Great Lakes states because he championed an industrial policy for the automobile and allied industries. What saved that region was not a temporary stimulus but a skilful rescue package, complete with government financing and public investment in research and development directed at next-generation electric vehicles.

Though climate change was the issue, neither candidate wanted to mention it played the leading role in the final act, in the form of Hurricane Sandy. Not only was the east coast reminded of the furies of a rising ocean level; the nation was reminded again of the need for collective action to anticipate, ameliorate, and respond to emergencies.

The problem for Mr Obama in the second term is that he does not yet have an economic strategy commensurate with his vision of a proactive government. Low tax revenues continue to leave the US vulnerable. The US government at all levels collected only 32 per cent of gross domestic product in revenues last year, compared with 38 per cent in Canada, 45 per cent in Germany and 49 per cent in Sweden. The latter countries can overcome budget deficits, poverty and outdated infrastructure. The US cannot. It will need a tax ratio like Canada’s by later this decade to get the job done.


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Yet revenues are not enough. The entire Keynesian apparatus that dominates Democratic party circles is also outdated and outmoded. It is a cyclical theory trying to fit a secular (that is, long-term) structural challenge. The US needs massive overhauls of its key economic sectors, almost all of which have public and private sector components that are deeply intertwined. Aggregate demand management cannot fix excessive healthcare and college costs, broken infrastructure, or an economy based on fossil fuel that needs to be decarbonised.

The modern president must therefore not be the overseer of aggregate demand but the conductor of deep-seated structural changes. He should be the convener of governors, mayors, university presidents, CEOs, healthcare providers and scientists to clear the obstacles from investment programmes in energy, education, infrastructure, health, skills and critical R&D.

Mr Obama’s legacy should be to foster the overhaul of the US economy. The information technology revolution can and should lead to lower-cost universities, radically lower healthcare costs, smart grids, smart cities and smart low-carbon energy systems. The government can lead the way, for example, using the federally supported land-grant universities to lower the cost of tuition through IT-enabled higher education. It can truly leave no child behind – as President George W. Bush once championed – not through a naive testing regime, but through upgraded pre-school programmes, IT-strengthened primary and secondary schools, e-tutoring and countless other innovations already taking hold around the world but strangely lagging behind in the US.

Who will pay and who will back this new dispensation? It is easier than it looks. Wipe out the tax havens by charging a minimum 20 per cent corporate tax rate on all companies whether they book their profits in the Cayman Islands or not. Cap deductions for high-income taxpayers. Impose a modest wealth tax on the mega-rich. And tax carbon emissions and financial transactions. These measures are tough politics but good economics, and they are good revenue raisers. And they would fund a true reform agenda.

As for the governing coalition, the president need not put the country’s fate in the hands of Congressional holdouts and K-Street lobbyists. The business is with the people and their local leaders. Governors and mayors want answers to storm surges and flooding, heat waves and droughts, fast rail, renewable energy, overpriced education and healthcare, and upgraded skills for global competitiveness and jobs. This means four years of problem-solving out in the country, backed by cutting-edge science and technology.

Yes, I’m sorry to say it, but the campaign has just begun. Yet this one is for America’s future, not for an elective office.

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

Ian Bremmer, president of Eurasia Group, tells Frederick Studemann, the FT’s comment and analysis editor, that he sees more tension to come between China and the US.

There is one clear lesson from President Barack Obama’s win: Latinos, African-Americans, and young people have become the most reliable Democratic voting blocs. And white men, especially those without college degrees, have become the mainstays of the Republican party.

According to a summary of exit polls assembled by Fox News, hardly a Democratic bastion, non-whites made up 28 per cent of the electorate on election day, up from 27 per cent in 2008. And they overwhelmingly backed President Obama: 71 per cent of Hispanics voted for him (it was 67 per cent in 2008), and 93 per cent of blacks. In addition, the share of votes cast by whites was lower (72 per cent) than it has been going back to at least 1992.

Meanwhile, 60 per cent of voters under age 30 also strongly backed the President. Young people were 19 per cent of all voters, a point higher than the 18 per cent in 2008.

All this is good news for Democrats and a troubling omen for Republicans. Latinos, African-Americans, and young people constitute a growing percentage of the voting population (young people eventually become the entire voting population).

The challenge for Democrats will be to hold these groups in the future. All have been attracted to the Democratic Party in recent years mainly because Republican policies have turned them off – policies like the GOP’s draconian responses to undocumented workers, its eagerness to slash Medicaid and food stamps for the poor, its misogynistic approach to abortion, and its demand to cut federal spending on education and student loans.

But if Democrats want to keep their loyalty over the long term, the party will need to do more than rely on Republican electoral stupidity. After all, the GOP might learn it has to become (or appear to become) more inclusive.

Democrats will need to champion policies especially important to these groups – for example, immigration reforms that take account of how long someone has been in the United States and how much they’ve contributed as workers and citizens; paid family and medical leave for women (as well as men) who must care for their families in emergencies; expansion of the Earned Income Tax Credit, providing larger income supplements to lower-income workers; and income-contingent college loans, allowing them to be repaid as a fixed percentage of full-time jobs over a limited number of years.

