Opinion

Anatole Kaletsky

Learning budget lessons from Japan and Britain

Anatole Kaletsky
Oct 10, 2013 14:55 UTC

While the world is transfixed by the U.S. budget paralysis, fiscal policies have been moving in several other countries, most notably in Japan and Britain, with lessons for Washington and for other governments all over the world.

Let’s start with the bad news: Shinzo Abe’s decision to increase consumption taxes from 5 to 8 percent next April. This massive tax hike, to be followed by another increase in 2015, threatens to strangle Japan’s consumer-led growth from next year onwards, since Abe looks unlikely to offset this massive fiscal tightening with stimulative measures that would maintain consumers’ spending power. Even if Abe delivers on his vague promise to compensate with business tax reductions, these will only aggravate the over-investment and corporate cash hoarding that have long distorted the Japanese economy. Meanwhile, the government’s willingness to risk economic recovery in the cause of fiscal discipline implies that those of us who believed Abe was making an unconditional commitment to do whatever it takes to achieve economic recovery were simply wrong. Now that the forces of budgetary austerity have reasserted themselves, Japan’s probability of ending its decades of stagnation is much reduced.

Now for the good news: a change of attitude to debt and borrowing is transforming Britain from the second-weakest G7 economy (after Italy) into a world champion of growth. As recently as last April, the British government was attacked by the International Monetary Fund’s chief economist for “playing with fire” by trying too hard to reduce its budget deficits. This week the IMF World Economic Outlook praised Britain’s rapidly improving economy and upgraded 2013 growth projections by 0.5 percentage points, to 1.4 percent. That may not sound like much, but this improvement comes when almost every economy is being downgraded — and compared with last year’s miserable 0.2 percent growth rate, it feels almost like a boom.

Does this experience prove that David Cameron was right to persist with his unprecedented program of spending cuts, tax hikes and fiscal austerity? The answer is no, for two reasons.

First, the British government, despite its tough fiscal rhetoric, has actually relaxed its efforts at deficit reduction and has effectively abandoned its commitment to balanced budgets. In 2010 and 2011 Britain’s structural deficit was slashed by 4.3 percent of GDP, by far the biggest fiscal tightening in any major economy. In the next two years, 2012 and 2013, the pace of deficit reduction has halved to just 2 percent, and according to the IMF’s latest analysis there will be no further tightening at all in 2014. So instead of a near-balanced budget, Britain will next year still have the biggest budget deficit among the advanced Western economies: 5.8 percent of GDP, against 4.6 percent in the U.S., 3.5 percent in France and 2.1 percent in Italy. Thus Britain’s better growth performance, far from demonstrating the wisdom of relentless budget cuts, has actually reflected an easing of fiscal austerity and a belated acceptance of much wider deficits than European and U.S. politicians seem willing to tolerate.

Game theory and America’s budget battle

Anatole Kaletsky
Oct 3, 2013 14:17 UTC

So far, the battle of the budget in Washington is playing out roughly as expected. While a government shutdown has theoretically been ordered, nothing much has really happened, all the functions of government deemed essential have continued and financial markets have simply yawned. The only real difference between the tragicomedy now unfolding on Capitol Hill and the scenario outlined here last week has been in timing. I had suggested that the House Republicans would give way almost immediately on the budget, if only to keep some of their powder dry for a second, though equally hopeless, battle over the Treasury debt limit. Instead, it now looks like President Obama may succeed in rolling the two issues into one and forcing the Republicans to capitulate on both simultaneously.

The ultimate outcome of these battles is now clearer than ever. As explained here last week, the Tea Party’s campaign either to defund Obamacare or to sabotage the U.S. economy was doomed by the transformation in political dynamics that resulted from November’s election — above all by the fact that the president never again has to face the voters, while nearly every member of Congress must. This shift in the balance of power made the Republicans’ decision to mount a last stand on Obamacare, instead of attacking the White House on genuine budgetary issues, politically suicidal as well as quixotic. But while the outcome now looks inevitable, the timing of the decisive battle is important. Financial markets and businesses have responded with a tolerance bordering on complacency to the shenanigans in Washington, but this attitude could change abruptly if the House Republicans’ capitulation is delayed too long. As they say in the theater, the only difference between comedy and tragedy is timing.

The risk, as everyone now realizes, is that the battle of the budget — which turns out really to be just a minor tussle over the funding of a limited range of worthy but nonessential government services — remains in a stalemate right up to October 17, when U.S. Treasury is expected to hit its debt limit. At that point, an immediate settlement will be needed or all hell could break loose. The key question for businesses and investors around the world, therefore, is whether the Republicans’ impossible demands to defund Obamacare are removed from the budgetary bills comfortably before the October 17 deadline, or whether this capitulation is triggered by a financial crisis once the deadline draws too close.

