The Great Debate UK

from The Great Debate:

Stubborn national politics drag down the global economy

Four years ago world leaders, meeting in the G20 crisis session, agreed they would all work to move from recession to growth and prosperity.  They agreed to a global growth compact to be delivered by combining national growth targets with coordinated global interventions. It didn’t happen. After the $1 trillion stimulus of 2009, fiscal consolidation became the established order of the day, and so year after year millions have continued to endure unemployment and lower living standards.

Only now are there signs that the long-overdue shift in national macro-economic policies may be taking place. The new Japanese government is backing up a "minimum inflation target" with a multi-billion-dollar stimulus designed to create 600,000 jobs. In what some call the “reverse Volcker moment,” Ben Bernanke has become the first head of a central bank for decades to announce he will target a 6 percent level of unemployment alongside his inflation objective. And the new governor of the Bank of England, Mark Carney, has told us that "when policy rates are stuck at the zero lower bound, there could not be a more favorable case for Nominal GDP targeting.” Side by side with this shift in policy, in every area but the Euro, there is also policy progress in China. It may look from the outside as if November’s Communist Party Congress simply re-announced their all-too-familiar but undelivered wish to re-balance the economy from exports to domestic consumption, but this time the promise has been accompanied by a time-specific commitment: to double average domestic income per head by 2020.

The intellectual case for change is obvious. A chronic shortage of demand has developed for two reasons. First, as the IMF announced at the end of 2012, the adverse impact of fiscal consolidation on employment and demand has been greater than many people expected. Secondly, the effectiveness of quantitative easing has almost certainly started to wane. As former BBC chief Gavyn Davies has put it, “the supply potential of the economy is in danger of becoming dependent on, or ‘endogenous to,’ the weakness of domestic demand. ...With demand constrained in this way for such a lengthy period of time, supply potential is beginning to downsize to fit the low level of demand.” It is a new equilibrium that can be reversed only by boosting demand.

But why is there so little optimism when the paradigm shift sought in 2009 is finally starting to materialize? Why do experts continue to downgrade their forecasts for 2013 and even 2014, while discussion so often drifts toward talk of a lost decade? It is, I suggest, because while countries are today adopting national growth strategies, they have missed out on the other part of the 2009 decision -- the necessity of coordinated global intervention. And the big question is whether the momentum for growth can be sustained by national initiatives alone in the absence of global action or will instead melt away once again under the pressure of narrow, self-defeating national policies.

Quality of care the missing link between coverage of care and health improvements

Jocalyn Clark (@jocalynclark) is Senior Editor at PLOS Medicine. The opinions expressed are the organisation’s own.–

While coverage of health care has increased considerably since the international community defined its millennium development goals to improve health around the world, health gains remain stubbornly elusive, especially in developing countries, and poor quality of care may be the reason why.

Economic quagmire adds pressure for monetary policy change

–Darren Williams is Senior European Economist at AllianceBernstein. The opinions expressed are his own.–

Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. Although the costs seem to outweigh the benefits, the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.

from The Great Debate:

The year ahead in the euro zone: Lower risks, same problems

Financial conditions in the euro zone have significantly improved since the summer, when euro zone risks peaked because of German policymakers’ open consideration of a Greek exit, and the sovereign spreads of Italy and Spain reached new heights. The day before European Central Bank President Mario Draghi’s famous speech in London in which he announced that the ECB would do “whatever it takes” to save the euro, bond yields in Spain and Italy were at 7.75 percent and 6.75 percent, respectively, and rising. When the ECB announced its outright monetary transactions (OMT) bond-buying program, the euro zone was at risk of a collapse.

Since then, risks have abated significantly, thanks to a number of factors:

    The ECB’s OMT has been incredibly successful in reducing the risks of breakup, redenomination and a liquidity/rollover crisis in the public debt markets of Spain and Italy. Although the ECB has yet to spend a single additional euro to buy the bonds of Spain and Italy, both short-term and longer-term sovereign spreads against German bonds have fallen substantially. Following a number of political and legal hurdles, the successful operational start of the European Stability Mechanism (ESM) rescue fund provides the euro zone with another €500 billion of official resources to backstop banks and sovereigns in the euro zone periphery, on top of the leftover funds of its predecessor, the European Financial Stability Facility (EFSF). Realizing that a monetary union is not viable without deeper integration, euro zone leaders have proposed a banking union, a fiscal union, an economic union and, eventually, a political union. The last is necessary to resolve any issue of democratic legitimacy that might result from national states transferring power from national governments to EU- or euro zone-wide institutions. This transfer of power also would have to involve the creation of such institutions to ensure solidarity and risk-sharing are developed in the banking, fiscal and economic unions. The open talk in the summer by some German authorities about an exit option for Greece has turned into a tentative willingness to prevent and postpone such an exit. There are several reasons for this. First, Greece has done some austerity and reforms in spite of a deepening recession, and the current coalition is holding up. Second, an orderly exit of Greece is impossible until Spain and Italy are successfully isolated. Such an exit would lead to massive contagion, which would hurt not only the euro zone periphery but also the core, given extensive trade and financial links. Third, an economic disaster in Greece would be damaging to the CDU Party’s chances of winning the German elections. Thus, even when Greece inevitably underperforms on its policy commitments, Germany and the troika (the IMF, EU and ECB) will hold their noses and keep the funds flowing as long as the current coalition holds up.

