Choose enemies carefully but be less picky about allies

Perhaps the most duplicated photograph in diplomatic history shows Chairman Mao Zedong smiling benignly at Henry Kissinger, his American interlocutor.

We know from Jung Chang’s biography of Mao just what a monster he was but we also know that Mr Kissinger’s diplomacy was essential to ending the cold war and bringing China into the state system it had vowed to destroy.

Should we talk to tyrants? Of course. And we do, all the time. Despite official disavowals, the Nato states involved in the pacification of Afghanistan would not be serving the military alliance’s interests if they were not in touch with some pretty ghastly warlords and some murderous Taliban.

The more difficult question is: should we walk with tyrants? Should we, for example, form a tacit alliance with Bashar al-Assad in order to deprive Isis, the self-styled Islamic State, of its Syrian sanctuary, even though we have denounced Mr Assad and dedicated ourselves to his removal on the grounds of his bestial behaviour towards his own people?

Franklin Roosevelt is supposed to have said of Anastasio Somoza, the dictator of Nicaragua, (or possibly of Rafael Trujillo, the dictator of the Dominican Republic) that the American ally against the communists “may be a son-of-a-bitch, but he’s our son-of-a-bitch”. Client states who manipulate their patrons have a long imperial history, and though there is no imperial great power today, there are plenty of clients and plenty of sons-of-bitches. The issue always seems to be, “is he better – more humane, more amenable, more adroit – than the person who would replace him?”

In the end, maintaining local allies who rule by terror sows bitterness and hatred towards the patronising sponsor, and makes of other societies no more than instruments of the patron’s own interests. But what about the truly life-threatening peril states sometimes face when the only viable alternative seems to be to ally with a horrific regime that would, if it did not face the same peril, pose its own menacing threat? Do we walk with tyrants then?

The Turks have a saying that might be translated as: “It is permissible to call the bear uncle until you cross the bridge.” This was the situation democracies faced in the world war against fascism.

Indeed, Roosevelt said to Joseph Davies, “I can’t take communism, nor can you but to cross the bridge I would hold hands with the devil.”

The devil he had in mind was Joseph Stalin. It seems obvious now that Hitler’s invasion of the Soviet Union in 1941 was a fatal step for the Nazi regime; that ardent anti-communist Winston Churchill remarked to Jock Colville the evening before Operation Barbarossa: “If Hitler invaded Hell, I would at least make a favourable reference to the devil in the House of Commons.”

Perhaps it is harder for democracies to embrace unsavoury regimes even when their survival is at stake; perhaps it should be. The democracies were fighting for something more than survival in 1941. There must have been moments when civilisation itself seemed held in the balance and the possibility loomed that we should have to fight even if there were no hope of victory rather than acquiesce in the degradation that would have followed capitulation to the fascists.

But this is not the calculus of the state, whether it be a democracy or some other form. The first duty of the state is the survival of the society that has called it into being. The princely states of the Renaissance made and broke alliances with cynical abandon. Should the democratic states today adopt similarly agnostic rules?

“The Assad government may be evil – but it is a lesser evil than Isis, and a local one,” Richard Haass has recently pointed out in these pages.

Other options – a Nato ground invasion, an Arab League expeditionary force (without, tellingly, Iran), the resurrection of the moderate Syrian opposition – look hopeless.

Unfortunately, such a tacit alliance might also serve the goals of Iran, an anti-western regime whose own clients are the Syrian government and Hizbollah. A similar point has often been made of the US-led removal of Iraq’s Saddam Hussein.

But perhaps this misframes the problem. Our objective is not simply the defeat of Isis nor even the calling to account of the Assad regime. Our objective is a peaceful region that does not ground its world view on a hatred of the west. That objective may only be achievable if Iran is brought into the society of law-abiding states, an inclusion that may also demand a certain detente with Tehran, whatever our long-term conflicts with its theocracy, and a truce between Sunni and Shia. That may not be possible, but if it is it will require adroit diplomacy, bending the arc of sectarian conflict to achieve peace much as
Mr Kissinger played competing communist capitals off against one other. And that means intense engagement, not detachment.

We have been on this bridge before. As John Gaddis observed, “Collaboration with the Soviet Mephistopheles helped the US and Great Britain achieve victory.”

But the price was the rise of a totalitarian state that was more powerful and less fathomable, and American policy became consumed with attempts to deal with the consequences. The challenge that Roosevelt and Harry Truman faced was, Mr Gaddis added, to find “a way to win the war without compromising the objectives for which it was being fought. It was out of their successive failures to square that circle that [the] concept of containment eventually emerged.”

As the late Robert Strauss said, “When you dance with the bear, you don’t quit when you’re tired; you quit when the bear is tired.”

Philip Bobbitt is a member of a Hoover Institution task force and teaches at Columbia and the University of Texas

Fonte: FT

ECB QE: will it happen and what next?

Markets’ initial response to Mario Draghi’s Jackson Hole speech has been to inch up the probability that the European Central Bank will finally enact full-blown quantitative easing, or large-scale asset purchases, although the ECB president’s speech was sufficiently Delphic to cover a wide range of possibilities.

With valuations in some markets at record levels, particularly European government bonds, it is at least as important to consider how markets are likely to react if and when QE is announced, as it is to consider the likelihood of the announcement itself.

We were told at Jackson Hole that the ECB governing council would “acknowledge” that medium- and long-term market-implied inflation expectations are becoming unanchored; and Mr Draghi also expressed a new, softer stance on fiscal austerity.

But the governing council can hardly deny that markets are pricing in ever-lower inflation expectations. And rather than implying some sort of joint easing (fiscal stimulus matched with more monetary stimulus), the softer stance on austerity may be presented as a new additional reason for the ECB to hold off from full-blown QE.
QE or not QE?

So Mr Draghi’s speech may presage the announcement of QE. But it is equally compatible with the continuation of the existing ECB stance that the measures already announced at the June meeting (the negative deposit rate, targeted longer-term refinancing operations, and eventual asset-backed securities purchases) have the capacity to be effective and need time to work, with QE as a tool in reserve.

While the path of ECB policy remains unclear, the extreme levels of European government bond markets demonstrate growing doubt that the ECB will deliver the policy response needed to revive growth in the euro area.

Market pricing of future inflation has also moved to levels suggesting scepticism that the ECB will meet its inflation target over a two- five- or 10-year horizon.

As a result, yields on 10-year German Bunds have fallen below 1 per cent – nearly 150 basis points below equivalent US Treasuries. This is close to the widest negative spread since the euro was introduced. Spreads of less than 50 basis points above 10-year Japanese government bond yields are also the lowest positive spread in 30 years or more. This is a market pricing in convergence towards a deflation scenario, not economic revival.

The fall in Bund yields has dragged down yields on other European sovereign bonds, which on the face of it is encouraging. But it is notable that peripheral sovereign 10-year yield spreads versus Bunds are above June’s levels. That implies an increasing credit risk premium.

For the moment, the core-peripheral risk premium is still capped by the low level of bond yields around the world, as well as by the prospect of support from the TLTROs (cheap loans available to banks), and of full-scale QE if necessary.

But look ahead: within months, Federal Reserve QE will end; within a few quarters, the Bank of England and the Fed will probably have started raising interest rates; uncertainty regarding take-up of the TLTROs will persist; and if the ECB again postpones QE, market scepticism is unlikely to decrease. Ultimately, it seems it will become increasingly risky for the ECB to continue to postpone QE.
Market reaction

So what will be the markets’ reaction if ECB QE is announced? Given the record valuations already reached, some of the responses may be the opposite of what one might normally expect.

The US and UK experience is that the announcement of QE raises inflation expectations and cuts real yields, overall reducing nominal 10-year yields. But because the ECB has waited so long to act, both 10-year break-even inflation and 10-year real yields are already much lower than they were in the US when the Fed started its QE programmes.

An announcement of ECB QE is likely to raise inflation expectations much more than it would lower the real yield, meaning the nominal 10-year Bund yield would rise rather than fall, by 40-50bp. At shorter maturities (up to five years), though, the yield curve would remain flat, anticipating that policy rates will stay low for years after the inception of QE, as has been the case in the US, UK and Japan.

For the eurozone periphery, QE would see 10-year yield spreads over Germany fall to about 100bp as credit risk premiums diminished. But with Bund yields rising, this spread narrowing would probably not result in any meaningful fall in peripheral 10-year yields from their present levels.

Finally, it is likely that ECB QE would be moderately bearish for US and UK government bonds, as the prospect of effective stimulus for the euro area would remove one of the impediments to the normalisation of rates in the US and UK.


Laurence Mutkin is global head of G10 rates strategy at BNP Paribas


Fonte: FT

Marina, codinome instabilidade política e econômica.