All these have the added advantage of being good policies, regardless of their political attractiveness. Yet to create an enduring coalition, Democrats also need the white working class. They used to have it. In 1960, 57 per cent of blue-collar whites identified themselves as Democrats, and only 26 per cent as Republicans.

But that support began to erode dramatically. By 1980, 57 per cent of the white working class voted for Ronald Reagan over Jimmy Carter; in 1984, 65 per cent backed Reagan over Walter Mondale; in 1988 60 percent voted for George H. W. Bush over Michael Dukakis. And even though Bill Clinton managed to win back white working-class women, the shift of white men to the GOP continued.

Mitt Romney won among white voters by 20 percentage points, according to Fox News. That’s significantly higher than John McCain’s edge of 12 points in 2008.

It’s tempting to point to race as the major reason the white working class has shifted to the Republican party over the years. Southern whites began deserting the Democratic party after the Civil Rights Act of 1964. And since then the GOP has on occasion played the race card – whether in the “Willie Horton” ads of 1988, or the more subtle racial message of “state’s rights” in 2012.

But that explanation leaves out the bigger story. The wages of white men without college degrees began falling in the late 1970s because of globalisation and technological changes that corporations were all too eager to take advantage of. Today, the typical white male worker without a college degree earns less than he did 35 years ago, adjusted for inflation.

Yet the Democratic party has done little to reverse this trend. (It pains me to say this because I was Secretary of Labor in the 1990s and didn’t fight hard enough.)

Democrats could have enacted labor law reforms that made it easier to form and preserve labor unions – which in the 1950s and 1960s gave the working class bargaining power to get a fair share of the profits. Democrats could have pushed for a nationwide system of productivity bargains, as in Germany, through which employees get a share of the gains from productivity growth.

They could have insisted all trade-opening treaties require that America’s trading partners have a minimum wage equal to half their median wage — and have set America’s own minimum wage to this standard. And Democrats could have reduced taxes on the middle and working class, and raised them on the rich.

By turning its back on white working-class men the Democratic party created a political vacuum Republicans have been all too eager to fill. Whether through racism, xenophobia, or homophobia, or by means of right-wing evangelical Protestantism, the GOP have found scapegoats. Blacks, immigrants, gays, and women seeking abortions aren’t responsible for the declining real wages of white men without college degrees, of course, but they are convenient targets of their anger.

Modern-day Democrats would do well to recall the core principle of the Democratic Party when President Harry Truman summarized it in 1948: We need a government, he said, “that will work in the interests of the common people and not in the interests of the men who have all the money.”

How did he do it? With nearly 8 per cent unemployment, a famously diffident public temperament and an inflamed opposition, how did Barack Obama score such an easy election win?

First, he had some important structural advantages. Elected incumbents don’t often lose US presidential elections. In the past 80 years, only Jimmy Carter and George H.W. Bush have managed it and Mitt Romney lacks the native political talents of Ronald Reagan and Bill Clinton, the victorious challengers in those remarkable elections. The power of the office was never more obvious than during the response to Hurricane Sandy, an unusually violent October surprise, as Mr Obama played crisis-manager-in-chief while Mr Romney was forced to tiptoe his way off the campaign trail.

Second, Obama enjoyed a remarkable run of luck in 2012. The Supreme Court could have struck down his signature domestic achievement, the healthcare law that now bears his name, leaving supporters to wonder if he could deliver on anything big. Instead, a 5-4 vote gave him a crucial political victory. The eurozone might have descended into chaos this summer, but the willingness of Germany and the European Central Bank to keep a reform process on track prevented a European market meltdown that would surely have sent Wall Street – and Mr Obama’s re-election bid – tumbling. Finally, the US Federal Reserve produced a kind of blank cheque programme of quantitative easing to restore the economic recovery after a wobbly few months. Chief Justice John Roberts, German Chancellor Angela Merkel and Fed Chief Ben Bernanke are hardly Obama’s ideological soul mates, but each had a hand in delivering him a second term.

There’s a broader point to be made about incumbency in today’s volatile world. In the past, holding the office was an advantage, not just in America, but in every advanced industrial democracy with a reasonably robust economy. Voters need a reason to vote for a change of course, incumbents have more to offer potential donors and opinion-makers, and there are more opportunities to show gravitas when playing the role of international statesman.

Since the financial crisis of 2008, however, incumbency hasn’t proved such a prize. In fact, in nearly two dozen EU elections since September 2008, incumbent parties have been pushed from power. In Europe, of course, the watchword has been austerity, the deeply unpopular belt-tightening that has fuelled public fury in many countries. It wasn’t simply the likes of Greece, Spain, Portugal, Italy, Ireland, Belgium and Bulgaria that voted to shuffle the deck. Governments in Britain, Denmark, the Netherlands and Finland have gone down too. Nicolas Sarkozy took a beating for even hinting that France might have to learn to do more with less. Even Silvio Berlusconi, who has more political lives than a dozen cats, couldn’t survive.

There are two notable exceptions to the austerity rule. The first is Ms Merkel, who has defied the anti-incumbent trend, in part by limiting her calls for austerity to other countries. The other is Mr Obama, who would have spent even more to stimulate a US recovery if congressional Republicans had let him.

