Commentaries

Third person spells trouble in politicians

Beware of politicians who speak about themselves in the third person. It doesn’t necessarily mean they are paranoid. But it is usually an indicator of some kind of trouble.

More than a decade before he was forced out of the White House for lying, destroying evidence, bugging his political opponents and covering up a crime in the Watergate affair, Richard Nixon (right) famously told journalists at what he said was his last press conference: “You won’t have Nixon to kick around any more.”

Now Italian Prime Minister Silvio Berlusconi (left) has taken to referring to himself in the third person as the victim of left-wing judges and the media (at least the parts of it that he doesn’t own or control). His response to the Italian Constitutional Court’s ruling on Wednesday overturning a law that granted the prime minister immunity from prosecution during his term in office was to declare:

Without Silvio, the country would be in the hands of the left and you all know what would happen. The trials that they are going to throw against me are a farce. Long live Italy! Long live Berlusconi! 

What do the two have in common? Clearly a belief that they are victims of persecution, and perhaps also a sense that power exists to be used implacably against enemies.

Berlusconi, a billionaire media magnate and soccer club owner, also has a lot in common with Bernard Tapie, a self-made French businessman who owned Olympique Marseille when they beat Berlusconi’s AC Milan to become European champions in 1993. Tapie was briefly made a minister under Socialist President Francois Mitterrand before being sent to prison for fraud and match-fixing. He too talked of himself frequently in the third person, making comments such as “They want to destroy Tapie”.

In some cases, politicians may be indicating a loss of reality by referring to themselves in the third person. In his final months as president of the crumbling Soviet Union, as power ebbed from his office, Mikhail Gorbachev took to calling himself “Gorbachev” in interviews and speeches. Although he enjoyed international acclaim for loosening Moscow’s iron grip on eastern Europe and Soviet society, he too came to feel that he was a victim of enemies both among hardline Communists and nationalists who wanted to destroy him politically.

West raises stakes over Iran nuclear programme

President Obama and the leaders of France and Britain have deliberately raised the stakes in the confrontation over Iran’s nuclear programme by dramatising the disclosure that it is building a second uranium enrichment plant. Their shoulder-to-shoulder statements of resolve, less than a week before Iran opens talks with six major powers in Geneva, raised more questions than they answer.

It turns out that the United States has known for a long time (how long?) that Iran had been building the still incomplete plant near Qom. Did it share that intelligence with the U.N. nuclear watchdog, and if not, why not? Why did it wait until now, in the middle of a G20 summit in Pittsburgh, to make the announcement — after Iran had notified the International Atomic Energy Authority of the plant’s existence on Monday, after Iranian President Mahmoud Ahmadinejad had delivered a defiant speech to the U.N. General Assembly on Wednesday and after the Security Council had adopted a unanimous resolution calling for an end to the spread of nuclear weapons on Thursday?

Is this all part of Obama’s choreography to  build international pressure on Iran by getting Russia, in return for the dropping of plans to put a U.S. missile shield in Poland the Czech Republic, to threaten more sanctions against Tehran? A U.S. official says Obama shared the intelligence with Russian President Dimitry Medvedev at the United Nations this week and China had only just been informed. Did Obama try and fail to get Medvedev and Chinese President Hu Jintao — both in Pittsburgh — to join the three Western leaders on the podium? Or was his hand forced on timing by the fact that the New York Times had got wind of the Iranian nuclear plant and was set to publish the news on Friday?

The division of labour between Obama, Sarkozy and Brown was striking. The U.S. president sounded stern but his tone was measured. He stressed his commitment to dialogue and negotiation with Iran and to Tehran’s right to peaceful nuclear energy. He did not mention sanctions, let alone the possibility of military action. It fell to the Europeans to inject a tone of menace.

Sarkozy accused Iran of defying the international community and taking the world on a dangerous path, and said that unless Tehran changed course by December, there would be tougher sanctions. Brown charged the Islamic Republic with deception and said the international community had no choice but “to draw a line in the sand”, and that he did not rule out anything although sanctions were the preferred route. 

Will the latest disclosure on what Iran insists is a peaceful nuclear programme persuade Russia to renounce the sale of advanced S-300 anti-aircraft missiles to Tehran? Will it persuade China, which reaffirmed its scepticism about more sanctions this week and has begun supplying gasoline to Iran, to change its mind? The West sees Iran’s dependency on imported fuel as a key vulnerability.

Friday’s dramatic announcement was a clear effort to appeal to the world court of public opinion and maximise pressure on Tehran before the Oct. 1 talks, but there is no sign that the Islamic Republic’s leaders are even considering yielding on their nuclear ambitions. On the contrary, they seem convinced that the nuclear standoff will enable them to patch over deep internal divisions over the disputed June presidential election by playing the patriotic card.