Na democracia nem sempre o resultado é do nosso agrado e este é caso, ainda não concretizado, da eleição da Sra Marina para Presidente da Republica.  Ela deve ter lá seus meritos, mas confesso que, apesar   de todo o meu esforço, ainda não consegui encontra-los.  A retórica dela é impecável, ainda que longe da maestria do grande Cicero: no máximo a colocaria ao lado de Obama que, com uma bela retórica, conseguiu ganhar a vaga  da Hillary Clinton, que era a candidata muito melhor preparada. Deu no que deu e agora é tarde para chorar sobre o leite derramado. Felizmente, ainda não é o caso do Brasil:  a boa performance na pesquisa eleitoral no momento atual , não implica em vitoria certa nas urnas, exceto se o terceiro colocado jogar a toalha e reagir à queda, como se ela fosse um nocaute. Não me parece ser o caso. Melhor levantar,sacudir a poeira  e dar a volta por cima, como nos ensina um velho cantor popular.

Há candidatos para todos os gostos, mas seguramente Marina é a pior de todos. Não tanto pelas propostas, mas pelo histórico de incapacidade de fazer política devido ao seu messianismo que, como sabemos,  na política, não raro tem um forte componente autoritario. Ela acuso os dois maiores partidos, PT e PSDB, de serem responsaveis pela divisão do pais que ela e somente ela, poderia resolver liderando uma governo onibus, ou seja com a participação de todos. Dificil levar a serio este discurso , haja vista, a sua dificuldade de relacionamento com os membros do partido que a hospeda, para não mencionar sua participação no governo Lula. Divisão, conflito e a política baseada na idéia de predestinação, são as marcas do agir político da Marina. Se eleita, será um desastre. A repetição da trágica experiencia dos governos Janio e Collor.

Espera-se que a direita e a centro direita tenham aprendido um pouco com as aventuras em que se meteram na história do país no pós guerra e consigam resistir ao canto de sereia  marineiro. Instabilidade política e por consequencia instabilidade econômica não interessa a ninguem.

Martin Wolf: Opportunist shareholders must embrace commitment

Limited-liability, privately owned joint-stock companies are the core institutions of modern capitalism. These entities are largely responsible for organising the production and distribution of goods and services across the globe. Their role is both cause and consequence of the revolution in the scale and diversity of economic activity that has taken place over the past two centuries.

Almost nothing in economics is more important than thinking through how companies should be managed and for what ends. Unfortunately, we have made a mess of this. That mess has a name: it is “shareholder value maximisation”. Operating companies in line with this belief not only leads to misbehaviour but may also militate against their true social aim, which is to generate greater prosperity.

I am not the first person to worry about the joint-stock company. Adam Smith, founder of modern economics, argued: “Negligence and profusion . . . must always prevail, more or less, in the management of the affairs of such a company.” His concern is over what we call the “agency problem” – the difficulty of monitoring management. Others complain that companies behave like psychopaths: a company aiming at maximising shareholder value might conclude it would be profitable – and so perhaps even its duty – to pollute the air and water if allowed to do so. It might also use its resources to obstruct an appropriate regulatory response to such (mis)behaviour.

The economic argument for shareholder value maximisation and control is that, while all other stakeholders are protected by contract, shareholders are not. They therefore bear the residual risk. This being so, they need to control the company in order to align the interests of management with their own. Only then would they be prepared to make risky investments.

Yet, while shareholders do indeed bear risks in their role as the insurers of solvency, they are not the only stakeholders to do so. A host of others are also exposed to risks against which they cannot be fully protected by contract: long-term workers; long-term suppliers; and, not least, the jurisdictions in which companies operate. Moreover, shareholders, unlike others, and particularly employees, can hedge their risks by diversifying their portfolios. A worker cannot normally work for many companies at the same time and nobody can hedge employee income by owning shares in other people, except via taxation.

The doctrine of shareholder value maximisation has allowed us to believe that the existence of these long-lived, hierarchical and powerful entities has not changed the market economy fundamentally. But, as Colin Mayer of Oxford’s Saïd Business School argues in his splendid book, Firm Commitment, this approach also misses the true purpose of the company.


Companies, argues Professor Mayer, are a mechanism for sustaining long-term commitments. But such commitments will only work if it is costly for the parties to act opportunistically. Moreover, it is often in the interests of all parties to bind themselves not to behave in such a way. But, with an active market in corporate control, such commitments cannot be made. Those who make the promises may disappear before they can deliver.

These commitments take the form of implicit – or not fully specified – contracts. Why do we have to rely on implicit contracts? Long-term commitments could in theory be managed instead by trying to specify every eventuality. About a second’s thought makes it clear that this is impossible. It would not just be inconceivably complex and costly. It would come up against the deeper problem of uncertainty. We have little idea of what might happen in the next few months, let alone the next few decades. If people are to make long-term commitments, trust is the only alternative. But a company whose goal is whatever seems profitable today can be trusted only to renege on implicit contracts. It is sure to act opportunistically. If its managers did not want to do so, they would be replaced. This is because, as Prof Mayer argues: “The corporation is a rent extraction vehicle for the shortest-term shareholders.” Aligning managerial rewards to shareholder returns reinforces the opportunism.

In practice, many capitalist economies do mitigate the risks of shareholder value maximisation and the market in corporate control. This is true of continental Europe, notably German companies. But it is also, notes Prof Mayer, true in the US, where the idea that management should be protected against shareholders is widely accepted in practice, if not so much in theory. The country that has taken the idea furthest is the UK.

Prof Mayer argues rightly: “The defect of existing economic models of the corporation is in not recognising its distinguishing feature – the fact that it is a separate legal entity. The significance of this stems from the fact that it is thereby capable of sustaining arrangements that are distinct from those that its owners, its shareholders, are able to achieve.” It is, in other words, in the shareholders’ interests not to control companies completely. They need to be able to tie their hands.

Prof Mayer’s suggested solution is what he calls a “trust company”, one with explicit values and a board designed to oversee them. He justifies such a radical switch with his scepticism about the feasibility and effectiveness of regulation. Less radical would be to encourage companies to consider divergent structures of control. One might be to vest voting rights in shares whose ownership can be transferred only after a holding period of years, not hours. In that way, control would be married to commitment. One could also vest limited control rights in some groups of workers. Yet this is not to argue that committed long-term ownership is always preferable. Family control, for example, has both weaknesses and strengths.

The right way to approach governance is to recognise the big trade-offs in managing and governing these complex, vital and long-lived institutions. We should let 100 governance flowers bloom. But the canonical academic model of the past few decades will rarely be the best.


Martin Wolf


Fonte: FT

Jonathan Fenby: After decades of stalling, a day of reckoning for France

After two years of compromise, France’s President Normal has met his moment of truth. The stand-off between François Hollande, the Socialist head of state, and the left wing of his own party that erupted at the weekend, resulting in the purging of anti-austerity leftwingers from the government, has ramifications stretching far beyond the immediate confrontation. These will have significant implications both for the way France is run and for Europe. There is a distinct possibility of a period of chaos, reflecting the deep concerns at the root of the morosité under which the EU’s second state is labouring.

The catalyst was in itself no great surprise. Arnaud Montebourg, the outspoken leftwing economy minister, said in a speech and newspaper interview that conformism was an enemy and “my enemy is governing”. He added: “France is a free country which shouldn’t be aligning itself with the obsessions of the German right,” and called for “just and sane resistance”. He has followed an anti-German, anti-austerity line since the 2012 presidential election. As Mr Hollande has moderated the reflationary, high-tax measures on which he was elected, his minister has looked increasingly out of step. But when Mr Hollande appointed centre-left Manuel Valls as his prime minister in March after catastrophic local elections, Mr Montebourg was promoted along with his ally, Benoît Hamon, the education minister.


This was typical of Mr Hollande, who spent much of his career as a backroom party manager. For all the institutional power of his office, he is weaker than predecessors because, unlike them, he is a creature of his party rather than having moulded it to do what he wants. He is an accidental president who got where he is because of the scandal that enveloped Dominique Strauss-Kahn, who would otherwise have been the natural Socialist candidate in 2012.

Mr Valls was popular in the country – though less so now – and a president with an approval rating below 20 per cent needs all the help he can get. But the Socialist ranks see him as dangerously social democratic and an advocate of tough law and order of a piece with the left’s bête noire, former president Nicolas Sarkozy. Mr Montebourg’s anti-capitalist, anti-German rhetoric, meanwhile, goes down well with party members and backbenchers in the National Assembly.

Now, Mr Montebourg has thrown down the gauntlet and his ally, Mr Hamon, announced his departure on television news. The former economy minister said that France has to stop the economy being sunk by austerity, and he and Mr Hamon claim there is an majority in the EU opposed to the policies of German Chancellor Angela Merkel. Mr Hollande has to react if he is not to lose all credibility. He has told Mr Valls to form a government “consistent with the direction set for the country”. That means cutting the budget deficit and easing taxes on business to inject some life into the flatlining economy, cutting double-digit unemployment and getting to grips with structural factors that make France uncompetitive.

