Simon Rabinovitch: Economic danger lurks in China’s shadow banks

Of all the economic dangers to flare up over the past week, the most unsettling was at first glance also the most esoteric: the near default of a high-yield loan product held by a few hundred small-time Chinese investors.

Set against the turmoil in other emerging markets – steep currency falls in Turkey and South Africa that prompted their central banks to raise interest rates, stubbornly high inflation in India and a collapsing currency in Argentina – China appears to be a bastion of economic strength. Even analysts with a bearish bent still expect its growth to come in at about 7 per cent this year. The renminbi is steady against the dollar and inflation is under control. And unlike developing countries faced with cash outflows as the US Federal Reserve winds down its monetary stimulus, China is protected by robust capital controls.

Why then has the saga of Credit Equals Gold No. 1, the Chinese investment product that was rescued from the brink of failure, so captivated global attention? There are both direct and indirect reasons; the latter are especially worrying.

First, the direct risks. Credit Equals Gold No. 1 is just one of a wave of Chinese shadow banking products that will fail to live up to their outlandishly confident names when they mature this year. The drama over repayment will be played out again and again.

Over the past decade, China’s economy has grown ever more reliant on financing outside the formal banking system. Bank loans, which used to account for more than 90 per cent of total credit, fell to little more than half of new financing last year. Lending by shadow banks now totals Rmb47tn, or 84 per cent of gross domestic product, according to JPMorgan.

Reducing the dominance of banks is part of the plan for unleashing more market forces in China – a positive development. But some of the loosely regulated institutions that have plugged the lending gap are simply reckless. It is the most buccaneering of these that are now sowing doubts about China’s financial stability.
Investors who lend to indebted miners are not crazy – they are betting that government-owned banks will bail them out

This week’s story began in 2011 when China Credit Trust loaned Rmb3bn to Wang Pingyan, a coal mine operator in the northern province of Shanxi. Mr Wang made the ill-fated decision to scale up investment dramatically just as coal prices peaked. His company collapsed soon after receiving the loan.

If the pain had been confined to China Credit it would have been bad enough. But making matters worse, the case has shown that there is only a thin dividing wall between shadow banks and the better-regulated parts of the financial sector. China Credit had pitched the loan as an investment product, promising an annual return of 10 per cent. Rather than sell it directly, the product was marketed by Industrial and Commercial Bank of China, the country’s largest lender, to wealthy private banking clients.

The controversy in recent weeks about which party, if any, is responsible for the dud loan has drawn in all involved: the local government in Shanxi, which gave its blessing to Mr Wang’s plan; China Credit, which structured the investment product; and ICBC, which distributed it. In the end an unidentified entity bailed out investors by covering their principal, though not the full interest.

Those wondering where the next big troubled shadow bank loan might lurk need only look down the road from Mr Wang’s failed mine to another in Liulin, the same county in Shanxi province. Xing Libin, a coal tycoon who threw a Rmb70m wedding party for his daughter in 2012, is restructuring his mining company because it could not repay its loans. Among those debts is an Rmb1bn ($164m) investment product – structured by Jilin Trust and distributed by China Construction Bank – that falls due in a few weeks.

In all, there are about $660bn of trust products up for repayment or refinancing this year, according to Bank of America Merrill Lynch. Chinese shadow banks, by definition, have been focused on customers – miners, property developers and local governments – that regulators have deemed too risky for banks, so more problem loans are a certainty.

Shadow banks have not all been pedalling junk. Many trust companies are well run and have demanded ample collateral from borrowers. And where they have been poorly managed, China’s state-owned banks have enough assets to cover much of the damage. Most investors in trust products will walk away unscathed. It is the indirect consequences of this week’s bailout that are more worrying. As rating agency Fitch put it, the rescue of the trust product was a “missed opportunity” to create more risk awareness in the financial sector. This could cast a shadow over Chinese markets for years to come.

Chinese investors who lend money to heavily indebted miners or property developers are not crazy. They are making a calculated gamble – one that has proved mostly correct until now – that the government or state-owned banks will bail them out if they get into trouble. Yet an accumulation of bad investment decisions explains the excess capacity that plagues manufacturers from sportswear companies to steel mills. The perception of ironclad, if implicit, government guarantees is also why overall Chinese debt levels have soared from 130 per cent of GDP in 2008 to more than 200 per cent today. Similarly fast increases have been precursors to financial crises in countries from South Korea to the US.

Hence China’s uncomfortable predicament. Because the government was unwilling to see Credit Equals Gold No. 1 collapse, fears of an imminent economic meltdown are overblown. But for precisely the same reason China’s debt powder keg is only getting more tightly packed.


Simon Rabinovitch


FT

Edmund Phelps: Free innovators from the state’s deadening hand

Henry Ford’s low-cost car and Steve Jobs’ iPhone have enriched millions of lives in ways that no one envisioned. Yet neither sprung from groundbreaking scientific advances. Their genius was to use old technology in creative ways. Societies will be richly rewarded if they can find a way to quicken the pace of innovation. Yet misconceptions of the way forward are putting this goal farther out of reach.

A century ago, historians and economists linked innovation to the discoveries of scientists and navigators. As long as scientists were outside the economy – locked in ivory towers or embarking on distant expeditions – productivity gains were seen as beyond the influence of economic policy. The economist and political scientist, Joseph Schumpeter, supposed so for decades.


In Schumpeter’s time, however, scientists were coming inside the economy to engage in projects and innovate at companies from Bayer to DuPont. Economic theorists increasingly thought of the nation’s innovation as governed by a simple mechanism. How much research is conducted, and at what price, is determined by consumers’ demand for innovations and the supply of researchers to make them. If society cuts taxes on profit or boosts the supply of researchers, faster innovation is supposed to follow.

But this mechanist theory has done badly at explaining actual events. America’s slow technical progress since 1970 can now be understood as an effect of slowing innovation. In the mechanist view, this must mean one of two things. Either the profitability of innovations must have fallen, deflating demand; or the availability of researchers has fallen, choking supply. Neither explanation withstands scrutiny. Gross business profit relative to business output is near all-time highs; research spending relative to business output is not so low as to suggest a dearth of researchers. The theory also flunked the great test of history. The birth in about 1815, in Britain and America, of the first modern economies – economies rife with innovation – was not augured by any surge of scientists or of profits as a share of output.

The mechanical view of innovation means new practice, not invention or discovery. Most of it derives from having original ideas about what would be useful or enjoyable – thus using existing technology in new ways. Such leaps of imagination are more likely to come from business people of a practical bent than cloistered scientists.

A true innovation is rarely the result of noticing an opportunity. It depends on a vision of a new product or method, and an insight into how the economy will react to it. These often come from an idiosyncratic blend of experience and knowledge that is hard to convey to a chief executive or a government official.

Trying to innovate is not like planting cotton. It is a leap into the void, with unforeseeable costs and an unknown market reception. Success requires an entrepreneur with the right stuff – and a canny financier to spot him or her.

Most importantly, a high volume of homegrown innovation requires widespread dynamism, across the economy and down to the grassroots – so new ideas can come from anyone and anywhere.

Finally, innovation within a company requires employees, managers and owners who are in it not only for the small chance of a large material reward but also for the non-material rewards of mental stimulation, exploration and personal growth that innovative work usually presents – even if the project fails.

Yet we now see trained economists turning to the mechanist manual for switches to throw to regain lost dynamism. Proposed cuts in profit tax would not obviously coax innovative talent from established companies to start-ups, from which no profit flow is expected soon. It is cuts in capital gains taxes – paid as soon as a founder sells shares – that might give start-ups new blood.

Proponents of expanding government institutes for the advancement of science seem unaware that the explosion of productivity from 1820 to 1940 was driven by grassroots innovation, not big science; forgetful that true discoveries, like innovations, are a shot in the dark; and innocent of the institutional politicking that determines which ideas get funding.

Some mechanists say that if the financial sector will not lend to innovators, let the state supply more finance. Such suggestions are unhistorical: the colossal projects that have won state support have rarely matched the innovation brought by grassroots dynamism. They are also unworldly. Officials lack the insight and experience to know what partners to take on.

The state is no better suited to take a big role in technical innovation than in artistic creation. Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress.


Edmund Phelps


FT

Emerging markets beyond Turkey face stormy skies

The decision late on Tuesday night by the Central Bank of Turkey to increase interest rates substantially has taken many observers by surprise. Yet there was no other way to stem the decline in the currency and alleviate the threat of a damaging exodus of foreign capital. Even so, it may not have been enough. The monetary squeeze buys some time before elections but also intensifies the political and economic crisis. Turkey is not alone in facing these problems. In many ways the country is a dark star in a volatile emerging market firmament.

Turkish economic growth was spectacular in 2010-11. It is pedestrian now. The official forecast that the economy will grow by 4 per cent in 2014, hardly ambitious to begin with, cannot now be met. This matters a lot to investor confidence, and also to a country that needs its economy to grow if it is to supply jobs for young people entering the labour force.

Turkey’s underlying problems are weak savings, rapid credit creation, rising import dependency and an external deficit of 7 per cent of gross domestic product, three-quarters of which is financed by volatile short-term capital flows. Turkey’s currency reserves can satisfy no more than one-fifth of its external financing needs this year. Raising interest rates cannot solve these problems without bringing the economy to its knees. This week’s rate decisiondoes little to address the serious problems that beset the country’s economy.

