Monthly Archives: January 2013

Historically, the drive for tax reform in the US has focused on the individual income tax. The ideal, epitomised by the Tax Reform Act of 1986, has been to broaden the tax base and thereby reduce statutory tax rates in a revenue-neutral manner.

American observers, however, now believe that the so-called fiscal cliff deal that President Barack Obama and congressional Republicans agreed to on the first day of the year has effectively taken individual income tax reform off the table indefinitely.

Thus it appears that there is no potential for a tax reform deal in the traditional sense. But there is a growing need for it on the corporate side of the ledger that may yet become a vehicle for meaningful tax reform. Continue reading »

Currency wars may be all the rage but they are merely a symptom of a much more deep-rooted problem. We are witnessing the return of economic nationalism. At the 2009 London Group of 20 summit, it seemed for a fleeting moment that nations had learnt how to work together to solve the world’s economic and financial problems. That dream no longer holds. Persistent economic stagnation has left our political leaders increasingly looking for national solutions to what have become deeply-entrenched international problems.

It is not so much that nations are becoming deliberately more protectionist. Rather, the cheerleaders for globalisation have gone into hiding. They can no longer so easily claim that the forces of internationalisation have brought benefits to all. Without those cheerleaders, however, the temptation to pursue economic nationalism becomes ever greater. Continue reading »

It is easier to make money than sense out of China’s banks. These big four state-owned commercial banks are huge profit centres, but many who see vulnerabilities in China’s economy think these banks are the problem when they actually reflect symptoms of distortions elsewhere. China’s banks are in fact too secure – and their performance could be improved by strengthening competition and breaking up the “too big to manage” entities.

Many critics cite inflexible interest rates that are deemed too low relative to inflation as the issue. Others point to excessive government interventions fomenting risks such as a property bubble. Still others remind us the state-owned banking behemoths are sitting on a mountain of household deposits that feed into temptations to misuse captive funds given lax governance safeguards. Continue reading »

Having solved its urgent problem, the eurozone needs to deal with a new dilemma: that of an appreciating currency. There is a growing number of countries seeking to weaken their own currencies. Indeed, in the last six months, the euro has appreciated by 11 per cent against the US dollar and by 8 per cent in nominal trade weighted terms. It has appreciated by a lot more against the Japanese yen. Continue reading »

It may seem hard not to be pessimistic about the global battle to manage the huge risks of climate change, a defining challenge of this century. The most recent UN climate change summit in Doha made only modest progress. It made crystal clear that the pace of international action is not consistent with the scale and urgency of the challenge the world faces.

Given this backdrop, it is not hard to see why there is so much pessimism. However, if one takes a step back and examines what is happening at national and provincial levels, a wholly different picture is emerging. Continue reading »

David Cameron made a well-received intervention here in Davos on his priorities for the Group of Eight, which he chairs this year, but inevitably the focus of attention has been the speech he made about Europe, before leaving London.

He was wise to lay his egg at home, as it would have been in the lead balloon category here. Davos Man, and his fur-clad trophy wife, are europhiles, almost to a fault. The eurosceptic tendency is very thin on the ice. You might think that there would be a natural constituency in the alpine confederation, but the Swiss who show up in Davos are typically those who bemoan their lack of influence in the councils of Europe and wish their compatriots weren’t, well, so damned Swiss about it all. Continue reading »

In London, the G20 has rather faded from view since Gordon Brown’s great event in Docklands in the spring of 2009, when a $1tn global stimulus was announced. (We await a final audit of this figure). It is hard to bring to mind any solid achievements to which it can claim credit since then. But in Davos, where Gs x & y are part of the currency of debate over breakfast, it is still alive and kicking. Indeed one reason why there is such a large Russian presence here is that Russia holds the presidency this year. They will be followed by the Australians in 2014. After digesting that recherché fact, who dare suggest that one does not learn interesting things in the Swiss mountains? Continue reading »

David Cameron’s speech on Europe was predominantly tactical. So, too, are the reactions from Berlin and Paris. But the British prime minister’s speech raises questions of broad significance for the whole of the European Union. Should the EU be redefined as a permanently two-level edifice? And if so, how? Continue reading »

At a session on the crisis of confidence in business the moderator told us that after the initial presentations there would be plenty of time “for your interrogatives”. As the presenters talked movingly of the crucial need for businesses to communicate clearly and fully with their stakeholders, I had the leisure to ponder why the word “question” has become somehow too blunt and vulgar to use in polite company. Continue reading »

David Cameron is making three assumptions in seeking to change the basis of Britain’s EU membership and then put this “new settlement” to an in-out referendum. That our partners want Britain in at any price. That they will negotiate a new treaty in which Britain’s demands can be easily accommodated. And that the British government will be able to determine the timetable. All these assumptions are highly questionable. Continue reading »

Davos ought not to succeed. Why on earth should the world’s business and financial community, with a leavening of politicians and princes, trek up a mountain to an overpriced resort, to spend much of their time sitting in an Audi (the official car) traffic jam, where the only interest lies in distinguishing the A8s from the A4 Quattros? (Aston Martins can’t fit the snow tyres, I am told, or the Russians would take theirs along).