It is an agenda administrations of left and right have put off since the collapse of the race for growth under François Mitterrand in the 1980s, when Mr Hollande was a government adviser. The stakes are heightened by the political environment that has deteriorated to the point where some ask whether the Fifth Republic founded in 1958 can still function.

Mr Valls will form a cabinet of like-minded politicians, possibly reaching beyond Socialist ranks. That, and a rebellion by Mr Montebourg and ministers of his stripe claiming to represent true socialism, could split the party, costing it its parliamentary majority. A general election would be, primarily, a referendum on Mr Hollande, who pledged to be a “normal president” but has put in an abnormally ineffective performance. Unless he could stage a miraculous revival, he would inflict defeat on his supporters. The mainstream right UMP party would form a government in a period of cohabitation between a president and his opponents.


Such a grand coalition might be the only way to achieve structural reform but would face serious practical problems in governing. The mainstream right is divided between Mr Sarkozy on the comeback trail and former premier Alain Juppé, who this month threw his hat into the 2017 presidential ring. Marine Le Pen, leader of the far-right National Front, enjoys the highest personal approval ratings; because of the electoral system, the party would probably win few seats but that would enable it to step up its assault on the system. Meanwhile, Socialist rebels would form an opposition bloc on the other side, with vocal support from the hardline Left party of Jean-Luc Mélenchon.

This would bode ill for the euro, and for EU co-operation. The tendency to blame outsiders – primarily Mrs Merkel – for France’s woes would flourish amid the rising concern about national identity that lies at the root of the nation’s “morosité”.




Jonathan Fenby is author of ‘France on the Brink’

Barry Eichengreen: The rules of central banking are made to be broken

The Federal Reserve’s Jackson Hole conclave may be dominated by technical discussions of abstruse concepts such as the non-accelerating inflation rate of unemployment, but one also detects an undercurrent of nostalgia. Central bankers are wistful for a past when monetary policy was conventional and its makers could focus on adjusting interest rates.

Specifically, the assembled are eager to end the extended period of zero interest rates. They want to wind down their purchases of mortgage-backed securities and asset-backed commercial paper. These programmes involve interventions in financial markets. They may have undesirable side effects, encouraging investors to over-reach in the search for yield. Their benefits can be questioned. Policy makers are anxious to bring them to an end.

This instinct has led to calls, not least in the Federal Open Market Committee, for the US central bank to raise interest rates. It has prompted a noisy minority within the Bank of England’s Monetary Policy Committee to do likewise. It has discouraged the European Central Bank from pursuing unconventional policies of its own.

It is a dangerous sentiment, this yearning for an idealised past in which central bankers could focus on moving rates by a notch or two, this way or that – much as a physician adjusts the drugs administered to a patient with high blood pressure. For as long as they have existed, central banks have been in the business of buying and selling not just Treasury bonds but also commercial paper and sundry other corporate obligations.

Making monetary policy has always been a complicated craft. Whenever there was an effort to reduce the art of central banking to a simple formula, be it an exchange rate target under the gold standard or an inflation target more recently, other problems – such as threats to financial stability – have had an awkward tendency to intrude. They will undoubtedly do so again. That should be a caution to those seeking to tie the Fed to algorithms such as the Taylor rule, a simple formula that purports to say how interest rates should respond to changes in inflation and output.

Why then did modern central bankers embrace the mistaken notion of mechanistic monetary policy? Part of the explanation is serial malpractice by central banks in the 1970s and 1980s. If policy makers could not be trusted to exercise discretion wisely, better to bind them to a simple rule.

Another factor was the increased sophistication of analytical models and methods. Fed staff first undertook a project using mathematical techniques adapted from engineering science to guide policy in the 1970s. Others quickly followed, believing that if the structure of the economy could be represented as a set of fixed mathematical relationships, interest rates could easily be fine-tuned.

Milton Friedman was among the sage observers who were careful not to take the models too literally. As early as the 1940s, he understood that uncertainty about the structure of the economy was too great. But the spurious precision of these techniques, and the false scientism to which they gave rise, encouraged central bankers to believe that their job was to implement an optimal feedback rule, barely more complex than the one that switches on the compressor before the contents of the icebox begin to melt.

Such an idealised world never existed and never will. Financial innovation marches onwards. The more financially sophisticated the world, the more difficult it is for policy makers to draw the line between money and credit. Threats to financial stability are like a jack-in-the-box. You can close the lid, but you cannot keep the jester down.

It is fanciful to suppose that central banks can regulate the economy while responsibility for financial stability is hived off to some entirely separate government agency. Nothing better demonstrates this than the UK’s experience with the Financial Services Authority, the regulator whose disastrous 12-year tenure culminated in the run on Northern Rock.

The question is where to draw the line. If it is appropriate for central bankers to warn against excessive risk taking and dubious financial practices, should they also weigh in on fiscal policies? On structural reform? On income inequality?

The temptations are great. Before weighing in on an issue, central bankers should apply three tests.

First, do they have special expertise? The BoE was put in charge of rationalising the British textile industry in the 1920s, and the results were not great. The central bank, as a bank, has special expertise on issues of money and credit, but not obviously elsewhere. It should mind the gap.

Second, the issue in question should have big implications for the conduct of monetary policy. For instance, given the high level of public debts in Europe, failure to reduce them could place intense pressure on the ECB to inflate. The ECB could reasonably weigh in on the fiscal problems of Europe’s heavily indebted governments. This, however, is not a licence to pontificate on fiscal policy generally.

Third, is the issue one the central bank can address without losing sight of its fundamental responsibility for price and financial stability? The ECB has resisted loosening monetary policy for fear that such a stimulus would reduce the perceived urgency of reforms. This misguided priority has thrust Europe to the verge of deflation. It is a prime example of what a central bank should not do.

Knowing where to draw the line is difficult. Like it or not, central banking is still more art than science.


Barry Eichengreen is author of ‘Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History’

Dramas to match scenery at Jackson Hole

The annual August summits of the world’s top central bankers in Jackson Hole, Wyoming, have a dramatic mountain backdrop, but the conference titles are not exactly works of blockbuster film writers.

“Re-evaluating labour market dynamics”, the topic of this weekend’s symposium, appears deliberately dull, as if intended to keep financial markets in a summer slumber. Yet, like James Bond film titles, Jackson Hole summits have a habit of capturing the zeitgeist.

Famously, the 2005 summit was meant as an appreciation of Alan Greenspan’s years as US Federal Reserve chairman. In the event, it is remembered for propitious warnings about risks in the financial system from Raghuram Rajan, the International Monetary Fund’s then-chief economist who now heads India’s central bank.

Although academic sounding, this year’s conference subject is of wide significance. Labour market dynamics could determine the pace of monetary policy tightening in the US and UK; the latter may yet lead a rate-rising cycle.

With central banks maintaining their mesmerising grip over financial markets, much attention will be paid to any signals out of Jackson Hole. Even six years after Lehman Brothers investment bank collapsed, the challenges facing central banks have not diminished. Sensitivity is high to a possible turn in the interest rate cycle, which has driven yields to historic lows. A big risk is of fresh disruption as monetary policy makers react to widening divergences in performance between the world’s main economies.


Cycling and hiking

Despite the US’s relative robustness, expectations are for more dovishness from Janet Yellen, the Fed chairwoman, who is expected to see significant slack remaining in the country’s labour market and no need for early US monetary policy tightening, even as the Fed’s “quantitative easing”, or asset purchase programme, comes to an end.

But in the private discussions in Jackson Hole, where popular activities are hiking (as in walking, not raising interest rates) and cycling, the Fed’s dovishness may not be appreciated by the Bank of Japan and European Central Bank. Both would prefer a more hawkish Fed that led to a stronger dollar.

Haruhiko Kuroda, BoJ governor, arrives in Jackson Hole amid rising market scepticism about whether his aggressive quantitative easing will successfully drag Japan out of decades of deflation. Labour market dynamics are crucial in Japan, too. Wage growth is needed to generate inflation. While Japanese unemployment is low, demographics and productivity trends could thwart Mr Kuroda’s ambitions. A further bout of yen weakness would help.

Similarly, a weaker euro would help Mario Draghi, attending a Jackson Hole summit for the first time as ECB president. He is battling to prevent the eurozone falling into Japanese-style deflation. With eurozone second-quarter growth data last week showing the region stagnating, the ECB faces market pressure for Fed-style quantitative easing.
Escape routes

Mr Draghi, whose economics PhD is from the Massachusetts Institute of Technology, at least speaks a similar language to the Fed. Traditionally, the ECB disliked discussing “output gaps”, or measures of economic slack, which it regarded as impossible to measure in a timely fashion. But Mr Draghi happily uses such concepts when discussing ECB monetary policies.

With unemployment still at 11.5 per cent of the labour force, there is plenty of “slack” in the eurozone. But there is widespread scepticism about whether eurozone QE would work, not least from Jens Weidmann, the Bundesbank president (not attending Jackson Hole this year). A further depreciation of Europe’s single currency would offer Mr Draghi an alternative escape route.