Turkey has its own script. But it is not alone in being caught between the tightening in US monetary policy and the Chinese economic slowdown. As interest rates rise in the world’s two biggest economies, capital that previously flowed into emerging markets is now leaving. To manage the instability of capital flows and currencies, Brazil and India have also been raising rates; their most recent increases came just before Turkey’s announcement. One day later, South Africa did the same. Other emerging countries will doubtless follow suit.

It is important to consider the broader context. Many emerging markets have arrived at a hiatus after a long period of growth that enabled some to climb up (or into) the middle-income league. But it has become harder to achieve growth while maintaining stability. Building robust and inclusive institutions is essential. Elections this year in Thailand, Turkey, India and Brazil will be scrutinised closely for clues about future policy. So, too, will the reforms promised by the Chinese leadership.

It is true that many emerging markets look stronger today than in the 1990s – they have larger currency reserves and better financial governance. At the same time they are also more vulnerable to shocks. They have lifted their share of global GDP from 40 per cent in 1997 to almost 55 per cent (on a purchasing power parity basis); now more than ever, the impact of a slowdown will be felt around the world. Most emerging economies are sustained by western export markets rather than local demand. This is a strategy that has passed its sell-by date.

Dependency on capital inflows, especially to finance rising local currency borrowing, makes these economies vulnerable to changing conditions in overseas markets. Credit cycles in China, Brazil and other countries are peaking. Commodity prices are falling from record highs. China’s success in exploiting its demographic dividend, or the absorption of a vast pool of former agricultural workers into the industrial workforce, may not be repeated so well elsewhere.

Just as China’s ascendancy had dramatic positive consequences for emerging markets, so its slowdown can be expected to have opposite effects. The challenge of pursuing important economic reforms without eroding the power of the Communist party, and of trying to slow down fast and often weakly regulated credit creation, are China’s principal concerns now. Rising bond yields, illiquidity and instability in financial markets are the early signs.

The current crisis in emerging markets is still viewed by many as being just about Turkey. But the tequila crisis in 1994 was initially about only Mexico, the Asia crisis in 1997 about Thailand and the financial crisis of 2007-08 about US subprime lending. A crisis must make landfall somewhere. But the effects of the current storm will be felt beyond Turkey’s borders.


George Magnus


FT

John Kay : The world’s rich stay rich while the poor struggle to prosper

Dear Bill Gates,

We have never met, but your annual letter (coinciding with your Davos speech) seemed to be addressed directly to me. Your aim is to critique books with titles such as “how rich countries got rich and why poor countries stay poor”, and I did write a book with almost exactly that subtitle. You go on to say “thankfully these are not bestsellers because the basic premise is false”. I am afraid you are right to say my book is not a bestseller, but wrong to say its premise is false.


Taking the year 2001, I used two different measures of whether a country was rich: the market value of per capita output (a measure of productivity) and the average consumption of the inhabitants (a measure of material standard of living). The two rankings differ, though not by much; Switzerland had the highest productivity and the US the highest consumption.

Using either measure to order the countries of the world, the distribution was U-shaped. There were about 20 rich countries (with about a billion people in total), many much poorer countries and few states in between. These intermediate states – such as South Korea and the Czech Republic – tended to be on a trajectory to join the rich list, a transition experienced in Japan and Italy a generation earlier. Rich countries operate at, or close to, the frontier of what is achievable with current technology and advanced commercial and political organisation. And when countries reach that frontier they tend to stay there, with Argentina the most significant exception.

You suggest that this claim might have been true 50 years ago but not now. It is 10 years since my book was published and time to update the calculations. So I did, and established that the hypothesis remains true.

There are some significant changes. The dispersion of productivity among already rich countries has increased. Norway and Switzerland have surged ahead – one due to its oil wealth, the other by the growing and seemingly price insensitive demand for its chemical and engineering exports. But laggards such as Italy – and indeed Britain – have struggled to keep up with the pack. More encouragingly, some additional countries, mostly in eastern Europe and Asia, seem on course to join the rich club.

So what about China and India? Their recent growth performance has been exceptional, but both are still desperately poor countries by the standards set by Switzerland and Norway. The gap will take many generations to eradicate.

One effect of globalisation is that the centres of major cities everywhere now appear similar – the offices of KPMG and the branches of HSBC look much the same across the world. But you do not have to venture far from the centre of Nairobi or Shanghai, and only round the corner in Mumbai, to see sights unimaginable in Norway or Switzerland.
Even if incomes are very unequal, every king needs courtiers, every computer billionaire creates a slew of computer millionaires

I was surprised and disappointed that the data you chose to support your case referred not to the distribution of average incomes across states – the subject of your letter – but to the distribution of household incomes across the world. These are very different things.

The information we have on global household income distribution is poor, but there seem to be plenty of middle income people. Even if incomes are very unequal, every king needs courtiers, every computer billionaire creates a slew of computer millionaires. This might change if, as some people argue, the middle of the skill distribution is hollowed out by robots and computers. But no such change is yet evident.

The major part of my book, Bill, (if I may) was devoted to descriptions of the economic and social institutions that enable some countries to operate near the technological frontier. The failure to establish such institutions, or to operate them effectively, condemns most of the world to levels of productivity and living standards far below what is possible with existing knowledge and techniques. That subject should interest you, and I’ll be happy to send you a copy of the book (though I know you can afford the extremely modest price).

Best wishes




John


The writer’s book, ‘The Truth about Markets’, was published in 2003 – and in the US in 2004 as ‘Culture and Prosperity’




FT

Growth and globalisation cannot cure all the world’s ills

Faced with a dangerous political threat, governments the world over tend to place their faith in the same magic medicine – economic growth. When world leaders try to address the roots of terrorism, for example, they instinctively assume that prosperity and jobs must be the long-term answer. And when a regional conflict threatens to get out of control – in east Asia or the Middle East – the standard political response is to call for greater economic integration. From Europe to China, governments place their faith in economic growth as the key to political and social stability.

But just as doctors fear the emergence of superbugs that will not respond to existing drugs, so world leaders are beginning to witness the emergence of new forms of political conflict that are resistant to their traditional prescriptions – more trade and more investment, washed down with a good dose of structural reform.

Three political superbugs are causing special concern. The first is the spread of conflict in the Middle East. The second is the growing rivalry between China and Japan. The third is rising inequality in the western world – and the threat of social conflict that goes with it.

Delegates at the World Economic Forum in Davos, which ended last week, are the classic believers that capitalism and globalisation are the best antidotes to conflict. This belief is so deeply ingrained that it no longer even needs to be articulated. You can just see it in the way in which a Davos audience responds to political leaders.

This year it was President Hassan Rouhani of Iran who was received with great enthusiasm, largely because he seemed more interested in trade and investment than in nuclear weapons. Mr Rouhani did not shift Iran’s position on the difficult political issues – such as Syria, Israel or nuclear weapons – in any important way. But he sent a significant signal by beginning his speech with a statement of his ambition for Iran to become one of the 10 largest economies in the world. The Iranian leader also stressed the need to improve his nation’s relations with the rest of the world in order to achieve that goal. This emphasis on economics suggested to those in the audience that President Rouhani is literally a man you could do business with.

As a result, Mr Rouhani is in the novel position, for an Iranian leader, of being regarded as a voice of reason in the Middle East. But the president’s elevated status in the eyes of the Davos crowd is also a sign of how bleak things look elsewhere in the region.

No appeal to economic rationality is likely to end the war in Syria – where both sides are fighting for survival. It is also clear that the jihadists who are flourishing in Syria, Iraq and elsewhere are unmoved by the fruits of globalisation. Unless something goes seriously wrong, they will not be showing up in Davos any time soon.

Many still hope that an improvement in the economic situation of the Middle East will assuage the economic despair on which militant Islam is assumed to flourish. Yet not all jihadists hail from poor countries or impoverished backgrounds. Some of the militants showing up in Syria have travelled from Europe. Others have come from Saudi Arabia or the Gulf states. Jihadism is a disease that does not respond well to the traditional economic drugs.

The rise in tensions between China and Japan is an even more graphic illustration of the fact that economic self-interest is not a cure-all for political problems. China is now Japan’s largest trading partner and the biggest recipient of Japanese foreign investment – facts that many analysts still hope will make conflict between the two nations significantly less likely. Yet in some respects, China’s growing prosperity is actually driving the increase in international tensions in Asia. That is because the rise of China has altered the balance of power between Beijing and Tokyo and – combined with the bitter history between the two countries – that explains why relations are getting worse.

In Europe and North America it is the threat of political and social tensions within nations, rather than international rivalries, that are worrying the global plutocracy. A central element of the Davos creed is the faith that globalisation is good for both the western world and for emerging powers.

However, it is now almost conventional wisdom that the globalisation medicine has had an unpleasant side-effect. Even if it raises overall growth levels it has also powerfully contributed to wage stagnation and increasing inequality in the west. As a result, European politicians are worrying about a possible resurgence of the nationalist right and the radical left. And the Americans are increasingly worried about the gap between the richest 1 per cent and the rest – and the political consequences should the gulf keep widening.