Rethinking carbon diplomacy

Climate change was initially billed in a leading role at the G20 meeting in Pittsburgh. Now it looks set to make the briefest of cameo appearances.

Nonetheless, the gathering offers a crucial chance to recast the talks. The United Nations carbon process is in deep trouble and desperately needs help from the top. If the G20 heads of government want to avoid embarrassment at the Copenhagen Summit, they need to start to steer the talks in a new direction.

The first step is to move away from the flawed Kyoto model on which the talks are based. Haggling over overall emissions caps is unproductive. Nations have an incentive to push for targets that are easy to hit — giving themselves plenty of headroom in the event of faster economic growth.

Even then, it is hard to check up on compliance, since countries like China and India lack the ability to track their emissions.

And not much happens to countries that blow through their targets. Canada will surpass its Kyoto limit by close to a third. Yet this failure has clearly not turned Canada into an international pariah.

World leaders should set aside this failed framework. One way of doing so is to move toward energy efficiency goals — targeting emissions per unit of GDP. Recasting the debate in this way would reassure developing nations that climate talks would not infringe on their right to grow.

Blunt overall targets punish nations with vibrant economies and growing populations while rewarding those with a dwindling workforce. Europe was able to breeze through the Kyoto test partly because of the collapse of the Eastern bloc in the 1990s.

A chance for real change at the G20

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Most commentators are not expecting much. Such cynicism is easy to understand. When the IMF tried to bang heads together in 2006 the result was a series of empty pledges. It now makes for comic reading.

The United States swore to eliminate the federal deficit by 2012 and contain spending growth. China agreed to allow further exchange rate liberalization. The euro area said it would reform labor markets. We all know what happened to these promises.

But self-interest is providing a strong tailwind behind the current talks.

One background motivator at the G20 may be the mounting suspicion that imbalances were a leading culprit of the 2008 financial crisis. The tide of savings flowing from China into the U.S. bond market certainly helped fuel the asset price bubble by lowering borrowing costs.

The influential governor of the Bank of England, Mervyn King, recently warned that unless the situation is resolved the world was “doomed to repetitions” of the meltdown and the “substantial recessions” that accompanied it.

This theory is unlikely to be the driving force, however. Imbalances may after all have only played a walk-on part in the crisis. The deluge of money from China did not oblige U.S. regulators to tolerate a surge of bank leverage and a slide in lending standards.

Why Russia needs America

In the wake of President Obama’s decision to scrap the U.S. missile defence shield in eastern Europe, many are pondering Russia’s response. The relationship will remain in the spotlight this week, when President Medvedev heads to the U.S. for the G20 summit. Although the precise nature of Russia’s reaction remains to be seen, it has a big incentive to improve relations. It badly needs American investment and co-operation to help solve serious economic problems at home.

Critics of Obama’s decision worry that it will “embolden” Russia, causing more aggressive behaviour abroad. Yet they forget that the Bush administration’s antagonistic policies failed to provide security to Russia’s neighbours. These policies didn’t prevent Russia’s war with Georgia, the repeated gas disputes with Ukraine, and a serious cooling of relations with countries such as Poland. Far from being restrained, Russia’s confrontational attitude had a lot to do with its perception that the U.S. was busy encircling the country with missile bases and alliances.

The critics also imply that Russia is preoccupied with external expansion, but that hardly seems appropriate today. Russia’s GDP is set to plummet by 8 percent this year. Russian analysts estimate that the country needs up to $2 trillion to renovate its dangerously clapped-out infrastructure. In major industrial cities, Russia’s dilapidated factories are mulling huge job losses. For the foreseeable future, Russia’s leaders are likely to be preoccupied with thorny domestic problems. (more…)

“Tobin tax” gaining ground in Europe

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept. (more…)

Shelved missile shield tests NATO unity

After just six weeks as NATO secretary-general, Anders Fogh Rasmussen has his first crisis. The alliance may be slowly bleeding in an intractable war in Afghanistan, but the immediate cause is the U.S. administration’s decision to shelve a planned missile shield due to have been built in Poland and the Czech Republic.

The shield, energetically promoted by former President George W. Bush, was designed to intercept a small number of missiles fired by Iran or some other ”rogue state”. But Russia saw it as a threat to its own nuclear deterrent and NATO’s new east European members saw it as a useful deterrent against Russian bullying, by putting U.S. strategic assets on their soil.

President Barack Obama’s decision to drop plans to install it on Polish and Czech territory leaves those former Soviet satellites feeling betrayed — because they expended political capital to win parliamentary support — and more exposed to a resurgent Russia, especially after its use of force against Georgia last year.