Fortunately, neither Republicans nor Democrats will prosper if America goes barrelling over its fiscal cliff, the automatic tax hikes and spending cuts set to take effect in January if Mr Obama and Republican House Speaker John Boehner can’t reach a budget deal. And when austerity measures become unavoidable to restore America to fiscal health, Mr Obama will have Republican partners to share both the credit and blame.

But Mr Obama’s greatest advantage in finally embracing austerity is that he has no more elections to face, freeing him to make tough choices and consider his place in history. Many Europeans believe that American politics is broken. But when it comes to enabling austerity, term limits are not such a bad thing.

This may well prove to be the luckiest day of Barack Obama’s life: he scraped through to win a second term. But it could well prove to be the unluckiest day of his life. A crunching set of challenges could overwhelm him and damage his legacy.

The first challenge is the economy. The fiscal cliff can be postponed if the Republicans cooperate in Congress. But the structural challenge of creating jobs when globalisation and automation have eroded many middle class occupations may prove to be insoluble. Most painfully, Obama may be remembered as the president who led America to the number two position in the world. In 1980, in terms of purchasing power parity, America had a 25 per cent share of the world economy while China had 2.2 per cent. By 2016, America’s share will slide to 17.6 per cent while China’s will grow to 18 per cent. America is not yet ready to accept becoming number two.

The second challenge is China. A more assertive and nationalist China is raising its head. Japan-China relations are spiraling downward. China is behaving in an unusually aggressive fashion towards its Asean neighbours around the South China Sea, even scuttling the Asean joint communique in July 2012. Xi Jinping could prove to be the most constrained leader China has had in recent times. He is hemmed in by other factions. The weaker he is internally, the more assertive he will have to be externally.

The third challenge is the Islamic world. America has wasted more than a decade fighting an unwinnable war in Afghanistan (which may well collapse in Obama’s second term) and a futile war in Iraq. Syria and Bahrain loom as new challenges. The pressure to bomb Iran will grow more intense. But if Mr Obama were to bomb Iran, he would hand China a major geopolitical gift, wreck the global economy with high oil prices and ruin America’s prospects of growing again economically.

In short, if Mr Obama is not careful, he could sink into a quagmire of problems that could overwhelm him. The tears he shed in Iowa were in fear of losing. Now the tears may flow as a result of winning. Yet, fortunately for him, there is a solution to each big challenge that could save him and America.

As regards the Islamic world, a two-state solution for Israel and Palestine would suck away much of the anti-American poison and would serve Israel’s interests too. Bill Clinton would make the perfect envoy. There is nothing Mr Clinton wants more than the Nobel Peace Prize that Mr Obama and Mr Gore already have. His Taba Accords can be revived and modified. Each recent US president has made the mistake of waiting till the end of his term to seek Middle East peace. Mr Obama can do the opposite.

Equally important, Mr Obama should revisit the wonderful speeches he delivered in Cairo and Istanbul. The contents were correct. Now, in his second term, he can implement them. The best way to undermine the Iranian regime is through engagement, not isolation. This is the lesson Asia has taught the world through Myanmar. And the world’s most populous Islamic country, Indonesia, is still waiting for Mr Obama’s triumphant return as the local boy who made good. Mr Clinton captured Indian hearts, Mr Obama can do the same with Indonesia – which could well become the new modernising beacon for the Islamic world.

Mr Xi also wants nothing more than a deep engagement with America. The only way to strengthen his rule is to focus on internal economic development, rather than external distractions. GM and Ford have made record profits in China. Other US companies can do the same. Many US states welcome Chinese investments. Mr Xi needs economic growth. So does Mr Obama. A win-win strategic business partnership is feasible.

A strong US-China economic partnership can also pave the way for an agreement on trade liberalisation. In his second term, Mr Obama can stand up to the agricultural lobbies that scuttled the Doha round of trade talks. Most emerging economies are also prepared to make concessions. Privately, many trade experts tell me a deal is feasible.

Most fundamentally, long-term trends are also working in Mr Obama’s favour. The great convergence of incomes, which will result in the explosion of the global middle class from 1.8bn today to 3.2bn in 2020, will push the world towards greater global integration and cooperation. The number of people dying in interstate conflicts is the lowest it has ever been. Yes, Mr Obama will have to cut US defence budgets, but there could not be a more propitious historical moment to do so.

This is Mr Obama’s opportunity. The world is looking to him to take advantage of a uniquely propitious moment for fashioning a new global order. Contrary to conventional wisdom, the stars are aligned in his favour. All he has to do now is to lead.

For a while in the small hours, even after the arithmetic of the electoral college had already doomed his campaign, it seemed Mitt Romney would not concede defeat. Karl Rove, whose perpetual air of self-satisfaction must for once have been tinged with chagrin, was muttering on air that Ohio would have to be recounted; that his home network of Fox had thrown in the towel prematurely. Hopes of a repeat of Bush-Gore were evidently still glimmering. But this was the last gasp emitted from the echo chamber of delusions within which the Republican elite have sealed themselves for years

Then Mr Romney came on stage in Boston to make his concession speech. It was gracious but less moving than John McCain’s speech four years ago, a concession so generous and imbued with a sense of the historical moment that it alarmed even his own Republican troops. But in his way, too, Mitt Romney for a moment dropped the mask. Behind it was a chastened man, for once slightly unkempt, the weariness visible. But not much else. Graceful good wishes to the victor, a prayer for the President and the country and then true Romney, a homily that teachers, investors, citizens of strong faith might lead us out of dire straits. And that was it.