It is easy to mock the global plutocracy – fretting about war and inequality – as they sip fine wines, behind a security perimeter high in the Swiss mountains. Yet global bankers and business people are, at least, largely immune to the viruses of xenophobia and nationalism. Their unofficial slogan is “make money, not war”. And they treat foreigners as potential customers rather than potential enemies.

In that sense, the idea that capitalism and globalisation are the best antidotes to political conflict – for all its flaws – retains a lot of attraction. Even if the old economic treatments for political conflict are losing some of their potency, they are still the best we have.

Gideon Rachman


FT

The economist’s guide to the future

What will the world look like in 100 years?” wondered Ignacio Palacios-Huerta. Being an economist at the London School of Economics, he put this question to other economists. Admittedly, the profession didn’t foresee the financial crisis but, still, he writes in the introduction to his new book, economists “know more about the laws of human interactions and have reflected more deeply and with better methods than any other human beings”. (Declaration of interest: I once tried to market Palacios-Huerta’s insights into penalty-kicks to football clubs. Nobody ever paid us.)

Economists liked his question. “Hi Ignacio:” emailed Alvin Roth, Nobel laureate of 2012. “To my surprise, I do find your invitation tempting. It’s a sign of old age, I’m afraid.” The economists who volunteered to write chapters included two other Nobel-winners. The resulting book, In 100 Years, suggests some probable contours of our great-grandchildren’s world, among them:

Greater longevity will push us to reshape our lives. Over the past century, life expectancy in the west has risen by about 30 years. In another century the average person could be living to 100 – perhaps even in currently poor countries, which are already making quick gains by saving infants from simple illnesses such as diarrhoea.

Future advances against cancer could match the “cardiovascular revolution” that has reduced deaths from heart disease since the 1970s, says Angus Deaton of Princeton. Health should keep improving, simply “because people want it to improve and are prepared to pay for” innovations.

Roth foresees parents manipulating their children’s genes. Some such methods, he writes, “may come to be seen as part of careful child rearing”. He also thinks people will become more efficient thanks to performance-enhancing drugs that improve “concentration, memory, or intelligence”.

Once humans have more years in good health, they will probably reorder their lives. Roth says that if child rearing takes up less of the lifespan, people may want different spouses for different phases of life. “New forms of polygamy-over-lifetime relationships” could arise, he writes.

Greater longevity will alter careers too. “A typical career” may mean working intensely for 30 years “followed by many years of low-intensity work”, writes Andreu Mas-Colell of the Universitat Pompeu Fabra in Barcelona.

Robots will change far more than just work. Already today, anyone thinking of studying accountancy should consider the chances of the profession lasting her lifetime. Within mere decades, self-driving cars will have replaced taxis and a robot will write my column. In 100 years, writes Robert M Solow, the 1987 Nobel laureate, we could live “the bad dream of an economy in which robots do all the production, including the production of robots”. The remaining jobs will be more interesting, notes Mas-Colell, because everything else will have been automated.

Another consequence of robots: humanity will become more educated. Demand has already plummeted for uneducated workers in rich countries. In 100 years, robots will make that true in poor countries too. Our great-grandchildren will think of us as ignorant, sick, tiny peasants. They will also be better trained in emotional skills than we are, because that’s one realm where they might outcompete robots. As Edward Glaeser of Harvard writes: “I cannot imagine a world where wealthy people are unwilling to pay for pleasant interactions with a capable service provider.”

Based on past trends, an educated population is more likely to demand democracy and live in peace. But terrorists will also have awesome technology.

Face-to-face interaction may continue to lose relevance, writes Roth. I’ll continue his thought: in 100 years, instead of Skyping someone, you might invite their hologram into your living room. By then, actual physical proximity may matter (perhaps) only for sex.

As physical proximity loses importance, last century’s trend to urbanisation could reverse. In 100 years, people may be spread out more efficiently across the earth. They may marvel that greater Tokyo once had more inhabitants than Siberia.

Climate change could cause Siberia or northern Canada to fill with people. The economists in this book expect no significant attempts to prevent climate change. People will try to deal with it only after it starts affecting them, suspects Harvard’s Martin Weitzman.

He says we cannot predict the scale of the change. The uncertainty is enormous. But he worries that eventually a desperate country will choose an “unbelievably cheap”, unilateral solution: shooting a “sunshade” of reflective particles into the stratosphere to block some of the sun’s rays. That would cool the planet. It may also have horrendous unintended consequences.

Incomes will probably be much higher worldwide, driven by higher productivity, most of the writers agree. In 100 years, the world’s poorest people may live like today’s middle-class Americans, says Roth. That matters. However, writes Avinash Dixit of Princeton, rising incomes in developed nations matter much less. Theorists of happiness such as Richard Layard argue that once people have about $15,000 a year, more money doesn’t make them happier. Most economists in this book worry less about income levels than about inequality,


‘In 100 Years: Leading Economists Predict the Future’, by Ignacio Palacios-Huerta (ed), MIT Press, $24.95/£17.95


Simon Kuper


FT

Larry Siedentop:Remember the religious roots of liberal thought

The west is in crisis. The advance of China, India and other nations has led to a dramatic shift of economic power. In the political sphere, military adventures in Iraq and Afghanistan have compromised western influence, leading the US to draw back from its “superpower” role. Yet the west’s troubles go deeper than that. It is suffering a moral crisis, a crisis of identity.

Some are now uncomfortable using the term “the west” for fear that it carries the residue of an imperialist and racist past. But that is not the only source of discomfort. The crisis of identity also springs from the challenge of Islam, a creed that can make western liberal secularism seem morally tepid, if not worse. Indeed, the term “liberal” is at risk of becoming a pejorative. In continental Europe it connotes little more than market economics. In parts of the US it is becoming a synonym for “radical”, or even “socialist”.


But who are we, if not liberals? Elusive though it may at times be, this remains the best available description of western attitudes and institutions. We lack a compelling account of their evolution, a story we can plausibly tell ourselves about our moral roots. Our self-image comes dangerously close to equating liberal secularism with non-belief. A sophisticated version of that view is that our political and legal systems aim to achieve “neutrality”. But that does not do justice to the moral content of our tradition.

Accounts of western development usually involve a major discontinuity, captured in the phrase “the middle ages”. Since the Renaissance and the Enlightenment, this period has been represented as one of superstition, social privilege and clerical oppression – the antithesis of liberal secularism. Historians have been tempted to maximise the moral and intellectual distance between the modern world and the middle ages, while minimising the moral and intellectual distance between modern Europe and antiquity.

Describing the ancient world as “secular” – with citizens free from the oppression of priests and an authoritarian church – became an important political weapon during early modern struggles to separate Church and state in Europe. But this account fails to notice that the ancient family, the basic constituent of the city-state, was itself a kind of Church. The paterfamilias was originally both the family’s magistrate and high priest, with his wife, daughters and younger sons having a radically inferior status. Inequality remained the hallmark of the ancient patriarchal family. “Society” was understood as an association of families rather than of individuals.

It was the Christian movement that began to challenge this understanding. Pauline belief in the equality of souls in the eyes of God – the discovery of human freedom and its potential – created a point of view that would transform the meaning of “society”. This began to undercut traditional inequalities of status. It was nothing short of a moral revolution, and it laid the foundation for the social revolution that followed. The individual gradually displaced the family, tribe or caste as the basis of social organisation.

This was a centuries-long process. By the 12th and 13th centuries the Papacy sponsored the creation of a legal system for the Church, founded on the assumption of moral equality. Canon lawyers assumed that the basic organising unit of the legal system was the individual (or “soul”). Working from that assumption, canonists transformed the ancient doctrine of natural law (“everything in its place”) into a theory of natural rights – the forerunner of modern liberal rights theory. By the 15th century these intellectual developments contributed to a reform movement (“Conciliarism”) calling for something like representative government in the Church.

The failure of that reform movement lay behind the outbreak of the Reformation, which led to religious wars and growing pressure across Europe for the separation of Church and state. By the 18th century such pressure had become a virulent anticlericalism, which reshaped the writing of western history and with it our understanding of ourselves.

It is this selective memory of our past that lies behind our failure to see that it was moral intuitions generated by Christianity that were turned against the coercive claims of the Church – intuitions founded on belief in free will, which led to the conclusion that enforced belief is a contradiction in terms. So it is no accident that the west generated a rights-based culture of principles rather than of rules. It is our enormous strength, reflected in the liberation of women and a refusal to accept that apostasy is a crime.

We should acknowledge the religious sources of liberal secularism. That would strengthen the west, making it better able to shape the conversation of mankind.

Larry Siedentop is an emeritus fellow of Keble College, Oxford, and author of ‘Inventing the Individual’

FT

Pierre Moscovici: You can be both French and fiscally responsible

The doom-mongers are wrong: France is modernising and reforming. But it is doing so in its own way. The country regularly comes under fire from those who want it to conform to an economic and social model that is not its own. They would gladly dismiss, with a stroke of the pen, its history and its culture – what sets it apart, its identity. France is changing but in the French way.

The government is working round the clock to turn the economy round, and it knows that it must speed up the pace. We did think that we would pull out of the crisis faster. We have achieved results but they are still precarious. Our economy is growing again but not fast enough. Unemployment is slowing but it is still too high, and taxes and social security contributions may be hampering long-term growth.