Each year, the invited and the salon des refuses compete to be as dismissive as possible about what they are, or are not, going to do. Will Hutton kicked off this season with a bitter piece in the Observer, condemning Davos Man and all his works. He knows whereof he speaks, as a 20-year veteran. I shall be sorry not to see him leave the hotel for the slopes on non-filing days – four out of five for a Sunday journalist. But George Soros, who is here as usual, told me he “hates it”, but always attends. Continue reading »

In the two and a half months between the election and this week’s inauguration of President Barack Obama, America’s public policy debate has been focused on prospective budget deficits and what can be done to reduce them.
The concerns are partly economic – there is a recognition that debts cannot be allowed to grow indefinitely faster than incomes and the capacity to repay them. Then there is a moral dimension in terms of not unduly burdening our children. There is also the global and security dimension, with the concern that the excessive build-up of debt would leave the US vulnerable to foreign creditors and without the flexibility to respond to international emergencies. Continue reading »

Mr Obama faces the problem of what to do for an encore. He takes his oath for the second time with greatly diminished personal promise, a far healthier economy and facing no special peril. After some eloquent words today, he seems likeliest to keep on governing like a Dwight Eisenhower or George H.W. Bush — a moderate, effective problem-solver with limited aspirations. The word Mr Obama has used more than any other to describe himself is “pragmatist.” By continuing in this mode for another four years, he stands to leave a legacy as a fine decision-maker and manager in troubled times. Unless he raises his sights, however, he is unlikely to live up to his promise as a transformational leader.  Continue reading »

America isn’t working. The grim reality of today’s US economy is that 24m people who want to work cannot get a job. That is an astounding number. That is a level of long-term unemployment that has not been seen since the Great Depression.

What we have become good at is creating more part-time jobs, not full-time jobs. Manufacturing jobs have been replaced by new jobs in healthcare, warehousing and retail, many of which don’t even allow workers to rack up enough hours to earn healthcare benefits let alone break out of poverty. It is hard to believe that after the 20th-century labour struggles for the 40-hour work week, the 21st-century battle is a fight for enough working hours to make a living. Continue reading »

The missing word in the election debate is competitiveness. Italy’s economy has lost competitiveness over the past decade or so. Internal labour costs have grown at a faster pace than productivity, and faster than in most of the rest of the world. Since the creation of the euro, Italy’s unit labour costs have risen by about 30 per cent more than the currency area average. Continue reading »

The French operation risks following the same trajectory of early honeymoon and apparent success followed by a long, bitter and losing engagement with no clear exit strategy. Continue reading »

The Bundesbank, Germany’s central bank, has decided to move part of its gold holdings from the Federal Reserve Bank in New York and other central banks such as the Banque de France to Frankfurt. This unusual and highly-visible decision is sure to trigger an explosion of media commentary relating both to motivation and implications – especially since Germany joins Iran, Libya and Venezuela in making such a move.

I suspect that Germany’s motivation is purely domestic: officials are responding to growing internal pressures ahead of elections later this year.  Continue reading »

British savers and pensioners are among the biggest losers from the Bank of England’s long-running programme of quantitative easing. This is because the main way QE affects the economy is by holding long-term interest rates below market levels. Annuities are based on long-term rates and, for a 65-year-old man, the income from an average annuity fell by almost 12 per cent in 2012.

The Bank has claimed that such loss of retirement income is offset by the stimulus QE provides to the stock and bond markets in which pensions are invested. However, the extent of this offset is limited for funds that are in deficit and for many people with personal pensions and savings who have been advised to shift their resources out of volatile assets and into fixed-interest accounts. Retirees and others who are living off their savings will continue to suffer financial repression as long as interest rates are held down. They receive a double whammy if inflation remains high, pushing real interest rates further below zero. Continue reading »

Business leaders are starting to make their voices heard about Britain’s role in the EU, and about time too.
As the prime minister prepares for this month’s critically important speech on the subject, there is growing pressure on him to promise a referendum after the 2015 election of a kind that could lead to Britain’s exit. Such a commitment would yield tactical benefits at home. It would take the wind out of the sails of the UK Independence party, seen as a growing threat in the Conservative party’s heartland. It would help to change the mood of at least some troublesome backbenchers. And it would appease the Europhobe media, which should be natural Tory allies but which have become increasingly offensive about his leadership. Continue reading »