Given these developments, the risk of a Greek exit in 2013 has been significantly reduced, even if the risk of an eventual Greek exit from the euro zone is still high, close to 50 percent by my estimation. Meanwhile, the narrowing of Spanish and Italian sovereign spreads has significantly diminished the risk that either country will fully lose market access and be forced to undergo a full troika bailout like Greece, Portugal and Ireland. Both Spain and Italy may in 2013 opt for a memorandum of understanding (MoU) that opens the taps of ESM and OMT support, but such official financing would inspire confidence as it would not be associated with rising, unsustainable spreads and a loss of market access.

The morally blind leading the arithmetically blind

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

You’ve got to admire the endless inventiveness of our politicians. Just when you think there’s nothing new under the sun, they catch you out by coming up with an idea so bad nobody seems to have thought of it before.

from John Lloyd:

A church married to the wrong side of history

After the attack on the Twin Towers in September 2001, the evangelical preacher Jerry Falwell took some time to tell his fellow Americans that homosexuals (along with abortionists, feminists and pagans) were at least in part to blame. “I point my finger in their face,” he said, “and say, ‘You helped this happen.’”

Later, in a “did I say that?” moment, he apologized.

It was a low moment, but not an unusual one. Falwell is in the hate-filled corner of the religious spectrum. But even those religious leaders at the mild and inclusive end must, more in sorrow than in anger, generally tell gay men and women that as much as they respect them, they can’t officiate at their marriages. That’s a bridge over too-troubled waters.

from Reihan Salam:

Does Britain’s austerity hold lessons for the United States?

The dog’s breakfast of a deal that “resolved” the fiscal cliff fell far short of expectations. In the hours after it passed, deficit hawks at the Committee for a Responsible Federal Budget and the tag team of former Senator Alan Simpson and former Clinton White House chief of Staff Erskine Bowles all expressed disappointment in a bargain that was anything but grand. Senate Republicans gritted their teeth to accept a small increase in taxes on America’s highest-earning households while Senate Democrats made permanent the bulk of the Bush-era tax cuts. A number of tax provisions that hark back to the 2009 fiscal stimulus law were extended, as were unemployment benefits, thus delivering a modest income boost to a large number of low-income households. But the Social Security payroll tax cut, a Republican-backed replacement for the more narrowly targeted Making Work Pay tax credit that was part of the stimulus law, which benefited a wide range of affluent households as well as families of more modest means, was allowed to lapse. Long-term spending levels, meanwhile, were left largely untouched, which is why rebellious House Republicans came close to scuttling the delicately constructed compromise.

One group that offered at least two cheers for the deal were deficit doves, who believe that premature fiscal consolidation poses a grave threat to America’s sluggish economic recovery. Paul Krugman, the prominent economist and popular left-of-center New York Times columnist who never shrinks from apocalyptic pronouncements, was almost pleased to see that the deal avoided any serious spending cuts and that it entailed relatively modest near-term tax increases.

Fiscal cliff deal is depressingly European

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

The deal to break the deadlock in the US looks awful, far worse than going over the cliff, which I suspect would have been a lot less damaging than is usually assumed.

from The Great Debate:

Will this be the year that Israel goes to war with Iran?

Israel did not bomb Iran last year. Why should it happen this year?

Because it did not happen last year. The Iranians are proceeding apace with their nuclear program. The Americans are determined to stop them. Sanctions are biting, but the diplomatic process produced nothing visible in 2012. Knowledgeable observers believe there is no "zone of possible agreement." Both the United States and Iran may believe that they have viable alternatives to a negotiated agreement.

While Israel has signaled that its "red line" (no nuclear weapons capability) won't be reached before mid-2013, it seems likely it will be reached before the end of the year. President Barack Obama has refused to specify his red line, but he has made it amply clear that he prefers intensified sanctions and eventual military action to a nuclear Iran that needs to be contained and provides incentives for other countries to go nuclear. If and when he takes the decision for war, there is little doubt about a bipartisan majority in Congress supporting the effort.

from The Great Debate:

What CEOs can learn from Sherlock Holmes

This essay is excerpted from Mastermind: How to Think Like Sherlock Holmes, published this week by Viking.

How do we make sure we don’t fall victim to overly confident thinking, thinking that forgets to challenge itself on a regular basis? No method is foolproof. In fact, thinking it foolproof is the very thing that might trip us up.

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