Suddenly the man who had tried to be everything to everyone was nothing to anyone, except a tired private equity executive and former Governor of a state that had just repudiated him by a huge margin. In the last weeks of the campaign his strategists had imagined they might expand the “battleground map” into the industrial mid-West, concocting a fable – that Barack Obama had sent the auto industry into bankruptcy and was even now outsourcing jobs to China – so at odds with the truth that even MoTown executives were compelled to denounce it. Detroit, Milwaukee and Cleveland were not buying it, and so long before Pennsylvania was known to have turned the tide Mr Obama’s way, the Republicans had lost the presidency in the industrial heartland.

What bit the dust on Tuesday was the world of denial in which Republicans have immured themselves ever since the rise of the Tea Party in 2009. This is a universe in which the financial crash was caused by over-regulation; one in which, despite years of brutal drought and violent weather patterns, climate change is a liberal hoax; a country that can correct a vast structural deficit without ever raising additional revenue, while expanding the military budget beyond anything sought by the Pentagon; a belief system in which Mr Obama was the source of all economic ills rather than the steward of the most intractable crisis since the Depression. The mantra was that a business executive would, simply by virtue of that fact, effect a magical rejuvenation of the staggering American economy.

But the most obstinate fantasy to die in this election was that the greatness of the United States was somehow inseparably bound to the dominion of the white male. The most egregiously offensive candidates for the Senate, Richard Mourdock in Indiana, who proclaimed that post-rape conceptions must be part of God’s plan, and Todd Akin in Missouri, who spoke of “legitimate rape”, threw away Senate seats that were the GOP’s for the taking. Another illusion was that huge sums poured through Super- Pacs would tip the balance in competitive races. Linda McMahon, the professional wrestling tycoon, spent $100m in two elections attempting to become Senator for Connecticut and still head-locked herself into disaster.

Built into these assumptions was the conviction that non-white, non-male voters, especially Latinos, could not be mobilised, especially not with the same intensity or numbers they had shown in 2008. The long lines of people waiting hours to vote in Florida and many other places ended that narrow-minded complacency.

Of course the Republican party does not altogether turn its back on this new America. But the harshness of its policy on immigration is a slow-drip suicide for the Republicans, reducing them to becoming the Party of the confederacy and the mountain states of guns and God.

The mere fact of Mr Obama’s re-election ought, if the Republicans have an eye for their long-term preservation, give them pause before venturing on the usual manic conspiracy theories or denouncing their nominee for being insufficiently conservative. But you might also hope they listened to his victory speech, which was, for a candidate who has at times been startlingly disengaged from the persuading element of the presidency, one of the great moments in his political career. For after generously thanking two generations of Romneys for public service, Mr Obama went on to defend democracy itself on one of its climactic days: not in the airy philosophical terms to which he often resorts, but by painting a picture of ordinary people ennobled by the democratic process. In vivid words he painted a picture of countless people knocking on doors, queueing to vote notwithstanding all the obstacles placed in their way by institutions or Mother Nature; living their American identity through these acts of engagement. Politics, the President said, can sometimes seem, small or “silly” (amen to that) before insisting that in the majesty of the multitudes it was as big as anything can get. Then he sounded a theme that has been too often muted in his first term: that the US is a republic in which mutual obligations matter as much as the assertion of rights. And where did America’s true exceptionalism lie? In its unique diversity, which his own person embodies and which might at last be seen as the sign not of its enervation but of its rejuvenated redemption.

The writer is an FT contributing editor

What ought to pain Republicans most about Barack Obama’s victory is that 2012 was entirely winnable for them. In European elections over the past few years, voters have thrown out leaders who were in charge during the worst of the financial crisis, whether those leaders deserved the blame or not.

Macroeconomic indicators in the United States, where an unemployment rate of 8 per cent is highly correlated with defeat for the incumbent party, pointed in the same direction. Mr Obama himself had proven a disappointment to many of his former supporters, going from a beloved symbol of generational and social change in 2008 to a detached and remote figure, with limited ability to touch an emotional chord in the electorate.

That Mitt Romney lost nonetheless is in part a tribute to his own weaknesses as a candidate. The Obama campaign put Mr Romney on the defensive early about his work at Bain Capital, and left him there. The Republican nominee made any number of horrendous gaffes. He ran a disastrous Republican convention. He never found a way to talk about himself or his agenda that middle-class voters could relate to. Continue reading »

There is nothing better than the widespread perception of a close election for the full spectrum of “experts” to get carried away with what might occur under alternative outcomes. And carried away they were.

Many argued that the two presidential candidates would implement meaningfully different economic policies and, thus, trigger different market reactions. But now that the election outcome is known, it will soon become apparent that the main risk is that investors’ prospects remain hostage to the same issues that existed long before the election. Continue reading »

The economy is the central issue in the US presidential campaign – as it is in all such contests. Even during wartime, foreign policy plays a subordinate role in American elections and social issues like abortion are never more than subtext.

