Opinion

The Great Debate

America’s aging population undermines monetary policy

Last week the Fed announced it would keep buying assets, for now, to keep the economy afloat. But that raises the question: why haven’t all the Fed’s efforts so far worked better?

One reason is that the economy constantly evolves and each recession is different; that alters the way monetary policy is supposed to work. The latest recession is notable for the way it destroyed households’ wealth. Median household net worth fell nearly 40 percent between 2007 and 2010. The severity of the recession also heightened awareness that the world is riskier than many people thought. Each of these factors make people want to save more. The Fed’s policy is to keep interest rates low to juice demand. But the state of household balance sheets going into the recession and the aging U.S. population may be why the Fed has not been more successful.

The Fed is currently buying bonds and mortgage-backed securities to keep interest rates low. The low rates are supposed to increase demand through several different channels. One way is through firms; if you lower real interest rates it’s cheaper for them to invest, expand and hire. Also, low rates encourage more consumption. They lower the returns to saving so it’s cheaper to consume today instead of in the future. This is called substitution effect. Or, the lower rates change how wealthy you feel — this is a wealth effect.

However, whether the substitution or wealth effect dominates, and how strong each is, depends on the age of the consumer. A recent paper from the IMF points out that the aging population may result in less effective monetary policy.

Older people hold the most wealth and savings; they are more sensitive to the wealth effect. Lower rates are supposed to make savers feel wealthier by increasing stock prices and encouraging investment in riskier assets. But that is inconsistent with life-cycle investing: as people near retirement they are usually advised to move out of risky stocks and into safer bonds. Encouraging the near-retired to take on more risk exposure than they’d like may have adverse consequences. They may anticipate having an uncertain future income, and save more to hedge future shocks. Also post-crisis, older people are investing less in equities. Between 2007 and 2010 the share of equities in the portfolio of 65-to 74-year-olds fell from 55 to 44 percent.

For U.S.-Iran, it’s all in the timing

Four years after President Barack Obama famously extended his hand of friendship to Iran, Tehran finally seems willing to unclench its fist. The most decisive geopolitical handshake of this decade may take place today at the United Nations.

Iran’s new president Hassan Rouhani and Obama may have this encounter at the luncheon of U.N. Secretary General Ban Ki-moon Tuesday or in the U.N building’s corridors.

This new opening has taken the world by surprise. Washington’s dual track policy over the past three years — a combination of a little bit of diplomacy and a whole lot of strangulating sanctions — has produced a hardening of the Iranian position. Tehran’s nuclear activities have continued unabated, while its regional policies, particularly its support for the Assad regime in Syria, have intensified.

On U.S.-Iran deal, devil is in the details

The feel-good mood engendered by promising overtures from Iran’s new president Hassan Rouhani and President Barack Obama has raised hopes for a settlement in the Iranian nuclear crisis. But the devil — especially in this case — is in the details.

The nuts-and-bolts of Iran’s nuclear program, and whether Tehran can give guarantees that it is not designed to make nuclear weapons will determine whether a deal with the United States is possible.

Here is a look at what Iran has achieved in a decade of intense nuclear work; what the main areas of concern are, and how the Iranian program can be reined in to give adequate guarantees that Iran does not seek the bomb.

The minister who dreams of a reindustrialized France

The body of Jean-Baptiste Colbert, Louis XIV’s wily finance minister, is encased in a marble tomb in the Church of Saint Eustache in central Paris. But if you believe Arnaud Montebourg, the enfant terrible of French politics, his spirit is still very much alive, 330 years after his death, and about to spark a new, digital-age industrial revolution in France.

Montebourg, 50, an ardent opponent of globalization, has for the past 15 months served as the nation’s “Minister of Productive Renewal,” in charge of industry, a post that — in theory — gives him leeway to implement some of his more radical ideas. He spells them out in a book published on Sept.18, “The Battle for Made in France.” Invoking Colbert’s grandiose interventionist approach, it is a strident call for industry to be protected and nurtured. Among other things, Montebourg insists that the outsourcing trend of the past decade needs to be reversed; he dreams of the day when televisions, textiles and toys will once again be made in France, as the nation recaptures its manufacturing glory.

Montebourg’s political fortunes hit a low point in December 2012 when he threatened to resign after being overruled in a very public clash with the London-based steel magnate Lakshmi Mittal. President François Hollande personally asked him to reconsider, and today, he seems to be back in favor.

Why Fellini’s films speak to the pope

La Strada may be almost 60 years old, but Federico Fellini’s masterpiece is in the news. In an interview published late last week, Pope Francis called La Strada his favorite film.