Why markets don’t fear a government shutdown

Anatole Kaletsky
Sep 26, 2013 14:44 UTC

Now that the worldwide panic over U.S. monetary policy has subsided, Washington is brewing another storm in a teacup: the budget and Obamacare battle that reaches a climax next Monday, followed by the debt limit vote required to prevent a mid-October Treasury default. The ultimate outcome of these crises is a foregone conclusion. As Senator John McCain told the press this week: “We will end up not shutting down the government and not de-funding Obamacare.” He could surely have added that a Treasury default is also out of the question.

But how exactly will Washington manage to dodge these bullets? As McCain added, “I don’t know what all the scenes are, [although] I’ve seen how this movie ends.” Markets understandably fear that all the plot twists leading up to a seemingly satisfactory resolution could produce an economic horror film, crushing business and consumer confidence, damaging economic growth and triggering a major sell-off in global stock markets. That, after all, is exactly what happened when the U.S. Treasury almost defaulted in July 2011.

What, then, are the chances of similar disruption in the weeks ahead? The risks this time are much smaller than in 2011 because of four events that have transformed the dynamics of U.S. budget battles.

The markets and Bernanke’s “taper tantrums”

Anatole Kaletsky
Sep 19, 2013 16:22 UTC

So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.

The Fed’s decision not to cut back on its $85 billion of monthly bond purchases, even by some small symbolic amount such as $5 billion, stunned the markets — but only because analysts had refused to believe what Bernanke, along with most other central bankers around the world, was saying throughout the period since May 21. The Fed chairman repeatedly stated that tapering would begin only if and when there was consistent evidence that U.S. employment conditions were improving. Bernanke also stated that, even after tapering started, the Fed would not allow U.S. monetary conditions to tighten and would keep short-term interest rates near zero for a very long period — at least until 2015, and quite possibly beyond.

Why, then, were investors so surprised when the Fed officially implemented exactly what Bernanke had promised? And now that the Fed has put its money where Bernanke’s mouth was, how will the global economy and financial markets react?

Dalian Man

Anatole Kaletsky
Sep 11, 2013 21:02 UTC

The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.

The biggest surprise at this week’s Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board’s meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed’s easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the “middle-income trap” that has prevented further progress in many developing economies. The trap starts to hobble growth when per capita incomes rise to around $10,000 and many of the obvious opportunities for catching up with Western productivity are exhausted. China’s is $9,160 according to the IMF.

When I travelled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organised by Tsinghua University and the Institute for New Economic Thinking.

Syrian intervention invokes Europe’s history

Anatole Kaletsky
Sep 5, 2013 14:51 UTC

The prospect of Congressional approval for a U.S. attack on Syria is probably good news for the world economy and financial markets, since the impact on the oil price of an intense but strictly time-limited military action is likely to be a classic case of “buy on the rumor and sell on the news.” History suggests that the moment U.S. bombs start raining down on Syria, oil prices will pull back and stock markets around the world will rise. But what about the bigger picture? How will a U.S. bombing campaign affect the stability of the Middle East and global geopolitics?

To consider these questions it helps to recall that the main principle underlying the United Nations Charter is non-intervention by foreign governments in the affairs of sovereign states. Morally, this principle is hard to justify. It conflicts with the “duty to protect” civilians from barbarous treatment by their own rulers, which Western governments have invoked when crossing international borders in response to massacres in former Yugoslavia, Sudan and Sierra Leone — and should have invoked, with hindsight, to stop Hitler in the 1930s and prevent the Rwandan genocide in 1994.

Why, then, is non-intervention still recognized as the bedrock of modern international law? A standard answer is the Peace of Westphalia — a series of treaties in 17th century Europe that legally enshrined national self-determination and inviolability of borders for the first time. But why should the world today still be bound by these 400-year-old ideas?

A guide to the upcoming financial hurricane season

Anatole Kaletsky
Aug 29, 2013 15:42 UTC

As the summer holidays wind down, the world is again moving into the financial Hurricane Season, which coincides uncannily with the meteorological hurricane season in the North Atlantic every autumn. Most great financial crises have occurred in the six weeks from late August to mid-October, for reasons I discussed in this column last September.