Both Mitt Romney and Barack Obama would have us believe that their policies are diametrically opposed to each other, with little if any room for compromise between the two. Therefore, voters apparently face a Manichean choice between two competing visions for restoring America’s economic prosperity

Yet however strong the contrast between the two candidates’ economic plans, readers need not fear that Tuesday’s vote will herald either the end of the Federal Reserve system, or a massive expansion in government. The reality is that the victor will not have the power to change the nation’s economic direction, at least in the short run.

There are two reasons for that – the structure of US government, and America’s changing place in the world.

The important thing to remember is that the US president has far less power over the economy than is commonly believed – and not nearly as much as the British prime minister, for example. The reason is simple: the constitution expressly limits the president’s power and the institutions of government that have developed since 1789 limit it further.

Unlike prime ministers, who necessarily have working majorities in parliament, US presidents must frequently deal with congresses under control of the other party. Different parties may also control the House and Senate, as is the case now with Republicans controlling the former and Democrats the latter.

In all likelihood the current political split in Congress will not change after the election. But even if Republicans gain control of the Senate, it will be by the skin of their teeth, while a 50-50 split is quite possible. A thin majority or split senate will likely mean more paralysis given that only 40 votes are needed to block almost any presidential initiative, since 60 are necessary to break a filibuster (the practice of senators extemporising at length to prevent a vote).

Moreover, even under the best of circumstances, in which a president controls the House and has 60 votes in the Senate, changing policy is very difficult, as we saw when President Obama enjoyed this advantage during the early days of his administration. That is because members of Congress are provincial and myopic, subject to very little in the way of party discipline, and have different institutional perspectives even when they share the president’s political philosophy.

Furthermore, US presidents have far less control of the government’s operations than most people realise. They can appoint only a few thousand staff. Ethical constraints and financial disclosure requirements discourage many of the best people from serving in government. Without political leadership, cabinet departments are run by career bureaucrats, who tend to maintain the status quo. Many important government functions are now performed by independent agencies such as the Federal Reserve Board or Securities and Exchange Commission. Those agencies’ leaders serve fixed terms, which often outlast the president’s, by 10 years in the case of members of the Federal Reserve Board for example.

Indeed changes at the central bank are likely to have far more influence on the economy than the presidential election. With politicians unable to hammer out an agreement on fiscal policy, it has been left to Ben Bernanke and his Federal Reserve colleagues to pilot the economy through monetary policy alone. That means the next president’s most meaningful economic decision may well be nominating a new chair of the Federal Reserve, should Mr Bernanke not seek a third term in the post.

Finally over the years the Supreme Court has become deeply involved in economic policy questions, for example only allowing Obama’s signature health reform to stand by a hair’s breadth. Over the years Republicans have been far more aggressive in appointing federal judges, who serve for life, that are not shy about using the courts to implement their ideology. In the past, the same was true of Democrats, but both Obama and Bill Clinton have tended to appoint nonideological judges who do not provide a counterweight to those appointed by George W. Bush.

All this means that America’s basic economic policy is unlikely to change much or quickly whoever wins the presidency. What really matters for the economy is the economy itself – the actions of workers, business people, entrepreneurs, investors and so on, who go about their jobs largely oblivious to what comes out of Washington.

That is unlikely to change materially for some time, even were presidential authority unlimited. The economy is like an ocean liner that changes direction only very slowly, although a small change is meaningful if sustained long enough.

The fact is that the underlying trend rate of growth of the US economy is a function of two things politicians can’t do much about: productivity and demography.

The formula for long-term growth is basically labour force growth plus the growth in productivity or output per worker. America’s demography is a low birth rate and falling immigration, which prevents the population and labour force from rising. As population growth falls, so, necessarily, will growth.

So far, productivity has held up, but in the long run it is dependent on research and development and a continuing new supply of ideas and technological innovation. Government policy affects such things only slowly and indirectly, and the payoff may not come for decades.

Finally presidents can do very little about the business cycle – the quarterly ups and downs in the economy around the long-term trend.

In short, much of the economy’s trend is baked in the cake, and there is not much presidents can do to change it. To the extent they can exert influence there are institutional and political obstacles to doing so. The reality is that whoever wins, the economy will be pretty much the same for the foreseeable future.

The writer is 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’.

This release of the monthly US jobs report this morning was sandwiched between two historical events: the devastating hurricane that hit the country’s eastern seaboard and what many see as a particularly important presidential election. While the report will likely have little impact on undecided voters, it tells us a lot about the continuing vulnerability of the economy to external shocks such as Hurricane Sandy.

Let us start with the drivers of the headline numbers in the jobs report.

The labour market is benefiting from two inter-related factors: the stabilisation of the housing sector and more confident consumers. These are the main forces behind the strong job creation (171,000 in October, as well as the favorable revisions to prior months’ data).

Higher than expected job creation was accompanied by slight increases in both the participation rate and the employment-to-population ratio – both pointing to the gradual return to the labour force of less discouraged workers. As such, the slight upward tick in the unemployment rate to 7.9 per cent, calculated from a different data survey, is not a contradictory indicator.

