Opinion

Anatole Kaletsky

Renewed optimism can be a double-edged sword

Anatole Kaletsky
May 2, 2013 15:22 UTC

This is a critical week for the world economy and financial markets, especially in the United States. Friday’s U.S. employment report will signal either a renewal of the economic recovery or, much more likely, will confirm that the economy is sinking into another seasonal “soft patch” for the fourth time in four years. Despite this risk, stock prices on Wall Street are at record highs, suggesting that equity investors see this slowdown as nothing more than a temporary obstruction on the way to a sustained recovery, just as in the summers of 2010, 2011 and 2012. So should we prepare for more anxiety about a double-dip recession, or can we feel confident that this summer will be followed by an autumn of strong recovery, as in the past four years?

I had an excellent vantage point this week from which to assess this question: the global conference of the Milken Institute in California, which brings together 1,000 business executives, politicians and financiers in a U.S. equivalent of the Davos economic forum, transplanted to the warmer and even plusher surroundings of Beverly Hills. Clearly, there was anxiety about the flagging recovery and the self-inflected damage caused by January’s payroll tax hike and the unplanned cuts to public spending caused by the sequestration process. But there was also a palpable resurgence of optimism about America’s long term prospects: the opportunities created by 3 billion new global consumers; the U.S. track record of innovation and enterprise; the magnetism of U.S. universities for global talent; the promise of energy independence; the transformational opportunities from “big data” and robotics; the prospect of liberalized immigration policies; and, encompassing many of these issues, a sense that the hyperpartisan warfare in Washington over healthcare, taxes and public spending had reached a point of exhaustion. Both sides, it seems, might be ready for a ceasefire, if not yet a lasting peace.

A surprising highlight of the conference was an amiable hour-long discussion between two of the most partisan antagonists in Washington’s political dramas ‑ Senate Majority Leader Harry Reid (D-Nev.) and Eric Cantor of Virginia, the ultra-conservative leader of the Republican majority in the House of Representatives. This ended with both politicians agreeing that there might be scope for a deal on the U.S. budget and thanking the Milken Institute for bringing them to California so they could talk to each other constructively in a way that simply isn’t possible in Washington. Similar sentiments came from leaders of both parties, ranging from Tennessee Republican Senator Bob Corker’s appreciation that “President Obama has put himself to the right of the House Republicans on entitlement reform” to Senator Bob Casey, a Democrat from Pennsylvania, saying that “so many people have become intolerant of hyperpartisanship – this is an even bigger issue for voters now than unemployment.”

If U.S. politics is edging away from internecine warfare, this has big implications for the world economy ‑ not all of them positive. The good news is policy predictability and stability. Even the staunchest conservatives, such as Cantor, have accepted that Obama’s main legislative achievements will not be reversed. They are learning to live with healthcare reform (now generally by its official name, the Affordable Care Act, instead of the contemptuous “Obamacare,” even by Cantor). They are embracing immigration reform, and some are even calling for greater government activism in areas such as education and healthcare research.

At the same time, Democrats have sobered up after their electoral celebrations and are realizing they may have to accept some long-term reductions in health and pension entitlements if they want to defend the discretionary spending priorities they hold dear: welfare, education, infrastructure investment and so on. As Peter Orszag, President Obama’s former budget director, noted, “I tell my friends on the left [of the Democratic Party] that there is a concern in the country about deficit reduction that they can’t ignore – it’s like an itch and it is going to get scratched. So if you don’t do entitlement reform in the long term, you will do too much on discretionary spending in 2013 and that is the most dangerous kind of deficit reduction.”

Market euphoria misreads the signals from Brussels and Rome

Anatole Kaletsky
Apr 25, 2013 15:31 UTC

Financial markets, which balance judgments from some of the world’s most highly paid and best-informed analysts, are often uncannily right in anticipating unpredictable events, ranging from economic booms and busts to elections and terrorist attacks. But markets can sometimes can be spectacularly wrong, especially when it comes to politics. A classic case was the slump on Wall Street after last November’s election in the United States. This week’s market action in Europe may offer an even clearer example of market confusion about two fascinating but Byzantine political entities – the Italian government and the European Central Bank.

European stock markets have rebounded strongly this week in the face of deteriorating economic and financial fundamentals from across Europe on the basis of two political events: the reluctant agreement by Italy’s 87-yearold president. Giorgio Napolitano, to serve another seven-year term because nobody else could be found to do the job; and hints from ECB council members that they might vote to cut interest rates from 0.75 percent to 0.5 percent next Thursday.