Some might have expected a more church-friendly movie, like Roberto Rossellini’s Rome, Open City — which Fellini co-wrote — about a priest helping the Italian Resistance fight Nazi occupiers during World War Two. While he also mentions it, the pontiff’s favorite choice crystallizes his embrace of the fallible and the marginalized.

Consistent with his refusal to speak out against traditional hot-button topics like abortion, contraception and homosexuality, Pope Francis reveals in this movie selection a humanism that links him to the Italian director of such other classics as 8 1/2, Nights of Cabiria, La Dolce Vita and Amarcord.

Seeking ‘good-enough-governance’ — not democracy

Only rarely have American leaders been able to reconcile the nation’s democratic values, material interest and national security.

Despite these tensions, promoting democracy has always been a lodestone for American foreign policy. Sometimes its attraction has been weak, very weak, overshadowed by more immediate national security concerns. During the Cold, War, for example, the United States backed many autocratic leaders in exchange for their support against the Soviet Union — or at least for pretending to be democrats. Sometimes, very rarely, as in the case of Germany and Japan after World War Two or Eastern Europe after the collapse of the Soviet Union, all good things — freedom, security, economic prosperity — have gone together. But these moments are exceptional.

Often the most effective way to increase the chances of freedom in the long run is to improve the prospects for security and economic growth in the short run — rather than pressing for direct democratic reforms.

For Biden, Mexico’s endless allure

Vice President Joe Biden recently canceled the Panama leg of his trip to Latin America, citing the need to be in Washington, focusing on Syria. He did not, however, cancel his visit to Mexico.

Biden arrived in Mexico late Thursday night and is due to meet with President Enrique Peña Nieto, and kick off the U.S.-Mexico High Level Economic Dialogue (HLED). There were plenty of reasons for the vice president to stay home — including the brewing budget battle, and the shootings in Washington’s Navy Yard — in addition to Syria. So it is worth asking why he didn’t.

Biden had both political and economic reasons to visit Mexico. On the political front, he is seeking to strengthen his credibility with the businesses that can benefit from strengthened trade and investment with Mexico. But perhaps Biden’s most important reason is the power of Latino voters. The 2012 election made it clear that any viable Republican presidential candidate would need to win the support of close to 40 percent of Latino voters. President George W. Bush did this in 2004; Mitt Romney got 27 percent last year.

Stepping up to the plate to reduce food waste

How many times have you reached into the refrigerator, only to discover the yogurt or fruit juice you were looking forward to enjoying had passed its expiration date?

What next? Did you sling that yogurt into the trash? Pour the juice down the sink? You probably congratulated yourself on a lucky escape. After all, who knows what might have happened had you unwittingly consumed a food a few hours past its “sell by” date?

In fact, it’s likely you would never have noticed. Food date labels are typically unrelated to food safety. They are simply a manufacturer’s suggestions for “peak quality” and a shelf life they set by their own market standards. The dates don’t tell you when your food will spoil, nor do they indicate the safety of food.

from David Rohde:

Iran’s offer is genuine — and fleeting

President Barack Obama’s speech to the United Nations General Assembly in New York on Tuesday is not expected to generate much excitement. Battered by his uneven handling of Syria, no bold foreign policy initiatives are likely.

Instead, the undisputed diplomatic rock star of the gathering will be Iran’s new President Hassan Rouhani. In his first six weeks in office, the cleric has carried out one of the most aggressive charm offensives in the 34-year history of the Islamic Republic. And the Obama administration responded Thursday, saying the president would be open to having a meeting in New York.

If Obama and Rouhani, who will both address the assembly on Tuesday, simply shake hands in public, it will be the seminal event of the gathering’s first day.

The myth of Republican doves

From reading the political press these days, one could get the impression that the Republican Party, from top to bottom, has radically altered its principles on foreign policy. Sen. Rand Paul (R-KY), an isolationist, is said to be a serious contender for the 2016 GOP nomination. Former House Speaker Newt Gingrich and former Sen. Rick Santorum have recently come out against military intervention in Syria, as have Tea Party heroes Sens. Marco Rubio (R-Fl) and Ted Cruz (R-TX).

Last week the Hill reported:

“A decisive vote against President Obama’s plan for strikes in Syria would cement a sharp shift by the Republican Party away from the hawkish military posture it adopted after the terrorist attacks that occurred 12 years ago this week.”

Even some steadfast Republican hawks agree. Rep. Peter King (R-NY) told the Hill, “It’s probably an indication that the party has become less internationalist and more isolationist.”

  •