But the better sentiment in housing and among consumers is not extending to the broader business community. There companies remain nervous about the outlook, including the much discussed “fiscal cliff” of tax increases and spending cuts scheduled for January unless political agreement can be reached. As such business hiring is sluggish, and there is little willingness to increase weekly wages.

Indeed, Friday’s report confirms the growing economic divergence between the household and the business sectors – one that will need to be reconciled one way or the other over the next few months.

Then there are the less encouraging, and also less visible, indicators of underlying trends in the labour market. Here, the report reminds us once more that developments with very harmful long-term effects are becoming more deeply embedded in the structure of the work force. Long-term joblessness remains a big problem. Indeed, the number of Americans out of a job for more than six months edged back above 5 million (or a staggering 40.6 per cent of the unemployed). Meanwhile, the unemployment rate among 16-19 year olds is stuck at an alarming 23.7 per cent; and that for older workers lacking a high school diploma rose almost a full percentage point to 12.2 per cent.

Look for the two presidential campaigns to try very hard to exaggerate the contrasting elements of Friday’s job report. But their opposing narratives will likely have little impact on undecided voters. Simply put, the job report is neither good enough nor bad enough to have a meaningful impact on Tuesday’s election.

How about the outlook for future job reports? They will be subject to the intensifying tug of war between household and business sentiment. They will also be whipsawed by Hurricane Sandy in a manner that we need to understand better.

In the short-term, Sandy’s disruption of economic activity and its negative wealth effects will weaken job creation. This should be recouped over the longer-term as reconstruction proceeds and delayed activity is made up.

However this effect will only be partial given America’s limited and declining macroeconomic policy flexibility. Compared to previous natural disasters, the compensating factors of reconstruction may not arrive as soon as expected, or be as comprehensive in reach for two reasons:

Most federal, state and local budgets are already quite stretched, undermining their ability to assist uninsured businesses and households, which would be critical for limiting the duration of the immediate blow to economic activity. Meanwhile, there is little that monetary policy can do at this stage. Interest rates are already floored at zero, and with considerable forward guidance; and the impact of balance sheet expansion is declining.

Overall, Friday’s jobs report is consistent with what now should be the widely-accepted view of the US economy – it continues to heal on account of certain segments, in particular households and housing, but is yet to attain “escape velocity.” As such, the risk of longer-term structural impediments continues to be too high, while the sensitivity to disruptive domestic and external headwinds – and certainly hurricanes – remains uncomfortably large.

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

Ohio. Ohio. Ohio. As the 2012 presidential election races to a nail-biting conclusion, all eyes are on the Buckeye State. Without it, Mitt Romney almost certainly will not win the White House.

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The state’s battleground status should not be a surprise: it has backed the winner in every presidential vote since 1960. What is unusual this time around is the suggestion of opinion polls that President Barack Obama may win a larger slice of the vote in Ohio than he does nationally; in all but one election since 1976, the Democratic presidential candidate’s performance in the state has lagged behind his national showing.

Should the reverse indeed happen this year it could only be attributed to one factor: the president’s decision to rescue the US car industry. That act has led Ohio from a double-digit unemployment rate as recently as October 2010 to a jobless rate of 7 per cent today, below the national rate of 7.8 per cent.


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Michigan may be home to General Motors, Ford and Chrysler, but with a concentration of parts suppliers, Ohio’s 150,000 car industry jobs rank it as a not too distant second. More than 20 per cent of new jobs created in Ohio since mid-2009 have been within the sector. Add in the spillover effects for businesses from office suppliers to local bars and by some counts one in eight Ohioans depend on the auto industry for their livelihoods.

As daunting as a rescue of the industry appeared to be in 2009, the next president faces an even greater challenge: reversing the course of US salaries, which are on a downward trajectory. Solutions to this problem may be even more elusive than fixes to the auto industry. Once again they may also start in Ohio.

Often depicted as quintessentially Middle American, Ohio is more diverse than its image suggests. It encompasses industrial metropolises such as Cleveland, smaller cities preserved in 19th-century amber, and farms that seem straight out of a Grant Wood painting.

All told, Ohio is not all that different socio-economically from America as a whole, except for its lack of a significant immigrant or Hispanic population.

But manufacturing remains at the core of Ohio’s economy. Even excluding carmakers and suppliers, companies that make things account for 40 per cent of new employment in Ohio over the past three years.

That strong manufacturing presence means Ohio reflects many of the challenges facing the rest of America, particularly the continuing threat to manufacturing from globalisation.

As strongly as manufacturing is rebounding, it follows a dizzying fall; in 1990 Ohio had 1.1m manufacturing jobs; today, even after the recent recovery, it has 657,000.

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staff fixes the presidential seal before US President Barack Obama gives a press conference

Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

Changes in incomes in the state are even more dismaying. A decade ago, a typical Ohio family earned about $53,000, identical to the national median income. Since then the national median household income has fallen to $50,000 (after adjustment for inflation). But in Ohio it has plummeted to $44,650. For Ohio’s sharper fall blame international competition, which has put huge downward pressure on pay.