Like cyclists, central banks are most effective when they are all travelling in the same direction, as immediately after Lehman Brothers’ collapse. Joachim Fels, international economist at Morgan Stanley, argues that the Fed, ECB and BoJ currently form an easy-money “peloton”, the group of cyclists at the front of a race who bunch together to reduce wind resistance.

Breaking away to raise interest rates is hard for smaller central banks because of the headwinds created, for instance, by an appreciating currency; a stronger pound would delay a Bank of England interest rate rise.

It might be easier for the Fed to pull apart, however, and divergences in performance between the US, eurozone and Japanese economies suggest the central bank peloton should break up. Whether that happens, and what turbulence it creates, could determine the script followed by financial markets once the central bankers have returned from their Jackson Hole weekend.


Ralph Atkins


Fonte: FT

Draghi has to do, as well as say, whatever it takes

Mario Draghi does his redoubtable best to reassure us: the eurozone recovery, he tells us, is “on track”.

Rather than face the reality of stagnation, the president of the European Central Bank seems to have adopted the leitmotif of Olli Rehn, the former EU economic and monetary affairs chief, who for the past three years has asserted in defiance of all evidence that a turning point was in sight.

At this year’s annual conference of central bankers at Jackson Hole, Mr Draghi should change tack. His promise two years ago to do “whatever it takes” to save the euro captured the attention of markets. Now he should say what he will do to save the economy.

True, Mr Draghi faces an unenviable predicament. Some of his colleagues on the ECB governing council have opposed expansionary measures. ECB policy has therefore been based as much on words as on action. It is understandable that Mr Draghi might want to keep up a brave front. His promise to keep monetary union intact – and his vow that “believe me, it will be enough” – saved the eurozone. This was a huge achievement. But it did not lay the basis for a sustained recovery.

The clouds over the eurozone economy began to accumulate long ago. It is no use blaming unrest in Ukraine and the Middle East for its flagging economic performance. The road to stagnation did not originate in Gaza and Kiev, and there can be no doubt that it runs through Frankfurt and Brussels. Perceptions are important, but you cannot conjure an economic recovery by summoning the confidence fairy. There is no substitute for pragmatic, non-ideological policies that accept and confront the data – which tell us that current policies are failing.

Economic commentators conventionally define a recession as two consecutive quarters of declining output. That narrow definition belies economic reality, however. Under the chairmanship of economist Philippe Weil, the business cycle dating committee at the Centre for Economic Policy Research identifies economic cycles by looking at a wide range of indicators. It has twice warned that the meagre signs of a rebound in the eurozone since early 2013 were not enough to declare the end of the double-dip recession that started in the third quarter of 2011. It signalled concern that the economy could again go into reverse, or that sluggish growth could become the new, dismal normal of the eurozone.



The second quarter data are now in. Most of the optimists are finally silent. The three largest eurozone economies all failed to register growth. Observers are busy revising their output forecasts downward. Inflation is at 0.4 per cent, against an objective of below but close to 2 per cent. This is not a recovery, not even a fragile one. Nor is it a return to recession. It is a continuation of stagnation. We cannot expect that under present policies, and with weak global trade growth, a depreciation in the euro will help much. Nor will the provision of cheap funding under the ECB’s targeted longer-term refinancing operation. A comprehensive assessment of bank balance sheets will, if properly conducted, renew confidence in eurozone lenders, some of which have been under a cloud since the crisis struck in 2008. But this will not in itself lift investment demand.

European citizens must hope that their policy makers, in Frankfurt and in Brussels, will abandon further attempts to reassure us, and abandon their one-sided mantra of structural reform. The acute, pressing problem is aggregate demand.

Repairing the credit system, implementing serious reforms of state expenditure and taxation, creating more flexible labour markets, finally opening the services market to cross-border competition – all are indeed very important. But they will not liberate the eurozone from stagnation.

Lightening the load of debt on private and public sector balance sheets requires a convincing return to growth. That will not come from policies such as raising bank capital and primary fiscal surpluses, which do not stimulate economic activity.

Seriously expansionary monetary and fiscal policies are both necessary and urgent. When will the ECB acknowledge that it is so far from achieving its inflation mandate that the eurozone risks slipping into deflation? When will it do “whatever it takes” to achieve it? Fiscal austerity was intended to bring public sector debt under control. Yet debt-to-GDP ratios have actually risen as a result. When will the commission acknowledge that its strategy has failed?

Much has been said about the need to maintain the credibility of European monetary institutions. Too often, that has been an excuse for inaction. Yet a return to economic growth is what is needed to restore credibility. Failure and continued stagnation could destroy the ECB, the European Commission, and the European project.



Richard Portes is professor of economics at London Business School. This article was written with Philippe Weil of Université Libre de Bruxelles



Fonte: FT

Adam Posen: Keep rates low until the hidden jobless return to work

This year’s annual conference of central bankers in Jackson Hole is focused on the right question: how to determine the extent of labour market slack in the US and other advanced economies. This is the most pressing issue for Janet Yellen, Federal Reserve chairwoman, and her colleagues, given the limits of what monetary policy can do about structural unemployment.

There has been a legitimate debate over what lies behind the low US labour force participation rate, which measures the proportion of adults who are either working or looking for work. Some blame demographics, with two large cohorts (ageing baby boomers and women of child-bearing age) both disproportionately likely to leave the workforce. Eight years ago, a group of Federal Reserve staff predicted in an academic paper that labour force participation would fall to about 63 per cent this year for precisely this reason. That turned out to be eerily close to reality, suggesting the US may be at full employment. If so, there is nothing the Fed can do to improve matters; it would cause inflation if it tried.

Others take a different view, arguing that wages are being held down in areas of the country where statisticians count more people as unemployed or no longer looking for work. This pattern is confirmed by analysis of employment and wage data for different localities and states. The implication is clear: some portion of those who are seen in official statistics as having left the workforce are nonetheless viewed by employers as prospective hires, weakening the position of workers in wage talks.

This statistically significant pattern offers a better picture of actual hiring decisions than national demographic data. It takes account of local conditions that might obscure the true picture. And it explains why wages have not been rising nationally, as one would expect if the US were approaching full employment.

Still, any decision by the Federal Open Market Committee to hold off raising interest rates will not be made on data alone. At least two other judgments are involved.

The first concerns the relative costs of erring in one direction or another, given the unavoidable uncertainty. For most of the past three decades central bankers have assumed that allowing inflation to overshoot would lead to explosive upward spirals in prices. By contrast, overshooting on unemployment was assumed to have little lasting effect. The risks were seen as asymmetric. No chances were to be taken with inflation for the sake of employment.

It has become clear, however, that those assumptions should be reversed under conditions of persistent low inflation and slow growth. Even if it overshoots briefly, people are unlikely to expect high inflation to stick in the face of weak demand, particularly for labour; expectations are well-anchored. This was demonstrated by the experience in the UK in 2010-11, when the Bank of England’s Monetary Policy Committee held its fire on interest rates as inflation briefly spiked due to short-term shocks, and inflation came back down nonetheless.

Meanwhile, there is growing evidence that long-term unemployment, or even underemployment, does lasting damage to the ability of younger people to find work that pays well throughout their working lives. Under current conditions it is labour slack that does lasting damage, whereas brief inflationary episodes will have only a transient impact.

The second issue is whether keeping interest rates low will do some other form of harm, which outweighs the potential benefits of large numbers of people returning to work. The most obvious concern, which has been mentioned by a number of former senior officials, is for financial stability. After the global financial crisis, no one can dispute that central banks have to take financial stability into account when making policy. But that does not mean that they must rush to raise interest rates.

Financial imbalances can be tackled directly using macroprudential tools, which work by constraining the amount of credit that banks are allowed to extend or that borrowers can access. These are being used in China, Singapore, the UK and elsewhere. They have proved effective when applied aggressively. By contrast, increasing interest rates has little effect on asset price booms, despite repeated calls to use interest rates for financial rather than cyclical stabilisation.

This is the conclusion that ought to emerge from Jackson Hole. The Fed should hold off raising rates, for the sake of fuller employment.

There are clear indications that wage growth is being kept down by the overall state of the labour market, and raising rates would further depress demand. Allowing excess unemployment to persist is likely to do more lasting damage than allowing inflation to rise above the target – and any such overshoot will be temporary. Concerns about financial stability should be addressed directly, not through the blunt instruments of monetary policy.

As Fed chairman in the 1980s, Paul Volcker was right to resist calls to loosen monetary policy in the face of high unemployment, at a time when spiralling inflation would have done lasting damage. Now the risks are reversed, and the right course is to hold off rate rises to tackle persistent unemployment that threatens permanent harm. This, too, will attract criticism. But, like their predecessors, Ms Yellen and the Federal Open Market Committee need to hang tough.