This is why President François Hollande asked us last week to launch a new phase under the rallying cry “faster, further and stronger”. Building on policy implemented in the past 18 months, it will take the battle for jobs to a new level, with clear objectives in mind: making life easier for businesses, cutting red tape, decreasing public spending and boosting employment.

France will take a multipronged approach to improving things for businesses. By 2017, we will eliminate €30bn in employer contributions for family allowances; business regulations will be radically streamlined; and we have a detailed plan for putting an end to France’s impenetrable and disorienting tax environment.

Moreover, not only is France borrowing at historically low rates, but the government has pledged to cut public spending by €50bn between 2015 and 2017 – in addition to the €15bn in savings scheduled for 2014.

These measures will be enacted with clear timelines. Politically, their legitimacy will be reinforced by a vote of confidence in parliament.

These reforms all point towards one goal: bolstering growth and stimulating job creation. It is possible to be progressive and still turn to the private sector to help stem unemployment. One can be French and take fiscal consolidation seriously. There is no contradiction between being a social democrat and being fully committed to restoring competitiveness.

Our renewed zeal will come as no surprise to those who, free of preconceptions and bias, have been observing France over the past 20 months. It is merely the next stage in our strategy. Since President Hollande came to power in 2012 we have cut deficits at a pace that has maintained growth and allowed us to finance our key policies.

Labour market reforms in May last year introduced a groundbreaking, and very French, concoction of flexibility for businesses and job security. I myself led efforts to restructure how France finances its economy by establishing a Public Investment Bank – an idea that is now about to be implemented in the UK. In addition, for the first time, the country’s abundant private savings are being used to bolster our manufacturing industry. This is a clear policy line that will be implemented with a firm hand.


As in any democracy, our plans have their champions and their opponents. Political opposition, however, is not the same thing as a knee-jerk rejection of a country that still has great appeal and credibility. This is borne out by the fact that France is America’s first choice for European investment: the total stock of foreign direct investment currently stands at €60bn.

These reforms are not and will not be carried out by slashing our social safety net. This is not a sign of weakness but rather a reflection of France’s commitment to its values. Our refusal to apply ready-made solutions does not reflect a lack of ambition but our belief that France needs to give voice, both in Europe and beyond, to the words of the national motto: liberté, égalité, fraternité. In economic terms: freedom, fairness, solidarity.

We are moving forwards and we will do so even faster in the coming year. France is a great nation. It has great infrastructure, high productivity and a dynamic population: it is equipped for the future. We are the world’s fifth-largest economy and the second-largest in Europe.

We will remain and thrive in this position if we can successfully carry out the reforms that will make us even more competitive. This is the desire of Mr Hollande and it is the government’s responsibility. France deserves better than being subject to preconceived ideas and French-bashing – it deserves the world’s trust.

Pierre Moscovici is finance minister of France

FT

Martin Wolf: The very model of a modern central banker

In their patter song in The Pirates of Penzance, Gilbert and Sullivan satirised the notion of an educated “modern major-general”. Today they might satirise academic central bankers, of which Ben Bernanke – soon to be ex-chairman of the Federal Reserve – is the very model. As a distinguished scholar, he brought to the Fed a brilliant and well-informed mind. His knowledge of economic history helped him halt a terrifying panic. But he also made mistakes. History will probably judge him kindly. But there is much to be learnt from his time at the Fed.

Mr Bernanke was hugely influential even before he became chairman, in 2006. As governor from 2002, he made notable contributions, including his 2002 “Making Sure ‘It’ [Japanese-style deflation] Doesn’t Happen Here”, and his 2004 celebration of the “Great Moderation”. Before this, not least in a 1999 paper co-authored with Mark Gertler of New York University, he had argued that “the best policy framework for attaining [price and financial stability] is a regime of flexible inflation targeting”. This is the core dogma of modern central banking.

In a valedictory this month, Mr Bernanke started with “transparency and accountability”, pointing to the fact that, in January 2012, the Federal Open Market Committee “established, for the first time, an explicit longer-run goal for inflation of 2 per cent”. He added that the Fed’s transparency and accountability proved “critical in a quite different sphere – namely, in supporting the institution’s democratic legitimacy”. He was surely right. Central banks wield great power. Transparency and accountability are vital if its exercise is to be both effective and legitimate.

Another area on which Mr Bernanke focused was financial stability. Here, in the run-up to the crisis, he made two mistakes.

First, in his 2004 praise for the great moderation, the vainglorious label given to the performance of the US economy before the largest financial and economic crisis for 80 years, Mr Bernanke claimed that “better monetary policy may have been a major contributor to increased economic stability”. In this, he displayed the blinkers of his profession. As the disregarded economist Hyman Minsky tried to tell us, stability destabilises. An active and enterprising financial system creates risk, often by raising leverage dramatically in good times.

Second, he missed the implications of subprime mortgages. Thus, in May 2007, he remarked that “we believe the effect of the troubles in the subprime sector on the broader housing market will probably be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system”.

Fortunately, when it became evident that this judgment was in gross error, the Bernanke Fed acted decisively and effectively, slashing interest rates and sustaining credit. As panic-fighter Mr Bernanke followed the guidance of the great Victorian economic journalist Walter Bagehot, who urged unrestricted lending by central banks to solvent institutions in times of crisis. This is a world of manias and panics. Happily, Mr Bernanke knew this.

Having prevented the seizure of financial markets, the Fed focused on the moribund economy. As Mr Bernanke explains, “to provide additional monetary policy accommodation despite the constraint imposed by the effective lower bound on interest rates, the Federal Reserve turned to two alternative tools: enhanced forward guidance regarding the likely path of the federal funds rate and large-scale purchases of longer-term securities for the Federal Reserve’s portfolio”.

Such actions were widely condemned for risking hyperinflation or thwarting a desirable liquidation of pre-crisis excesses. These criticisms were nonsense. Fear of hyperinflation was based on a mechanistic model of the links between central bank reserves and bank lending, which is irrelevant to contemporary banking. Banks are constrained not by reserves but by their perception of the risks and rewards of additional lending. The former had soared and the latter collapsed in the crisis, which is why the central bank had to intervene. The calls for liquidation failed to understand that an unchecked panic could cause mass bankruptcy and another Great Depression.

Many have also expressed concern over the exit from these exceptional policies. Again, this concern is misplaced. Tools exist for managing or eliminating excess reserves. Many complain, too, about over-reliance on monetary policy. But the determination of Congress to impose a grotesquely ill-timed fiscal squeeze left the Fed the only actor.

In all, the Fed managed to deal with the crisis and its aftermath in fraught circumstances. For this, Mr Bernanke deserves great credit.

Where, however, does Mr Bernanke leave finance and monetary policy? The answer is: in great uncertainty. There are two huge challenges, both related to pre-crisis errors.

The first is how far it will be possible to combine inflation-targeting monetary policy with financial stability. Pulling this off depends on making a new idea – macroprudential policy – effective. Nobody really knows whether this can be made to work.

The second is whether enough has been done to make the financial system less fragile. I remain concerned. Yes, regulation and oversight have improved. But, in essence, today’s financial system is the same as before. Worse, it is yet more dominated by a small number of thinly capitalised, complex, global behemoths. The notion that such institutions could be “resolved” in a panic without triggering panic remains untested and, partly for this reason, government promises not to bail them out are not credible. This is a highly troubling legacy.

Mr Bernanke will surely be regarded as one of the Fed’s most significant chairmen. Yet the fact that such hyperactivity was needed to save the world from economic ruin tells us how fragile was the bright new global financial system and how ill-judged the confidence in its stability. Mr Bernanke saved the day. But he also leaves behind unresolved questions about the future of central banking, money and finance. We should not forget them. They matter.


Martin Wolf


FT

Get ready, the indispensable Americans are pulling back

The official theme for this year’s World Economic Forum is predictably bland – “Reshaping the World”. But the unofficial slogan will be “America is back”. Predictions that the US economy will grow by 3 per cent this year – added to worries about emerging markets – mean that Davos is likely to be bullish on America for the first time in years.

But a revival of the US economy should not be confused with a resurgence of America’s role as the “sole superpower”. On the contrary, the most important emerging theme in world politics is America’s slow retreat from its role as global policeman.

Some of America’s closest partners now talk openly of a diminished US global presence. Laurent Fabius, the French foreign minister, recently gave a speech in which he said: “The United States gives the impression of no longer wanting to get drawn into crises.” As a result, he said, America’s allies are “increasingly factoring in their calculations . . . the possibility that they will be left to their own devices in managing crises”. Even Israel is adjusting. Its foreign minister, Avigdor Lieberman, recently remarked: “Ties between Israel and the US are weakening . . . The Americans today are dealing with too many challenges.” The Israeli analysis is shared by America’s other key ally in the Middle East, Saudi Arabia, which is furious at what it regards as US disengagement.

The deep reluctance of Barack Obama’s administration to get involved militarily in the Syrian conflict has fuelled accusations that America is pulling back from the Middle East. But European policy makers are also worried. They are concerned that America’s famous “pivot” to Asia will mean less attention to Nato and its European partners.

Meanwhile, America’s Asian allies seem no more satisfied. Japan thinks that the US was not firm enough in responding to China’s declaration of an “air defence identification zone” in the East China Sea, while the Philippines feels it was left in the lurch when China established effective control of the disputed Scarborough shoal.