Barack Obama’s most cherished illusion during his first term was the possibility of co-operation with Republicans. Time and again, the president came to Congress bearing pre-emptive concessions – on his original economic stimulus package, his healthcare plan, and the 2011 debt ceiling fight – only to have the door slammed in his face by an obstructionist Republican party that viewed politics as a zero-sum game. Because Mr Obama has long seen himself as a conciliator, he was unwilling to let go his faith that if he only hewed to the path of moderation, his opponents would eventually have to meet him there. Continue reading »

Whether they like it or not, central bankers are being dragged into the political fray. It is not so much an issue of whether independence is good or bad. Rather, monetary policy itself is no longer a job for technocrats.
 Continue reading »

As the redesign of Europe churns along in 2013, some still fear that one or more eurozone states will take its leave. Others warn that individual European states will soon crack from within, as less familiar flags appear in places such as Catalonia, Scotland and Flanders. There are separatist pressures building within Spain and the UK, and Belgium’s unity remains fragile as well. But, at least for 2013, there is less to these warning signs than meets the eye. In fact, European separatism is one of 2013’s most important red herrings. There is virtually no chance that any of these independence movements becomes a full-blown phenomenon – at least this year. Continue reading »

The last-second deal to avoid America’s fiscal cliff has been criticised by budget experts, the business community and the press. In the face of deficits still exceeding a breathtaking $1tn annually, they had hoped for a “grand bargain” – namely, a long-term, multitrillion-dollar package of revenue increases and spending cuts that would truly fix the debt problem. That did not happen. Instead, the deal is seen as too small and unbalanced, as it raises only modest amounts of revenue and cuts no spending. Outside Washington, no one has a good word for it. Continue reading »

Two upcoming elections will be critical for the future stability of south and central Asia and for the continuing success in the struggle to defeat Islamic extremism.

The first are the parliamentary elections in Pakistan scheduled for next spring to elect a new government. In the next few weeks President Asif Ali Zardari and the opposition have to agree to a neutral caretaker government that would be in place for three months and would be responsible for holding the elections. Continue reading »

A great advantage of predictions is usually that only the author remembers them and then can portentously pull from the hat the one or two which challenged conventional thinking and were proved right. The other bold, but flawed, ideas can be discretely forgotten. So with that premium on shock value, here goes … Continue reading »

Governments’ policies will lag economic reality – this is the easy part of the prediction for the coming year. The more difficult is whether policymakers will be forced to deliver better outcomes for citizens, or be able to delay big decisions as was the case in 2012. Continue reading »

The environmental (and social) costs of unregulated development are now increasingly visible. Hurricane Sandy has brought climate change back into public debate. At a more everyday level, hundreds of millions of people struggle with the consequences of rampant air and water pollution, the depletion of groundwater aquifers, the decimation of forests and the decline of biodiversity. In India and China, in Nigeria and Mexico, villagers battle townsfolk who dump untreated garbage on their lands. Farmers fight other farmers for access to a shrinking water table. Fishermen protest at the gates of a factory that pollutes their river and destroys their fish. Everywhere, infants in cities are treated with steroids to combat pollution-induced asthma, while infants in villages die because of water contaminated by chemicals. Continue reading »

In Britain, the fate of the coalition government continues to hang on what happens to the economy. The prospect of a sustained recovery is forecast by some. This, it is assumed, will lift the country’s mood and the coalition parties’ poll ratings. Equally, others believe that UK growth won’t be looking much different in a year’s time, notwithstanding the rise in employment. In which case the gossip of last summer that George Osborne, UK chancellor will be reshuffled in a straight swap with William Hague at the Foreign Office could become reality. While if things continue to look sticky for Nick Clegg you could see the pressure mounting on him to stand aside for Vince Cable.  Continue reading »

At the last European Council summit of 2012, politicians decided to go ahead with the banking union while ending their reflections on fiscal union they had initiated in June, a time of acute market stress. The message: banking union is needed; the rest is not. Continue reading »

2013 will be remembered as the year China became a more “normal economy”. What does normality mean for China? Soon-to-depart Premier Wen Jiabao’s oft-cited quote that China’s growth is “unbalanced, unsustainable and uncoordinated” is a good place to start.

China was an abnormal economy with its state-led capitalist approach that produced double-digit growth rates, no major financial crises and average wage increases of 12 per cent annually for decades. But the drivers of this impressive economic transformation will no longer be available to the new leadership. Beijing cannot simply open the monetary floodgates to stimulate the economy as was done in previous downturns. Continue reading »

The November election had many consequences, but few may be as profound as its impact on the likelihood of immigration reform.

Why? It has a good deal to do with domestic politics. One out of every six Americans is of at least some Hispanic heritage. The Republican party will not continue to be a national party able to compete successfully in presidential elections unless it embraces a more open approach toward immigrants and immigration. It doesn’t hurt that two potential Republican nominees in 2016—former Florida governor Jeb Bush and current Florida senator Marco Rubio—are strong advocates of just such change. Continue reading »