Adam Posen is president of the Peterson Institute for International Economics in Washington

Fonte: FT

The Fed’s regimen will not remedy Europe’s ills

Once again, these are gloomy days for the eurozone. The yield on German 10-year government debt dipped below 1 per cent for the first time last week, signalling that investors expect growth to remain anaemic and leading to calls for the European Central Bank to start a full-blown quantitative easing programme, buying government bonds.

This is the path the US Federal Reserve took in 2008. But it would be a mistake for the ECB to follow. Bond yields are already at record lows; reducing them further is unlikely to stimulate investment in an economy that, unlike America’s, is still funded largely through the banking system rather than the bond markets. Some argue that quantitative easing would weaken the euro. This would be welcome, but it will not happen while the Fed stays on its present path.

There are times when aggressive monetary policy makes a difference. This is the lesson that Ben Bernanke, the former Fed chairman, taught the world’s central bankers in the aftermath of the financial crisis. But Europe’s biggest problems are structural, and QE will not fix them.

The German economy, at least, is still fundamentally strong. The contraction in the second quarter reflects a normalisation following the previous quarter, when construction activity during a mild winter fuelled annualised growth of 3.6 per cent. Longer-term, the outlook for Germany will deteriorate if the government continues with retrograde steps such as raising the retirement age. But that is another story. The situation has also improved in countries that are emerging from gruelling rescue programmes imposed by the International Monetary Fund and the European Commission. Spain and Portugal posted annualised growth of more than 2 per cent last week. Even Greece is making progress.

The eurozone still has deep problems, however. France and Italy are in a bad way, and no amount of QE can bring them back to growth. Their governments need to reform their labour markets, reduce taxes that weigh on business, free companies from red tape and continue to repair their public finances. Merely talking about such reforms is not enough.

Spain is among the programme countries whose recent experience proves that structural change is possible. Gerhard Schröder, Germany’s socialist chancellor between 1998 and 2005, introduced far-reaching labour market reforms that in many ways laid the foundation for the country’s recent resilience. But QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out.

That a bond-buying programme is unlikely to succeed is not, however, the reason why it should not be tried. After all, another lesson from the crisis is that in the face of impending disaster, you should try different approaches until something works. The trouble is that there are costs associated with embarking on aggressive QE in the eurozone. Yet virtually no one is pointing this out.

As the Basel-based Bank for International Settlements has urged, QE would create further distortions in financial markets. Market participants already witness these every day. Certain technology stocks, covenant light loans and government bonds are obvious candidates. Things would surely become worse if the ECBdecided to copy the Fed. These distortions will ultimately lead capital to flow into mispriced financial assets, instead of financing investment in new productive capacity. This, in turn, will undermine the proper functioning of the economy, leading in the end to lower potential growth – the opposite of what monetary activism is supposed to achieve.

The ECB should not follow the path of the Fed. But that does not mean that Europe’s central bankers are powerless. The key is to mend the ailing European banking system. There will be no robust European growth without properly capitalised European banks. It is certainly possible that targeted asset purchases could play a role in reinvigorating the eurozone banking system if they succeed in reducing real interest rates for companies and households. But they cannot achieve this result on their own. Banks can now borrow money much more cheaply than in July 2012, but they have not passed the benefits on to customers – either by lending more, or charging lower interest rates.

Mario Draghi is right to prioritise fixing the banks. That can happen only if the ECB president continues to focus all his energy on the comprehensive assessment of eurozone banks. Swift action is essential to rectify any capital shortfalls that are discovered.

The Fed’s bond-buying programme appears to have contributed to the recovery of the US economy. But Europe’s growth problems are different. They lie in the structural ills of the French and Italian economies, and the continuing ill health of the eurozone’s banks.

No amount of QE will cure this malaise. Europe needs its own ideas. It cannot simply copy the Fed.


Philipp Hildebrand is vice-chairman of BlackRock and former chairman of the governing board of the Swiss National Bank


Fonte: FT

David Gardner: Uncaged demons are tormenting the Middle East

At the start of this year, shortly after the US and other world powers reached an interim deal with Iran to negotiate further on its nuclear programme, The New Yorker magazine published a fascinating, discursive interview with Barack Obama. The US president floated the idea of a sort of competitive equilibrium in the Middle East to replace the sectarian struggle within Islam between Sunni and Shia, and the proxy wars across the region pursued by Saudi Arabia and Iran from each side of this schism.

If satisfactory safeguards could be agreed on Tehran’s nuclear ambitions, and a wider rapprochement and international reintegration of Iran were to follow, “you could see an equilibrium developing between Sunni, or predominantly Sunni, Gulf states and Iran, in which there’s competition, perhaps suspicion, but not an active or proxy warfare”, the president said. “If you can start unwinding some of that [hostility], that creates a new equilibrium”, which would “allow us to work with functioning states to prevent extremists from emerging there”, he went on.

Alas, almost as he was speaking, the Islamic State of Iraq and the Levant, the jihadi movement that hijacked the mainly Sunni uprising in Syria as the west declined to give mainstream rebels the means to fight Bashar al-Assad’s regime, started its surge into Iraq. In January, Isis took Fallujah and Ramadi in western Iraq. From June this seemingly elemental force seized Mosul, Tikrit and a string of towns in the north and centre of the country, pressing south to Baghdad and east into Kurdistan.

Six months on, Syria and Iraq are not functioning states. Isis, riding a wave of Sunni rebellion against Iran-backed regimes in Damascus and Baghdad, holds a third of both countries. The extremists – and they do not come much more extreme – have declared a jihadi caliphate in the heart of a disintegrating Middle East, and are trying to punch a corridor to the Mediterranean.

Mr Obama’s idea of a self-regulating balance of power has dissolved in an acid cocktail of state failure, sectarian savagery and a jihadist rampage so confident that almost every armed force in the Levant is melting before its onslaught.

Is the idea of resocialising Iran into the geopolitics of the Middle East and the world – which would be as historic for Mr Obama as American rapprochement with China was under Richard Nixon – still a runner? Saudi Arabia, the leading Sunni Arab power, and Iran, its Persian Shia rival, have both used sectarianism as a galvanising weapon in their struggle for regional power. Wahhabi fundamentalism is the ideological backbone of the Saudi absolute monarchy and has always abominated Shiism as a polytheist heresy, like the jihadis of Isis who pledge to annihilate it. The Wahhabis first sacked Kerbala and Najaf, the great Shia shrine cities of Iraq, in 1801-02 – and Isis promises to do so again. Iran became a theocracy after the 1979 Islamic Revolution but, unlike the Wahhabis, has no theological animus against other mainstream religions. Yet both countries have uncaged sectarian demons they cannot control.


One strand of Iran’s thinking, visible in the nuclear talks, is that it wants to secure recognition as a legitimate regional power and is alarmed by the tide of sectarianism roaring across the Middle East and lapping closer to its borders. But another has been complacent, aggressive and overreaching, lulled by the ease with which Tehran built an Arab Shia axis from Baghdad to Beirut after the US-led invasion of Iraq in 2003 – to which the Sunni states led by the Saudis will never resign themselves.

This Iranian triumphalism is epitomised by General Qassem Soleimani, commander of the al-Quds Force, external spearhead of the Revolutionary Guards. In February, as al-Quds auxiliaries such as Hizbollah, the Lebanese paramilitaries, were clearing the road from Damascus to the Syrian coast of anti-Assad rebels, he was exulting that “the countries that claim to be leading the Muslim world cannot take over from Iran as the leader of the Islamic world until tens of years later”.

Yet as the ostensible master of the seamless battlefield of the Levant, Gen Soleimani and his masters in Tehran have done little to restrain their local clients. Mr Assad, a ward of the Iranian state, has lost half his country and reduced much of the rest to rubble, killing 170,000 people. Using Hizbollah as shock troops in Syria has blown back into and destabilised Lebanon. Iran’s erstwhile ally in Baghdad, the Shia Islamist prime minister Nouri al-Maliki, hollowed out Iraq’s army with corrupt placemen and emulated the Assads by dropping barrel bombs on Fallujah. Mr Maliki is at last on the way out, with Iran’s complicity, but his sectarian policies have already swelled the ranks of Isis. For a man with a reputation as a consummate poker player, Gen Soleimani has overplayed his hand.

Mr Obama rightly judged that an Iran with a stake in solving the problems of the Middle East, rather than incentives to destabilise it, could be transformative. But the region is very far gone, descending daily to new depths of violence.

If these crumbling states can be reassembled, it will require a pan-communal effort to provide equal citizenship and secure diversity, through strong confederal institutions that nevertheless command assent by devolving power and defending minority rights. But this is theoretical unless this demonic sectarian spiral can be broken. And that will not happen until Saudi Arabia and Iran decide it has to be.


David Gardner


Fonte: FT

The worrying data on Italy’s recession

The latest data release of the Italian second quarter gross domestic productshows that the economy shrank 0.2 per cent, confirming that the country is back in recession. This is worrying in several ways. It brings GDP below the 2000 level, making Italy the worst performer since the start of the European monetary union. The slowdown in exports, the only component of GDP that had grown in the recent past, shows the underlying fragility of the country’s economy and its lack of competitiveness. The negative result, together with the very low level of inflation, makes debt sustainability more difficult to achieve, thus raising new concerns in financial markets.