Obama administration officials complain that all this talk of disengagement is wildly overdone. They point out that America is taking the lead in the Syrian peace negotiations, as well as in the Iran nuclear talks and the Israeli-Palestinian saga. The US also remains the main guarantor of the security arrangements of Europe, Asia-Pacific and the Middle East.

And yet, America under President Obama is clearly more reluctant actually to use its military muscle. When Congress debated missile strikes on Syria, Washington quickly became aware that opinion back home was strongly against. The spread of a new semi-isolationist mood was confirmed last week in a poll for the Pew Research Center. Some 52 per cent of Americans agreed that “the US should mind its own business internationally and let other countries get along the best way they can, on their own”; only 38 per cent disagreed. As Bruce Stokes of Pew points out, this is “the most lopsided balance in favour of the US minding its own business” in the nearly 50 years that pollsters have asked this question.

Mr Stokes calls this “an unprecedented lack of support for American engagement with the rest of the world”. What is more, this scepticism about foreign entanglements now reaches into the US policy making elite. When Pew polled members of the Council on Foreign Relations, an elite think-tank, they found their views roughly in line with those of the general public.

It is not hard to identify the reasons for America’s inward turn. The economic crisis persuaded Mr Obama to concentrate on “nation-building at home”. Meanwhile, the trauma of the Iraq and Afghanistan wars has led to an understandable disinclination to put America’s hand back into the Middle Eastern mangle. And there are also more positive reasons for America’s neo-isolationism. The shale-gas revolution has raised the prospect of American “energy independence”. By 2015 the US will once again be the world’s largest oil producer. Gyrations in the world energy market could still profoundly affect the US economy. But energy security is no longer such a compelling argument for global engagement.

It is possible that America’s isolationist mood will simply be a phase. The US went through similar, inward-looking periods after the first world war and after Vietnam. In both cases, international events compelled America to plunge back into global affairs. An economic resurgence in the US may create a more outward-looking mood. But it is also possible that, this time, the shift towards non-intervention is structural rather than cyclical – reflecting a US that is quietly adjusting to the rise of other major powers, in particular China.

For the moment, however, it is the rest of the world that is adjusting to an emerging political and security vacuum. The Clintonite slogan that America is the “indispensable nation” may have been vainglorious, but it also turns out to have been true. As Mr Fabius, the French foreign minister, acknowledges: “Nobody can take over from the Americans from a military point of view.” And, if the Americans cannot or will not act, he says, there is a “risk of letting major crises fester on their own”.

The truth of that proposition is currently on display from Syria to the Senkaku Islands to the Central African Republic. Who knows – it is a thought that might even disturb a few dinners at Davos.

Gideon Rachman

FT

A truly great book needs no introduction

The other day, I started Alex Ferguson’s autobiography three times. Not that I was distracted or that the life story of the long-time Manchester United manager failed to hold my interest. One cannot help starting the book three times because the book actually starts three times. In his “introduction” Sir Alex describes how “several years ago I began gathering my thoughts for this book . . .” A few pages later is a “preface” in which he begins at the beginning, the 1980s, when he “walked through that tunnel and on to the pitch for my first home game . . .” But then in chapter 1, a few pages on, we learn that those were actually false starts, and that Sir Alex really wants to get the story rolling with his final match last May. (“If I needed a result to epitomise what Manchester United were about it came to me in Game No. 1,500 …”)

The cluttering up of books with introductions and other “front matter” is a widespread problem. Sir Alex, a man famed for his directness, is only a mild offender. Other books have multiple prefaces, forewords, multipage acknowledgments, translator’s notes and so on. These obstacles stand like so many thickets, moats, snake pits and battlements separating the reader from the citadel of the main narrative.

The best way for an author to start a book about X is to say: “This is a book about X . . .” Thorstein Veblen does this in his Theory of the Leisure Class (1899): “It is the purpose of this book,” he begins, “to discuss the place and value of the leisure class in modern life” – and 300 words later we are in the thick of it. Lord Macaulay begins his History of England (1848): “I propose to write a history of England . . .”

But the problem is not a new one. Before computerised typesetting, the front and back ends of a book were the only place where authors could afford to fix errors and air second thoughts. They almost never used this space wisely. I recently looked at the second edition (1874) of James Fitzjames Stephen’s Liberty, Equality, Fraternity. Stephen was trying to bring himself to prominence by attacking John Stuart Mill’s On Liberty. Unfortunately for both of them, Mill died just as the first edition (1873) was being published. Stephen used the first 49 pages of the second edition to battle not Mill but various nit-picking reviewers. He might as well have sprayed his book with reader-repellent.

Today’s authors tend to waste readers’ time with similar hemming and hawing. They do it for a variety of reasons.

One is that influential American journalism schools tend to teach the “soft lead”. The best US journalism is built on a granite ledge of fact. But this makes US journalism a bore to precisely those literary-minded readers it most seeks to impress. So almost all writers are trained to sugar their dull stories by opening with pointless anecdotes.

A lot of people become authors because they have a story to tell – their own. But their readers want to hear a different one. Two or three pages of reminiscence about how the author first became interested in, say, Abraham Lincoln, might be as much autobiographical self-indulgence as the traffic will bear. Most publishers do not mind letting authors indulge themselves this way. In our audiovisual age, the stillness surrounding a book is eerie to some people. Chit-chat gives a sense of festivity, and of being on personal terms with the writer.

Finally, much of today’s serious writing is done either in academia or its immediate environs. Book-selling is influenced by university fads and politics. Fastidiously long lists of acknowledgments, which can add half a dozen pages to a book, originated in academic publishing, where gestures of gratitude are indistinguishable from shots across the bow. Assistant professor X will thank Doctor Y, who teaches at the University of Z – and, potential reviewers will hardly need to be told, controls all the grant money in the discipline.

In the internet age, explanatory stuff tends to become disaggregated from what it explains. MP3s do not naturally accommodate liner notes the way records and CDs did. This is not such a loss – the best record covers and liner notes from years past are usually available on the internet. Similarly, it is unlikely the tradition of cumbersome front matter will last long. There are some beautiful forewords in modern literature, but they would all be better as afterwords. And certainly no one will miss those literary essays that “introduce” classic page-turners by giving away the plot. A reader subjected to a lot of choppy, off-topic, preliminary prose has reason to be suspicious. It is often the sign of a book that is explaining something that should have been explained elsewhere, bullying the reader into reading the book in a certain spirit or insisting there is order in a narrative where there is none.

Christopher Caldwellis a senior editor at The Weekly Standard

Fonte: FT

Nothing can dent the divine right of bankers

Le banquier est mort; vive le banquier.

It is time to admit defeat. The bankers have got away with it. They have seen off politicians, regulators and angry citizens alike to stroll triumphant from the ruins of the great crash. Some thought the shock of 2008 might change things. We were fools. Bankers are still collecting multimillion-dollar bonuses even as they shrug off multibillion-dollar fines.

Countries and companies have gone bust, political leaders have fallen like skittles, and workers everywhere have been thrown out of jobs. We are all a lot poorer than we might have been. Yet on Wall Street and in the City of London, it is business as usual. Has the world been made safe for liberal financial capitalism? The short answer is No.

Two recent news items caught my attention. One reported the latest fine imposed on JPMorgan Chase, the US banking behemoth; the other that central bank regulators in Basel had diluted rules aimed at making commercial banks raise more capital against risk-taking. The remarkable thing about these reports is that they seemed wholly unremarkable. Big banks breaking the law and financial regulators retreating – what’s new?

Take the whopping fine on JPMorgan. The institution led by Jamie Dimon is paying $2.6bn to settle criminal and civil claims linked to Bernard Madoff’s Ponzi scheme. The penalty raised barely a ripple. No one in authority was vulgar enough to suggest Mr Dimon, once a poster boy for play-it-straight banking, might consider his position.

The fine, after all, was the latest in a long list. US and European banks have had to own up to crimes and misdemeanours ranging from money-laundering and interest rate fixing to defrauding customers and reckless trading. Sad to say, public outrage and political sensitivity have been dulled by familiarity.

What, anyway, is another couple of billion to an institution such as JPMorgan, which has totted up penalties of $20bn? In no other business would a chief executive survive such expensive ignominy. Bankers have made themselves an exception. The fines make only a small dent in the vast rents they extract from productive sectors of the economy. They may even be tax-deductible.

With the Basel decision, rule-setters let big investment banks off the hook by easing new requirements on leverage ratios, thus limiting the amounts they have to raise in new capital to set against their casino trading activities. The concessions chalked up another success for the industry’s slick public relations operation. Sometimes it almost seems the banks were victims rather than villains of the crash.

This has been the story since 2008. True, laws have been changed and regulations have been tightened to curb the most egregious dice games. Capital requirements have been raised a tad, lowering slightly the insurance risk to governments and reducing by the same small amount the implicit taxpayer subsidies that pay for the bankers’ bonuses. The Dodd-Frank legislation has increased compliance burdens on Wall Street.