Nowhere is this more evident than in the car industry. A long-serving worker at one of the big three Detroit carmakers takes home about $28 per hour in cash pay (plus almost the same amount in benefits).

However, in order for the big three to remain globally competitive, new workers – toiling side by side with their longer-standing colleagues – receive about half as much. New hires take home about $30,000 per year, well below the national median income, and hardly the definition of a good middle-class income.

No president will be able to turn back the clock and eliminate global competition. Instead, the focus should be on preparing American workers for higher-skilled jobs that face less intense competition from developing countries. That will mean investing in education and training.

It will be a long process that will involve considerable pain along the way. But realist political leaders will recognise that there is no quick or easy fix to the wage problem and embrace more protracted but efficacious solutions.

In the coming days the old saying, “as goes Ohio, so goes the nation”, will be used often. It is a phrase that could be applied not only to our elections but also to the economic challenges facing America.

The writer is former head of President Obama’s auto taskforce

Labour MPs trooped through the House of Commons lobby yesterday alongside Tory rebels to reprimand David Cameron for his negotiating stance on the European Union budget. Mr Cameron’s government will ask for a real terms freeze in the EU budget, but for MPs that was not ambitious enough and they called on the prime minister to seek a real terms cut.

That was the right decision for the wrong reasons. And in this case it is the wrong reasons that matter.

The EU budget is a runaway monster. Indeed the Commission’s initial proposal, including near €60bn of big ticket spending mischievously hidden outside the formal budget, would constitute an increase of 11 per cent on 2007-2013 spending and take the budget to 1.11 per cent of Europe’s gross national income. You do not have to be anti-Europe to grumble at eurocrats’ apparent detachment from national spending pressures. European institutions need to eventually exercise the same austerity they are forcing on everyone else. Brussels gives the impression of arrogantly floating above this – its Common Agricultural Policy largely unreformed and untouched; its regional funds representing politicians’ patronage rather than pressed areas. Its salaries and benefits still suggesting an unaccountable munificence. As a former UN official I was similarly amazed at our disregard for our donors’ local economic difficulties. We were too quick to think we were a world apart.

So a real terms cut to the EU budget is not to be shrugged off simply as Albion bloody-mindedness. Nor are the Labour frontbench the cynical opportunists they are being dismissed as. Yes Labour presided over a nominal rise in the EU budget from €100 billion in 2004 to €129 billion in 2011. But it is one thing to have spent more in good times, when the domestic economy was growing, and the EU itself was expanding, it is quite another to spend more when the domestic budget is being squeezed. It is not hypocrisy to say spend less in bad times. Circumstances change.

Nevertheless this was a very bad vote for Britain. Formally, it does not tie the prime minister’s hands but in practice it has undermined the prospect of a budget deal. Until now viewed from Brussels it was just about possible to believe that British resistance was limited to a combination of raucous Tory backbenchers and a prime minister not willing to see them off (thanks to Mr Cameron’s evident emotional detachment from, and distaste for, Brussels’ elaborate summitry and all-night negotiations.) In this view Britain was only an election away from recovering its sanity.

Indeed Labour leaders’ claim that their willingness to invest in the give and take of Brussels negotiations made them better advocates of British interests in Europe had validity – until yesterday.

Guy Verhofstadt, the leader of the Liberals group in the European Parliament and a former prime minister of Belgium, gave what will be a typical response: ‘It is a scandal that the Labour party has sided with the most anti-European wing of the Conservative party’.

In the eyes of European politicians yesterday’s Commons vote will be seen as confirmation of a wider British national madness. Now it will seem both major political parties are willing to head for the EU exit. German-born Labour MP Gisela Stuart’s expressed support for ‘Brexit’ over the weekend is remarkable. A natural European, she has expressed something that in 2005, at the last budget negotiations, would have seemed heresy in Labour ranks.

Ever since Britain entered the EU, oppositions have tended to make hay at the expense of British governments that have been forced by the responsibilities of office reluctantly to defend Brussels. But this politicking to observers watching Britain from the continent will seem like collective panic: a sign that few are willing to put their heads above the parapets and confront ancient but growing public hostility to Europe. Many will consider the British retreat from Europe to have begun.

With hindsight this may turn out to be like the instant reaction to last December’s veto by David Cameron of new treaty rules overseeing taxation and spending – hyperbolic morning-after judgement. A few days later we may find the world, even Europe, is still turning. After all the sluggish ways of Europe are not given to sudden breaks and overnight change.

But at the very least the Commons vote seems to confirm a course. And that perception alone may be enough to undermine Mr Cameron’s hand at the EU Summit on 22 November. If the Westminster political class has given up on Brussels why bother to placate them will go the thinking of other leaders. There may seem little point in giving anything to the prime minster of a country that appears to be walking away from Europe anyway.

Britain has been aloof from Europe’s big debate about the eurozone, other than lobbing in the occasional irritating piece of unsolicited advice from the outside. In Brussels. yesterday’s vote will be seen as a further side-show to that continuing main event, but one that demonstrates how wide the Channel is once again becoming.

The writer is a former government minister, UN deputy secretary-general and vice-chairman of the World Economic Forum.