The most worrying aspect, however, is that the recent number proves once again how wrong economic forecasts have been about the Italian economy. At the end of last year, the consensus of Italian and international institutions projected the 2014 GDP growth at about 0.6 per cent. The Italian government courageously aimed at 0.8 per cent. These forecasts were revised down earlier this year – and lately by the International Monetary Fund – to 0.3 per cent. The last release will probably induce a further correction towards zero.

This is the fourth year in a row that Italy’s growth forecasts have proved to be over optimistic. The year 2011 started with the expectation of a 1.1 per cent growth (according to the European Commission) and ended with only a 0.4 per cent rise in GDP. In 2012 the forecast error was even bigger, with an initial expected growth of 0.1 per cent and a final 2.3 per cent contraction. In 2013 the projected recession was initially estimated at 0.5 per cent but in the end resulted in a fall of 1.9 per cent. In the past four years the one-year-ahead forecast errors have been all of the same sign, and on average by 1.2 per cent a year (expected growth of 0.4 per cent against a final outcome of -0.8 per cent).

The magnitude and consistency of the error suggests that the available economic models no longer represent an adequate instrument to understand what is really happening in the Italian economy. In particular, they do not seem to capture the effects of the loss of competitiveness accumulated by Italy in a changing global environment.

These shortcomings represent a significant problem not only for professional forecasters but also for policy makers, who lack an essential tool to calibrate their actions. There is a wide consensus, even in Italy, that the country needs wide-ranging reforms. However, these reforms have been difficult to implement, first because of the complexity of the institutional system; and second because of opposition by powerful interest groups. The reforms brought forward by the the government of Prime Minister Matteo Renzi in order to change the electoral law and eliminate the “perfect” bicameral parliamentary system (where the lower house and senate hold equal powers), which are expected to be approved shortly, tackle the first aspect. They will also make it easier to fight against conservative forces that oppose change. However, when it comes to the substance of economic reforms, which must address the critical areas where Italy has lost competitiveness – such as the bureaucracy, the judicial system, the tax system, and the labour markets – there is a risk of underestimating how deep and far-reaching they need to be.

The first announcements that have been made suggest that the proposed changes might be marginal and expected to be implemented within a relatively long time horizon – the government announced a 1,000-day programme of reform. The recent GDP release should instead make the case for more fundamental changes, if not a complete overhaul of the economy. Without such reforms growth is likely to stagnate or decline.

The problem is that the economic case for such a conclusion has not been made in a clear and consistent way, in particular by international institutions. As long as economic forecasts continue to project a recovery over the coming year, the case for adopting a minimalistic approach and for postponing action will be strengthened. Indeed, why should political authorities accelerate the reform agenda if next year’s GDP growth bounces back, to above 1 per cent as projected by the IMF? Why should they incur the political cost of reforms if the recovery is around the corner?

But what if these forecasts prove wrong yet again, as in the past few years? It will confirm that prevailing economic models are useless. More importantly, it will entail a loss of precious time and political capital. The trust in national and international institutions would be further undermined.

When it comes to Italy, forecasters should thus be more humble and revise their models to reflect more closely the underlying economic trends. Policy makers, on the other hand, should stop calibrating their reforms on prevailing economic models. They should revert instead to the forgotten Lisbon Agenda, initiated in 2000. The aim is to identify the best performers in crucial economic areas, so as to create an incentive for emulation. Economic reforms should thus be targeted at copying best performers, concerning goods and labour markets, tax systems, judiciary infrastructure and bureaucracy. Concerning the labour market, for instance, the recent reform implemented in Spain – which is at the origin of the country’s recovery – should represent one of the main benchmarks.

The important message for Italy’s policy makers, and for the citizens, is that without these reforms income will continue to stagnate at best, and may even decline, especially on a per-capita basis, putting at risk the wellbeing of society and the wealth accumulated over the past decades. The best way to put public finances back onto a safe path is to revive Italy’s growth, through fundamental and far-reaching reforms, rather than by taking short-term budgetary measures. The expectation that growth will come back by itself – just because forecasters say so – and will solve Italy’s longstanding problems is at best a hope, at worse an illusion. And to borrow a phrase from Rudy Giuliani, former mayor of New York, hope is not a strategy.

Lorenzo Bini Smaghi is a former member of the executive board of the European Central Bank and currently visiting scholar at Harvard’s Weatherhead Center for International Affairs and at the Istituto Affari Internazionali in Rome




Fonte: FT

Tim Harford: Monopoly is a bureaucrat’s friend but a democrat’s foe

“It takes a heap of Harberger triangles to fill an Okun gap,” wrote James Tobin in 1977, four years before winning the Nobel Prize in economics. He meant that the big issue in economics was not battling against monopolists but preventing recessions and promoting recovery.

After the misery of recent years, nobody can doubt that preventing recessions and promoting recovery would have been a very good idea. But economists should be able to think about more than one thing at once. What if monopoly matters, too?

The Harberger triangle is the loss to society as monopolists raise their prices, and it is named after Arnold Harberger, who 60 years ago discovered that the costs of monopoly were about 0.1 per cent of US gross domestic product – a few billion dollars these days, much less than expected and much less than a recession.

Professor Harberger’s discovery helped build a consensus that competition authorities could relax about the power of big business. But have we relaxed too much?

Large companies are all around us. We buy our mid-morning coffee from global brands such as Starbucks, use petrol from Exxon or Shell, listen to music purchased from a conglomerate such as Sony (via Apple’s iTunes), boot up a computer that runs Microsoft on an Intel processor. Crucial utilities – water, power, heating, internet and telephone – are supplied by a few dominant groups, with baffling contracts damping any competition.

Of course, not all large businesses have monopoly power. Tesco, the monarch of British food retailing, has found discount competitors chopping up its throne to use as kindling. Apple and Google are supplanting Microsoft. And even where market power is real, Prof Harberger’s point was that it may matter less than we think. But his influential analysis focused on monopoly pricing. We now know there are many other ways in which dominant businesses can harm us.

In 1989 the Beer Orders shook up a British pub industry controlled by six brewers. The hope was that more competition would lead to more and cheaper beer. It did not. The price of beer rose. Yet so did the quality of pubs. Where once every pub had offered rubbery sandwiches and stinking urinals, suddenly there were sports bars, candlelit gastropubs and other options. There is more to competition than lower prices.

Monopolists can sometimes use their scale and cash flow to produce real innovations – the glory years of Bell Labs come to mind. But the ferocious cut and thrust of smaller competitors seems a more reliable way to produce many of the everyday innovations that matter.

That cut and thrust is no longer so cutting or thrusting as once it was. “The business sector of the US economy is ageing,” says a Brookings research paper. It is a trend found across regions and industries, as incumbent players enjoy entrenched advantages. “The rate of business start-ups and the pace of employment dynamism in the US economy has fallen over recent decades . . . This downward trend accelerated after 2000,” adds a survey in the Journal of Economic Perspectives.

That means higher prices and less innovation, but perhaps the game is broader still. The continuing debate in the US over “net neutrality” is really an argument about the least damaging way to regulate the conduct of cable companies that hold local monopolies. If customers had real choice over their internet service provider, net neutrality rules would be needed only as a backstop.

As the debate reminds us, large companies enjoy power as lobbyists. When they are monopolists, the incentive to lobby increases because the gains from convenient new rules and laws accrue solely to them. Monopolies are no friend of a healthy democracy.

They are, alas, often the friend of government bureaucracies. This is not just a case of corruption but also about what is convenient and comprehensible to a politician or civil servant. If they want something done about climate change, they have a chat with the oil companies. Obesity is a problem to be discussed with the likes of McDonald’s. If anything on the internet makes a politician feel sad, from alleged copyright infringement to “the right to be forgotten”, there is now a one-stop shop to sort it all out: Google.

Politicians feel this is a sensible, almost convivial, way to do business – but neither the problems in question nor the goal of vigorous competition are resolved as a result.

One has only to consider the way the financial crisis has played out. The emergency response involved propping up big institutions and ramming through mergers; hardly a long-term solution to the problem of “too big to fail”. Even if smaller banks do not guarantee a more stable financial system, entrepreneurs and consumers would profit from more pluralistic competition for their business.

No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.

As human freedoms go, the freedom to take your custom elsewhere is not a grand or noble one – but neither is it one that we should abandon without a fight.


Tim Harford


Fonte: FT

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Deirdre McCloskey: Equality lacks relevance if the poor are growing richer

Making men and women all equal. That I take to be the gist of our political theory.”

This rejoinder to rightwingers who delight in rank and privilege is spoken by Lady Glencora Palliser, the free-spirited Liberal heroine of Anthony Trollope’s Phineas Finn. It encapsulates the cardinal error of much of the left.