Neither of these events remotely justified investors’ euphoria. The ECB case is straightforward. First, the ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Second, even if the ECB does act, a quarter-point cut will do nothing for growth. Third and most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

If Europe wants Thatcherism, it must abandon austerity

Anatole Kaletsky
Apr 11, 2013 16:43 UTC

Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.

Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets: Inflation must be kept below 2 percent; deficits must be reduced to 3 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel. In sacrificing their citizens’ well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe’s leaders keep repeating Thatcher’s most famous slogans, “There is no alternative” and “No U-turn”.  But are these the right lessons to draw from Thatcher’s political life? A closer look at her economic achievements suggests otherwise.

In the 20 years she spent in parliament before becoming prime minister, Thatcher first saw Harold Wilson’s Labour government wrecked by currency crises and trade union militancy; then Ted Heath ousted by a miners’ strike; and finally James Callaghan humiliated by the 1976 sterling crisis and driven out of office by the wave of public-sector strikes that came to be called the “winter of discontent.” After these searing experiences, her immediate priority on becoming prime minister was to turn British monetary management and labor relations upside down. Yet her actions were much more cautious and pragmatic than her rhetoric.

Trying to fix broken economics

Anatole Kaletsky
Apr 4, 2013 15:01 UTC

Here is a list of economic questions that have something in common. In a recession, should governments reduce budget deficits or increase them? Do 0 percent interest rates stimulate economic recovery or suppress it? Should welfare benefits be maintained or cut in response to high unemployment? Should depositors in failed banks be protected or suffer big losses? Does income inequality damage or encourage economic growth? Will market forces create environmental disasters or avert them? Is government support necessary for technological progress or stifling to innovation?

What these important questions have in common is that professional economists can’t answer them. To be more precise, economists can offer plenty of answers about government deficits, printing money, inequality, environmental issues and so on, but none of these answers is authoritative enough any longer to persuade other economists, and never the world at large.

Take two examples. On whether government borrowing aggravates recessions or promotes recoveries, the world’s most eminent economists fall into one of two violently conflicting schools. The world’s most important central banks, the U.S. Federal Reserve and the European Central Bank, hold diametrically opposing views about the effects of quantitative easing. If economics were a genuinely scientific discipline, such disputes over fundamental issues would have been settled decades ago. They are equivalent to astronomers still arguing about whether the sun revolves around the earth or earth around the sun.

Will Putin attempt a last-minute Cyprus rescue?

Anatole Kaletsky
Mar 25, 2013 01:59 UTC

Vladimir Putin could restore Russia’s great power status and maybe go down in history as the country’s most visionary leader since Peter the Great. He could win respect from Beijing and Washington for averting a second global financial crisis and he could prove that Russia understands market economics better than the EU. His miraculous opportunity to do all this started with the Mafia-style “offer you can’t refuse”  presented by the EU to Cyprus on Sunday. It will end on Tuesday morning, if Cyprus banks then re-open under the conditions imposed by the European Troika, as currently planned.

One of the mysteries of the Cyprus crisis has been the lack of response from Russia, despite the obvious strategic opportunities, not just to protect its offshore deposits, but also to exploit the island’s strategic location and its military and energy potential. A possible explanation is that Europe’s indecision also paralyzed Russia -  until last night.

As long as Europe’s policy on Cyprus kept shifting, it was impossible for Russia to intervene, since any help it offered could be rejected or outbid by the EU. As a chess player, Putin probably understood that his best strategy was to wait for Cyprus to get weaker and more desperate, while the EU, and especially Germany, became more impatient and obstinate. The moment to make his move would be when Europe presented an ultimatum too painful or humiliating for Cyprus to accept. That moment arrived last night.

Even Britain has now abandoned austerity

Anatole Kaletsky
Mar 21, 2013 16:09 UTC

The Age of Austerity is over. This is not a prediction, but a simple statement of fact. No serious policymaker anywhere in the world is trying to reduce deficits or debt any longer, and all major central banks are happy to finance more government borrowing with printed money. After Japan’s election of Prime Minister Shinzo Abe and the undeclared budgetary ceasefire in Washington that followed President Obama’s victory last year, there were just two significant hold-outs against this trend: Britain and the euro-zone. Now, the fiscal “Austerians” and “sado-monetarists” in both these economies have surrendered, albeit for very different reasons.

Much attention has been focused this week on the chaos in Cyprus. Coming after the Italian election and subsequent easing of Italy’s fiscal conditions, the overriding necessity to keep Cyprus within the euro — and its military bases and gas supplies outside Russian control — will almost surely mean another retreat by Germany and the European Central Bank from their excessive austerity demands. But an even more remarkable shift has occurred in Britain. The Cameron government, which embraced fiscal austerity as its main raison d’etre, was suddenly converted to the joys of debt and borrowing in this week’s budget.