Obama’s move is clearly part of a warming of U.S. relations with Moscow from which Washington hopes to gain help in return on supply routes to Afghanistan, pressure on Iran to rein in its nuclear programme, and an agreement on radical cuts in nuclear arsenals. But this “reset” of U.S.-Russian relations has only exacerbated the rift within NATO over Russia.

The three Baltic states and Poland were particularly critical of NATO’s low-key response to Moscow’s military action in Georgia. Some said the refusal of west European allies led by Germany and France to agree at a NATO summit last year to putting Georgia and Ukraine on a path to NATO membership emboldened the Kremlin to act. President Dimitry Medvedev’s harsh attack on Ukraine’s leader in an open letter last month fanned their fears of Russian bullying of its neighbours.

East European officials cite Moscow’s playing with the gas taps and trade disputes, and its apparent determination to keep its Black Sea fleet in the Crimean port of Odessa Sevastopol beyond a 2017 deadline agreed with Ukraine as part of a strategy of tension intended to reverse the “colour revolutions” in Kiev and Tbilisi, and bring other former Soviet republics to heel.

All that makes it a particularly awkward moment for Rasmussen to deliver his inaugural keynote speech on NATO-Russia relations on Friday in Brussels. The former Danish prime minister has put a few noses out of joint in his first weeks by making clear he intends to run NATO in a more results-oriented way, leaving less room and time for ambassadors in the North Atlantic Council to debate any idea to a standstill. He has set strict time-limits on council meetings, streamlined flabby agendas and outsourced the drafting of a new Strategic Concept to a group of 12 experts led by former U.S. Secretary of State Madeleine Albright, on which not all allies are represented.

Free-trade advocates need to get real

President Barack Obama’s decision to impose safeguard tariffs on imported tyres from China has drawn predictable howls of outrage from economists, think tank staff and editorial writers — none of whom has seen their job exported to China. It would be more constructive if they devoted the same effort to devising ways to compensate losers from globalisation in order to shore up waning public support for trade liberalisation. Between 2000 and 2008, almost 4 million jobs were lost in U.S. manufacturing (22 percent of the total), many as the result of offshoring and increasing competition from lower-cost manufacturers in China and elsewhere in Asia.

Over the same period, the federal government provided just $1 billion per year in extended unemployment benefits and retraining under the Trade Adjustment Assistance (TAA) programme. In the fiscal year ending September 2008, TAA helped fewer than 100,000 workers who had lost jobs as a result of changing trade patterns.

No one questions the strong theoretical argument in favour of free trade over protectionism.

The problem is the highly uneven incidence of costs and benefits from the policy. Benefits tend to be distributed fairly widely among consumers in the form of cheaper prices. Costs are concentrated among those workers and households that lose income and jobs as the result of competition from lower-cost and more efficient producers abroad.

In theory, beneficiaries could compensate the losers, and everyone would still end up better off (free trade is “Pareto optimal” in the literature) through a system of taxes and transfers. In practice such compensation almost never happens. Politicians and proponents of trade liberalisation pay lip-service to the need to soften the impact on affected industries and households, but practical help has been limited.

All too often, once workers in affected industries are laid off, they cease to be treated as “victims” of trade liberalisation entitled to compensation. Instead they join the faceless ranks of the unemployed expected to find new employment as quickly as possible to minimise the burden on other taxpayers. Worse, when the federal government needs to find spending cuts to balance the budget, TAA funding has often been frozen or cut back.

There is something particularly callous in the way that many free-traders have turned their backs on workers affected by trade liberalisation — as if they were victims of impersonal historical forces rather than deliberate policy choices.

Banking? Keep it simple stupid

In 1873, Walter Bagehot wrote that “the business of banking ought to be simple; if it is hard it is wrong.” He would have struggled to recognize today’s banking system.

It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.

Complexity — as Bagehot predicted — has become a curse. If nobody can understand financial firms, they will become ever more accident prone.

The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.

Regulators too could be forgiven for scratching their heads.

“Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships,” former Fed official Vincent Reinhart has written.

Indeed Basel II — the international capital code — was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.

Scavenging for good news in the jobs data

Interpreting the employment numbers has become an exercise in scavenging for good news. After a year of beefy job losses, any sign that the pace of deterioration is slowing is certainly welcome. Were it not for the Obama stimulus package, we would probably be continuing to see job declines of closer to half a million a month.

Even so, the data still don’t offer much hope of a vigorous recovery.

While layoffs are declining, there are precious few signs that companies are hiring. As a result the number of people without work for more than six months has reached an alarming 5 million.

In addition, the swelling of the U.S. population means that the nation needs to create about 130,000 jobs a month just to stand still. This helps explain why unemployment rose by 466,000.

The total number of employment casualties since the start of the recession (December 2007) is fast approaching 7 million. We may still have another year of falling employment ahead.