Joshua Monk, one of the novel’s Radicals, sees through it. “Equality is an ugly word . . . and frightens,” he says. The aim of the true Liberal should not be equality but “lifting up those below him”. It is to be achieved not by redistribution but by free trade, compulsory education and women’s rights.

And so it came to pass. In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics.

In relative terms, the poorest people have been the biggest beneficiaries. The rich became richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened, not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.

Yet you will have heard that our biggest problem is inequality, and that we must make men and women equal. No, we should not – at least, not if we want to lift up the poor.

Ethically speaking, the true liberal should care only about whether the poorest among us are moving closer to having enough to live with dignity and to participate in a democracy. They are. Even in already rich countries, such as the UK and the US, the real income of the poor has recently risen, not stagnated – if, that is, income is correctly measured to include better healthcare, better working conditions, more years of education, longer retirements and, above all, the rising quality of goods. Admittedly, it is rising at a slower pace than in the 1950s; but that era of rising prosperity followed the wretched setbacks of the Great Depression and the second world war.

It matters ethically, of course, how the rich obtained their wealth – whether from stealing or from choosing the right womb (as the billionaire investor Warren Buffett puts it); or from voluntary exchanges for the cheap cement or the cheap air travel the now-rich had the good sense to provide the once-poor. We should prosecute theft and reintroduce heavy inheritance taxes. But we should not kill the goose that laid the golden eggs.

What does not matter ethically are the routine historical ups and downs of the Gini coefficient, a measure of inequality, or the excesses of the 1 per cent of the 1 per cent, of a sort one could have seen three centuries ago in Versailles. There are not enough really rich people. If we seized the assets of the 85 wealthiest people in the world to make a fund to give annually to the poorest half, it would raise their spending power by less than 4p a day.

All the foreign aid to Africa or South and Central America, for example, is dwarfed by the amount that nations in these areas would gain if the rich world abandoned tariffs and other protections for their agriculture industries. There are ways to help the poor – let the Great Enrichment proceed, as it has in China and India – but charity or expropriation are not the ways.

The Great Enrichment came from innovation, not from accumulating capital or exploiting the working classes or lording it over the colonies. Capital had little to do with it, despite the unhappy fact that we call the system “capitalism”. Capital is necessary. But so are water, labour, oxygen and pencils. The path to prosperity involves betterment, not piling brick on brick.

Taxing the rich, or capital, does not help the poor. It can throw a spanner into the mightiest engine for lifting up those below us, arising from a new equality, not of material worth but of liberty and dignity. Gini coefficients are not what matter; the Great Enrichment is.


Deirdre McCloskey is author of the forthcoming ‘Bourgeois Equality: How Betterment Became Ethical, 1600-1848, and Then Suspect’

Fonte: FT

The sudden death of the English Academy

I applaud the French Academy’s attempt to stop people using the hideous English term “upcycling”.

Not only is the academy’s suggested French replacement, “recyclage valorisant”, more elegant; it also helps explain what upcycling – turning discarded products into better ones – means.

But I fear that the academy’s effort will go the way of its attempt to replace “hashtag” with “mot-dièse”. Google “le hashtag” to see how ineffective that has been.

The anglophone world regards the French Academy as a joke – a pathetic attempt to block English’s relentless tide. English has no need for an academy, its champions believe. It evolves, adapts and triumphs, absorbing words from other languages with insouciance.

That has not always been the case. Prominent English speakers once pushed strongly for an academy. Jonathan Swift, in 1712, called for “some effectual Method for Correcting, Enlarging, and Ascertaining our Language . . . under the Protection of a Prince, the Countenance and Encouragement of a Ministry, and the Care of Proper Persons chosen for such an Undertaking.”

In his book The American Language, HL Mencken recounts how John Adams, later to become the US’s second president, suggested in 1780 the establishment of an American Academy, with the hope that England would follow suit.

Nothing came of either suggestion. But English has long had a highly-effective academy anyway. This academy did not try to keep out foreign words. But it did enforce rigorous rules of grammar, spelling and punctuation. Only in recent years has its power begun to fade. In fact, it is probably dying.



What is, or was, this academy? it was made up of book, magazine and newspaper editors, school teachers, university professors and employers. Standard English – the language of the educated classes of the English-speaking world – provided the rules, and if you did not obey them, you could not have your work published, pass your examinations, graduate from university or get a decent job.

For example, there is nothing wrong, in principle, with a double negative (“I don’t know nothing.”) Other languages, including French, have them. English writers, such as Chaucer and Shakespeare, used them. But standard English abhors the double negative – and anyone using one revealed themselves to the academy as uneducated and, in the more desirable jobs, unemployable.

The academy watched out for whether people knew their “Mondays” from their “Monday’s” and whether they could distinguish between “compliment” and “complement” or “council” and “counsel”. The academy guarded a narrow gate, regulating who got into print, university or the best jobs.

But for how much longer? Just as the printing press brought standardisation to English spelling and usage, the internet, seen by many as the most significant development since the printing press, is destroying that standardisation.

You don’t need a publisher to find readers now. Online, anyone is an author, and you can publish your work unedited.

This doesn’t mean that everyone on the internet has abandoned standard English. Some of the most popular websites, for all their youthful verve and irreverence, adhere strictly to its rules. The gap between standard and non-standard English is not always a generational one. A lot of young writers care about the old ways.

But many of those writing online do not know or care. With more people writing than ever, non-standard grammar and spelling have become common. The more people write “your wrong about that”, the more others regard it as acceptable.

Could there be a backlash, a return to standard English as standard? The popularity of Word Crimes , a song by the US performer “Weird Al” Yankovic that damns grammatical and punctuation deviation, suggests there could be. But I suspect those listening to the song know the standard rules already.

The academy still has some power, which is why those who do not bother to teach young people standard English are doing them a disservice.

But I am struck by the number of university academics and employers emailing me who don’t know or don’t bother with the old rules either, regularly mixing up their “it’s” and “its”. The academy is losing its grip.




Michael Skapinker


Fonte: FT

Bridge the income gap to create a future Asia’s poor deserve

Asia’s past successes in reducing poverty are under threat. More than 80 per cent of Asians live in countries where inequality is widening. The same forces that drove the region’s rapid growth for the past 30 years – globalisation, new technology and market reform – are widening the gap between rich and poor.

As the region’s middle class expands, more than 1.6bn Asians continue to live on less than $2 a day. These people lead highly vulnerable lives. It is time for Asian governments to raise the bar on growth; to commit to a future in which all their citizens have access to the basic tools needed to participate in a modern economy and to benefit from the region’s huge growth potential.

Fiscal policy can play an important role in making this happen. Three actions will help governments lead their countries toward the path of growth and broadly shared benefits.

First, governments should invest more in improving access to education and healthcare, both of which improve welfare. Moreover, better educated, healthier people have a greater chance of finding and keeping work, and of earning higher incomes. Yet access to such services is deeply unequal in many Asian countries. This is a major source of income inequality.

Public spending on education averages 5.3 per cent of output in the advanced economies and 5.5 per cent in Latin America, but only 2.9 per cent in Asia. The difference is even starker when it comes to public spending on health. Permanently raising public spending on education by 1 percentage point of output could lower the Gini coefficient – a common measure of inequality – by 1.1 percentage points within a decade; doing the same for healthcare buys a 0.3 percentage point gain.

Second, governments should adjust tax policy to raise more revenue and fund increases in public spending. Asia’s revenue base remains small by global standards. In the past decade, the ratio of tax revenue to gross domestic product averaged
18 per cent in developing Asia, well below the global average of 29 per cent. And in the decades ahead, many countries will face rising costs associated with ageing societies and mounting environmental pressures.

A wide range of revenue sources need to be explored. One option is to increase personal income tax – which is low in developing Asia, at 1.7 per cent of GDP in 2010, compared to 7.6 per cent in advanced countries. Another is value added tax. Corrective taxes – such as those levied on cigarettes, alcohol and pollution – are yet another possibility. Taxes on property, capital gains and inheritance are naturally progressive, claiming a higher proportion of wealth and income from the rich than they do from the poor. These, too, should be explored.

Experience in the Philippines, which raised taxes on cigarettes and alcohol in 2013, shows how powerful such reforms can be. Revenues increased by about $1.4bn. What is more, 85 per cent of the new revenues are allocated to health infrastructure and services. This enabled health insurance to be extended to an additional 9.5m poorer families.

Governments should also reform the large energy subsidies that are common in Asia, which can amount to as much as 8 per cent of GDP. These costly programmes do little to narrow income gaps: the rich tend to use the most energy. Targeted financial transfer programmes do much more to level the field.

Third, policy makers should adopt equality goals when they plan their budgets. Addressing inequality will take time; if progress is measured, it has a better chance of being made. Governments need to look beyond annual budget cycles and balance competing demands on public resources. A framework that incorporates explicit equity objectives into fiscal policy – such as targets on access to education and healthcare – would be a powerful device of commitment. Politicians should make detailed plans to increase the share of public spending benefiting target households. Overall fiscal sustainability cannot be sacrificed.