Of course, the rhetoric of British Chancellor George Osborne’s budget speech gave no hint of his Damascene conversion. On the contrary, it ridiculed “people who seem to think that the way to borrow less is to borrow more.” But Osborne’s trademark sneers could not disguise the meaning of the policies and numbers he presented.

Don’t worry about a stock market drop

Anatole Kaletsky
Mar 14, 2013 15:50 UTC

A feeling of vertigo may seem natural as Wall Street approaches a record and stock markets around the world climb to their highest levels since 2007. With the Standard & Poor’s 500-stock index  now only 0.5 percent away from its 2007 high of 1565 and with the Dow Jones industrial average scaling new peaks almost daily, what will investors expect to see when they reach the mountaintop? The mountaineering analogy suggests, at best, a long descent and, at worst, a precipitous drop. But how literally should we take such metaphors?

Bearish analysts often claim that stock market peaks have always been followed by sharp falls, citing as evidence the record high of October 2007, which was quickly followed by a 57 percent collapse in 2008-09. They add that the previous peak, in March 2000, was followed by a 37 percent plunge and that last major high before that, in August 1987, preceded the biggest-ever market crash, in October 1987. These precedents, along with the even more vertiginous peaks of 1989 in Japan and 1929 on Wall Street, certainly sound scary, but they are meaningless.

It may be true that all major market peaks have been followed by big declines, but the reason is semantics, not finance or economics. A peak is, by definition, a high point followed by a decline. A new market high that is not followed by a fall in prices is simply not called a peak. A record of this kind, far from preceding a steep decline, tends to act as a staging post for higher prices. Looking back through history, it turns out that this benign type of record, paving the way for higher prices, is actually the norm.

Obama’s best strategy: Do nothing

Anatole Kaletsky
Mar 8, 2013 13:05 UTC

Ronald Reagan had a catchphrase when faced with a crisis, especially a synthetic “crisis” of the kind Washington loves to concoct. He would call in the officials and media advisers rushing manically around the West Wing and calmly tell them: “Don’t just do something – stand there.”  In this respect, as in several others, “No Drama Obama” seems to resemble the man he once admiringly described, despite their ideological animosity, as the last great “transformational” U.S. president.

With Wall Street hitting new records as Washington supposedly plunges into its latest fiscal crisis with the budget sequestration that began this week, Obama could do well to emulate Reagan’s laid-back style. In addition to doing nothing about the latest manufactured fiscal crisis, he could explain why nothing is the right thing to do.

To be more specific, Obama could negotiate a truce in the budget war. Instead of insisting that Republicans must “pay” for Democratic spending cuts by agreeing to higher taxes, the president could offer a much more attractive deal to both sides. If Republicans eased the sequester and demanded no new spending cuts, the Democrats could promise not to raise any taxes. Such a ceasefire would  be seen by both parties as an honorable draw. Republicans would have fulfilled their pledge to stop higher taxes; while Democrats would have thwarted efforts to gut government and the welfare state.

The age of austerity is ending

Anatole Kaletsky
Feb 28, 2013 15:35 UTC

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

The losers in Italy’s election are already clear

Anatole Kaletsky
Feb 21, 2013 18:00 UTC

We don’t yet know the winner of Sunday’s election in Italy, but the losers are already clear. And in this election, who loses may be much more important than who wins.

The obvious loser is Mario Monti, the charming and eloquent economics professor who is widely credited with saving Italy from a Greek-style debt crisis during his one-year term as Italy’s unelected prime minister. Monti could have gone down in history as the most effective and intelligent Italian leader of his generation, had he decided to opt out of this weekend’s election and instead sought appointment as Italy’s president. That is a mainly ceremonial role that can become very important in times of constitutional crisis (which in Italy occur all too often), and Monti could almost certainly have won strong endorsements  from Italian politicians on the left and right.

Instead, Monti surprised everyone by founding a political party and running for Parliament at the head of a center-right grouping. This now looks like a big mistake. According to the last pre-election polls, Monti’s group is running a humiliating fourth, after the Italian Socialist Party, Silvio Berlusconi’s resurrected personal party and stand-up comedian Beppe Grillo’s anarchic Five Star Movement. Worse still for Monti, he seems to have helped his archenemy Berlusconi by splitting the opposition to the scandal-ridden former prime minister. If Monti’s party performs as badly as expected, it will be all too easy for his opponents to present the election as a clear rejection of the painful economic reforms he imposed on his long-suffering countrymen at the behest of the German government and the European Central Bank.

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