Welcome as they are, these represent changes at the margin. The basic structure of the system – with its perverse incentives, too-big-to-fail institutions and too-powerful-to-jail executives – remains untouched. The universal banks, combining straightforward commercial banking with high-risk trading, live on. The result is that the organising purpose of banking – to provide essential lubrication for the real economy – remains entangled with dangerous and socially useless speculation.

Taxpayers are still providing big subsidies in the form of guarantees that, perversely, encourage banks to take more risks. In the absence of real competition, a self-sustaining oligopoly of senior bankers continues to set its own rewards. Banks complain about the fatter rule books, but what we have seen is a series of “tweaks” rather than the radical shake-up needed to make the system safe. What Paul Volcker, the former US Federal Reserve chairman, has called the “unfinished business” of reform remains just that.

So what accounts for this palpable surrender to the divine right of bankers? Three reasons come to mind. The first, prosaically, stems from the banks’ vital function in any market economy. Once they had rescued the financial system from meltdown, policy makers turned their attention to the real economy. Faced with deep recessions and soaring fiscal deficits, they were loath to risk renewed destabilisation of the financial system. Instead, they decided to make do and mend.

Second, the reforms are the work essentially of insiders – the central bankers and regulators who gave the system a clean bill of health before the crash. They wanted to make the system a bit safer rather than to acknowledge that the basic structure was essentially rotten.

Finally, the banks have far outclassed politicians and regulators in a high-stakes game of bluff. Each demand for more capital or tighter prudential controls has been greeted with none-too-subtle threats that they would choke off credit to business. The politicians blinked.

The banks were not alone in their responsibility for the crash. There were other forces at work, not least huge imbalances in the world economy. Regulators were asleep.

Yet it is truly extraordinary that the reign of the bankers has carried on uninterrupted. Like monarchs of old, they have accepted some constraints, but these can be worn away over time. Their power and riches are largely untouched. Whatever happened, I sometimes wonder, to Robespierre’s guillotine?


Philip Stephens


FT

This will be a crunch year for the Japanese economy

For many years, the only economic story that has really mattered in Asia has been China. The motor of regional growth for a decade or more, it has year after year been the single most critical factor in determining the temperature of the Asian – even the global – economy. But this year, China is in for a run for its money. For the first time in as long as almost anyone can remember, there is perhaps even more interest in how Japan’s economy will fare.

Japan is in the throes of a radical experiment in monetary policy, so bold it has been given a fancy new name: quantitative and qualitative easing, or QQE. This is the year when we will find out whether it works. One of three possibilities exists. The first is that QQE, which calls for doubling the monetary base in two years, could fizzle out. Inflation would then sag back towards zero. Possibility two is graver still; the danger that Abenomics – named after Shinzo Abe, prime minister – will slip into “Abegeddon”. Inflation would run out of control, interest rates surge and capital flee. Possibility three is – wait for it – that QQE actually works. If that were to happen, Japan would move towards sustainable inflation of 2 per cent and growth might be 1.5 per cent.


In a recent note, HSBC’s Frederic Neumann says the two recent engines of Asian growth – cheap money supplied by the US Federal Reserve and fast Chinese expansion – are both sputtering. “But there is a third force . . . that will exert greater influence over the region in 2014 than it has for many years: Japan.”

Japan is a huge investor in Asia, but also a competitor with a corporate depth that is often underestimated. It is a huge market with an economy more than twice the size of Britain’s. It is also an enormous source of liquidity. As what Mr Neumann calls the “biggest monetary stimulus in history” gathers force, liquidity flowing from Japan could help fill the gap that may be left as a result of the tapering of monetary stimulus in the US. He estimates that Japanese banks, which have been snapping up regional lenders, could pump an extra $60bn-$140bn into southeast Asian economies alone. Thailand receives 60 per cent of its foreign direct investment from Japan. Further afield, Japanese companies are rediscovering their animal spirits. Suntory Beverage and Food has splashed the cash – too much of it, according to some – by acquiring whiskey maker Beam Inc in a deal valued at $16bn.

China, of course, has a bigger economy than Japan’s – roughly $9tn against $6tn. Beijing, too, has a challenging year ahead as it seeks to introduce market reforms. There is also potential for a negative shock if, say, the shadow banking system unravels or local governments start defaulting on debt. However – famous last words – China has a record of defying the doomsayers. The best bet is that it will grow at above 7 per cent in 2014 and that the economy lives to fight another year.

In Japan, consumer prices are key. Mr Abe has staked his reputation on hitting a 2 per cent inflation target within two years. So far, the news is encouraging. This year will show whether it is sustainable. November figures put core inflation, which excludes fresh fruit but includes energy, at 1.2 per cent. The concern is that recent price rises merely reflect higher imported energy costs resulting from a weaker yen. If that is the case, inflation could simply stall. Yet prices may be genuinely flickering to life: even excluding energy, inflation picked up to 0.6 per cent, the highest in 15 years.

If wages do not rise, even that could be snuffed out. Mr Abe is leaning on big companies to do their bit for the inflationary cause by raising salaries. Even if they oblige, cash-strapped smaller businesses, which employ far more people, will also need to dig deep. At least the job market is tightening. Unemployment has fallen to 4 per cent and the jobs-to-job seekers ratio has risen to 1.0.

On the negative side, Japanese consumers are about to be coshed with a consumption tax rise of3 percentage points to 8 per cent. Even Etsuro Honda, a close adviser of Mr Abe, thinks this is crazy. The danger is that the April tax rise will be followed by a sharp drop in demand.

In the medium term, it is crucial that growth continues at above trend so as to close the output gap. Haruhiko Kuroda, the Bank of Japan governor, told the Financial Times last month that he thought the output gap was a negative 1-1.5 per cent and that it had already “shrunk considerably”. At this rate, he said, it could become “slightly positive” in a year or two.

Even steady inflation of 2 per cent is no panacea. As Martin Wolf says, it will do nothing for Japan’s demographic crunch, since you “can’t print babies”. Nor can cranking the printing presses make offices more female-friendly or rice paddies better farmed. Still, if Japan were to reach 2 per cent inflation and achieve 1.5 per cent growth, its economy would look in better shape than it has done in years. Abegeddon or Abesuccess: 2014, you decide.


David Pilling


FT

Failing elites threaten our future

In 2014, Europeans commemorate the 100th anniversary of the start of the first world war. This calamity launched three decades of savagery and stupidity, destroying most of what was good in the European civilisation of the beginning of the 20th century. In the end, as Churchill foretold in June 1940, “the New World, with all its power and might”, had to step “forth to the rescue and the liberation of the old”.

The failures of Europe’s political, economic and intellectual elites created the disaster that befell their peoples between 1914 and 1945. It was their ignorance and prejudices that allowed catastrophe: false ideas and bad values were at work. These included the atavistic belief, not just that empires were magnificent and profitable, but that war was glorious and controllable. It was as if a will to collective suicide seized the leaders of great nations.

Complex societies rely on their elites to get things, if not right, at least not grotesquely wrong. When elites fail, the political order is likely to collapse, as happened to the defeated powers after first world war. The Russian, German and Austrian empires vanished, bequeathing weak successors succeeded by despotism. The first world war also destroyed the foundations of the 19th century economy: free trade and the gold standard. Attempts to restore it produced more elite failures, this time of Americans as much as Europeans. The Great Depression did much to create the political conditions for the second world war. The cold war, a conflict of democracies with a dictatorship sired by the first world war, followed.

The dire results of elite failures are not surprising. An implicit deal exists between elites and the people: the former obtain the privileges and perquisites of power and property; the latter, in return, obtain security and, in modern times, a measure of prosperity. If elites fail, they risk being replaced. The replacement of failed economic, bureaucratic and intellectual elites is always fraught. But, in a democracy, replacement of political elites at least is swift and clean. In a despotism, it will usually be slow and almost always bloody.

This is not just history. It remains true today. If one looks for direct lessons from the first world war for our world, we see them not in contemporary Europe but in the Middle East, on the borders of India and Pakistan and in the vexed relationships between a rising China and its neighbours. The possibilities of lethal miscalculation exist in all these cases, though the ideologies of militarism and imperialism are, happily, far less prevalent than a century ago. Today, powerful states accept the idea that peace is more conducive to prosperity than the illusory spoils of war. Yet this does not, alas, mean the west is immune to elite failures. On the contrary, it is living with them. But its failures are of mismanaged peace, not war.


Here are three visible failures.


First, the economic, financial, intellectual and political elites mostly misunderstood the consequences of headlong financial liberalisation. Lulled by fantasies of self-stabilising financial markets, they not only permitted but encouraged a huge and, for the financial sector, profitable bet on the expansion of debt. The policy making elite failed to appreciate the incentives at work and, above all, the risks of a systemic breakdown. When it came, the fruits of that breakdown were disastrous on several dimensions: economies collapsed; unemployment jumped; and public debt exploded. The policy making elite was discredited by its failure to prevent disaster. The financial elite was discredited by needing to be rescued. The political elite was discredited by willingness to finance the rescue. The intellectual elite – the economists – was discredited by its failure to anticipate a crisis or agree on what to do after it had struck. The rescue was necessary. But the belief that the powerful sacrificed taxpayers to the interests of the guilty is correct.