Fiscal policy should play a bigger role in promoting inclusive growth in Asia. This is a long-term challenge. Policy makers must plan and act now to create the future Asia deserves.


Juzhong Zhuang is deputy chief economist at the Asian Development Bank

Fonte: FT

"Ói nóis aqui traveis"

Não é nenhum segredo aos que já leram alguns dos posts deste blog ou ouviram alguma enttrevista/comentários desse blogueiro em outras midias, minhas divergências em relação a política econômica de Guido e cia iltda. O que, para alguns, pode parecer estranho, já que não estou na barco da oposição. O fato é que a aposta da atual administração em uma nova politica econômica ou seja lá o nome que se queira dar a este mambo jambo, ainda não apresentou os bons resultados cantados em verso e prosa  pela turma de sempre. Desnecessario mencionar os seus nomes.  Culpar a conjuntura internacional pelos resultados pifios  não convence ninguem, haja vista a boa performance de outros países no continente sul americano que  resistiram ao canto da sereia da heterodoxia.

Resultados acanhados, mas longe do cenário de filme de horror pintado pela oposição que, apesar dos bons quadros na área econômica, ainda não conseguiu formular uma proposta consistente de política econômica competitiva no mercado eleitoral.  

Wolfgang Münchau: A desperate Bundesbank has abandoned principle

When Germany’s conservative central bank calls for wages to rise faster than in the past, you know that something has gone seriously wrong with Europe’s biggest economy.

What went wrong is that almost everyone in Frankfurt – home to the Bundesbank as well as the European Central Bank – underestimated how persistent low inflation would turn out to be. Eurozone inflation rates fell off a cliff in November, and stood at a mere 0.4 per cent in July. Russian sanctions will weigh on the European economy, keeping inflation rates low for longer. Italy is stagnating again, and elsewhere in the eurozone the economic recovery has lost momentum. Only Spain shows some growth – but with an un rate of 24.5 per cent, I would not call this an economic recovery so much as a dead-cat bounce.

The German economy has been relatively strong by comparison. But even there inflation remains well below the ECB’s target of just under 2 per cent. Last year real wages in the economy fell by 0.2 per cent, according to a survey by the German Federal Statistical Office. The survey is not consistent with other official statistics because it captures effects not usually included in wage statistics, such as overtime payments. This year things have improved, but inflation is still not picking up.

The Bundesbank is now calling for wages to rise by 3 per cent. Superficially, this reflects the logic of German wage negotiations, which begin by looking at two sets of data – national inflation rates and productivity growth. Wages go up by the rate of consumer price inflation plus some agreed percentage of the productivity increase. The idea is that workers’ real wages should never fall, and that workers and shareholders should both benefit from increases in productivity. The Bundesbank’s 3 per cent target reflects the ECB’s inflation target plus the entire loot of this year’s expected productivity growth.

There are three problems with this calculation. The first concerns inflation. Why should an employer pretend that prices will rise by 2 per cent when the ECB has repeatedly failed to meet that target? Inflation is 0.4 per cent now, and is not expected to hit the target during the one or two-year period of negotiated wage contracts.

The second problem concerns productivity increases, the fruits of which would be given to workers if the Bundesbank had its way. Workers would rejoice, but why should employers voluntarily give up all the productivity gains if they do not have to? The labour market reforms of the past decade have firmly tilted the playing field against the unions. Workers have a strong incentive to cling on to their jobs because unemployment would lead to a large loss of income. The whole point of the labour reforms has been to weaken the unions’ negotiating power, and to prevent wage increases out of line with productivity and inflation. Wage moderation is a feature of that system, not a bug.



The third problem is a growing disconnect between officially negotiated wage tariffs and actual wages. Only 18 per cent of the German workforce is unionised, one of the lowest levels in the EU. Plant-level agreements often counteract nationally negotiated deals. Some employers have reportedly been planning to circumvent the recently agreed statutory minimum wage, which comes into effect next year, by forcing workers into low-paid overtime.

For the conservative economists of the German mainstream, slippage in the inflation target is no big deal. They could happily live with zero inflation. So why does the Bundesbank feel compelled to call for more? Hans-Werner Sinn, president of the Ifo Institute for Economic Research, has said that the Bundesbank wants to pre-empt quantitative easing by the ECB.

It is a possible, if somewhat conspiratorial, interpretation. Whatever the reason, I doubt it will work. Twenty years ago the economic environment may have been more receptive. But the German labour market has changed. The country, once economically autonomous, is part of a monetary union almost four times its size.

The Bundesbank’s call for higher wages is a sign of desperation and a signal the German central bank is not willing to address the underlying problem: a fall in aggregate demand, brought on by a financial crisis, excessive austerity and repeated monetary policy mistakes.

The eurozone does not need wage or price fixing. It needs further monetary expansion. The ECB should have started large-scale asset purchases a year ago. It certainly should do so now. The EU should allow governments to overshoot their fiscal targets this year, and suspend the fiscal compact, which would result in further fiscal pain from 2016.

Eurozone policy makers have again landed themselves in a situation where they need to do the opposite of what they have been promising. Stagnation and falling inflation are the price the eurozone is paying for muddling through the crisis.




Wolfgang Münchau


Fonte: FT

Henny Sender: US recovery rouses inflation concerns

It cannot be a good idea to begin a column by parsing the utterances of the Federal Reserve’s open market committee on the subject of inflation. But the combination of a delicate shift in emphasis on this matter and the news this week that the US economy grew 4 per cent in the second quarter has dramatically altered the investment calculus on Wall Street.

At least for the moment, the optimistic view that the US economy has finally reached take-off velocity prevails. Now the challenge for investors is to determine whether that view will endure, although it should be pointed out that, on average, the US growth rate remains barely more than 2 per cent – as it has for the past five years.

“Our base case remains that 2014 marks the beginning of the end of the post-global financial crisis era as stronger US-led global growth finally induces a ‘good’ rise in interest rates and a ‘safe’ departure from this weird world of Maximum Liquidity & Minimal Volatility,” wrote Bank of America Merrill Lynch chief investment strategist Michael Harnett in a research note the following morning.

“Higher US growth, higher US yields, higher US dollar and ultimately a modest normalisation of monetary policy will not lead to lower growth and/or a financial shock.”

Mr Harnett adds that he detects a shift from “leaders” such as the high yield market to the “laggards”, which include the Chinese and Japanese markets.

Many hedge funds clearly believe that to be the case. Two of the most popular hedge fund trades these days are to take bearish views on US rates and to buy Japanese shares. (Although a big part of the latter positioning is to front run the massive government pension fund, which has announced its intention to increase its exposure to the stock market now that the Bank of Japan is buying up most of the government bonds.)

In the wake of the two developments, 10-year Treasury bond yields rose 9 basis points to 2.56 per cent while the Nikkei increased to a fresh six-month high.

The sunny view gathered conviction with the Fed’s nuanced change in language that inflation “moved somewhat closer to the Committee’s longer run objective” rather than that “inflation has been running below the Committee’s objective”.

So the second task for investors is to ascertain whether that inflation will be the good sort or the bad sort, and whether inflation is better than deflation.

Economists and central bankers dislike and fear deflation because there is little they can do about it. The deeper deflation, the less effective monetary policy becomes. Meanwhile, bankers loathe it because the burden of repaying the loans they extend becomes heavier in a deflationary environment. But for others, deflation can be more benign. There are good deflationary scenarios, for example when prices fall because of gains in productivity or innovation while wages remain stable.

The same dynamic is true for inflation. The problem today is that the US risks falling into the bad kind of inflation whereby prices rise while wages fail to keep pace. The big support for economic growth these days has been consumption (real consumer spending rose 2.5 per cent for the quarter) but household spending depends on purchasing power and that depends in turn on compensation.

That is why the Fed is so concerned with the health of the housing market and the labour market. As long as there “remains significant underutilisation of labour resources”, in the words of Fed chairwoman Janet Yellen, the workforce has little pricing power. Wage growth has picked up only modestly, according to recent data.

Japan, meanwhile, seems to be suffering from the wrong kind of inflation, which stems from the rising cost of energy and other imports. Meanwhile, in June, total cash earnings of Japanese salarymen were down 3.8 per cent in real terms year over year, notes Chris Woods of CLSA.

During the three years 2004-06, one former Fed official noted that a full 3.5 per cent of GDP came from households using their homes as ATMs, borrowing (and spending) against the equity they had in those homes. Once that game ended, “I knew growth would be lower”, this official recalls.

Even if the optimistic scenario holds true today, it is possible that it will not be true tomorrow. For that to happen, the housing recovery must surmount higher rates. Labour needs to improve productivity and receive a greater share of corporate profits. The government needs to take advantage of current interest rates and a smaller budget deficit to start spending on things like education and infrastructure to make economic growth more sustainable. But what is so clearly sensible seems as elusive as ever.


Henny Sender


Fonte: FT