Sunday Times (London)
September 27, 2009
by Irwin Stelzer
Veni, vidi, dixi. That about describes President Obama’s week. Five, count them, five Sunday morning talk shows, a comedy talk show on Monday, followed by talks at an international conference on climate change, at the UN General Assembly to apologise for America's sins before he moved into the Oval Office, at a session on nuclear disarmament, at the Security Council, and at the G20 meeting in Pittsburgh. To be followed by talks with the Iranians, on their terms, later this week.
On the global warming front the president for once used his ability to disguise policy with rhetoric in a constructive way. He promised an end to American obstruction to international agreements to reduce greenhouse gas emissions, and then refused to sign on to legally binding international treaties to do just that. Instead, he laid out his plans to subsidise green energy, and encourage a shift from the oil-based internal combustion engine to electric cars.
Never mind that he failed to mention just where all that new electricity would come from, or that much of the subsidy money would be wasted. A small price to pay for avoiding the sort of binding commitments that might slow the economic recovery. This year has seen a sharp drop in CO2 emissions, largely because shuttered factories don’t produce any — or anything else, including jobs. And jobs win elections, emissions reductions do not.
On the trade front the president and his G20 partners, representing about 90% of world GDP and almost that large a portion of world trade, and set to replace the G8 as the important policy body, once again extolled the virtues of free trade before rushing home to adopt still more protectionist measures. Obama’s decision to load a 35% tariff on low-end tyres imported from China pleased the steelworkers’ union (to which tyre makers belong), to ban Mexican trucks from US roads pleased the teamsters’ union, and to allow Buy American provisions in the stimulus package pleased the construction unions. But not his G20 partners, who fear that a wave of protectionism is about to roll over US trade policy as other unions ready their pleas for protection.
Not that the other members of the group come with clean hands: China continues to undervalue its currency and make it hard for US firms to crack its markets, and the EU maintains barriers to the industries in which America has a competitive advantage — aircraft, audio-visual products and agriculture. The outlook is not bright for free trade.
Nor are the prospects for the rebalancing of the world economy looking anything other than grim. All parties to these international soirées are agreed that China and Germany, among others, must rely less on exports, and Americans must cut their consumption of imported goods to reduce the flood of dollars hitting world markets.
But China refuses to do more than talk about creating a social safety net that would persuade its citizens they need not save as much as 50% of their income, and can safely spend on their factories’ output. And it has no intention of allowing the value of the renminbi to rise. And Chancellor Angela Merkel had made it clear that she will do nothing to persuade Germany’s consumers to spend more: she plans to rely on its export industries to fuel its economic recovery.
Meanwhile, instead of applauding US consumers for finally increasing their savings rate from zero to 5% of income, the government is inducing them to spend. Cash-for-clunkers brought a spate of spending on cars; tax rebates encourage the purchase of homes; banks are pressured to increase lending; and interest rates are kept so low that a $10,000 money market account earns about 86 cents per month. Not a strong inducement to save for a rainy day.
The bright spot comes in the consensus that is forming about the future of the financial sector. Bank pay is to be restructured in a more or less sensible direction, with bonuses more in shares than in cash, and based on long-term performance rather than short-term gains. Required bank capital is to be related to the risk profile of the institution, those too big to fail will have to have proportionately more capital than their smaller competitors, and neither compensation nor dividends will be allowed to deplete needed capital.
There won’t be an all-powerful global regulator (good thing), but there will be greater co-ordination of regulations and an attempt by high-taxing countries to put what they call tax havens out of business. Every country’s economic policies will be subject to “peer review” to check its sustainability, but luckily there is no mechanism with which the inevitable attacks on the US market system can become effective. Contrary to most pundits, God, not the devil, is in the details. He is too busy to attend to international money changers, so we will see whether the finance ministers can convert these principles into workable regulatory and policy tools.
Finally, there is some good news on the exit strategy front. Politicians are naturally cautious about withdrawing the various stimulus measures when unemployment remains high. In America, without government support there would be no mortgage market, and in Britain without government support there might be no banking sector. But at least in America there is more than mere talk of exit strategies. Treasury secretary Tim Geithner is withdrawing some of the props he and his predecessor placed under money funds and banks, and Federal Reserve chairman Ben Bernanke has begun to pull back on interventions designed to keep interest rates near zero.
Banks have begun to repay their government loans, and raise capital from private investors. With banks loaded with commercial property loans that will not be repaid, and defaults on consumer credit cards and home mortgages still well above historic levels, problems remain. But the G20 members have reason to congratulate themselves that the threat of systemic failure has passed, due in part to their co-ordinated actions, and in part to natural economic forces that do, after all, end cyclical downturns.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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