Second, in the past three decades we have seen the emergence of a globalised economic and financial elite. Its members have become ever more detached from the countries that produced them. In the process, the glue that binds any democracy – the notion of citizenship – has weakened. The narrow distribution of the gains of economic growth greatly enhances this development. This, then, is ever more a plutocracy. A degree of plutocracy is inevitable in democracies built, as they must be, on market economies. But it is always a matter of degree. If the mass of the people view their economic elite as richly rewarded for mediocre performance and interested only in themselves, yet expecting rescue when things go badly, the bonds snap. We may be just at the beginning of this long-term decay.


Third, in creating the euro, the Europeans took their project beyond the practical into something far more important to people: the fate of their money. Nothing was more likely than frictions among Europeans over how their money was being managed or mismanaged. The probably inevitable financial crisis has now spawned a host of still unresolved difficulties. The economic difficulties of crisis-hit economies are evident: huge recessions, extraordinarily high unemployment, mass emigration and heavy debt overhangs. This is all well known. Yet it is the constitutional disorder of the eurozone that is least emphasised. Within the eurozone, power is now concentrated in the hands of the governments of the creditor countries, principally Germany, and a trio of unelected bureaucracies – the European Commission, the European Central Bank and the International Monetary Fund. The peoples of adversely affected countries have no influence upon them. The politicians who are accountable to them are powerless. This divorce between accountability and power strikes at the heart of any notion of democratic governance. The eurozone crisis is not just economic. It is also constitutional.


None of these failures matches in any way the follies of 1914. But they are big enough to cause doubts about our elites. The result is the birth of angry populism throughout the west, mostly the xenophobic populism of the right. The characteristic of rightwing populists is that they kick down. If elites continue to fail, we will go on watching the rise of angry populists. The elites need to do better. If they do not, rage may overwhelm us all.






Martin Wolf






FT

The tide is rising for America’s libertarians

Robert Nozick, the late US libertarian, smoked pot while he was writingAnarchy, State and Utopia. He would applaud the growth of libertarianismamong today’s young Americans. Whether it is their enthusiasm for legalised marijuana and gay marriage – both spreading across the US at remarkable speed – or their scepticism of government, US millennials no longer follow President Barack Obama’s cue. Most of America’s youth revile the Tea Party, particularly its south-dominated nativist core. But they are not big-government activists either. If there is a new spirit in America’s rising climate of anti-politics, it is libertarian.

On the face of it this ought to pose a bigger challenge to the Republican party – at least for its social conservative wing. Mr Obama may have disappointed America’s young, particularly the millions of graduates who have failed to find good jobs during his presidency. But he is no dinosaur. In contrast, Republicans such as Rick Santorum, the former presidential hopeful, who once likened gay sex to “man on dog”, elicit pure derision. Even moderate Republicans, such as Chris Christie, who until last week was the early frontrunner for the party’s 2016 nomination, are considered irrelevant. Whether Mr Christie was telling the truth last week, when he denied knowledge of his staff’s role in orchestrating a punitive local traffic jam, is beside the point. Mr Christie’s Sopranos brand of New Jersey politics is not tailored to the Apple generation.

The opposite is true of Rand Paul, the Kentucky senator, whose chances of taking the 2016 prize rose with Mr Christie’s dented fortunes last week. Unlike Ron Paul, the senator’s father, who still managed to garner a large slice of the youth vote in 2008, Rand Paul eschews the more outlandish fringes of libertarian thought. Rather than promising an isolationist US withdrawal from the world, he touts a more moderate “non-interventionism”. Instead of pledging to end fiat money, he promises to audit the US Federal Reserve – “mend the Fed”, rather than “end the Fed”. Both find echo among the Y generation. So too does his alarmism about the US national debt. Far from being big spenders, millennials are more concerned about US debt than other generations, according to polls. They are also strongly in favour of free trade. More than a third of the Republican party now identifies as libertarian, according to the Cato Institute. Just under a quarter of Americans do so too, says Gallup.

All of which looks ominous for Ted Cruz, the Texan Republican whose lengthy filibuster against Obamacare last year lit the fuse for the US government shutdown. Mr Cruz, also a 2016 aspirant, leads the pugilistic wing of the Republican party that is prepared to burn the house down in order to save the ranch. Although also a Tea Partier, Mr Paul is cultivating a sunnier Reaganesque optimism that draws on the deep roots of US libertarianism. His brand of politics also strikes a chord with those who fear the growth of the US surveillance state – the types who view Edward Snowden (another millennial) as a hero rather than a traitor. Last year the US House of Representatives came within 12 votes of passing a bill to defund the National Security Agency. Mr Paul led the bill in the Senate. Next time they could succeed.

What does it mean for the Democrats? In terms of social values, libertarians are almost identical to liberals. Smoking pot and same-sex marriage both meet with big approval. The same is not necessarily true of guns. In spite of recent school massacres, 40 US states now have “concealed weapons” laws – many passed in the past 12 months. Again, millennials are surprisingly sceptical of gun control, say the polls. But it is on economic policy where they really part company with liberals. The Great Depression helped forge a generation of solid Democrats. The same does not appear to be true of the Great Recession. Franklin Roosevelt helped dig people out of misery in the 1930s by providing direct public employment. Mr Obama, on the other hand, has stuck largely to economic orthodoxy. He may have missed a golden opportunity to mould a generation of social democrats.

He has also inadvertently fuelled scepticism about the role of government. Mr Obama came to power in 2008 on a surge of voluntarism. He did so in part by appealing to youthful idealism about public service. That now feels like a long time ago. Distrust in public institutions has continued to rise during his presidency – most strongly among the youngest generation. The share of voters who identify as independents, rather than Democrats or Republicans, recently hit an all-time high of 42 per cent, according to Gallup. This is bad news for established figures in either party – and, indeed, in any walk of life. Hillary Clinton should beware. So should Jeb Bush.

On the minus side, libertarians have no real answer to many of America’s biggest problems – not least the challenges posed to US middle-class incomes by globalisation and technology. Nor are they coherent as a force. Libertarianism is an attitude, rather than an organisation. It is also potentially fickle. Young Americans disdain foreign entanglements. That could change overnight with a big terrorist attack on the homeland. They feel let down by Democrats and hostile to mainstream Republicans. Yet they could flock to an exciting new figure in either party. Theirs is a restless generation that disdains authority. Establishment figures should take note. Tomorrow belongs to them.

Fonte: FT

Recession has revived labour’s struggle against capital

To express optimism about the developed world labour market in the aftermath of the financial crisis has been a sure way to invite incredulity or derision. But not any more, it seems.

In the US the jobless rate is falling faster than expected, wrongfooting the assumptions on which the Federal Reserve’s new-fangled forward guidance was based. Officials in Brussels are trumpeting falling unemployment in Ireland and Portugal as proof that austerity works. Some see the recent sharp falls in government borrowing costs in the eurozone periphery as an indication that 2014 will be a breakthrough year for the 17 countries of the monetary union.

In the UK, meanwhile, John Cridland, the head of the CBI employers’ body, caused surprise this week by saying he would like to see wages rise as the economy recovered. Still more surprisingly, George Osborne, the UK chancellor, faces pressure from fellow Tories to deliver a rise in the minimum wage in excess of inflation.

Could this be an early indication that the high tide of extreme inequality is on the turn? And will 2014 be the year in which labour finally regains ground in the perpetual tug of war between labour and capital? All that is clear at this stage is how much ground there is to make up. Profits as a share of gross domestic product have gone from under four per cent in the mid-1980s to a post-war peak of 11 per cent last year, a statistic that would gladden the heart of a 19th century American robber baron.

The share of wages has fallen consistently from the early 1970s as workers lost their ability to translate higher productivity into higher pay. That was partly a story of declining union power, the addition of a large pool of female labour to the workforce, technologies displacing workers and latterly an increased supply of workers from the developing world entering the global labour market.

The employment consequences of the Great Recession that followed the financial crisis would probably have been worse without the central banks’ bond buying programmes. Yet a consequence of quantitative easing has been increased inequality, because the chief impact has been on bonds and shares, which are mainly owned by the rich.

Marc Faber, an influential Asia-based strategist, sees QE as an aberration that funnels money to the “Mayfair economy” of the well-to-do and “boosts the prices of Warhols”. The middle class holds a much greater share of its wealth in housing. So in the US central the QE programme may have mitigated the fall in house prices, but it created no wealth effect to encourage consumer spending.

As for the working class, its savings tend to be in the form of bank deposits, which have yielded negative real returns as central banks have resorted to financial repression, whereby interest rates are kept below the rate of inflation. This is intended to stimulate economic activity by giving consumers an incentive to spend instead of save. But this offers scant consolation to those whose nesteggs are being eroded.

Companies have done pretty well out of ultra-loose monetary policy too. Economists at the McKinsey Global Institute reckon that US companies enjoyed a cumulative interest rate windfall of $310bn since 2007. This increased corporate profits by five per cent and accounted for just over 20 per cent of profits growth over the period. There were similar effects in the UK and continental Europe where annual earnings were estimated to have increased by five per cent and three per cent respectively. Yet this, too, came at the cost of more inequality since large companies derived much of the benefit by issuing low-cost paper in capital markets whereas smaller companies lack access to bond markets and were more reliant on expensive bank finance, if they could borrow at all.