As America slouches towards the final days of a dismal presidential campaign where too many issues have been fudged or avoided, the one question on which the candidates have provided a clear choice is whether the rich should pay more tax.

That choice will determine whether the US falls over a “fiscal cliff” in January, when $400bn of tax increases and spending cuts are scheduled to kick in. It will also dictate the terms on which Congress and the President (whoever he is next year) must reach a “grand bargain” for taming the nation’s growing budget deficit.

All sides are agreed that something must be done to rein in the country’s budget deficit, but with President Barack Obama and former Governor Mitt Romney neck-and-neck in the polls, it is possible America may elect someone who believes the rich should play no part in this. How is this possible?

President Obama is emphatically in favour of raising taxes on the rich. He proposes increasing tax on earnings in excess of $250,000 in a single year from 35 to 39 per cent (the highest rate during the Clinton years). He would do so while preserving George W. Bush’s tax cuts for people earning less than $250,000 a year. Mr Obama also wants a minimum tax rate of at least 30 per cent on annual incomes over $1 million (the so-called “Buffett Rule”, named after the billionaire investor who has championed it).

Mitt Romney is just as emphatically against taxing the rich more. He wants to cut everyone’s taxes by 20 per cent, which, in absolute terms, would amount to a larger tax cut for the rich than for anyone else. Mr Romney also wants to keep the Bush tax rate for the wealthy of 35 per cent, and reduce or eliminate taxes on dividends and capital gains.

Mr Romney says he will close loopholes and eliminate deductions used by the rich so that their share of total taxes remains the same as it is now, although he refuses to specify which loopholes or deductions. Even if we take him at his word, under no circumstances would he increase the amount of taxes paid by the rich.

Mr Obama has the stronger argument.

It begins with America’s large budget deficit. Just about everyone who has looked at how to reduce it — including the non-partisan Congressional Budget Office, the bipartisan Simpson-Bowles Commission, and almost all independent economists and analysts — has come up with some combination of spending cuts and tax increases that raise revenue.

Just last Thursday, executives of more than eighty large American corporations called for tax reform that “raises revenues and reduces the deficit.”

The practical question is who pays for those additional revenues. If Romney’s view prevails and the rich do not pay more, the burden shifts to everyone else.

That outcome would accelerate a divergence in American incomes that is already alarming: since 1980 the richest 1 per cent has doubled its share of America’s total income — from 10 per cent to 20 per cent; the share going to the top one tenth of 1 per cent has tripled; and the share garnered by the top one hundredth of 1 percent — 16,000 families — has quadrupled. The richest 400 Americans now have more wealth than the bottom 150 million Americans put together.

Data from the French economists Emmanel Saez and Thomas Piketty, meanwhile, show the top 1 per cent garnering 93 percent of all the gains from the recovery so far, while US median family income is 8 percent lower than it was in 2000, adjusted for inflation.

Meanwhile, the tax rates paid byAmerica’s wealthy have been dropping precipitously. Before 1981 the top marginal tax rate was never lower than 70 per cent. Under President Dwight Eisenhower, a Republican, it was 93 per cent. Even after taking all the deductions and tax credits available to them, the rich of that era paid around 54 per cent.

The top tax rate in Americais now 35 per cent and the tax on capital gains (increases in the value of investments) is only 15 per cent. Since so much of what they earn is from capital gains, many of the super-rich, like Mitt Romney himself, pay an effective rate of 14 percent or less. That’s a lower tax rate than many middle class Americans pay.

Add up all the taxes Americans pay — not just on income and capital gains, but also Social Security payroll taxes (which do not apply to income above $110,100) and numerous state and local taxes on the sale of goods — and many middle-class Americans now contribute a higher percentage of their income than do those at the top.

So how can anyone argue against raising taxes on America’s rich? Easily: Romney and his Republican allies say it would slow the economy because the rich are “job creators.” And they have backed their claim with a pile of money for advertisements, hammering it home over and over again. That may explains the closeness of the polls, and yet, in the immortal words of Joe Biden, it’s malarky.

The US economy did just fine during the three decades after World War II, when the top tax rate never fell below 70 per cent. Average yearly economic growth in theUnited States was higher in those years than it has been since, when taxes on the rich have been far lower.

In fact, there seems to be no correlation between tax rates on the highest earners and economic growth. Bill Clinton raised taxes and the economy did wonderfully well. George W Bush cut them and the economy slowed.

The real job creators are to be found in America’s vast middle class, whose spending encourages businesses to expand and hire — and whose lack of spending has the opposite effect.

That is a big reason why the US recovery has been painfully slow. So much income and wealth have gone to the wealthiest Americans that the vast majority do not have the purchasing power to get the economy moving again. The rich save most of what they earn, and their savings go to wherever in the world they can get the highest return.

It would seem nonsensical to compound the damage by raising taxes on the middle class and not on the rich.

Logic, fairness, and common sense should dictate that America’s rich pay more in taxes. But it’s far from clear that logic, fairness, and common sense will prevail when Americans go into voting booths on November 6.

The writer is the chancellor’s professor of public policy at the University of California at Berkeley, and former US secretary of labour under President Bill Clinton.


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