This year, exactly on cue, the seasonal risks are again building up: war in the Middle East; a watershed decision in U.S. monetary policy, plus the announcement of a new Fed chairman; a German election that could make or break the euro; the long-awaited “third arrow” of Shinzo Abe’s Japanese reform program; another internecine conflict over the U.S. budget and Treasury debt limit that could result in a government shutdown or even a temporary default. And I am not even counting probable policy upheavals in China, India, Brazil, Indonesia, Turkey and other crisis-ridden emerging economies, whose timing is less certain but which could also fall within the next few months.

The consolation is that confidence is likely to return to the world economy and financial markets if the political and financial storms blow over without too much damage. To gauge how the world is likely to fare under this barrage of uncertainties, consider them in turn.

Let the great economy spin

Anatole Kaletsky
Aug 22, 2013 21:43 UTC

On the way to my holiday in Italy this year, I had an epiphany about the state of the world economy. I stopped for lunch in the truly miraculous Piazza dei Miracoli in Pisa, where Galileo Galilei is said to have dropped cannon-balls from the Leaning Tower to test his theories of motion. A few years later, Galileo invented the telescope to amass the detailed astronomical observations that were needed to prove beyond reasonable doubt the heliocentric theory of the universe — the idea that the earth revolves around the sun and not the other way round, as the Bible implied. Galileo was famously tried by the Inquisition for this heresy and decided to recant, presumably inspired by what happened to his fellow-mathematician Giordano Bruno, who was burnt at the stake for similar ideas. But after mechanically recanting, Galileo muttered under his breath the rebellious phrase for which he is still renowned: eppur si muove — “and yet it moves.”

As I enjoyed my lunch in Pisa, Galileo’s defiantly optimistic words echoed through my mind. “And yet it moves” seemed perfectly to describe what I had felt about the world economy and financial markets since the crisis of 2008.

For the past five years, the media and financial markets have resounded with prophecies of doom. Economists have strained to prove why life would never be the same again; why bankruptcy was inevitable for great nations such as Italy, France, Britain and even the United States, Japan and China, and why the pre-crisis decades of prosperity would have to be followed by an era of repentance — or else a Biblical Day of Reckoning would be upon us.

Bezos needs to reinvent a business model, not journalism

Anatole Kaletsky
Aug 15, 2013 15:21 UTC

It is now a week since Jeff Bezos, the founder of Amazon,  announced that he was buying the Washington Post, in what could be the most exciting case of convergence between the new media and the old since the merger of AOL with Time Warner. But how might Bezos re-launch this venerable flagship of U.S. journalism? And what could his ownership of the Post mean for news businesses around the world?

These may seem strange questions for a column devoted mostly to controversies in public policy and economics, but newspapers today are a declining industry comparable to the steel and shipbuilding industries in the 1980s, and employ even more people at higher wages. Newspapers are therefore of great economic significance, not to mention their importance to democracy. Yet public discussion often assumes that journalism is technologically doomed. The Internet, it seems, is ineluctably turning news and analysis from a thriving industry, gainfully employing millions on decent incomes, into an unpaid hobby for philanthropists or self-promoters who will earn their living by other means.

From an economic standpoint, this fatalism is unjustified. If quality news and analysis have significant value to customers, then the people providing these services will eventually find ways to get paid. It is often claimed that the news has become worthless because Internet distribution involves zero marginal cost, but this is poor economics. The true cost of news lies not in distribution, but in the research, composition, selection and editing required for high quality writing. These costs are as high as ever today.

Mark Carney abandons Thatcher-era supply-side policy

Anatole Kaletsky
Aug 8, 2013 14:35 UTC

The era of laissez-faire monetarism is over, as the world moves by small but inexorable steps towards a new kind of Keynesian demand management. One after another, governments and central banks in the leading economies are accepting a responsibility for managing unemployment that they abandoned in the 1970s, during the monetarist counter-revolution against Keynesian economics. On Wednesday it was Britain’s turn, as Mark Carney, the new governor of the Bank of England, joined Ben Bernanke in making the reduction of unemployment his main monetary policy goal.

Carney was until recently Canada’s top central banker and was headhunted by the British government specifically to inaugurate a new era of “monetary activism.” On Wednesday, at his first official press conference, he lived up to this billing.

Instead of merely promising to keep British interest rates near zero for a predefined period of a year or two, as had widely been expected, Carney did something bolder and intellectually more controversial. By announcing that the BoE would not even consider any reduction in monetary stimulus until unemployment fell below 7 percent, Carney deliberately broke a taboo that has dominated British economic policy since Margaret Thatcher’s election in 1979.

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