For anyone to become seriously optimistic about labour making a comeback, it would be necessary to see an early depletion of the reserve army of labour in the developing world. China, where industrialisation and urbanisation are already well advanced seems unlikely to exhaust its excess labour supply in this decade. India remains at a much earlier stage of development. The scope for a return to a more unionised workforce in North America and Europe seems limited.


All of this makes it unlikely that the disconnect between growth and wages in the developed world will quickly become a thing of the past. It also suggests that current confidence in Brussels about the eurozone’s employment prospects borders on hubris, especially given persistently dreadful labour market data. If Portugal and Ireland are success stories with unemployment respectively at 15.5 per cent and 12.3 per cent, the official lens is seriously distorted.


And the real disaster lies in youth unemployment. In no-growth Italy, where the jobless rate of 12.7 per cent is at the highest level since the 1970s, youth unemployment is 41.6 per cent. The comparable figures for Spain and Greece are 57.7 per cent and 54.8 per cent. That is an appalling consequence of creditor countries in northern Europe putting all the burden of adjustment on the debtors after the sovereign debt crisis. It remains a big worry that the eurozone recovery looks so fragile.


Could increases in the minimum wage in the US and the UK make for less inequality? Provided the rates are not set too the impact would probably be benign. Yet the real driver of income inequality over the past decade or so has been top pay - more specifically the pay of chief executives and bankers whose bonuses have too often been based on profits that turned out to have been unreal after the crisis erupted.

John Plender

Fonte: FT

Michael Ignatieff: Free polarised politics from its intellectual vacuum

Cynics who say power is all that counts in politics forget that power without ideas is just improvisation. It is ideas that enable leaders to impose a direction on events. Margaret Thatcher’s death last year reminds us what it felt like to be led by a conviction politician. Some hated the UK prime minister’s direction, but no one doubted there was one. No one doubted that her success helped produce a conviction politician on the progressive side: Tony Blair.


In the past 15 years, few politicians have imposed their will on our times. We can blame the current crop of leaders for that, but the deeper cause seems to lie in the waning power of ideas. Politics is more polarised than ever, but behind the party stockades, diminishing bands of believers repeat partisan incantations that no longer describe the world, let alone change it.


We are living through the slow decay of the two master narratives – conservative and progressive – that have defined political argument since 1945. Whether you liked it or not, the conservatism that Friedrich Hayek and Karl Popper crafted in the 1940s had the courage of its convictions. It was a passionate defence of individual freedom and competitive markets against state tyranny. When articulated by politicians of genius, such as Thatcher and US president Ronald Reagan, these ideas conveyed a confidence about the future that forced progressives to answer with a vision of their own. In the dialectic of politics, without conviction conservatism, there would have been no progressive Third Way.

American conservatism today is an embittered shell of Reagan’s vision. Country club Republicans defend the privileges of the elites while Tea Party insurgents wage a rearguard revolt against the welfare state and the sexual revolution. In Europe, conservatism risks curdling into a sour language of fear towards foreigners, immigrants and the European dream itself.

Progressives seem unable to capitalise on conservatism’s travails. The depression has not produced a John Maynard Keynes de nos jours – and no youth protest from Madrid to Rio has inspired a rebirth in progressive thought. The Occupy movement came and went without leaving an intellectual trace.

In this vacuum of ideas, progressivism’s motto today seems to come from Hilaire Belloc: “Keep a-hold of Nurse for fear of something worse.” Progressives have become closet conservatives, defending the welfare state and the public-sector middle class at the very moment when rising inequality is eroding the tax and voter base for welfarism.

In the resulting political void, economists rule, but technical fixes lack the anchorage of public support. Economic policy lurches between excessive austerity and timid reflation. The great fear that grips democratic electorates – that globalised markets will once again run out of control – remains unaddressed. And no politician seems to hear these fears or offer hope.

It is no use bemoaning polarisation. The stockades are unlikely to come down soon. Conservative and progressive polarisation endures for good reason. Each tradition offers different answers to the fundamental question of politics: how to control the power of the market and of the state. Yet the current exhaustion of these two traditions illustrates a paradox: neither can renew itself unless each learns from the other.

Progressives will have to make their peace with the creative destruction brought about by competition, while conservatives will have to accept that the state has to take care of the market’s victims. As governments’ powers of surveillance grow, progressives will learn new respect for the conservative instinct that state power must be kept in check. As the globalisation of finance multiplies the risk of systemic meltdown, conservatives will begin to appreciate the progressive insight that only the state can keep markets from dropping us into the abyss.

One side of the partisan divide will put social justice first; the other, profits. But one is not the enemy of the other. And, whichever side wins power, each will have to repair the fissures of disadvantage that the new economy is carving into our social fabric. These risk pulling our societies apart unless both sides put their authority behind a social contract in which the success of the few enriches life for the many.

Finally, both traditions will not survive unless they remember what political ideas are for: to bring us together and enable us to believe that we can control our collective destinies. Without a political vision of where we should be headed, we become spectators of our own drift.

When democracies drift, as they are now, voters edge towards extremes, towards demagogues who throw false solutions at imagined problems. If the demagogues of right and left are to be defeated, politicians in the vital centre need to learn from their adversaries, break with the polarities of our time and, most of all, give fellow citizens faith that we can master events rather than bob in the tide.


Michael Ignatieff


Fonte: FT

Robert Rubin: Sound government finances will promote recovery

Debates persist in the US and eurozone about growth and job creation versus fiscal discipline. This false choice diverts fiscal focus away from a balanced approach that could achieve both imperatives. Such false choices also contribute to the failure of our political systems to better address continuing hardship through advancing growth and employment, and through programmes such as the unemployment insurance extension. Moreover, that political failure has also contributed to central bank decisions to employ unconventional monetary policies that create widely under-appreciated risks.

The US recovery remains slow by historical standards – even if recent signs of improvement are borne out. One reason is that our unsound fiscal trajectory undermines business confidence, and thus job creation, by creating uncertainty about future policy and exacerbating concerns about the will of Congress to govern. Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.

A sound fiscal trajectory is also a prerequisite for interest rates conducive to growth. Continued unsound fiscal conditions will almost surely destabilise markets at some future point. Recent reductions in deficit projections do not change the basic structural picture – except that healthcare cost increases are slowing – and are partly based on sequestration, a terrible policy that already looks too onerous to stick.

In the eurozone, the threat is more immediate. Bond markets in troubled countries were in dire conditions until the European Central Bank’s famous – and as yet unimplemented – 2012 promise to do “whatever it takes”. But ECB actions will not address fiscal and structural issues critical to healthy recovery. Also, the ECB cannot buy sovereign debt indefinitely without triggering capital flight from corporate and sovereign debt markets and the currency. The ECB has bought time, but if that time is not used for policy reforms that win market confidence, bond markets will eventually destabilise.

Unconventional policy decisions by central banks are sometimes justified as the only available tools in the absence of necessary government policies. The right criterion for action, however, is not the absence of alternatives, but an assessment of costs and benefits. In the US, the Federal Reserve’s first programme of quantitative easing was a courageous response to the crisis. And in the eurozone, too, it was imperative to stem the crisis. But the key policy issues have always rested with political leaders.

In the US, there are widely posed questions about the benefits of QE3, but the risks are significant. One is that central bank action will reduce market pressure on political leaders to act. Another is financial moral hazard, where that same comfort may increase reaching for yield in riskier asset classes. The greatest risks of all surround exit strategy.

Unwinding the vast enlargement of the Fed’s balance sheet and liquidity greatly increases the usual risks in monetary policy aimed at price stability, growth and employment. Greater uncertainty means navigating uncharted waters, with heightened chances that tightening leads to a significant downturn. Some suggest that raising interest rates on banks’ excess reserves at the Fed, instead of selling bonds, could limit the risks. But there are no magic wands. No one can reliably project the rate increases needed or the likelihood of destabilising reactions among lenders and borrowers.

Yet waiting too long to tighten heightens the risk of inflation at some point. The Fed’s dramatic expansion of bank reserves could feed excessive credit growth. Along with the possible erosion of Fed credibility on inflation, that could also feed inflationary expectations.

Whether or not QE3 was wise to begin with, the question is what to do now. So-called “tapering” will not withdraw liquidity. Time will tell whether tapering – now under way on a small scale – will increase market interest rates, or whether tapering is already priced in. (Recent rate increases may also reflect improved economic data.) Continued purchasing reduces the risk of market reaction, but increases future unwinding risk. Confidence generated by a sound fiscal regime could help ameliorate both risks.

Such a regime should be enacted now to stabilise, or preferably reduce, the ratio of debt-to-gross domestic product over 10 years, and protect discretionary spending. Implementation, designed in ways difficult to undo, should be deferred for a limited period to allow for recovery. Fiscal discipline could provide room for reasonable stimulus to create jobs. The partially cancelled sequestration should be fully rescinded to eliminate its fiscal drag. Fiscal funding should come largely from revenue increases and beginning the entitlement reforms necessary for long-term sustainability – as President Barack Obama has proposed.

Structural deficit reduction would address growing deficits in the decades beyond the next 10 years. The eurozone, too, should reject false choices. Instead, it should strike the right balance between fiscal discipline to win market and business confidence, and macroeconomic room for growth.

Unconventional monetary policy and stimulus can be part of a successful economic programme for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform.

Robert Rubin is a former US Treasury secretary

Fonte: FT